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

                                   FORM 10-KSB

(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. 

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ITEM 1.  DESCRIPTION OF BUSINESS

(a) BUSINESS DEVELOPMENT

     FiberChem, Inc. ("FiberChem," the "Company" or "FCI") was formed on 
April 6, 1987, under the name Tipton Industries, Inc. ("Tipton").  On 
December 18, 1987, Tipton acquired all of the issued and outstanding stock of 
FiberChem, Inc., a New Mexico corporation, for approximately 79% of Tipton's 
Common Shares. The transaction was accounted for as a reverse purchase of 
Tipton by the Company.  Pursuant to stockholder approval on December 21, 
1988, Tipton and FiberChem (New Mexico) were merged into the Company, a newly 
formed Delaware corporation, which changed its name to FiberChem, Inc.

     From inception through the period ended September 30, 1997, the Company 
and its wholly-owned subsidiary FCI Environmental, Inc. ("FCI Environmental") 
have operated in the same industry segment. 

     This report includes forward-looking statements that involve risks and 
uncertainties, including the timely development and acceptance of new 
products, the timely acceptance of existing products, the impact of 
competitive products and pricing, the impact of governmental regulations or 
lack thereof with respect to the Company's markets, the timely funding of 
customers' projects, customer payments to the Company and the other risks 
detailed from time to time in the Company's SEC reports.

(b)  BUSINESS OF ISSUER

     FiberChem develops, produces, markets and licenses its patented fiber 
optic chemical sensor ("FOCS-Registered Trademark-") technology which detects 
and monitors hydrocarbon pollution in the air, water and soil.  The Company 
has developed a range of products and systems based on FOCS-Registered 
Trademark-, which provide IN SITU and continuous monitoring capabilities with 
real-time information.  The Company also is commercializing a range of 
sensors based on its Sensor-on-a-Chip-Registered Trademark- technology for a 
wide variety of environmental and industrial applications.

     Since its inception in 1987, FiberChem has invested in excess of $25 
million in research and development relating to a wide range of technologies, 
and has now focused on products for environmental monitoring and industry. 
During the last several years, a de-emphasis of environmental issues in 
Congress has resulted in delays in enactment and enforcement of the 
regulatory climate upon which the Company's future prospects were dependent.  
Several federal and state programs were not re-authorized or funded.  Just 
like companies in the electric vehicle or alternative fuels arenas, FiberChem 
found that many of its expected opportunities had evaporated, at least for 
the foreseeable future. Consequently, FiberChem's management identified 
market segments that were driven by other forces.  Notwithstanding the slow 
down at the Federal level, the Company recognized that the State of Florida 
represented a short-term opportunity for aboveground tank leak detection and 
set about getting its sensor products specified.  At the same time, the phase 
out of Freon presented the Company with an opportunity to establish its 
technology as the preferred replacement for the existing Freon/Infrared 
method for measurement of total petroleum hydrocarbons (TPH) in process water 
streams.  

     During this refocusing process the Company has substantially enhanced 
the value of its development initiatives with Texas Instruments, Inc. ("TI") 
for its Sensor-on-a Chip-Registered Trademark-.  By working together with the 
Optoelectronics Group within TI's Semiconductor Group, the Company has 
expanded the scope of the joint marketing activity in the billion dollar 
chemical sensor marketplace.  The short term result from this process has 
been the development of eight major projects with very substantial revenue 
potential.  

     PRODUCTS AND APPLICATIONS

     The PetroSense-Registered Trademark- product line includes a continuous 
monitoring system ("CMS-5000") designed for IN-SITU measurement of petroleum 
hydrocarbons in a wide variety of applications including leak detection at 
above ground storage tank ("AST") and underground storage tank ("UST") sites, 
monitoring of 

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soil and water remediation processes and fence line monitoring at 
contaminated sites.  A CMS system typically sells for between $15,000 and 
$50,000.

     The CMS-4000 can be used to monitor hydrocarbon levels in applications 
such as storm water and waste water around industrial facilities.  The 
CMS-4000 is available with analog outputs for use in industrial applications 
where some control functions need to be performed.

     The use of on-board modems allows both versions of the CMS to warn of 
alarm conditions through remote communication.  Conversely, the unit itself 
can be interrogated remotely to provide retrieval of logged data, status and 
service information.  This is particularly important for unmanned sites.

     Up to sixteen of the Company's Digital Hydrocarbon Probes ("DHPs") can 
be interfaced to the CMS-5000 to allow monitoring at several different 
locations within a site.  The DHP typically sells for about $4,000.  The DHP 
can also be used as a standalone product to interface with existing data 
loggers that use the environmental industry standard communications protocol 
(referred to as Standard Digital Interface ("SDI-12")).  A second version of 
the DHP  has been developed by the Company.  This product uses the RS-485 
communications protocol, allowing direct interface with computers and 
programmable logic controllers for other industrial applications.

     The OilSense-4000-TM- is a new product specifically developed to address 
the produced and process water market, both offshore and onshore.  It is a 
version of the CMS-4000 specially developed for highly contaminated streams 
where there is a need for automatic cleaning of the sensor based on 
preprogrammed parameters.  It incorporates modems for remote communication 
and has a 4-20 mA output for control loop purposes.  The OilSense-4000-TM- 
sells for $25,000 to $35,000 depending upon its hazardous area certification. 

     The PetroSense-Registered Trademark- Portable Hydrocarbon Analyzer 
("PHA-100") is a hand held instrument using an analog hydrocarbon probe which 
can measure hydrocarbons in the air, soil and in or on water.  The PHA-100 
typically sells for about $6,900. The microprocessor in the instrument 
converts the data generated by the probe into a parts per million ("ppm") 
reading.  The user can store the reading for retrieval or can print the data 
on an external printer after as many as 100 separate measurements are 
completed.  Recent improvements in calibration have expanded the effective 
range for the PHA-100 down to the parts per billion ("ppb") range (in water) 
for benzene, toluene, ethyl benzene and xylene ("BTEX"), common petroleum 
hydrocarbon components of gasoline, diesel and jet fuel.

     Applications for the PHA-100 include quarterly monitoring of AST and UST 
sites and pipelines, the detection of contamination levels of soil and 
general environmental monitoring.

     A version of the PHA-100, known as the PHA-100W, has been developed for 
applications where hydrocarbons need to be monitored in water alone.  The 
unit sells for $6,250.  It is designed for applications such as breakthrough 
from remediation processes, monitoring of bodies of water, and process water, 
waste water and storm water monitoring.  

     A third version of the PHA-100 is the PHA-100WL.  It is specifically 
designed for measuring total petroleum hydrocarbons ("TPH") in produced water 
at offshore petroleum production platforms and is designed to imitate the 
operation of the infrared analyzer used in the existing Freon/Infrared 
method.  It typically sells for $6,375.

     The PetroSense-Registered Trademark- Field Kit is a product that is an 
integral part of each of the CMS, PHA-100 and DHP.  The field kits contain 
calibration solutions, traceable to the National Institute of Standards and 
Technology standards, that are used to calibrate the hydrocarbon probes and 
accessories such as cleaning solutions, computer and power adapters, and 
disposable calibration vials and tubes for the customer's convenience.  A 
vapor calibration procedure has been developed for soil gas applications.  A 
field kit for the CMS-5000 contains a few months' worth of supplies and the 
field kit for the DHP probes contains a 30-day supply.  In addition, refill 
kits are available to replenish each field kit on an "as needed" basis.

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     The Company has pursued federal, state and local approvals for its 
products.  In November 1994, the Company received Underwriters Laboratories 
approval for its product line in the United States and Canada.  In April 
1995, the Company received notification from KEMA, an authorized 
certification body for Europe, that its products had met their highest 
standard for intrinsic safety (CENELEC), and, as such, were approved for use 
in all hazardous environments including offshore platforms.  The products 
have also been designed and tested to meet European Union CE Mark standards 
which went into effect January 1, 1996 for the European Community.

     Both the Company's PHA-100 and DHP have been extensively tested by Ken 
Wilcox Associates, Inc. ("KWA"), an independent testing laboratory, in 
accordance with EPA protocols.  These evaluations meet the requirements of 
the EPA for external vapor-phase leak detection systems and liquid-phase 
out-of-tank product detectors.  KWA also certified that the data produced by 
the Company's products was equivalent to the EPA's standard method for 
groundwater analysis.

     The Company's products were included in the EPA's Office of Underground 
Storage Tanks list of products meeting certain minimum third-party 
certification guidelines, both for vapor and liquid product detection.  In 
addition, the Company has received written or verbal assurance that its 
products meet the requirements of 47 states.  Certain states rely on the EPA 
list and certain others have no specific requirements.

     The Company has also had the CMS-5000 product line third-party certified 
for use for AST leak detection in Florida.  As a result, FCI Environmental is 
the only company at this time to have an AST leak detection product approved 
for use at both contaminated and uncontaminated sites by the  Florida 
Department of Environmental Protection ("DEP").

     Recently developed applications of FOCS-Registered Trademark- include 
the use of the technology to replace a Freon-Registered Trademark- extraction 
method of analysis currently used on offshore oil production platforms.  EPA 
regulations require oil companies to monitor the hydrocarbon content in sea 
water returned to the ocean during the oil production process.  The 
conventional Freon method involves periodic sampling of the sea water output 
and analysis of the samples in the oil production platform's laboratory.  The 
Company's products can be used to monitor the sea water output continuously, 
thereby achieving a significant reduction in cost for the operator, both by 
eliminating the use of Freon-Registered Trademark- gas and by optimizing the 
usage of chemical agents used to facilitate removal of oil from produced 
water.

     THE TECHNOLOGY

     The Company's FOCS-Registered Trademark- technology, which is 
proprietary and patented, is at the center of the Company's products.  
FiberChem manufactures a probe which contains a short length (approximately 5 
cm) of fiber optic cable.  Commercially produced fiber optic cable is coated 
to keep all wavelengths of light contained.  The Company treats the fiber 
optic cable with the FOCS-Registered Trademark- technology, modifying the 
cable's coating to permit a certain amount of light to be lost when it comes 
into contact with hydrocarbon molecules.  The resulting change in light 
transmission is then recorded and transmitted by the probe either to one of 
the Company's monitoring devices (see "Products and Applications" above) or 
to other industry standard devices.  The Company's devices measure changes in 
ppm or, in some instances, in lesser concentrations.  Up to 16 probes can be 
linked together to provide a continuous monitoring system for various types 
of sites, including USTs, ASTs, remediation sites, pipelines and offshore oil 
production platforms.

     The FOCS-Registered Trademark- technology has been further developed 
through a joint venture with TI to produce Sensor-on-a-Chip-Registered 
Trademark-, a new generation of semiconductor-based sensor products.  The 
market for these chip-based sensors is potentially very large (forecasted to 
be over $1 billion by 1999) and is represented by clients and products in the 
consumer, medical and durable goods fields.  Often development costs are 
partially covered by the client in exchange for some level of exclusivity.  
The Company has eight such projects ongoing, varying from feasibility studies 
to final stages of development. 

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     The Company believes that its patents and patent applications, coupled 
with the trade secrets, proprietary information and experience in development 
provide the Company with a competitive advantage.  It is the Company's policy 
to apply for international patent rights in addition to United States patent 
rights. FiberChem holds 20 United States patents covering sensor technologies 
and has applied for five additional patents.  All of the United States 
patents are valid for 20 years from their respective dates of applications, 
the oldest of which was applied for in 1987.  The Company holds nine 
international patents, and has a total of 15 international patent 
applications pending in Canada, Taiwan, Japan, South Korea, the People's 
Republic of China and most Western European countries.  The sensor 
technologies are also protected in the United States by registered trademarks.

     THE MARKET

     FiberChem's primary markets and potential markets are the petroleum 
production, refinery and distribution chain.  Major oil companies, 
distributors and retailers of gasoline, diesel and aircraft fuel are 
important potential customers.  Other important markets and customers include 
remediation companies, environmental consultants, shipping ports, airports 
and military bases.  The markets for sensors transcend the petroleum 
hydrocarbon market place, are very diverse and are addressed directly by 
Company personnel.

     CUSTOMERS AND DISTRIBUTORS

     The Company entered into an OEM Strategic Alliance Agreement (the 
"Alliance" or the "Agreement") as of June 30, 1996, as amended, with Whessoe 
Varec, Inc. ("Whessoe Varec") whereby Whessoe Varec was granted exclusive 
worldwide right to market the Company's products in the aboveground storage 
tank (AST) market.  The Agreement was accompanied by firm orders for 
approximately $1.7 million of the Company's products.  At the request of 
Whessoe Varec in order to avoid unnecessary duplicate shipping costs, 
substantially all of the equipment was segregated in the Company's warehouse. 
 Terms of payment were 180 days and 90 days for $500,000 of orders to be 
shipped in June and an additional $500,000 of orders to be shipped in 
September 1996.  During early January 1997, Whessoe Varec requested that the 
Company consider a revised payment schedule acceptable to both parties.  As 
of February 25, 1997, Whessoe Varec had paid for approximately $59,000 of 
items actually shipped by that date, and during April 1997, paid an 
additional $250,000 for items shipped in March 1997.  In August 1997 the 
Company received one half of the outstanding amount and shipped the remaining 
products.  The last payment was received in September 1997.  Both payments 
are irrevocable and the products shipped are not subject to return except 
under normal warranty conditions.

     The Alliance, combined with the acquisition of Whessoe p.l.c. (Whessoe 
Varec's parent company) by Endress + Hauser of Switzerland, has positioned 
both Alliance partners to take advantage of the new Florida regulations 
regarding the requirements for AST leak detection. Internal liners and leak 
detection is by far the lowest cost option for compliance with the Florida 
mandates and as of today, the Company's PetroSense-Registered Trademark- line 
is the only product certified for use in both contaminated and uncontaminated 
sites in Florida. Approximately 1,000 tanks have been identified which are 
already lined and as such are immediate targets for leak detection.  Each 
tank represents an average of $35,000 in potential revenue for the Alliance. 
It is anticipated that this number will grow in the period before December 
1999 when installations must be completed.  The impact of these regulations 
has been that about $8,000,000 of projects have been identified and proposals 
generated.  It is anticipated that these projects will accelerate from 1997 
to 1999.  Many companies have already indicated that they intend to stagger 
installations over the period.  Based on this level of activity, Whessoe 
Varec has substantially expanded its sales and service capabilities in 
Florida, and management believes that significant business will be generated 
by the Alliance although there can be no assurance that this will occur. 

     Florida Power Company recently placed an order with Whessoe Varec to 
upgrade all of its tanks to include leak detection.  Other large orders are 
believed to be pending.  Citgo,  Dreyfus, and Hess among others, are awaiting 
final approval from the Florida DEP to install the Company's products.  

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     In November 1996, the Company was advised that its proposed joint 
venture in Finland had received funding authorization from the Finnish 
government.  A new company, Senveco Oy ("Senveco"), has been formed, owned 
75% by Finnish interests including the Company's existing distributor, and 
25% by the Company. Senveco offers sales, service, technical support and 
consulting services for FCI's products and for complementary products from 
other manufacturers. Senveco's region consists of Finland, the Baltic States, 
and Northwest Russia including the key areas of the Kola Peninsula where 
substantial cleanups of soil and water are expected in the next year or so, 
funded from European Union ("EU") sources.  Senveco also provides technical 
support to the Company's European distribution network and in the Middle 
East.  

     In October 1997, the Company was advised that Senveco had been selected 
for an EU Barents Intereg contract to provide consulting and monitoring 
services to locate "hot spots" of pollution in the Kola Peninsula region of 
Russia.  The contract is expected to provide revenues for Senveco and the 
Company from sales of the Company's products.  

     OFFSHORE PRODUCED WATER MARKET

     The offshore produced water market exists due to the restrictions on the 
manufacture and distribution of certain Freons which destroy the Earth's 
ozone layer.  For the past 15 or so years, tests to determine the TPH content 
of certain process water streams returned to the ocean from offshore 
platforms ("produced water") have been carried out by extracting water 
samples with Freon and analyzing the resultant extract by infrared 
spectroscopy ("IR").  As the price and availability of Freon have become less 
and less attractive, alternatives to the Freon/IR method have attracted 
increasing attention.  

     Of the various other methods currently offered, the Company believes 
that its FOCS-Registered Trademark- technology offers the best alternative in 
terms of correlation with the IR method, ease of use, features/benefits and 
cost.  The Company offers two different products to this marketplace.  The 
OilSense-4000-TM- is a continuous unit which can operate unattended.  It 
offers a 4-20 mA output and can be interrogated and programmed remotely via 
modem.  It operates for 30 days between maintenance.  At $25,000 to $35,000, 
it offers good value where manpower is at a premium.  The OilSense-4000-TM- 
can also be integrated into the process of treating the produced water stream 
to automatically optimize the use of water treatment chemicals and can 
continue operating where platforms are currently shut down due to adverse 
weather conditions.  The PHA-100WL is a single measurement analyzer which 
directly replaces the Freon/IR method.  Its FOCS-Registered Trademark- sensor 
directly measures TPH in water samples, according to a simple procedure.  At 
$6,375 it offers a direct replacement for the Freon/IR method without the use 
of Freon or other chemicals.  

     There are about 3,500 platforms in the Gulf of Mexico and a similar 
number in the rest of the world, mainly in the North Sea, Middle East, South 
China Sea and offshore West Africa.  It appears that each of these regions 
conforms to similar regulations.  This market represents a window of 
opportunity that will remain open until the IRs are replaced over the next 
two years or so.  
     
     Amoco, Exxon, Marathon, Chevron, Unocal and others are evaluating the 
Company's replacement for the existing Freon/IR technology.  Each of these 
companies represents a large opportunity, operating a significant number of 
platforms in the Gulf of Mexico and elsewhere, and each already has purchased 
multiple units from the Company.  Norsk Hydro has leased a unit for 
evaluation for its North Sea operations.  In addition, a unit was recently 
sold to Clyde Petroleum in Indonesia, the first sale for use in the South 
China Sea.

     FRAME AGREEMENT WITH AUTRONICA AS

     On October 1, 1996, the Company entered into a frame agreement with 
Autronica AS ("Autronica"), a Norwegian company within the Whessoe PLC group, 
for Autronica to exclusively distribute certain FCI products for offshore 
applications in regions of the world where there is oil and gas production 
offshore, including certain countries in the North Sea, West Africa, the 
Middle East and the Southeast Asia areas.  The Endress + Hauser acquisition 
of Whessoe Varec was accompanied by the 

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spinning off of Autronica to Navia, a Norwegian company.  Their marketing was 
refocused and as a result did not include any third party distribution 
activity.  The Agreement was consequently terminated without prejudice to 
either party.  

     EXCLUSIVE DISTRIBUTION AGREEMENT WITH UNIVERSAL ELECTRONICS & COMPUTERS, 
     INC.

     On February 7, 1995, FCI Environmental entered into a two-year exclusive 
distribution agreement with Universal Electronics & Computers, Inc. ("UECI"), 
a corporation of the Republic of China.  Pursuant to the agreement, FCI 
Environmental agreed to provide UECI with certain environmental products, 
accessories and parts, and UECI agreed to act as an independent contractor of 
FCI Environmental to promote and sell such products exclusively in the 
Republic of China.  Projects with China Petroleum and the ROC military are 
ongoing and other projects are pending.  The agreement has been renewed for 
an additional two years.

     MARKET DEVELOPMENT AGREEMENT WITH MITSUI MINERAL DEVELOPMENT ENGINEERING 
     CO., LTD.

     On May 31, 1995, the Company, through FCI Environmental, entered into a 
two-year joint market development agreement with Mitsui Mineral Development 
Engineering Co., Ltd. ("MINDECO") pursuant to which the Company and MINDECO 
are developing the Japanese market for the Company's products, initially 
limited to petroleum hydrocarbon products.  In general, the Company supplied 
the products and MINDECO demonstrated, marketed and sold them.  In addition, 
the Company and MINDECO have agreed to use their best efforts to achieve a 
minimum sales target of $1,000,000.  At the end of the term, the Company and 
MINDECO have the right to either 1) convert the market development agreement 
into a distributorship agreement, 2) terminate the market development 
agreement, or 3) automatically renew the market development agreement for one 
year on a non-exclusive basis. The agreement was automatically renewed.  

     EXCLUSIVE REPRESENTATIVE AGREEMENT WITH SHINHAN SCIENTIFIC CO., LTD.

     On February 9, 1995, FCI Environmental entered into a two-year exclusive 
representative agreement with Shinhan Scientific Co., Ltd. ("Shinhan"), a 
corporation of the Republic of Korea.  Pursuant to the agreement, FCI 
Environmental agreed to provide environmental products, accessories and parts 
to Shinhan, and Shinhan agreed to act as an independent contractor of FCI 
Environmental to promote and sell such products exclusively in the Republic 
of Korea.  Shinhan is actively involved in the developing UST regulatory 
process in the Republic of Korea and has made initial sales to indigenous oil 
companies. The agreement renewed automatically for two additional years.

     LETTER OF INTENT WITH AMERASIA CONSULTING, LTD.

     On November 1, 1994, the Company entered into a letter of intent with 
AmerAsia Consulting, Ltd. ("AmerAsia"), pursuant to which AmerAsia agreed to 
develop, on a non-exclusive basis, marketing and joint venture opportunities 
for the Company in Asia and Europe and to introduce the Company to parties in 
those areas interested in marketing the Company's technology and products.  
In consideration for its consulting services, AmerAsia receives compensation 
specific to each opportunity identified by it as mutually agreed upon by the 
Company and AmerAsia.  FiberChem has, to date, granted to AmerAsia options to 
purchase 125,000 shares of Common Stock exercisable at $1.00 per share, which 
was at or above the fair market value on the dates such options were granted. 
Shinhan, UECI and MINDECO, with which the Company has entered into the 
agreements described above, were all introduced to the Company by AmerAsia. 
AmerAsia is currently involved with introduction of FCI into the People's 
Republic of China where there is a large potential project for underground 
storage tank leak detection.  The award of this project is expected to occur 
in Fiscal 1998.

     LETTER OF INTENT WITH THE LOBBE GROUP

     On June 7, 1995, FCI Environmental signed a letter of intent with the 
Lobbe Group ("Lobbe") to develop certain European markets for FCI 
Environmental's petroleum hydrocarbon products.  The advent 

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of both the Autronica and Whessoe Varec alliances and changes in market focus 
at Lobbe resulted in a reduced role for Lobbe group.  At the same time Lobbe 
restructured its operations.  The companies have reverted to a non-exclusive 
relationship with no prejudice to either party.  

     SALES AND DISTRIBUTION AGREEMENT WITH QED ENVIRONMENTAL SYSTEMS, INC.

     On March 30, 1996, the Company, through FCI Environmental, entered into 
an agreement with QED Environmental Systems, Inc. ("QED"), pursuant to which 
the Company granted QED the exclusive right to acquire the PHA-100 Portable 
Hydrocarbon Analyzer for Direct Analysis of Hydrocarbons in Water and Vapor 
(the "PHA-100") in a private label configuration for resale into the ground 
water monitoring and remediation market in all 50 states.  QED agreed to 
purchase the PHA-100 and other products at specified prices and in certain 
minimum amounts. QED failed to purchase the minimum amount of products, and 
the Company has terminated the agreement effective January 7, 1997.  The 
Company has commenced legal action against QED seeking payment for unpaid 
invoices and other damages. QED has filed counterclaims, and the matter is 
scheduled for arbitration in January 1998.  

     SIPPICAN
     
     The Company has had a licensing agreement with Sippican Corporation of 
Marion, MA, a defense contracting company which had planned to move into the 
environmental market but reversed its course.  The Company and Sippican 
negotiated a position allowing Sippican to transfer its rights to a third 
party, while minimizing the potential for competition to the Company from 
Sippican or others.  Those rights have been recently transferred to Osmonics, 
Inc., a leading supplier of potable water equipment to the beverage industry 
and the water utility market.  It is believed that this new relationship 
between Osmonics and the Company will generate significantly higher royalty 
revenue than previously through Sippican.  

     COMPETITION

     Management believes that the unique capabilities of the Company's 
FOCS-Registered Trademark- technology provide competitive advantages in its 
markets. The Company is unaware of any other product in the marketplace, that 
can monitor petroleum hydrocarbons at all three desired monitoring points, 
i.e., the vapor area above the water body, the floating hydrocarbons at the 
water/air interface and the hydrocarbons dissolved in the water.  Management 
believes that this capability, coupled with the FOCS-Registered Trademark-'s 
rapid response time and reversibility (the ability to measure both increasing 
and decreasing levels of pollutants), together with its response to a wide 
variety of petroleum hydrocarbons, provide the Company with a competitive 
advantage.  In particular, the wide dynamic range of the measuring technology 
allows the detection of new leaks on top of old contamination.  The Company's 
Florida certification is a direct result of this capability.  

     Most tank leak detection methods currently in use are periodic tests.  
The early warning and early detection of leaks provided by the Company's 
continuous monitoring systems enable users to minimize environmental damage, 
liability and cleanup costs relating to leaks that might otherwise occur and 
remain undetected between periodic tests.  In addition, the Company's 
products permit tanks to be evaluated without being taken out of service, 
whereas, many competing methods require that tanks be taken out of service 
for a period of time.  

     Many competing methods used to detect and quantify the presence of 
petroleum hydrocarbons in the field (e.g., for groundwater monitoring wells, 
soil remediation sites, process streams and waste water streams) consist of 
extracting a sample, then analyzing the sample using field or laboratory 
analytic instruments such as gas chromatographs.  This process may take 
several days.  The Company's products provide IN SITU, real-time results with 
accuracy closely correlating with laboratory results.  Additionally, the 
products' analog outputs offer the capability to provide feedback loops for 
process control.

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     GOVERNMENT REGULATION

     In the United States, numerous environmental laws have been enacted over 
the last three decades.  These include the Resource Conservation and Recovery 
Act, the Comprehensive Environmental Response Conservation and Liability 
("Superfund") Act, the Clean Air Act, the Clean Water Act, the National 
Environmental Policy Act which established the EPA and others. The Clean Air 
and Clean Water Acts require measurement, monitoring and control of 
municipal, industrial and other discharges of hydrocarbons and numerous other 
substances including heavy metals, toxic gases, chlorinated solvents and 
fertilizer and pesticide residues. 

     During the last several years, a de-emphasis of environmental issues in 
Congress has resulted in delays in enactment and enforcement of the 
regulatory climate upon which the Company's future prospects were dependent.  
Several federal and state programs were not re-authorized or funded.  Just 
like companies in the electric vehicle or alternative fuels arenas, FiberChem 
found that many of its expected opportunities had evaporated, at least for 
the foreseeable future.  Consequently, FiberChem's management identified 
market segments that were driven by other forces.  Notwithstanding the slow 
down at the federal level, the Company recognized that the State of Florida 
represented a short-term opportunity for aboveground tank leak detection and 
set about getting its sensor products specified.  At the same time, the phase 
out of Freon presented the Company with an opportunity to establish its 
technology as the preferred replacement for the existing Freon/Infrared 
method for measurement of total petroleum hydrocarbons (TPH) in process water 
streams.  

     Although present federal laws do not require leak detection for ASTs, 
many state and local governments have enacted or are considering regulations 
requiring leak detection for ASTs.  Two pieces of legislation are pending 
before Congress and the EPA has proposed a collaboration with the American 
Petroleum Institute ("API") on voluntary AST programs in which leak detection 
is a significant factor.  As part of this collaboration, API is conducting a 
test of leak detection equipment at an operating tank farm.  The Company's 
products and those of two other companies were selected for this evaluation.  
The State of Florida has perhaps the most stringent regulations and FCI is 
believed to be the only company to have certification for both uncontaminated 
and contaminated sites in Florida.  The Company believes that similar 
regulations are being finalized in Virginia, Wisconsin, Pennsylvania and 
other jurisdictions.

     INTERNATIONAL REGULATORY ACTIVITY

     Several countries have environmental laws or regulations in place or 
being implemented that affect the market for the Company's products.  Belgium 
has a new environmental law that regulates retail gas stations.  Canada's 
Ontario Province has an AST regulation in process.  The Republic of South 
Korea has a UST law which is currently being implemented.  Taiwan has 
committed to significant expenditure for environmental clean up.  Finland has 
proposed leak detection for retail gasoline stations and has recently 
promulgated clean up regulations backed by government funding for the clean 
up of contaminated retail sites in the country.  The Company is working with 
its international distributors and others to promote the Company's products 
and enhance its name recognition in these countries so that the Company's 
products are taken into consideration when legislation and regulations are 
promulgated.
     
     MANUFACTURING

     The Company manufactures the FOCS-Registered Trademark- sensors and 
probes at its facilities located in Las Vegas, Nevada.  Printed circuit 
boards incorporated in the Company's products are fabricated and assembled by 
other companies using high quality commercially available components.

     The PHA-100 incorporates an instrument originally developed and 
manufactured to the Company's specifications by others.  Component parts and 
subassemblies are now being purchased directly by the Company, but final 
assembly and testing is performed directly by the Company.  The data logging 
and control instruments incorporated in the CMS systems are commercially 
available from a number of manufacturers; however, the Company has chosen one 
primary supplier, and integrates the instrument with 

                                       9
<PAGE>

the Company's DHP, operating and control software, personal computers and 
peripheral devices such as alarms.  Accessory kits are configured by the 
Company using both commercially available and specially manufactured 
components.

     The Company is in the process of undergoing certification under the ISO 
9000 quality standards.  This certification is expected to be completed 
during Fiscal 1998.

     RESEARCH AND DEVELOPMENT

     The Company shifted its emphasis in 1996 and 1997 to applications 
development of the petroleum hydrocarbons product line, particularly in the 
areas of produced water and waste water.  Peripherals were developed to allow 
the FOCS-Registered Trademark- technology to function in highly contaminated 
flowing water streams by automatically rinsing the probe on demand.  This led 
to the development of the OilSense-4000-Registered Trademark- a completely 
integrated system for use on offshore platforms. 

     The Company also put significant effort into developing both methodology 
and software for the use of the water-only versions of the portable unit 
(PHA-100W and PHA-100WL) in the storm and waste water and offshore produced 
water markets.   

     SENSORS
     
     The sensors market represents the Company's largest potential market, 
primarily because applications for sensors are much wider than those for the 
Company's environmental products.  Developed in cooperation with Texas 
Instruments, the Sensor-on-a-Chip-Registered Trademark- technology, patented 
by FCI,  has the potential to revolutionize a wide range of consumer, 
industrial, monitoring and medical products. 
     
     This new concept, based on an optical platform that is essentially a 
double beam spectrometer on a plug-in base in a standard 20-pin integrated 
circuit package, utilizes standard TI components for ease of design 
compatibility. These devices incorporate waveguides onto which a chemical 
matrix may be coated. The presence of a chemical analyte which causes a 
change in the refractive index, absorption or fluorescence of the waveguide 
material results in a change which can be detected, measured and related to 
concentration of the analyte, whether in the aqueous or gaseous phase.  
     
     While these sensors can be used in hardware currently under development 
at the Company, e.g., portable dosimeter devices as well as continuous 
monitoring probes and associated hardware, the primary application for these 
Sensors-on-a-Chip-Registered Trademark- lies in the OEM marketplace.  This 
market is characterized by clients who have needs or wants for sensors that 
give their products an advantage in their marketplace. 
     
     Examples of ongoing developments include:
     
     -  a fail-safe flammable gas sensor for a household appliance control
        system with a one million  units per year potential   

     -  a breath alcohol sensor for an ignition interlock device for automotive
        use with a three million unit potential over 5 years

     -  a fuel/air ratio sensor for an automotive client which could result in
        two sensors per automobile

     -  a gasoline vapor sensor for a gasoline retailing application with a one
        million unit potential

     -  a carbon monoxide sensor for residential and commercial with a multi-
        million unit potential

     -  an ammonia sensor for refrigerant levels in food processing facilities

                                      10
<PAGE>

     These applications represent sensors with selling prices anticipated to 
be in the $5.00 to $150.00 range depending upon application and volume.  

     The Company also has invented a proprietary method of analysis for 
chemical and biological molecules which is essentially a solid state version 
of the well-known immunoassay technology.  This technology was borrowed from 
the medical community and applied to environmental  monitoring.  The 
Company's invention (patents pending) has the potential to revolutionize 
sensor development in areas previously relegated to expensive and slow 
laboratory analysis.  When applied to the Sensor-on-a-Chip-Registered 
Trademark- this technology could provide a range of sensors and hardware 
products which could revolutionize the biomedical and biological analysis 
marketplace.  As an example, the Company recently demonstrated an immunoassay 
for cocaine and other drugs of abuse that reached a detection limit of 400 
parts per trillion. 

     TEXAS INSTRUMENTS, INC. ("TI")

     On June 15, 1995, the Company entered into an intellectual property 
license agreement and a cooperative development agreement with TI.  Under the 
License Agreement, TI licensed the Company's patented FOCS-Registered 
Trademark- for use with TI's optoelectronic technology.  The Company granted 
TI an exclusive worldwide royalty-bearing license to develop, produce and 
market chip-based chemical sensors for specific applications.  In exchange, 
TI granted the Company a non-exclusive worldwide royalty-bearing license to 
certain TI technology.  The license agreement terminates when the last 
Company or TI patent concerning the technology under the license agreement 
expires.  The License Agreement and Cooperative Development Agreement replace 
similar agreements between the Company and TI, entered into in January 1992, 
with a goal of miniaturizing the Company's FOCS-Registered Trademark- 
technologies into microchip sensors. This development work with TI is also 
the basis for the Sensor-on-a-Chip-Registered Trademark-product which is the 
subject of the joint development agreement with Gilbarco described below.  
The Company has been granted a United States patent on chip-based sensors in 
general and has applied for a patent on a chip-based toxic gas sensor.

     Under the cooperative development agreement, the Company and TI agreed 
to design and develop certain custom FOCS-Registered Trademark- based sensors 
for TI's exclusive use.  The first chip-based sensor has been developed for 
carbon monoxide (CO).  Chemistry development is essentially completed.  
Recent changes in the UL Standard for residential CO detectors and 
significant changes in market dynamics have impacted on the introduction of 
this product by TI.

     Since the Company developed a working relationship with the 
Optoelectronics Development Group within TI's Semiconductor Group, the 
Company has identified and pursued a number of opportunities in the sensor 
area, some introduced by TI, others directly by the Company.  It is expected 
that an expanded marketing activity on the part of TI will result in 
additional opportunities in the near future.  Robertshaw Controls, Alcohol 
Sensors International, Gilbarco, Amoco, Horiba, Bechtel Nevada and Manning 
Systems are examples of current development partnerships in various stages of 
completion.  

     AGREEMENT WITH ALCOHOL SENSORS INTERNATIONAL, LTD.

          The Company with the assistance of and pursuant to specifications 
and know-how of Alcohol Sensors International, Ltd. ("ASI"), has developed 
chemical sensors for the breath alcohol (ethanol) testing industry and 
market.  On November 8, 1996, the Company, through FCI Environmental, entered 
into an agreement with ASI pursuant to which the Company granted ASI 
exclusive right, title and interest (including sales and marketing rights) to 
such alcohol sensors for the breath alcohol testing industry and market.  In 
consideration therefor, ASI agreed to market, promote and sell instruments 
employing such alcohol sensors on a worldwide basis and to pay the Company 
development and licensing fees over the term of the agreement.  The term of 
the agreement is for five years and may automatically be renewed by ASI for 
successive five-year terms upon written notice to the Company not less than 
sixty days prior to the expiration of the prior term.  Development is 
continuing.

                                      11
<PAGE>

     JOINT DEVELOPMENT AGREEMENT WITH GILBARCO, INC.

     The Company, through FCI Environmental, completed the development for 
Gilbarco of a low-cost sensor for the detection of gasoline vapor in Phase II 
vapor recovery systems for gasoline dispensing equipment.  The introduction 
of the equipment is pending the promulgation of regulations by the California 
Air Resources Board (CARB) prior to the introduction of 1998 model year cars 
which have onboard vapor recovery.  Delays have occurred in the promulgation 
of the regulations; however, once regulations are promulgated, there would be 
a phase-in period of as yet undetermined duration.  Recently, Gilbarco has 
begun a program of cold weather testing of a gasoline dispenser equipped with 
the sensor in anticipation of action by CARB.  

     BECHTEL NEVADA

     In June 1995, the Company entered into a Cooperative Research and 
Development Agreement ("CRADA") with the U. S. Department of Energy ("DOE") 
through its operating entity Bechtel Nevada, Inc.'s Remote Sensing Laboratory 
in Las Vegas, Nevada to develop low-cost, rugged demountable probes suitable 
for use with the Sensor-on-a-Chip-Registered Trademark- platform.  This 
development resulted in the production of a prototype probe to carry up to 
three chips.  New development has focused on a dosimeter device for hand held 
use and is ongoing.

     In March 1996, the Company entered into a contract with DOE through 
Bechtel Nevada, to develop a chip-based sensor for trichloroethylene at the 
ppb level in water.  The first phase of the contract, the selection, 
evaluation and verification of an appropriate chemistry, was completed in 
September 1996.  The second phase of this contract, development of prototype 
chip sensors, has not been funded.   

     OTHER SENSOR DEVELOPMENT

     The Company is further developing numerous other sensors for specific 
contaminants and properties.  Certain sensors are completed, but will not be 
introduced into manufacturing until the Company has the resources to finalize 
the design of the chip-based platform for that specific application.  Other 
sensors are still in the chemistry development stage.  The current status of 
the Company's sensor development is outlined in the table below, showing 
analytes measured, their stage of development, targeted sensitivity 
(capability of measurement) and the particular media monitored:  

<TABLE>
<CAPTION>
                                               Stage of                              Targeted 
                Type                          Development                        Sensitivity/Media 
----------------------------------------      ------------   ------------------------------------------------------- 
<S>                                           <C>            <C>
Petroleum Hydrocarbons                        Commercial     LESS THAN 1 ppm in water; LESS THAN 10 ppm in air, soil 
Trichloroethylene ("TCE")                     Commercial     LESS THAN 10 ppm in water, remediation 
Tetrachloroethylene                           Commercial     LESS THAN 10 ppm in water, remediation 
Oxygen                                        Prototype      LESS THAN 1 ppm in air, water, soil 
Carbon Dioxide                                Prototype      LESS THAN 5 ppm in air, water, soil 
Carbon Monoxide                               Prototype      LESS THAN 5 ppm in air 
Illegal Narcotics                             Prototype      LESS THAN 400 pptrillion in air, water 
pH                                            Prototype      2-12  in water 
Trichloroethylene ("TCE")                     Development    ppb in water (1) 
Heavy Metals (total of 7)                     Development    ppb in water (1) 
Phosphates                                    Development    ppm in water, soil (1) 
Sulfates                                      Development    ppm in water, soil (1) 
Hydrazine                                     Development    ppb in air, water, soil (1) 
Total Organic Carbon ("TOC")                  Research       ppb in water (1) 
Total Organic Chloride ("TOCl")               Research       ppb in water (1) 
</TABLE>

(1) Targeted sensitivity for sensors in the development and research stage will
    be established as they enter into the prototype stage.  The development 
    target is to meet the regulatory compliance requirements.

                                      12
<PAGE>

     The Company also believes that its technology may be adapted for use in 
sub-sea modules under development by Asea Brown Boveri for Norsk Hydro.  
These developments are intended to replace the current platform operations at 
the surface with unmanned operations on the ocean floor.  The Company  has 
also had preliminary discussions with a Norwegian company Seateam to 
incorporate its sensors into remote operating vehicles for undersea pipeline 
leak detection.  
 
     The Port of Rotterdam has proposed to remediate its facility through 
state-of-the-art bioremediation and the operating consortium has selected the 
Company to be the technology vendor for monitoring systems.  

     The Company's spending on research and development activities during 
Fiscal 1997 and 1996 was $1,257,324 and $1,233,054, respectively.

     COSTS AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS

     The Company has determined the costs and effects of compliance with 
federal, state and local environmental laws to be minimal in amount and 
exposure.  The Company spends less than 1% of its total expenditures to 
comply with the various environmental laws.

     EMPLOYEES

     As of September 30, 1997, the Company and its subsidiaries employed 19 
persons on a full-time basis.  These include Geoffrey F. Hewitt, President 
and Chief Executive Officer; Melvin W. Pelley, Chief Financial Officer and 
Thomas A. Collins, President of FCI Environmental.  These three persons 
devote substantially all of their business time to the Company's affairs. The 
Company also employed three administrative persons; one scientist; five 
laboratory and manufacturing technicians; one manager of manufacturing; one 
materials, production control, shipping and receiving specialist; two 
engineers; one sales applications specialist; and two strategic business unit 
sales managers.

ITEM 2.   DESCRIPTION OF PROPERTIES

     In September 1989, the Company leased approximately 15,000 square feet 
of space in a new multi-tenant showroom/warehouse/distribution facility 
within Hughes Airport Center, 1181 Grier Drive, Suite B, Las Vegas, Nevada. 
The Company is currently using approximately 8,000 square feet of its 
facility for production, 4,000 square feet for research, development and 
engineering and the remaining 3,000 square feet for marketing and 
administrative purposes.  The lease was for five years and expired on 
February 28, 1995. The Company and the lessor have agreed to a month-to-month 
lease which is terminable by either party upon 30 days' notice.  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 current lease at 
approximately the current base monthly rental charge. 

ITEM 3. LEGAL PROCEEDINGS

     On February 20, 1997 FCI Environmental, Inc. ("FCIE") commenced a 
lawsuit in the State Court of Nevada (the "State Action") against QED 
Environmental, Inc. ("QED").  FCIE alleged a breach of a Sales and 
Distribution contract dated March 29, 1996 between FCIE and QED.  FCIE is 
seeking $123,800 in direct damages and $297,075 in consequential damages.  
QED filed a motion to remove the State Action to the United States District 
Court, District of Nevada, and on April 10, 1997 the State Action was removed 
to Federal Court.  QED filed a counterclaim against the Company and brought a 
third-party complaint against certain officers and employees and former 
employees of the Company, seeking reimbursement of $62,223 paid by QED 
pursuant to the subject contract.  The Company has responded to the 
counterclaim denying all of QED's counterclaims.  Upon QED's motion which was 
unopposed, the Court ordered the parties to proceed to early neutral 
evaluation which is scheduled for January 1998.

                                      13
<PAGE>

     A former distributor has filed an action in French national courts 
claiming improper termination by FCI Environmental, Inc.  The Company has 
responded that the distribution agreement provides for arbitration, in 
Nevada, of any disputes and that therefore, the French courts do not have 
jurisdiction, and further that the claims are without merit.  An 
administrative hearing is scheduled in January 1998.  The Company does not 
expect an adverse outcome and believes that even in the event of an adverse 
outcome, such an outcome would not have a material effect on its financial 
position or results of operations.

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

     No matters were submitted to a vote of the Company's stockholders during 
the fourth quarter of the fiscal year ended September 30, 1997.







                                      14
<PAGE>

                                   PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS

     The Common Stock of FiberChem is traded in the over-the-counter market 
and is quoted on the National Association of Securities Dealers Automated 
Quotation System, Inc. ("NASDAQ") under the symbol "FOCS."

     The following table sets forth for the periods indicated the high and 
low trade prices of the Company's Common Stock as reported by NASDAQ.  

<TABLE>
<CAPTION>

  Trading                   Period                                High          Low 
------------   ----------------------------------------       -----------   ---------- 
<S>            <C>                                               <C>           <C>
COMMON STOCK   FISCAL YEAR ENDED SEPTEMBER 30, 1996 
               ----------------------------------------
               FIRST QUARTER                                     $1.53         $0.75 
               SECOND QUARTER                                    $1.31         $0.75 
               THIRD QUARTER                                     $1.59         $0.97 
               FOURTH QUARTER                                    $1.22         $0.75 

               FISCAL YEAR ENDED SEPTEMBER 30, 1997 
               ----------------------------------------
               FIRST QUARTER                                     $0.94         $0.50 
               SECOND QUARTER                                    $0.63         $0.28 
               THIRD QUARTER                                     $0.50         $0.16 
               FOURTH QUARTER                                    $0.34         $0.16 

               FISCAL YEAR ENDING SEPTEMBER 30, 1998 
               ----------------------------------------
               FIRST QUARTER                                     $0.28        $0.19  
                  October 1, 1997 - December 19, 1997 
</TABLE>

     On December 19, 1997, the closing bid price of a share of the Company's 
Common Stock was $0.19.

     On December 19, 1997, the Company had approximately 475 holders of 
record and had in excess of 2,500 beneficial holders of its Common Stock.  

     The Company has not paid any cash dividends on its Common Stock to date 
and does not anticipate paying any in the foreseeable future.  The Board of 
Directors intends to retain any earnings to support the growth of the 
Company's business. On October 1, 1995, the Company declared dividends on its 
Convertible Preferred Stock to holders of record as of that date. The 
dividends are cumulative and are payable, at the discretion of the holders, 
in cash (11%) or additional shares of Convertible Preferred Stock (8%).  In 
November, 1995, the Company paid cash dividends of $23,645 and issued 15,214 
shares of Convertible Preferred Stock dividends.

     On October 1, 1996, the Company declared dividends on Convertible 
Preferred Stock to holders of record as of that date.  In November 1996, the 
Company paid cash dividends of $46,171 and issued 13,909 shares of 
Convertible Preferred Stock dividends.  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, that dividend 
will accumulate in accordance with the terms of the Convertible Preferred 
Stock.  

                                      15
<PAGE>

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

     The following discussion and analysis should be read in conjunction with 
the Consolidated Financial Statements and notes thereto of the Company 
appearing elsewhere in this Report.  

LIQUIDITY AND CAPITAL RESOURCES

     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 which has been 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 and December 2, 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 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 initial 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.

     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.

     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 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 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 

                                      16
<PAGE>

unpaid principal on promissory notes (which were executed in March 1994 by 
employees and directors for the exercise of options) 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.  The Company did not want to penalize the employees and 
directors by requiring payment of the promissory notes.  The Company believes 
that it must provide an incentive when it is compensating employees and 
directors for services rendered to the Company in the form of non-cash 
compensation.

     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.

     The Company had working capital of $1,883,551 at September 30, 1997, as 
compared with  working capital of $4,384,841 at September 30, 1996, a 
decrease of $2,501,290.  The Company had a decrease in cash and cash 
equivalents of $2,638,084 and a decrease in stockholders' equity of 
$2,996,747 during the fiscal year ended September 30, 1997 ("Fiscal 1997").  
These decreases resulted primarily from the Company's net cash used in 
operating activities of $2,715,012 offset by only $216,412 net cash provided 
by financing activities.  During Fiscal 1996, net cash provided by financing 
activities was $5,282,651 and was reduced by net cash used in operating 
activities during Fiscal 1996 of $2,953,916.    

     The net cash used in operating activities of $2,715,012 during Fiscal 
1997 considered changes in current assets and liabilities, as well as 
non-cash transactions including the write-down of accrued interest on notes 
receivable for the exercise of stock options in the amount $248,212; 
amortization expense of $356,587; depreciation expense of $69,853; and 
provisions for obsolete inventory and loss on uncollectible accounts 
receivable totaling $72,375.

     The net cash used in operating activities of $2,953,916 during Fiscal 
1996 considered changes in current assets and liabilities, as well as 
non-cash transactions including the write-down of accounts receivable and 
inventories totaling $482,538, amortization expense of $331,825, depreciation 
expense of $50,542, accrued interest receivable of $107,367, Common Stock 
issued for services of $15,417 reduction of notes receivable for the exercise 
of options in exchange for services of $42,263, and recognition of deferred 
compensation of $5,596.  

     The Company's inventories increased during Fiscal 1996 by $747,146 or 
75% and increased a further $142,346 during Fiscal 1997.  These increases are 
primarily attributable to the production of products which were called for in 
agreements with the Company's distributors and strategic alliances including 
Whessoe Varec, Autronica, and QED.  Manufacturing capacity was reduced during 
Fiscal 1997 and inventories are expected to decrease as these products are 
shipped.

     During Fiscal 1997, the net cash used in investing activities was 
$139,484, including the purchase of $83,505 in equipment and payments of 
$55,979 in patent fees.  During Fiscal 1996, the net cash used in investing 
activities was $174,349. This included payments of $128,873 in fees for the 
filing, processing and maintenance of patents and patent applications, 
primarily in foreign countries, and the purchase of $45,476 in equipment.  

     During Fiscal 1997, the Company received net cash from financing 
activities of $216,412, which included (i) $174,406 in interest and principal 
payments on notes receivable for the exercise of options; (ii) $55,086 
received from the exercise of options; (iii) $30,954 received from the 
exercise of Class D Warrants; (iv) $46,171 in cash dividends issued to 
preferred stockholders; and (v) the release of $18,456 in restricted cash 
serving as security for a note payable to a bank, less $16,319 in payments on 
notes payable.  During Fiscal 1996, the Company received net cash from 
financing activities of $5,282,651, which included (i) $3,000,000 in proceeds 
from Common Stock and warrant Units, (ii) $2,825,000 in proceeds from senior 

                                      17
<PAGE>

convertible notes payable, (iii) $773,987 used for the payment of financing 
costs, (iv) $6,832 in payments on the note payable to a bank, (v) $241,595 
received from the exercise of options, (vi) $1,031 from the exercise of Class 
D Warrants, (vii) $19,489 received as payments on notes receivable for the 
exercise of options, and (viii) $23,645 in cash dividends paid to preferred 
stockholders.  
     
     See Item 10. Management - Executive Compensation and Note 8 to the 
Company's Consolidated Financial Statements for information concerning the 
Company's material contracts for compensation and rent.

     As discussed in Note 1 to the Consolidated Financial Statements, the 
Company continues to incur substantial losses and may need additional 
financing to continue its operations. The Company is reviewing alternatives 
for raising additional capital.  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, acquisition 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.

     The Company is currently planning an offering of rights to purchase 
shares and warrants, to be offered to holders of its Common and Preferred 
Stock, and to holders of Class D Purchase Warrants and all other outstanding 
Warrants as soon as reasonably possible following the filing of this Report 
and upon  the effectiveness of a registration statement with the SEC.  
Notwithstanding the foregoing, 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. 

RESULTS OF OPERATIONS

     The Company's total revenues for Fiscal 1997 were $1,523,994 as compared 
to total revenues of $908,700 for Fiscal 1996.   Revenues for Fiscal 1997 
include sales of approximately $985,000 to Whessoe Varec.  See Item 1. 
Description of Business.  Revenues from a second customer during 1997 
amounted to $171,100.

     Revenues during 1996 from three different customers were $189,700, 
$99,786, and$92,838.    
     
     During Fiscal 1997, the Company had cost of revenues of $945,434, or a 
gross profit of 38% of sales, as compared to cost of revenues of $367,779, or 
a gross profit of 60%, during Fiscal 1996.  The decrease in gross profit 
margin resulted primarily from excess manufacturing capacity.  A  slightly 
lower margin mix of sales also reduced gross profit margins during 1997.

      The Company's research, development and engineering expenditures 
increased by 2% to $1,257,324 during Fiscal 1997 from $1,233,054 during 
Fiscal 1996. The Company has focused its development and engineering efforts 
on its hydrocarbon sensors and systems and has also maintained its aggressive 
Sensor-on-a-Chip-TM-development program with TI, Gilbarco, ASI, Bechtel 
Nevada and others.  See Item 1.  Description of Business - Research and 
Development.

     The Company incurred general and administrative expenses of $1,101,781 
during Fiscal 1997 as compared to $1,109,456 for Fiscal 1996, a decrease of 
$7,675 or 1%.  During Fiscal 1996, one of the Company's distributors 
failed to meet certain minimum contractual purchase and payment commitments, 
and the collection of certain other receivables from Fiscal 1995 sales to 
distributors and representatives became contingent upon subsequent sale and 
collection by those distributors.  Accordingly, the Company has provided an 
estimated reserve against these and other receivables amounting to $201,225.  
During Fiscal 1997, similar provisions amounted to $36,085.

                                      18
<PAGE>

     Also during Fiscal 1996, the Company developed substantial improvements 
to its manufacturing processes and products, including a process which 
improved the already substantial resistance of its probes to potential leaks 
and other damage from prolonged exposure to water and water vapor and to 
strong solvents and other chemicals which may be present in water.  
Accordingly, the Company provided a reserve of approximately $130,000 against 
finished products.  In addition, the Company provided approximately $150,000 
as a reserve against other finished goods, including products shipped to or 
segregated for Whessoe Varec, Autronica and other distributors.  During 
Fiscal 1997, no similar provisions were charged to general and administrative 
expense.

     Sales and marketing expenses during Fiscal 1997 and Fiscal 1996 were 
$1,007,975 and $1,004,172,  respectively.   Sales and marketing expenditures 
actually increased during the second half of Fiscal 1996 and the first half 
of fiscal 1997, but were reduced during the second half of fiscal 1997. 
Expenditures are focused on sales and support activities in the offshore 
produced water market, and the support of Whessoe Varec in the AST market.

     Interest income during Fiscal 1997 was $81,787, as compared to $201,268 
during Fiscal 1996, a decrease of $119,481, or 59%.  Interest income consists 
primarily of interest earned on the Company's cash and short-term investments 
and on notes receivable for the exercise of stock options.  Interest income 
from cash and short-term investments during Fiscal 1997 was $54,802, compared 
to $85,640 during Fiscal 1996, reflecting the decrease in cash and 
investments. Interest income from notes receivable for the exercise of 
options was $26,985 during Fiscal 1997 and $115,628 during Fiscal 1996. These 
notes were extinguished in May 1997 and did not accrue interest after 
December 1996.
     
     Interest expense during Fiscal 1997 was $223,161 as compared to $183,795 
during Fiscal 1996.  During 1997, the Company paid approximately $134,000 of 
interest on its senior convertible debt and amortized as additional interest 
expense $82,620 of the costs of placement of the debt.  During Fiscal 1996, 
the Company paid $93,500 and accrued an additional $18,016 of interest and 
amortized $65,778 of the placement costs.  Other interest expense during 1997 
and 1996 consisted primarily of interest on insurance premium installment 
payments and the December 1994 loan from Bank of America Nevada (see Note 6 
of the Notes to the Company's Consolidated Financial Statements).

     As a result of the foregoing, during Fiscal 1997, the Company incurred a 
net loss of  $3,226,958, or $0.13 per share as compared with a net loss of 
$3,274,629, or $0.15 per share, for Fiscal 1996.

     Management does not consider that inflation has had a significant effect 
on the Company's operations to date, nor is inflation expected to have a 
material impact over the next year.

RECENTLY ISSUED ACCOUNTING STANDARDS

In March 1997, the Financial Accounting Standards Board ("FASB") issued 
Statement No. 128, Earnings per Share ("SFAS 128"), which modified existing 
guidance for computing earnings per share and requires the disclosure of 
basic 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 ended 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.

In March 1997 the FASB issued Statement No. 129 ("SFAS 129"), Disclosure of 
Information about Capital Structure and in June 1997 the FASB issued 
Statement No. 130, Reporting Comprehensive Income ("SFAS 130") and Statement 
No. 131, Disclosure about Segments of an Enterprise and Related Information 
("SFAS 131"). The Company is required to adopt SFAS 129 in fiscal 1998 and 
SFAS's 130 and 131 in fiscal 1999. SFAS 129 establishes new standards for 
reporting and disclosing the pertinent rights and privileges of the various 
securities outstanding. 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.


ITEM 7.   FINANCIAL STATEMENTS 

     The following financial statements of the Company are contained in a 
separate section of this Form 10-KSB which follows Part III. 

                                                                PAGE NO.
                                                                --------
     Independent Auditors' Report                                  F-1

     Consolidated Balance Sheets                                   F-2

     Consolidated Statements of Operations                         F-4

     Consolidated Statements of  Stockholders' Equity              F-5

     Consolidated Statements of Cash Flows                         F-6

     Notes to Consolidated Financial Statements                    F-8


                                      19
<PAGE>

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND   
  FINANCIAL DISCLOSURE

     On January 24, 1997, KPMG Peat Marwick LLP (the "Former Accountant") 
resigned as the Company's principal accountants.

     The Former Accountant did not state any reason for resigning in its 
resignation letter to the Company.  However, in its letter to the Audit 
Committee and its Material Weakness letter both dated January 10, 1997 and 
delivered January 23, 1997, the Former Accountant reported "Disagreements 
with Management" on financial accounting and reporting matters and auditing 
scope concerning revenue recognition that, if not satisfactorily resolved 
(which all were) would have caused a modification of their report on the 
fiscal 1996 consolidated financial statements.  The disagreements, 
aggregating approximately $1,800,000, concerned certain transactions termed 
"consignments" by the Former Accountant, products warehoused for customers, 
and a research and development effort, none of which met the requirements for 
revenue recognition under generally accepted accounting principles.

     The Audit Committee of the Board of Directors met with and discussed the 
subject matter of the disagreements with the Former Accountant.

     The Former Accountant's report on the consolidated financial statements 
for the fiscal years ended September 30, 1995 and 1996 contained an 
explanatory paragraph concerning the Company's ability to continue as a going 
concern. Management plans in regard to these matters are described in Note 1 
to the Consolidated Financial Statements for September 30, 1996.  The 
consolidated financial statements do not include any adjustment that might 
result from the ultimate outcome of these uncertainties.

     The Company has authorized the Former Accountant to respond fully to 
inquiries of the successor accountant concerning the subject matter of such 
disagreements.

     On April 9, 1997, the Board of Directors appointed Goldstein Golub 
Kessler & Company, P.C., certified public accountants, as the Company's 
successor accountant and to audit the books of account and other records of 
the Company for the fiscal year ending September 30, 1997. 

                                      20
<PAGE>
                                       
                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;  
  COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

     The names, ages and respective positions of the Executive Officers and 
Directors of the Company are as follows:

Name                   Age     Position 
----                   ---     --------

Geoffrey F. Hewitt     54      Chairman  of  the  Board,   President,  Chief 
                               Executive Officer and Class A Director 

Dale W. Conrad         57      Class A Director 

Byron A. Denenberg     63      Class C Director 

Irwin J. Gruverman     64      Class A Director 

Walter Haemmerli       68      Class B Director 

Scott J. Loomis        49      Class B Director 

Gerald T. Owens        70      Class C Director 

Melvin W. Pelley       53      Chief Financial Officer and Secretary 



     The names, ages and respective positions of the Executive Officers and 
Directors of FCI Environmental are as follows:

Name                   Age     Position 
----                   ---     --------

Dale W. Conrad         57      Chairman of the Board and Director 

Geoffrey F. Hewitt     54      Chief Executive Officer and Director 

Scott J. Loomis        49      Director 

Melvin W. Pelley       53      Chief Financial Officer, Secretary and 
                               Director 

Thomas A. Collins      51      President 

     GEOFFREY F. HEWITT has served as Chairman of the Board since November 
14, 1997 and as President and Chief Executive Officer of the Company, as well 
as Chief Executive Officer of FCI Environmental since August 1995.  Mr. 
Hewitt was appointed as a Director of the Company on September 11, 1996.  He 
has also served as a Director of FCI Environmental since April 1994 and as 
its President from April 1994 to November 1996.   He served as Chief 
Operating Officer of FCI Environmental from April 1994 to August 1995.  Prior 
thereto, from 1977 until March 1994, Mr. Hewitt served as Vice President of 
worldwide sales and marketing for H.N.U. Systems, Inc., a manufacturer of 
environmental and material analysis instrumentation.

                                      21
<PAGE>

     DALE W. CONRAD has served as a Director of the Company since August 
1995. He has also served as Chairman of the Board of Directors of FCI 
Environmental since March 1993, as President of Environmental from March 1993 
until April 1994, and as Chief Executive Officer of FCI Environmental from 
March 1993 until August 1995.  Prior thereto, from 1988 to 1991, he was 
President and Chief Executive Officer of Biotope, Inc., Redmond, Washington, 
a defunct company engaged in the design and manufacturing of blood diagnostic 
equipment.  From 1983 to 1988 he was President of Advanced Technology 
Laboratories, Inc. ("ATL"), Bothell, Washington, which manufactures and 
markets real-time ultrasound medical diagnostic equipment.  From 1981 to 1983 
Mr. Conrad was Executive Vice President and General Manager for Advanced 
Diagnostic Research Corporation ("ADR"), Tempe, Arizona, a designer, 
manufacturer and marketer of diagnostic ultrasound scanners.  From 1965 to 
1981, he held various positions at Texas Instruments, Inc., including Site 
Manager for the College Station, Texas plant from 1979 to 1981.

     BYRON A. DENENBERG has served as a Director of the Company since August 
1995.  Mr. Denenberg has been a private investor since 1991.  Mr. Denenberg 
was co-founder in 1969 of MDA Scientific, Inc. ("MDA"), a manufacturer and 
marketer of toxic gas monitoring systems, where he was CEO from inception 
until 1991. MDA was purchased by Zwellweger Uster AG in 1988.  Mr. Denenberg 
received a B.S. degree in Mechanical Engineering from Bucknell University, 
Lewisburg, Pennsylvania.  He currently serves as a Director of RCT Systems, 
Inc., MST Measurement Systems, Inc., FPM Analytics, Inc., and Microsensor 
Technologies, GmbH.

     IRWIN J. GRUVERMAN has served as a Director of the Company since May 
1994. Since 1990, Mr. Gruverman has served as the General Partner for G&G 
Diagnostics Funds, a venture capital business, and in 1982 founded and 
currently serves as Chairman of the Board of Directors and Chief Executive 
Officer of Microfluidics Corporation, an equipment manufacturer and process 
research and development company.

     WALTER HAEMMERLI has served as a Director of the Company since February 
1990.  Mr. Haemmerli has been the Chief Executive Officer since 1978 of 
Manport AG, Zurich, Switzerland, an investment management company owned by 
him.  Mr. Haemmerli was employed by Union Bank of Switzerland, Geneva, Basle 
and Zurich form 1960 to 1978, holding the position of Vice President from 
1970.  Mr. Haemmerli serves on the Board of Directors and is Vice-Chairman of 
Privatbank Vermag AG, Chur, Switzerland, and is a Member of the Board of 
Directors for American Cold Storage, Inc., Louisville, Kentucky.

     SCOTT J. LOOMIS has served as a Director of the Company since June 1989 
and as Chairman of the Board of Directors from August 1995 until November 14, 
1997. He served as President of the Company from April 1994 to August 1995.  
Mr. Loomis has served as a Director of FCI Environmental since January 1990. 
Mr. Loomis has served as a Director of AgriBioTech, Inc. ("ABT"), formerly a 
subsidiary of the Company, since January 1988, as Vice President of ABT since 
April 1994 and as President from June 1992 until March 1994.  Mr. Loomis 
spends a small percentage of his business time on the Company's affairs.  
Since 1985, Mr. Loomis has been President of AgriResearch and Development, 
Inc.  From 1979 until July 1986, Mr. Loomis was President of MLM Properties 
Ltd., engaged in real estate investments. Mr. Loomis has been a licensed 
attorney in the State of Arizona since 1974.

     GERALD T. OWENS has served as a Director of the Company since December 
1987.  Mr. Owens served with Mobil Oil from 1962 to 1983 when he retired.  At 
retirement, he was President of Mobil Sales and Supply Corporation, a 
wholly-owned subsidiary of Mobil Oil, and he was a Vice President of Mobil 
Oil. From 1951 to 1961, Mr. Owens practiced law with the law firm of Andrews 
and Kurth in Houston, Texas.  Mr. Owens received an L.L.B. degree from the 
University of Texas in 1950 and a B.A. degree in history in 1948 from the 
University of Texas.  He serves as Chairman of the Board of Trustees for the 
Kenny Stout Memorial Golf Foundation, and as a member of the Board of 
Trustees for the Monterey Institute of International Studies.

                                      22
<PAGE>

     MELVIN W. PELLEY has been the Chief Financial Officer and Secretary of 
the Company since April 1994 and has been Chief Financial Officer and 
Secretary of FCI Environmental since June 1993.  Prior thereto, from 1988 he 
was Vice President of Finance and Administration of Acoustic Imaging 
Technologies Corporation, Phoenix, Arizona, a manufacturer of diagnostic 
ultrasound medical equipment.  From 1983 to 1988 he was Director of Costs, 
Financial Planning and Analysis of ATL.  From 1977 to 1983, Mr. Pelley was 
Chief Financial and Administrative Officer for ADR.
     
     THOMAS A. COLLINS has served as President of FCI Environmental since 
November 1996 and as Vice President of International Marketing and Product 
Development from March 1996 to November 1996.  Prior thereto, from 1992 he 
was Director of International Sales and Product Marketing of Arizona 
Instrument Corporation, a manufacturer of environmental and control 
instrumentation; from 1990 to 1992 he was Director of Marketing of Wayne 
Division, Dresser Industries, Inc., a manufacturer of dispensing equipment 
for the gasoline industry; from 1986 to 1989 he was Manager of Domestic 
Retail Marketing for Diebold, Inc., a manufacturer of transaction terminals 
in the petroleum retailing market; and from 1968 to 1986 he held marketing 
and engineering positions at ARCO Petroleum Products Co.

     Officers serve at the discretion of the Board of Directors.  All 
Directors hold office until the expiration of their terms and the election 
and qualification of their successors.  The Company's Board of Directors is 
divided into three classes of approximately equal size with the members of 
each class elected, after an initial phase-in-period, to three-year terms 
expiring in consecutive years. Mr. Gruverman, Mr. Conrad and Mr. Hewitt were 
elected to three-year terms as Directors at the Company's June 1997 Annual 
Meeting of Shareholders.  Mr. Loomis and Mr. Haemmerli were elected to 
three-year terms as Directors at the Company's May 1996 Annual Meeting of 
Stockholders.  Mr. Owens was elected to a three-year term as Director at the 
Company's May 1995 Annual Meeting of Stockholders and Mr. Denenberg was 
appointed to the Board of Directors in August 1995.

     In January 1993, the Company established a Stock Option Committee.  The 
Stock Option Committee is responsible for the granting of stock options under 
the Company's Stock Option Plans.  The Company also established a 
Compensation Review Committee, which is responsible for reviewing the 
compensation of the Company's executives and employees.  In August 1995, Mr. 
Owens and Mr. Haemmerli were appointed to a single Compensation Review and 
Stock Option Committee. Also, in August 1995, Mr. Loomis and Mr. Owens were 
appointed to a newly established Audit Committee.  Mr. Gruverman was added to 
the Audit Committee on November 14, 1997.  The Board of Directors did not 
have a standing nomination committee or committee performing similar 
functions during the fiscal year ended September 30, 1997.

COMPLIANCE WITH 16(a) OF THE EXCHANGE ACT

     Section 16(a) of the Securities Exchange Act of 1934 requires the 
Company's officers, Directors and persons who own more than ten percent of a 
registered class of the Company's equity securities, to file reports of 
ownership and changes in ownership with the Securities and Exchange 
Commission.  Officers, Directors and ten percent shareholders are required by 
regulation to furnish the Company with copies of all Section 16(a) forms they 
file.  Based solely on the Company's copies of such forms received or written 
representations from certain reporting persons that no Form 5's were required 
for those persons, the Company believes that, during the time period from 
October 1, 1996 to September 30, 1997, all filing requirements applicable to 
its officers, Directors and greater than ten percent beneficial owners were 
complied with. 

                                      23
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

     The compensation paid and/or accrued to each of the executive officers 
of the Company and its subsidiaries and of all executive officers as a group, 
whose annual compensation exceeds $100,000, for services rendered to the 
Company during the three fiscal years ended September 30, 1997, was as 
follows:

(a)  SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                    Long Term Compensation 
                                                                         -----------------------------------------
                                            Annual Compensation                     Awards               Payouts
                                ---------------------------------------  ----------------------------   ----------
                                                                                                        Long-Term
                                                            Other        Restricted     Securities      Incentive       All 
Name of Individual      Fiscal                              Annual         Stock        Underlying        Plan         Other
and Principal Position   Year    Salary($)    Bonus($)  Compensation($)   Awards($)   Options/SARs(#)   Payouts($) Compensation($)
-----------------------  ----   ------------  --------  ---------------  -----------  ---------------  ----------- ---------------
<S>                      <C>    <C>            <C>       <C>               <C>          <C>               <C>         <C>
Geoffrey F. Hewitt       1997   $205,000 (1)   $   --    $     --           --          125,000           $  --       $  --
President and CEO of     1996   $195,768       $   --    $     --           --          100,000           $  --       $  --
FiberChem, Inc. and      1995   $177,596       $   --    $     --           --           75,000           $  --       $  --
CEO of FCI    
Environmental, Inc.
                                                                              
Dale W. Conrad           1997   $   --         $   --    $  2,709 (2)       --           25,000           $  --       $  --
Chairman of the          1996   $ 18,730       $   --    $ 13,594 (2)       --           35,000           $  --       $  --
Board of FCI             1995   $112,535       $   --    $     --           --           60,000           $  --       $  --
Environmental, Inc.                                                                                                      
                                                                                                                         
Melvin W. Pelley         1997   $136,708 (3)   $   --    $     --           --           75,000           $  --       $  --
Chief Financial          1996   $126,461       $   --    $     --           --           50,000           $  --       $  --
Officer of FiberChem,    1995   $113,346       $   --    $     --           --           25,000 (2)       $  --       $  --
Inc. and of FCI                                                                                                          
Environmental, Inc.                                                                                                      
                                                                                                                         
David R. LeBlanc         1997   $  5,288 (5)   $   --    $     --           --                0           $  --       $  --
Vice President - Sales   1996   $125,000       $   --    $     --           --            5,000           $  --       $  --
and Marketing of         1995   $123,588       $   --    $     --           --            5,000           $  --       $  --
FCI Environmental, Inc.                                                                                                  
                                                                                                                         
Thomas A. Collins        1997   $129,708 (4)   $   --    $     --           --           75,000           $  --       $  --
President of             1996   $ 70,192       $   --    $     --           --          100,000           $  --       $  --
FCI Environmental, Inc.  1995   $   --         $   --    $     --           --             --             $  --       $  --
</TABLE>

(1) Includes $14,808 in accrued but unpaid salary, earned during the period 
    from June 15 through September 30, 1997.  Payment has been deferred 
    until after anuary 1, 1998 at the Company's discretion.

(2) Consulting fees of $2,709 paid during Fiscal 1997; Directors' 
    compensation of $11,194 and consulting fees of $2,400 paid during Fiscal 
    1996.  Amounts earned, net of applicable taxes, reduced the promissory 
    notes issued by Mr. Conrad to the Company for the exercise of options.

(3) Includes $8,615 in accrued but unpaid salary, earned during the period 
    from June 15 through September 30, 1997.  Payment has been deferred until 
    after January 1, 1998 at the Company's discretion.

(4) Hired March 1, 1996 as Vice President of International Marketing and 
    Product Development; President of FCI Environmental since November 1996. 
    Includes $6,730 in accrued but unpaid salary, earned during the period 
    from June 15 through September 30, 1997.  Payment has been deferred 
    until after January 1, 1998 at the Company's discretion. 

(5) Resigned July 1996; compensated at the rate of $125,000 annually through 
    October 5, 1996.  

                                      24
<PAGE>

(b)  OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                       Number of      Percent of Total
                      Securities        Options/SARs 
                      Underlying          Granted           Exercise 
                     Options/SARs       to Employees         or Base              Expiration 
Name of Individual      Granted        In Fiscal Year     Price($/Share)             Date 
------------------   -------------    ----------------    --------------      ------------------
<S>                   <C>                   <C>              <C>              <C>
Geoffrey F. Hewitt    125,000               27.8%            $  0.25          September 12, 2007 
Dale W. Conrad         25,000                5.6%            $  0.22             May 29, 2007 

Melvin W. Pelley       75,000               16.7%            $  0.25          September 12, 2007 
David R. LeBlanc         --                  --                 -- 
Thomas A. Collins      75,000               16.7%            $  0.25          September 12, 2007 
</TABLE>

(c)  AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END 
     OPTION/SAR VALUES 

<TABLE>
<CAPTION>
                                                      Number of Securities        Value of Unexercised 
                                                    Underlying Unexercised           In-The-Money  
                         Shares                           Options/SARs                Options/SARs   
                      Acquired on       Value        at Fiscal Year End (#)       at Fiscal Year End ($) 
Name of Individual    Exercise (#)   Realized ($)   Exercisable/Unexercisable   Exercisable/Unexercisable
------------------    ------------   ------------   -------------------------   -------------------------
<S>                     <C>          <C>                <C>                       <C>
Geoffrey F. Hewitt      18,961       $(3,262) (1)       486,247 / 0               $(255,740) (2) / $0 
Dale W. Conrad            --         $                  120,000 / 0               $ (20,781) (2) / $0 
Melvin W. Pelley        74,712       $(9,068) (1)        75,000 / 0               $   2,344      / $0 
David R. LeBlanc             0       $     0             98,350 / 0               $ (21,514) (2) / $0 
Thomas A. Collins            0       $     0            175,000 / 0               $ (69,531) (2) / $0 
</TABLE>

(1) Certain options were exercised at exercise prices which exceeded fair
    market value at the time of exercise, resulting in negative "Value 
    Realized."

(2) The options' exercise price exceeded their fair market value as of
    September 30, 1997, resulting in negative "Value of Unexercised 
    In-The-Money Options."

(d)  LONG-TERM INCENTIVE PLANS

     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. 

(e)  DIRECTORS COMPENSATION

     In September 1996, the existing base compensation fee of $10,000 per 
year for non-management directors was eliminated, replaced by the granting of 
options to purchase 25,000 shares of Common Stock of the Company.  Fees for 
attendance at Board meetings were suspended.   Fees for service as Chairman 
and fees for committee service were also eliminated and replaced by the 
granting of options to purchase from 4,000 to 12,500 shares of Common Stock 
of the Company.

                                      25
<PAGE>

     During Fiscal 1996, the Company expensed an aggregate of $99,000 in 
Directors' compensation for the Company's six non-management Directors, 
applying $42,451 to the payment of promissory notes and interest, $35,272 to 
the exercise of 35,272 stock options and $21,277 of payroll taxes.   In 
addition, on April 8, 1996, the Company granted to each of its six 
non-management Directors options to purchase 10,000 shares of Common Stock at 
$1.00 per share, which was the market value of Common Stock on that date and 
on September 11, 1996, the Company granted to each of its six non-management 
Directors options to purchase 25,000 shares of Common Stock at $0.93 per 
share, which was the market value of the Common Stock on that date.  On May 
29, 1997, the Company granted to each of its six non-management Directors 
options to purchase 25,000 shares of Common Stock at $0.22 per share, which 
was the market value of the Common Stock on that date. In addition, the 
Company granted options to purchase an aggregate of 36,500 shares of the 
Common Stock to three of its non-management directors for service as Chairman 
and members of its Audit Committee and Compensation and Stock Options 
Committee.

(f)  EMPLOYMENT CONTRACTS 

     Geoffrey F. Hewitt serves under an employment agreement with the 
Company, effective October 1, 1997.  Mr. Hewitt is currently compensated at a 
rate of $205,000 per annum and is entitled to receive bonuses, if any, at the 
discretion of the Board of Directors.  The employment contract is terminable 
for cause. Since June 15, 1997, payment of approximately 27%  (or $55,000) of 
Mr. Hewitt's salary has been deferred.  Payment of the earned but unpaid 
amount is at the discretion of the Company and is expected to be paid during 
calendar 1998.

     Melvin W. Pelley serves under an employment agreement with the Company, 
effective October 1, 1997.  Mr. Pelley is currently compensated at a rate of 
$132,000 per annum, and is entitled to receive bonuses, if any, at the 
discretion of the Board of Directors.  The employment contract is terminable 
for cause.  Since June 15, 1997, payment of approximately 24%  (or $32,000) 
of Mr. Pelley's salary has been deferred.  Payment of the earned but unpaid 
amount is at the discretion of the Company and is expected to be paid during 
calendar 1998.

     Thomas A. Collins serves under an employment agreement with the Company, 
effective October 1, 1997.  Mr. Collins is currently compensated at a rate of 
$125,000 per annum, and is entitled to receive bonuses, if any, at the 
discretion of the Board of Directors.  The employment contract is terminable 
for cause.  Since June 15, 1997, payment of approximately 20%  (or $25,000) 
of Mr. Collins' salary has been deferred.  Payment of the earned but unpaid 
amount is at the discretion of the Company and is expected to be paid during 
calendar 1998.

     David R. LeBlanc served until October 5, 1996 under an employment 
agreement with FCI Environmental, effective July 18, 1994.  Mr. LeBlanc was 
compensated at a rate of $125,000 per annum and was entitled to receive 
bonuses, if any, at the discretion of the Board of Directors.  The employment 
contract was terminable without cause with 90 days notice.
     
 (g) CONSULTING AGREEMENTS

     In August 1995, the Company entered into an agreement with Dale W. 
Conrad to provide consulting services to the Company on an as requested basis 
at an hourly rate.  The services include advice and assistance in technical, 
operational, and administrative matters.  From August through September, 
1995, the Company paid Mr. Conrad $8,394 under this agreement, all of which 
was applied to promissory notes executed by Mr. Conrad in connection with the 
exercise of stock options, and to the exercise of additional stock options. 
From October 1995 through September 1996, the Company paid Mr. Conrad $18,730 
under this agreement, all of which was applied to the promissory notes, the 
exercise of stock options and payment for group insurance benefits paid by 
the Company.  From October 1996 through September 1997, the Company paid Mr. 
Conrad $2,709 under this agreement, all of which was applied to promissory 
notes, the exercise of stock options and payment for group insurance benefits 
paid by the Company.   The agreement is terminable by either party upon 
written notice.

                                      26
<PAGE>

     On February 14, 1996, the Company entered into an agreement, superseding 
earlier verbal and letter agreements, with European Capital Advisors, Ltd. 
("ECA") pursuant to which ECA would be compensated for marketing strategy and 
business and financial planning services for the Company.  In consideration 
for these services, ECA was paid $30,000 in cash and was granted warrants to 
purchase 75,000 shares of Common Stock of the Company at $0.90 per share, 
exercisable until February 13, 2001.

(h)  STOCK OPTIONS 

     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 $2.15 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 Stockholders 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.
     
     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. During 
Fiscal 1995, no Class D Warrants were exercised.  During Fiscal 1996, the 
Company received $1,031 for the exercise of 1,031 Class D Warrants. 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.

     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 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. 
     
     As of April 4, 1997 an aggregate of $277,916 had been paid on the 
promissory  notes receivable (issued in 1994 for the early exercise of stock 
options), an aggregate of $47,999 of interest had been paid, and an 
additional $248,212 of interest had been accrued (through December 31, 1996) 
but remained unpaid.  

     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.  

                                      27
<PAGE>

     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 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 FCI Environmental and Directors of the 
Company.  

(i)  STOCK BONUS PLANS 

     On February 20, 1990, the Company's stockholders authorized the Board of 
Directors to design and implement a stock bonus plan providing for the 
issuance of up to 143,000 shares of Common Stock which have been registered 
and reserved for issuance.  In May 1990, the Board of Directors adopted the 
Company's Employee Stock Bonus Plan ("Bonus Plan").  Pursuant to the Bonus 
Plan, full-time employees of the Company will be granted a stock bonus 
equivalent to 15% of their annual salary. The stock granted under the Bonus 
Plan is vested at a rate of 20% per year.  However, an employee must work 12 
consecutive months before any stock is vested.  All employees of the Company, 
including, but not limited to, its executive officers, received shares under 
the Bonus Plan.  As of September 30, 1996, all 143,000 shares of Common Stock 
were issued to and vested by employees.  For the fiscal years ended September 
30, 1996 and 1997, no executive officer received any shares of Common Stock 
under the Bonus Plan.  In addition, an aggregate of 15,000 shares of Common 
Stock are available to be granted as bonus compensation at the discretion of 
the Managing Committee ("Discretionary Bonus Plan").  As of September 30, 
1997, 8,500 Discretionary Bonus Plan shares have been issued to employees of 
the Company.  For the fiscal years ended September 30, 1996 and 1997, no 
shares of Common Stock under the Discretionary Bonus Plan were granted to any 
executive officers nor to any other employee.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth, as of December 19, 1997, certain 
information concerning those persons known to the Company, based on 
information obtained from such persons, with respect to the beneficial 
ownership (as such term is defined in Rule 13d-3 under the Securities 
Exchange Act of 1934) of shares of Common Stock, $.0001 par value, of the 
Company by (i) each person known by the Company to be the owner of more than 
5% of the outstanding shares of Common Stock, (ii) each Director and 
executive officer of the Company and its subsidiaries, (iii) each executive 
officer named in the Summary Compensation Table and (iv) all Directors and 
officers as a group:

                                      28
<PAGE>

                                        Amount and 
                                        Nature of 
Name and Address of                     Beneficial          Percentage of
Beneficial Owner                       Ownership (1)          Class (2) 
-----------------------------       -----------------       -------------

Geoffrey F. Hewitt  (3)                 574,329 (5)              2.2% 

Dale W. Conrad                          415,840 (6)              1.6% 
7204 Wellington Point Road 
McKinney, TX 75070 

Byron A. Denenberg                      190,000 (7)               (4) 
RCT Systems, Inc. 
327 Messner Drive 
Wheeling, IL 60090 

Irwin J. Gruverman                      300,470 (8)              1.2% 
30 Ossipee Road 
Newton, MA  02164 

Walter Haemmerli                      3,749,844 (9)             13.2% 
Manport AG 
Basteiplatz 3, CH 8001 
Zurich, Switzerland 

Scott J. Loomis                         852,649 (10)             3.3% 
P.O. Box 35238 
Tucson, AZ  85740 

Gerald T. Owens                         226,823 (11)              (4) 
147 Paddington Way 
San Antonio, TX 78209 

Melvin W. Pelley  (3)                   293,863 (12)             1.2% 

Thomas A. Collins  (3)                  175,000 (13)              (4) 

All Directors and Officers as         6,778,818                 22.6% 
a Group (9 persons)

(1)  Unless otherwise noted, the Company believes that all persons named in 
     the table have sole investment power with respect to all shares of 
     Common Stock beneficially owned by them.  A person is deemed to be the 
     beneficial owner of securities that can be acquired by such person 
     within 60 days from the date hereof upon the exercise of warrants or 
     options or upon the conversion of convertible securities.  Each 
     beneficial owner's percentage ownership is determined by assuming that 
     options or warrants or shares of Convertible Preferred Stock that are 
     held by such person (but not those held by any other person) 

                                      29
<PAGE>

     and which are exercisable or convertible within 60 days from the date 
     hereof have been exercised or converted.
(2)  Based on 25,520,660 shares issued and outstanding as of December 19, 
     1997.
(3)  The address of this person is c/o FCI Environmental, Inc., 1181 Grier 
     Drive, Suite B, Las Vegas, Nevada 89119.
(4)  Represents less than one percent ownership.
(5)  Includes an aggregate of 486,247 shares of Common Stock issuable upon 
     exercise of a like number of options.
(6)  Includes an aggregate of 120,000 shares of Common Stock issuable upon 
     exercise of a like number of options. 
(7)  Includes an aggregate of 58,142 shares of Common Stock issuable upon 
     exercise of a like member of options.
(8)  Includes 66,880 shares of Common Stock issuable upon exercise of a like 
     number of options.  Also includes 67,500 shares of Common Stock held by 
     G&G Diagnostics, L.P. I, 48,200 shares of Common Stock held by G&G 
     Diagnostics, L.P. II, and 8,161 shares of Convertible Preferred Stock 
     convertible into 81,610 shares of Common Stock held by G&G Diagnostics, 
     L.P. III, all of which Mr. Gruverman is a principal.
(9)  Includes 32,000 Class D Common Stock Purchase Warrants, 3,586 shares of 
     Convertible Preferred Stock convertible into 35,860 shares of Common 
     Stock, and an aggregate of 29,000 shares of Common Stock issuable upon 
     exercise of a like number of options.  Also includes 704,000 shares of 
     Common Stock, 963,800 Class D Common Stock Purchase Warrants, and 
     165,286 shares of Convertible Preferred Stock convertible into 1,652,860 
     shares of Common Stock, all held by Privatbank Vermag A.G., Chur, 
     Switzerland, as custodian for certain customers, of which company Mr. 
     Haemmerli is Vice-Chairman.  Also includes $150,000 of Senior 
     Convertible 8% notes convertible into 367,824 shares of Common Stock 
     held by Manport AG, of which company Mr. Haemmerli is Chief Executive 
     Officer.
(10) Includes 32,353 Class D Common Stock Purchase Warrants and an aggregate 
     of 90,500 shares of Common Stock issuable upon exercise of a like number 
     of options.  Also includes 486,668 shares of Common Stock, and 151,590 
     Class D Common Stock Purchase Warrants held by Agri Research and 
     Development, Inc., of which Mr. Loomis is a Director and principal 
     stockholder.
(11) Includes 39,965 Class D Common Stock Purchase Warrants and an aggregate 
     of 82,000 shares of Common Stock issuable upon exercise of a like number 
     of options. 
(12) Includes an aggregate of 75,000 shares of Common Stock issuable upon 
     exercise of a like number of options. 
(13) Includes an aggregate of  175,000 shares of Common Stock issuable upon 
     exercise of a like number of options.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     See Item 10. Executive Compensation, for information concerning stock 
options granted and employment and consulting agreements entered into during 
Fiscal 1996 and Fiscal 1997 with officers and Directors of the Company.

     The Company entered into an agreement effective June 30, 1992, to sell 
its wholly-owned subsidiary, AgriBioTech, Inc. ("ABT"), to the Company's 
former President, its former Vice-President, its former Chairman of the 
Board and a fourth individual (collectively, the "Purchaser").  The Purchaser 
agreed to purchase all of the issued and outstanding shares of common stock 
of ABT, which were all owned by the Company, for the approximate book value 
of ABT.  The net sales price of $425,559 was payable in four equal 
installments of principal plus interest at a rate of 8% per annum, commencing 
on  July 1, 1993 and annually thereafter until paid in full.  As of September 
30, 1995, the principal balance due the Company was $106,390, and as of 
September 30, 1996 the entire principal and accrued interest had been paid in 
full.

     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 stock options eligible under the Company's 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 

                                      30
<PAGE>

stock options.  The promissory notes bear interest at 5% per annum until 
September 15, 1994, and at 7% per annum thereafter, and were initially due on 
September 15, 1995.  On April 7, 1995, the Board of Directors extended the 
due date of the notes to March 15, 1998.   As of April 4, 1997 an aggregate 
of $277,916 had been paid on these notes, an aggregate of $47,999 of interest 
had been paid, and an additional $248,212 of interest had been accrued 
(through December 31, 1996) but remained unpaid.

     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. The Company did not want to penalize 
the employees and directors by requiring payment of the promissory notes.  
The Company believes that it must provide an incentive when it is 
compensating employees and directors for services rendered to the Company in 
the form of non-cash compensation.

     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.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.
                                       
                                 (a) EXHIBITS

The following is a complete list of exhibits which are incorporated herein as 
part of this Report.

3.1    Articles of Incorporation of Registrant, as amended. (1)

31     By-Laws of Registrant. (2)

4.1    Class D Warrant Agreement of the Registrant with form of Warrant
       Certificate. (3)

4.2    Form of 8% Senior Convertible Note Due 1999 issued in the Company's
       February 1996 private placement. (4)

4.3    Form of Warrant to purchase Common Stock on or before May 31, 2001. (5)

10.1   Lease Agreement and Reimbursement Agreement dated July 27, 1989 by and
       between the Company and Howard Hughes Properties for Hughes Airport 
       Center, 1181 Grier Drive, Suite B, Las Vegas, Nevada. (4)

-------------------------
(1)  Incorporated by reference from the Company's January 13, 1988 Post
     Effective Amendment to the Registration Statement on Form S-18 (File 
     No. 33-12097-C) as declared effective on March 3, 1988.
(2)  Incorporated by reference from the Company's April 15, 1987 Amendment to
     the Registration Statement on Form S-18 (File No. 33-12097-C) as declared
     effective on March 3, 1988.
(3)  Incorporated by reference from the Company's Registration Statement No.
     33-35985
(4)  Incorporated by reference from the Company's Current Report on Form 8-K
     for February 15, 1996.
(5)  Incorporated by reference from the Company's Current Report on Form 8-K
     on July 15, 1996.
(6)  Incorporated by reference from the Company's Registration Statement No.
     33-29338.
(7)  Incorporated by reference from the Company's Annual Report on Form 10-K for
     September 30, 1991.

                                      31
<PAGE>

10.2   Amendment dated May 6, 1991 and September 26, 1991 to the Industrial 
       Real Estate Lease (Exhibit 10.10) for the Company's facilities. (8)

10.3   Employee Stock Bonus Plan. (3)

10.4   Amendments dated October 23, 1990 and February 21, 1991 to the 
       Industrial Real Estate Lease (Exhibit 10.10) for the Company's 
       facilities. (5)

10.5   Non-qualified stock option plan. (9)

10.6   Agreement dated December 10, 1992 by and between the Company and
       Tanknology Environmental, Inc. (10)

10.7   Qualified Stock Option Plan. (11)

10.8   Consulting  agreement by and between the Company and with Irv J.
       Gruverman, dated November 4, 1993. (12)

10.9   Qualified Stock Option Plan. (13)

10.10  Termination of Distributor Agreement with Sippican, Inc. dated
       February 24, 1994. (14)
 
10.11  Employment contract with David R. LeBlanc dated June 8, 1994. (14)

10.12  FCI FiberChem, Inc. and FCI Environmental, Inc. 401(k) Profit Sharing
       Plan. (14)

10.13  Qualified Stock Option Plan (15)

10.14  License Agreement with Texas Instruments, Incorporated, dated June 15,
       1995. (16)

10.15  Cooperative Development Agreement with Texas Instruments,
       Incorporated, dated June 15, 1995. (16)

10.16  Form of Distribution Agreement. (17)

10.17  Form of agreement for services with Gordon Werner and others dated as
       of September 15, 1995. (17)

-------------------------
(8)  Incorporated by reference from the Company's April 24, 1991 Post Effective
     Amendment to the Registration Statement on Form S-18 (File No. 33-35985) 
     as declared effective on April 30, 1991. 
(9)  Incorporated by reference from the Company's Registration Statement on Form
     S-8 for April 28, 1992. (No. 33-47518).
(10) Incorporated by reference from the Company's Current Report on Form 8-K for
     May 26, 1992.
(11) Incorporated by reference from the Company's Proxy Statement dated May
     3, 1993.
(12) Incorporated by reference from the Company's Report on Form 10-K for
     September 30, 1993.
(13) Incorporated by reference from the Company's Proxy Statement dated May
     23, 1994.
(14) Incorporated by reference from the Company's Report on Form 10-KSB for
     September 30, 1994.
(15) Incorporated by reference from the Company's Report on Form S-8 for
     August 1, 1995.
(16) Incorporated by reference from the Company's Report on Form 8-K/A for
     August 30, 1995.
(17) Incorporated by reference from the Company's Report on Form 10-KSB for
     September 30, 1995.

                                      32
<PAGE>

10.18  Agreement dated November 8, 1996 by and between FCI Environmental,
       Inc. and Alcohol Sensors International, Ltd.  CERTAIN INFORMATION IN
       THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SEC
       PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. (18)

10.19  Agreement dated October 1, 1996 by and between FCI Environmental, Inc.
       and Autronica AS. (18)
 
10.20  OEM Strategic Alliance Agreement dated June 30, 1996 by and between
       Whessoe Varec, Inc. and FCI Environmental, Inc. (18)

10.21  1997 Employee Stock Plan (19)

*10.22 Employment agreement with Geoffrey F. Hewitt dated October 1, 1997.

*10.23 Employment agreement with Melvin W. Pelley dated October 1, 1997.

*10.24 Employment Agreement with Thomas A. Collins dated October 1, 1997.

*10.25 Amendment to Whessoe Varec, Inc. OEM Strategic Alliance Agreement
       dated August 13, 1997.

*10.26 Agreement dated October 2, 1997 between the Company and entrenet 
       Group, L.L.C. 

*21.1  Subsidiaries of the Registrant.

*23.1  Consent of Goldstein Golub Kessler & Company, P.C.

-------------------------
* filed with this Report.
(18) Incorporated by reference from the Company's Report on Form 10-KSB for
     September 30, 1996.
(19) Incorporated by reference from the Company's Proxy Statement dated May
     20, 1997.

-------------------------
                                       
                        (b)   REPORTS ON FORM 8-K

     No reports on Form 8-K were filed by the Company during the fourth 
quarter ended September 30, 1997.

-------------------------

                                      33
<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 6, 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 6, 1998
--------------------------    Officer (Principal Executive Officer)
Geoffrey F. Hewitt        

/s/ Melvin W. Pelley          Chief Financial Officer                   January 6, 1998
--------------------------    (Principal Accounting Officer)
Melvin W. Pelley          

/s/ Scott J. Loomis           Director                                  January 6, 1998
--------------------------
Scott J. Loomis               

/s/ Walter Haemmerli          Director                                  January 6, 1998
--------------------------
Walter Haemmerli

/s/ Gerald T. Owens           Director                                  January 6, 1998
--------------------------
Gerald T. Owens

/s/ Irwin J. Gruverman        Director                                  January 6, 1998
--------------------------
Irwin J. Gruverman

/s/ Dale W. Conrad            Director                                  January 6, 1998
--------------------------
Dale W. Conrad

/s/ Byron A. Denenberg        Director                                  January 6, 1998
--------------------------
Byron A. Denenberg
</TABLE>
                                      
                                      34
<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>

                                EXHIBIT INDEX

Exhibit No.    Name
-----------    ----

10.22          Employment Agreement with Geoffrey F. Hewitt dated October 1,
               1997.
10.23          Employment Agreement with Melvin W. Pelley dated October 1,
               1997.
10.24          Employment Agreement with Thomas A. Collins dated October 1,
               1997.
10.25          Amendment to Whessoe Varec, Inc. OEM Strategic Alliance dated
               August 13, 1997.
10.26          Agreement dated October 2, 1997 between the Company and entrenet
               Group, LLC.
21.1           Subsidiaries of the Registrant.
23.1           Consent of Goldstein Golub Kessler & Company, PC.