FIBERCHEM INC, S-2, 1999-05-12

FIBERCHEM INC
S-2, 1999-05-12
MEASURING & CONTROLLING DEVICES, NEC

Previous: SOUTHEAST ACQUISITIONS I L P, 10-Q, 1999-05-12

Next: FIRST CAPITAL INCOME & GROWTH FUND SERIES XII, 10-Q, 1999-05-12

<PAGE>

As filed with the Securities and Exchange Commission on May 12,1999
Registration No. 333-______

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

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

FORM S-2
Registration Statement
Under the
Securities Act of 1933

FIBERCHEM, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware 2834 84-1063897
- ---------------------------- ------------------------- -------------------
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Classification Identification No.)
Organization) Code Number)

1181 Grier Drive, Suite B
Las Vegas, Nevada 89119
(702) 361-9873

(Address and Telephone Number of Principal Executive Offices and Principal Place
of Business)

Mr. Melvin Pelley
Chief Financial Officer
FiberChem, Inc.
1181 Grier Drive, Suite B
Las Vegas, Nevada 89119

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

Copies to:

Elliot H. Lutzker, Esq.
Snow Becker Krauss P.C.
605 Third Avenue
New York, NY 10158
Tel: (212) 687-3860
Fax: (212) 949-7052

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

Approximate Date of Proposed Sale to the Public: As soon as practicable
after the registration Statement becomes effective.

<PAGE>

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]

If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item
11(a)(1) of this form, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

- --------------------------------------------------------------------------------
* * * * *
- --------------------------------------------------------------------------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Title of Proposed Proposed
Each Class Maximum Maximum
of Securities Amount Offering Aggregate Amount of
to be to be Price Per Offering Registration
Registered Registered Unit(1) Price Fee
<S> <C> <C> <C> <C>
Common Stock, 1,425,500 shares (2) $0.14(3) $199,570 $55.48
$.0001 par value

Class E Common Stock 300,000 wts. (4) $ .90(5) $270,000 $75.06
Purchase Warrants

Common Stock, 300,000 shares (6)(7) (8) (8) (8)
$.0001 par value
</TABLE>

ii
<PAGE>

<TABLE>
<CAPTION>
Title of Proposed Proposed
Each Class Maximum Maximum
of Securities Amount Offering Aggregate Amount of
to be to be Price Per Offering Registration
Registered Registered Unit(1) Price Fee
<S> <C> <C> <C> <C>
Common Stock, 692,742 shares (7)(9) $ .23 $ 159,330 $ 44.29
$.0001 par value

Common Stock, 1,280,411 shares (7)(10) $ .23 $ 294,495 $ 81.87
$.0001 par value

Common Stock, 3,333,333 shares (7)(11) $ 1.00 $3,333,333 $ 926.67
$.001 par value

Common Stock, 75,000 shares (7)(12) $ .90 $ 67,500 $ 18.77
$.0001 par value

Class E Common 3,408,333 wts. (13) $ .90(5) $3,067,500 $ 852.77
Stock Purchase
Warrants

Common Stock, 3,408,333 shares (6)(7) (8) (8) (8)
$.0001 par value

Common Stock, 200,000 shares (14) $ .18 $ 36,000 $ 10.00
$.0001 par value

Common Stock, 200,000 shares (14) $ .50 $ 100,000 $ 27.80
$.0001 par value

Common Stock, 200,000 shares (14) $ 1.00 $ 200,000 $ 55.60
$.0001 par value

Total 11,115,319 shares $7,727,728 $2,148.31(15)
</TABLE>
- --------------------------------------------------------------------------------

(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 promulgated under the Securities Act of 1933, as
amended.

(2) Consists of common stock being offered by the selling securityholders.

(3) Pursuant to Rule 457(c) under the Act, the registration fee has been
calculated based upon the $.14 per share closing price of the common stock
on May 7, 1999, as reported by the National Quotation Bureau, Inc.

(4) Consists of Class E common stock purchase warrants offered by the selling
securityholder("Class E Warrants").

(5) Pursuant to Rule 457(g) under the Act, the registration fee has been
calculated on the basis of the highest price at which the warrants may be
exercised.

iii
<PAGE>

(6) Consists of shares of common stock issuable upon exercise of the warrants
being offered by the selling securityholder.

(7) Pursuant to Rule 416, this registration statement also covers such
indeterminable additional shares as may become issuable as a result of
anti-dilution adjustments in accordance with the terms of the warrants.

(8) Pursuant to Rule 457(i) under the Act, no additional registration fee is
required for the securities.

(9) Consists of shares of common stock issuable upon exercise of warrants
issued as partial consideration for the services of a placement agent in
connection with the offering of 8% Senior Convertible Notes in February
1996 (the "Note Warrants").

(10) Consists of shares of common stock issuable pursuant to warrants issued
as partial consideration for the services of a placement agent in
connection with the Regulation S offering in May 1996 (the "May 1996
Warrants").

(11) Consists of shares of common stock issuable upon exercise of warrants
issued as part of a foreign offering in May 1996 ("Reg S Warrants").

(12) Consists of shares of common stock issuable upon exercise of warrants
issued as partial consideration for consulting services (the "Consultant
Warrants")

(13) The Registrant is offering to exchange to the holders of the Reg S Warrants
and Consultant Warrants, on a one-for-one basis, Class E Warrants (the
"Exchange Warrants").

(14) Consists of shares of common stock issuable upon exercise of options.

(15) The fee of $2,148.31 is being paid herewith.

iv
<PAGE>

The information in this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION - DATED MAY 12, 1999
FIBERCHEM, INC.
11,115,319 SHARES OF COMMON STOCK, $.0001 PAR VALUE
3,708,333 CLASS E COMMON STOCK PURCHASE WARRANTS

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

This prospectus covers 1,425,500 outstanding shares of common stock,
$.0001 par value, 300,000 Class E common stock purchase warrants (the "Class
E Warrants") and 6,281,486 shares of common stock issuable upon exercise of
warrants and options of FiberChem held by certain selling securityholders
named herein. This prospectus also covers 3,408,333 Class E Warrants
("Exchange Warrants") and 3,408,333 shares of common stock issuable upon their
exercise, offered in exchange on a one-for-one basis to holders of 3,408,333
outstanding warrants.

The common stock and warrants are speculative investments and involve a
high degree of risk. You should read the description of certain risks under
the caption "Risk Factors" beginning on page 3 before purchasing the common
stock or warrants.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.

The common stock and Class E warrants are quoted on the Over-The-Counter
Electronic Bulletin Board ("OTCBB") under the symbol "FOCS" and "FOCSZ". On
May 7, 1999, the closing price per share of common stock on the OTCBB was
$0.14 and the closing price per Class E Warrant was $0.02 on April 13, 1999,
the date the last sale occurred.

Our executive offices are located at 1181 Grier Drive, Suite B, Las
Vegas, Nevada 89119, and our telephone number is (702) 361-9873.

This prospectus relates to securities to be sold by selling
securityholders. See Page 12.

THE DATE OF THIS PROSPECTUS IS ___________, 1999.

<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements incorporated by reference or appearing
elsewhere in this prospectus. This prospectus contains, in addition to
historical information, forward-looking statements that involve risks and
uncertainties. FiberChem's actual results could differ materially from the
results discussed in the forward-looking statements. Factors that could cause
or contribute to such differences include, but are not limited to,
FiberChem's lack of profitability, ability to continue as a going concern,
intense competition in the industry, and the other risks discussed in "Risk
Factors," as well as those discussed elsewhere in this prospectus.

INFORMATION ABOUT THE COMPANY

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. FiberChem has
developed a range of products and systems based on FOCS-Registered
Trademark-, which provide IN SITU and continuous real-time information
reporting. Products based on its FOCS-Registered Trademark- technology
currently being marketed by FiberChem include the PetroSense-Registered
Trademark- PHA-100 series of portable analyzers, the CMS-4000 and 5000
Continuous Monitoring Systems and the OilSense-4000-TM- System. These
products detect and measure petroleum hydrocarbon concentrations in a variety
of applications, including groundwater, waste water, storm water and process
water streams on offshore platforms. FiberChem is also developing for
commercial use a range of chemical sensors based on its
Sensor-on-a-Chip-Registered Trademark- technology for a wide variety of
environmental, consumer, commercial, industrial, automotive and military
applications.

We file reports, proxy statements and other information with the SEC.
You may read and copy any document we file at the Public Reference Room of
the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the Regional Offices of the SEC at Seven World Trade Center, Suite
1300, New York, New York 10048 and at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Please call 1-800-SEC-0330 for further
information concerning the Public Reference Room. Our filings also are
available to the public from the SEC's website at www.sec.gov. We distribute
to our stockholders annual reports containing audited financial statements.

Information Incorporated by Reference

The SEC allows us to "incorporate by reference" the information we file
with it, which means that we can disclose important information to you by
referring to those documents. The information incorporated by reference is
considered to be part of this prospectus. This prospectus is accompanied by
and incorporates by reference the documents listed below.

1. Annual Report on Form 10-KSB for the fiscal year ended September 30,
1998, and
2. Quarterly Report on Form 10-QSB for the fiscal quarter ended December
31, 1998.

2
<PAGE>

THE OFFERING

SECURITIES OFFERED:

- - 1,425,500 shares of common stock held by selling securityholders;

- - 300,000 Class E Warrants;

- - 3,408,333 Exchange Warrants;

- - 9,689,819 shares of common stock issuable upon exercise of warrants and
options.

OTCBB COMMON STOCK SYMBOL: . . . . . . . . . . . . . . . . . . . . . . . .FOCS

NUMBER OF SHARES OF COMMON
STOCK OUTSTANDING AS
OF MAY 10, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . .36,018,238

RISK FACTORS

The securities offered hereby are speculative and involve a high degree
of risk. Accordingly, you as a prospective investor, should carefully
consider the following factors relating to an investment in FiberChem.

We Have Had Historical Operating Losses and Have an Accumulated Deficit of
Approximately $32.6 Million. For the fiscal years ended September 30, 1996,
1997 and 1998, we had net losses of approximately $3,275,000, $3,227,000, and
$2,392,000, respectively, and for the three-month periods ended December 31,
1997 and l998 we had net losses of $507,000 and $620,000, respectively, with
an accumulated deficit of approximately $32,609,000 at December 31, 1998.
There can be no assurance that we will derive sufficient revenues from
operations to offset our level of fixed and planned expenditures, or that
losses will not continue.

We Lack Working Capital and Will Require Additional Capital. We had negative
working capital at December 31, 1998, of approximately $334,000, as compared
with working capital of approximately $1,608,000, at December 31, 1997, a
decrease of approximately $1,942,000. We had negative working capital of
approximately $919,000, at September 30, 1998, and working capital of
$1,884,000 at September 30, 1997, representing a decrease of $2,803,000. As
long as we continue to lose money and utilize capital to support operations,
we will require additional capital. We don't know whether we will be able to
obtain additional funding when it is needed, or that such funding, if
available, will be obtainable on terms favorable to or affordable to us or

3
<PAGE>

on any terms. If we are unable to obtain other financing we may be unable to
continue in business. See "Ability to Continue as a Going Concern; Modified
Report of Independent Accountants" below.

Ability to Continue as a "Going Concern"; Modified Report of Independent
Accountants. Our consolidated financial statements for the year ended
September 30, 1998, indicated there is substantial doubt about our ability to
continue as a going concern due to our need to generate cash from operations
and obtain additional financing. Accordingly, our ability to continue as a
going concern on a short-term or long-term basis is in substantial doubt
without permanent funding. In the event we are not able to continue as a
going concern, we may have to curtail operations, sell assets or seek
protection under the bankruptcy laws.

We May Not Be Able to Profitably Market New Products Under Development. We
have been engaged in the development of new products representing
applications of our chemical sensor technology and have had only limited
sales of these products to date. Before we can achieve profitable operations
we must complete our product development, develop adequate manufacturing
capacity for these products and must be able to sell our products to
purchasers in adequate volumes and prices to cover our costs and expenses.

In addition, in order to conduct more extensive manufacturing, marketing and
sales activities, we will need to implement and improve operational,
financial and management information systems, procedures and controls. We do
not know whether there will be adequate demand for out products in commercial
quantities, that we will be able to manufacture our products at costs that
would allow for profitable sales or that, in general, we will be able to
develop the operational, financial and management information systems,
procedures and controls necessary to operate profitably on a larger scale
than at present.

Our FOCS-Registered Trademark- Technology May Become Obsolete. To date, we
have been dependent on the marketing and sale of our fiber optic chemical
sensors ("FOCS-Registered Trademark-"). Other technologies exist that compete
with the FOCS-Registered Trademark- technology. Although we are also
developing a range of sensor products based on our
Sensor-on-a-chip-Registered Trademark-technology, we do not know whether any
or all of our products will be rendered superfluous or obsolete by research
efforts and technological advances made by others. Our failure to
successfully market the products incorporating the technologies would have a
material adverse effect on our operations. We are also dependent on the
successful development and marketing by other entities of products
incorporating our sensors.

We Must Compete with Larger and Financially Stronger Competitors.
Competition in the field of diagnostic sensor and environmental technology is
intense. Competition in the underground and aboveground storage tank
detection markets have intensified since the promulgation of various state
and EPA regulations.

Most of our actual and potential competitors have greater financial
resources, more extensive business experience and larger organizations than
we possess. Even if we are able to

4
<PAGE>

successfully market our FOCS-Registered Trademark-products, we do not know
whether larger or better financed companies will develop effective
competitive products.

Extensive Effect of Government Regulation in Environmental Monitoring Area.
The EPA regulations regulate the installation, testing, manufacture and
maintenance of underground storage tanks. There can be no assurance that our
PetroSense-Registered Trademark- Continuous Monitoring System will meet
future regulatory requirements. The state and EPA regulations establish
timetables for the installation of leak detection equipment in aboveground
and underground storage tanks and pipings and are subject to interpretation
and subsequent changes. These regulations are the minimum federal
requirements; state and local regulators are permitted to enact more
stringent standards. The EPA also regulates the monitoring, management and
cleanup of storm water-generated pollution and hazardous wastes. We do not
know whether other sensor products under development will meet future
federal or state regulatory requirements.

We are Dependent on Patent Protection of our Technologies. Our
FOCS-Registered Trademark- technology, which is proprietary and patented, is
our most critical asset. We own 21 United States patents and three additional
patent applications are pending with the United States Patent and Trademark
Office. We also have 12 foreign patents and 15 foreign patent applications
pending for our various sensor technologies and devices. We do not know
whether such patents will protect us from other persons who develop products
that infringe our proprietary rights. Many patents involving fiber optic
technology have been issued to others. To our best knowledge, our
technologies do not infringe patent or other proprietary rights of others;
however, there can be no assurance that such infringement has not occurred or
will not occur in the future.

If it were determined that our products infringed the claims of someone
else's issued patent, we could be enjoined from making or selling such
products or be forced to obtain a license in order to continue the
manufacture or sale of the product involved, requiring payment of a licensing
fee or royalties of unknown magnitude on sales of the product. In addition,
we could be liable for substantial damages, and even the defense of patent
litigation can be extremely expensive. There can be no assurance that if any
such license were required, it would be available or available on terms
acceptable to us. Any inability to obtain required licenses on favorable
terms, or at all, would adversely affect our business.

There can be no assurance that our pending patent applications will be
allowed, that any of our issued patents would be upheld, that any issued
patents will provide us with significant competitive advantages, or that
challenges will not be instituted against the validity or enforceability of
any patents owned by us and, if instituted, that such challenges will not be
successful. The cost of litigation to uphold the validity of a patent and
prevent infringement can be substantial even if we prevail. Furthermore,
there can be no assurance that others will not independently develop similar
technologies, duplicate our technology or design around the patented aspects
of our technology. If patents do not issue from present or future patent
applications, we may be subject to greater competition. In addition, our
technology might be subject to reverse engineering, allowing competitors to
obtain our proprietary technology.

5
<PAGE>

We Have Limited Products Liability Insurance and Exposure to Uninsured Risks.
We have products liability insurance in the amount of $5 million. When we
sell any product it may become subject to substantial claims and liabilities
from users of such products in excess of our insurance. In the event of an
uninsured claim or one in excess of our coverage, our business and financial
condition could be materially adversely affected.

We Have Limited Manufacturing Facilities. Our facilities in Las Vegas,
Nevada are capable of manufacturing our FOCS-Registered Trademark- and
Sensor-on-a-chip-Registered Trademark- products for our current sales
volumes. Although alternative assembly operations are currently available,
there can be no assurance that such operations will be available in the
future or will be available on terms acceptable to us.

We are Dependent on Third Parties for Manufacturing and Supply. We currently
manufacture only one of the components of our products, although we currently
assemble the products ourselves. We have not entered into any formal
arrangement with any supplier. Although we believe that there are several
potential suppliers for substantially all required components, we might incur
delays in meeting delivery deadlines in the event a particular supplier is
unable or unwilling to meet our requirements. Suppliers of custom designed
components would be more difficult to replace. No assurance can be given that
the cost of third party manufacturing of components or of our products will
not exceed current estimates. In addition, we are largely dependent on our
suppliers to maintain quality control.

We are Dependent upon Key Personnel. We are dependent upon the services of
Geoffrey Hewitt, Chief Executive Officer, Thomas Collins, President, and
Melvin Pelley, Chief Financial Officer, of FCI Environmental, our
wholly-owned subsidiary. To the extent that any of their services become
unavailable, our business or prospects may be adversely affected. Each is
employed pursuant to employment agreements which automatically renew for a
one year term unless terminated by either party to the agreements. There is
no assurance that we would be able to employ qualified persons to replace
these key individuals. We carry key man life insurance policies of $3
million, $2 million and $1 million on the lives of Messrs. Hewitt, Collins
and Pelley, respectively. We do not know whether we will continue to carry
the key man life insurance policies.

We are Dependent on Technical and Professional Personnel. Our ability to
produce and market our FOCS-Registered Trademark- products and develop new
products is dependent upon the availability and technical abilities of our
in-house staff and facilities and/or agreements to be negotiated with third
parties. Competition for qualified technical personnel is intense. No
assurance can be given that we will be able to retain those independent
persons presently employed and be able to attract qualified individuals in
the future to satisfy our requirements for technical expertise.

Possible Volatility of Common Stock Prices. The market price of our common
stock may be significantly affected by various factors, including, but not
limited to, general economic conditions and those specific to the
environmental testing industry, future acquisitions, if any, and our
financial condition. Moreover, the price of our common stock may be affected
by the

6
<PAGE>

significant number of shares of common stock outstanding, and the shares
underlying outstanding warrants and/or options to purchase shares of our
common stock. See "Market for Common Stock and Related Stockholder Matters."

Shares Eligible for Future Sales by our Current Stockholders May Affect our
Stock Price and Potential Future Dilution. Approximately 7,493,005 of the
36,018,238 shares of common stock outstanding as of May 10, 1999 are
"restricted securities" as such term is defined in Rule 144 promulgated under
the Securities Act. Restricted securities may only be publicly sold pursuant
to an effective registration statement under the Securities Act or in
accordance with applicable exemptions from the registration requirements of
the Securities Act. Rule 144 provides for the public sale by affiliates and
non-affiliates of limited quantities of restricted securities without
registration under the Securities Act when the securities are held over one
year. Non-affiliates that hold the restricted securities over two years may
sell an unlimited quantity of the restricted securities. Currently 3,333,333
shares of restricted securities are held by non-affiliates for over two years
and none are held by non-affiliates for less than one year.

We are unable to predict the effect that sales made pursuant to this
prospectus, Rule 144 or otherwise may have on the then prevailing market
price of our securities, although sales of substantial amounts of shares by
existing stockholders, or even the potential of such sales, may be expected
to have an adverse effect on the trading price and market for our securities.

Your Ownership Interest May Become Diluted. In the event that our stock
price increases, holders of outstanding options and warrants may elect to
exercise them, and holders of outstanding notes may elect to convert them,
resulting in dilution of other stockholders' interests. As of May 10, 1999,
we had outstanding 7,808,679 Class E warrants and 1,895,175 Class D warrants.
Each Class E Warrant is currently exercisable by the holder thereof to
purchase one share of common stock at an exercise price of $.25 per share
through October 23, 1999, increasing gradually to $.90 per share through
October 23, 2003. Each Class D Warrant is currently exercisable by the
holder thereof to purchase one share of common stock at an exercise price of
$1.20 through September 15, 1999 and $1.25 through the expiration date of
September 15, 2000. There are an additional 1,280,411 warrants outstanding,
each exercisable at $.2343; 692,742 warrants each exercisable at $.4078;
75,000 warrants each exercisable at $.90 and 3,333,333 warrants each
exercisable at $1.00 (collectively with the Class E warrants and Class D
warrants, the "Outstanding Warrants"). The convertible preferred
stockholders have the right to convert the 207,848 shares of convertible
preferred stock outstanding into 2,078,480 shares of common stock, subject to
adjustment, and redemption under certain circumstances. The holders of the 8%
Senior Convertible Notes have the right to convert their notes into an
aggregate of 7,047,826 shares of common stock, assuming a conversion price of
$.23, subject to adjustment and redemption under certain circumstances. The
holders of the notes will also receive upon conversion, warrants to purchase
7,047,826 shares of common stock, exercisable at $.23 for approximately two
years from issuance. In addition, we have previously registered an
additional 992,649 shares of common stock and intend to register 1,500,000
shares of common stock underlying a like number of options (2,433,649 options
outstanding; 59,000 options authorized,

7
<PAGE>

but not granted) and 250,000 shares of common stock issuable pursuant to an
Employee Stock Purchase Plan pursuant to registration statements on Forms
S-8. In addition, 600,000 shares of common stock are issuable upon exercise
of options granted pursuant to a consulting agreement dated May 10, 1999.

During the terms of our warrants, options, convertible preferred stock and
notes, the holders may be able to purchase shares of common stock at prices
substantially below the then current market price of our common stock, with a
resultant dilution in the interests in the existing common stockholders. The
holders of the warrants, options, convertible preferred stock and notes may
be expected to exercise their rights to acquire shares of common stock at
times when we might be able to obtain needed capital through a new offering
of securities on terms more favorable than those provided by these
outstanding securities. Thus, exercise of the warrants, and options and/or
the conversion of convertible preferred stock and notes may be expected to
have a depressive effect on the market price for the common stock and might
adversely affect the terms on which we may be able to obtain additional
financing or additional capital. In addition, the exercise or conversion of
the warrants, options, convertible preferred stock or notes and the
subsequent sales of shares of common stock by holders of such securities
pursuant to a registration statement, under Rule 144, or otherwise, could
have an adverse effect upon the market for our securities. Moreover, warrant
holders who fail to exercise their warrants will experience a corresponding
decrease in their interest held in us relative to the ownership interest held
by exercising warrant holders.

Classified Board of Directors. Our by-laws provide for a classified Board of
Directors with board members serving staggered three-year terms. The Board
has three classes of directors serving for three-year terms, with one class
of directors to be elected at each annual meeting of stockholders. The
classification of Directors has the effect of making it more difficult to
change the composition of the Board of Directors and more difficult for a
third-party to acquire us.

Preferred Stock Authorization. Our Certificate of Incorporation authorizes
the issuance of a maximum of 10,000,000 shares of "blank check" preferred
stock, $.001 par value with such designations, rights and preferences as may
be determined from time to time by our Board of Directors. As of May 10,
1999, we had 207,848 shares of Preferred Stock outstanding. There can be no
assurance that we will not issue additional preferred stock in the near
future. If issued, the terms of a series of additional preferred stock could
operate to the significant disadvantage of holders of outstanding convertible
preferred stock and/or common stock. In addition, in the event of a proposed
attempt to gain control of us where the Board of Directors does not approve,
the Board could authorize the issuance of preferred stock as an anti-takeover
device, which could prevent the completion of such a transaction to the
detriment of public stockholders.

Disclosure Relating to Low-Priced Stocks. Our common stock, which is traded
on the OTCBB, is subject to Rule 15g-9 promulgated under the Securities
Exchange Act of 1934, as amended, which imposes various sales practice
requirements on broker-dealers who sell securities governed by Rule 15g-9 to
persons other than established customers and accredited investors (generally
institutions with assets in excess of $5,000,000 or individuals with a net
worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000
jointly with their

8
<PAGE>

spouse). For transactions covered by Rule 15g-9, the broker-dealer must make
a special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. Consequently,
Rule 15g-9 may have an adverse effect on the ability of broker-dealers to
sell our securities and may affect the ability of purchasers in this offering
to sell our securities in the secondary market and otherwise affect the
trading market in the common stock.

The Commission has adopted rules that regulate broker-dealer practices in
connection with transactions in "penny stocks." If our securities become
subject to the penny stock rules, investors in the offering may find it more
difficult to sell their shares. Penny stocks generally are equity securities
with a price of less than $5.00 (other than securities registered on certain
national securities exchanges or quoted on the NASDAQ system, provided that
current price and volume information with respect to transactions in that
security is provided by the exchange or system). The penny stock rules
require a broker-dealer, prior to a transaction in a penny stock not
otherwise exempt from the rules, to deliver a standardized risk disclosure
document prepared by the Commission that provides information about penny
stocks and the nature and level of risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer's account. The bid and
offer quotations, and the broker dealer salesperson compensation information,
must be given to the customer orally or in writing before or with the
customer's confirmation. These disclosure requirements may have the effect of
reducing the level of trading activity in the secondary market for a stock
that becomes subject to the penny stock rules.

Year 2000. We continue to review the cost and operating impact of addressing
the Year-2000 issue. Management has conducted assessments of the potential
costs associated with its internal operations, products shipped to our
customers, and material and services provided by our suppliers. We have
conducted tests of our products and based on such testing, we believe that
our current products are Year-2000 compliant, in accordance with the
Year-2000 Information and Disclosure Act. We have provided upgrades to older
products, and believe that all our products are Year-2000 compliant. We have
not incurred, and do not expect to incur, material costs relative to our
products.

We have incurred costs of less than $5,000 as of May 10, 1999, and expect to
incur additional costs of approximately $50,000 during calendar 1999 to
upgrade our internal hardware and software systems which are critical to and
support our manufacturing, engineering, financial and other operations. The
risks of disruptions in the business community in general, as well as with
respect to our customers and suppliers, are difficult to discern. We continue
to review these risks with respect to our operations, and we do not expect
that the Year-2000 issue will have a material impact on our current financial
position, liquidity or results of operations.

9
<PAGE>

This prospectus contains certain forward-looking statements that are subject
to significant risks and uncertainties. There are a number of important
factors that could cause actual results to differ materially from historical
results and results anticipated by the forward looking statements contained
in the following discussion. Such factors and risks include, but are not
limited to, intense competition, price cutting, dependence on key personnel,
the economic environment, the ability to develop, market, and support new
products and the ability of FiberChem to manage its growth.

For all of the aforesaid reasons and others set forth herein, the purchase of
securities offered hereby involves a high degree of risk. Any person
considering an investment in the securities offered hereby should be aware of
these and other factors set forth in this prospectus. The securities should
be purchased only by persons who can afford to absorb a total loss of their
investment in us and have no need for a return on their investment.

USE OF PROCEEDS

FiberChem will not receive the proceeds from the sales of common stock
by the selling securityholders. However, FiberChem may receive up to
$3,673,500 from the exercise of the warrants and options, which it intends to
use for working capital and other general corporate purposes.

MARKET FOR COMMON STOCK AND RELATED STOCKHOLDERS MATTERS

FiberChem's common stock was traded on the Nasdaq/SCM under the symbol
"FOCS" until February 25, 1998, when it was delisted from Nasdaq/SCM. Since
then it has been traded on the OTCBB. The following table sets forth the high
and low trade prices of the common stock for the periods shown through
February 25, 1998 as reported by Nasdaq and the high and low bid prices of
the common stock and Class E Warrants as reported by the National Quotation
Bureau thereafter. The Class E Warrants commenced trading on the OTCBB on
December 7, 1998. The bid prices quoted on the OTCBB reflect inter-dealer
prices without retail mark-up, mark-down or commission and may not represent
actual transactions.

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
COMMON STOCK

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 ENDED SEPTEMBER 30, 1998
First Quarter . . . . . . . . . . . . . . . . . . . $0.28 $0.12
Second Quarter . . . . . . . . . . . . . . . . . . 0.22 0.12
Third Quarter . . . . . . . . . . . . . . . . . . . 0.24 0.16

10
<PAGE>

Fourth Quarter . . . . . . . . . . . . . . . . . . 0.15 0.11
FISCAL YEAR ENDED SEPTEMBER 30, 1999
First Quarter . . . . . . . . . . . . . . . . . . . $0.23 $0.13
Second Quarter . . . . . . . . . . . . . . . . . . $0.27 $0.13
Third Quarter ( April 1, 1999 - May 7, 1999). . . . $0.23 $0.14

CLASS E WARRANTS
HIGH LOW
---- ---
FISCAL YEAR ENDED SEPTEMBER 30, 1999
First Quarter December 7, 1998 - December 31, 1998) . . $0.01 $0.01
Second Quarter . . . . . . . . . . . . . . . . . . . . 0.02 0.01
Third Quarter (April 1, 1999 - May 7, 1999) . . . . . . 0.02 0.02
</TABLE>

On May 7, 1999, the closing bid price of the common stock and Class E
warrants on the OTCBB were $0.014 and $0.02, respectively.

At April 30, 1999, there were approximately 501 holders of record of
common stock and 65 holders of record of Class E warrants. We estimate that
we have approximately 2,500 beneficial holders of our common stock.

DIVIDEND POLICY

The payment of dividends by FiberChem is within the discretion of its
Board of Directors and depends in part upon our earnings, capital
requirements and financial condition. Since our inception, we have not paid
any dividends on our common stock and do not anticipate paying such dividends
in the foreseeable future. FiberChem intends to retain earnings, if any, to
finance our operations.

Pursuant to the terms of the FiberChem's convertible preferred stock,
dividends are payable annually on November 1st. The holders of the
convertible preferred stock may elect to receive their dividend payments in
cash at a rate of 11% of the liquidation value, or in additional shares of
convertible preferred stock at the rate of 8% the number of shares of
convertible preferred stock held by such holder on the date of declaration.
In September 1998, FiberChem's Board of Directors determined that, in view of
the recent trading price of FiberChem's common stock and in view of
FiberChem's current cash position, it would not be appropriate to declare the
annual dividend payable on the convertible preferred stock on November 1,
1998. As a result, that dividend will accumulate in accordance with the terms
of the convertible preferred stock. The undeclared dividends in arrears as of
May 10, 1999 are $722,694 if elected entirely in cash or 36,442 additional
shares of convertible preferred stock if elected solely in shares. No
assurance can be given that FiberChem will be able to make dividend
distributions in the future if the holders of the convertible preferred stock
request cash.

11
<PAGE>

SELLING SECURITYHOLDERS

The following table sets forth, with respect to each selling
securityholder, based upon information available to FiberChem as of May 10,
1999, the number of shares of common stock beneficially owned, the number of
shares of common stock to be sold, and the number and percentage of
outstanding shares of common stock beneficially owned before and after the
sale of the shares offered hereby. It also includes such information as to
Class E Warrants owned and to be sold by selling securityholders. None of
the selling securityholders has been an affiliate of FiberChem during the
preceding three years, and none of them will own beneficially 1% of the
outstanding stock of FiberChem hereafter. The table assumes that each of the
selling securityholders will sell all of the shares of common stock offered
by this prospectus. You may refer to Description of Securities for
additional information concerning the issuance of these securities by the
Company.

<TABLE>
<CAPTION>
Percentage
of Common
Shares of Common Amount of Shares of Stock
Stock Beneficially Class E Common Owned
Owned Warrants Stock Before
Name of Security Holder Before Offering (1) To Be Sold To Be Sold Offering (2)
----------------------- ------------------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Makenna Delaney & Sullivan, Inc. 426,500(3) -0- 426,500 1.2%

Continental Capital & Equity 1,599,000(4) -0- 1,599,000 4.4%
Corporation

CIF Financial Ltd. 300,000(5) 300,000 300,000 *

Dalworth Capital Limited 97,093(6) -0- 300,863 *
203,770(7)

Rauscher Pierce & Clark 16,793(6) -0- 36,576 *
19,783(7)

Rauscher Pierce & Clark (Guernsey) 441,391(6) -0- 1,204,087 3.2%
762,696(7)

12
<PAGE>

Percentage
of Common
Shares of Common Amount of Shares of Stock
Stock Beneficially Class E Common Owned
Owned Warrants Stock Before
Name of Security Holder Before Offering (1) To Be Sold To Be Sold Offering (2)
----------------------- ------------------- ---------- ---------- ------------

Royal Bank of Scotland Trust Co. 40,390(6) -0- 364,552 *
(Jersey) 294,162(7)
30,000(8)

Royal Bank of Scotland Trust Co. 97,075(6) -0- 97,075 *

European Capital Advisors Ltd. 37,500(9) -0- 37,500 *

AmerAsia Consulting Ltd. 37,500(9) -0- 37,500 *

Affida Bank 100,000(8) -0- 100,000 *

Banca Del Gottardo 110,000(8) -0- 110,000 *

Bank Austria (Schweiz) AG 160,000(8) -0- 160,000 *

Peter L. Boggs 30,000(8) -0- 30,000 *

Camrose Limited 200,000(8) -0- 200,000 *

Centrum Bank AG 150,000(8) -0- 150,000 *

CEPA 89,111(8) -0- 89,111 *

City and Claremont Nominees Ltd. 80,000(8) -0- 80,000 *

13
<PAGE>

Coutts Nominees 200,000(8) -0- 200,000 *

Faisal Finance (Switzerland) 190,000(8) -0- 190,000 *

Harvey H. Frey 30,000(8) -0- 30,000 *

Peter Paul Keel 70,000(8) -0- 70,000 *

Helen C. Kimball-Brooke 12,000(8) -0- 12,000 *

Maerki Baumann & Co. Ag. 40,000(8) -0- 40,000 *

Medig Placements SA 75,000(8) -0- 75,000 *

Georges Muller 75,000(8) -0- 75,000 *

Charles B. Robinson & Janet C. 30,000(8) -0- 30,000 *
Robinson

Sissel Smaller 30,000(8) -0- 30,000 *

Sreedeswar Holdings Inc. Panama 250,000(8) -0- 250,000 *

Valux SA 55,000(8) -0- 55,000 *

Swan Alley (Nominees) Limited 222,222(8) -0- 222,222 *

14
<PAGE>

Xanthus Ltd. 75,000(8) -0- 75,000 *

Hare & Company 55,000(8) -0- 55,000 *

Booth & Co. 425,000(8) -0- 425,000 1.2%

Willro/Nominees Limited 270,000(8) -0- 270,000 *

Dunlaw Nominees 280,000(5) -0- 280,000 *
------------- ---------- ---------

Totals 7,707,985 300,000 7,707,985
</TABLE>

* less than 1% of the total number of shares issued and outstanding.

(1) Unless otherwise noted, FiberChem believes that all persons named in the
table have sole voting and 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 effective date of this prospectus upon the exercise of
warrants or other convertible securities.

(2) Based on 36,018,238 common stock outstanding as of May 10, 1999.

(3) Shares issued as compensation for investor relation services.

(4) Includes shares issued as compensation for financial consulting services
and 600,000 shares issuable upon exercise of currently exercisable stock
options.

(5) Issuable upon exercise of Class E Warrants.

(6) Issuable upon exercise of warrants issued in February 1996.

15
<PAGE>

(7) Issuable upon exercise of warrants issued in May 1996.

(8) Issuable upon exercise of warrants issued in May 1996 to non U.S. persons.

(9) Issuable upon exercise of warrants issued in September 1995.

PLAN OF DISTRIBUTION

The Exchange Warrants and the shares of common stock issuable upon their
exercise are being offered by FiberChem directly to securityholders without
an underwriter.

The shares of common stock issuable upon exercise of the balance of
warrants and options covered by this prospectus also are being offered by the
Company directly to the securityholders, without an underwriter. The holders
of the warrants and options who exercise such warrants and options may sell
the common stock purchased upon their exercise, in the over-the-counter
market, or otherwise.

The 300,000 outstanding Class E Warrants being offered pursuant to this
prospectus, are part of a class of 7,508,679 identical outstanding warrants
publicly traded. They are being offered by the holders thereof and may be
sold in the over-the-counter market, or privately, through broker-dealers
selected by the holders thereof, or as principals.

There are 1,425,500 shares of outstanding common stock covered by this
prospectus offered by the holders thereof for their own account and not that
of the Company. Such shares may be sold in the over-the-counter market
through brokers, or otherwise.

Usual and customary or negotiated brokerage fees or commissions may be
paid by the holders in connection with such sales.

The selling securityholders, their respective transferees,
intermediaries, donees, pledgees or other successors in interest through whom
the selling securityholders' common stock and warrants are sold may be deemed
"underwriters" within the meaning of Section 2(11) of the Securities Act,
with respect to the securities offered and any profits realized or
commissions received may be deemed to be underwriting compensation. Any
broker-dealers that participate in the distribution of the selling
securityholders' securities may be deemed to be "underwriters," as defined in
the Securities Act, and any commissions, discounts, concessions or other
payments made to them, or any profits realized by them upon the resale of any
selling securityholders' securities purchased by them as principals, may be
deemed to be underwriting commissions or discounts under the Securities Act.

FiberChem will pay all expenses incident to the registration of the
securities covered by this prospectus. FiberChem will not pay, among other
expenses, commissions and discounts of brokers, dealers or agents.

16
<PAGE>

The sale of the common stock and warrants are subject to the prospectus
delivery and other requirements of the Securities Act. To the extent
required, FiberChem will use its best efforts to file and distribute, during
any period in which offers or sales are being made, one or more amendments or
supplements to this prospectus or a new registration statement to describe
any material information with respect to the plan of distribution not
previously disclosed in this prospectus, including, but not limited to, the
number of securities being offered and the terms of the offering, including
the name or names of any underwriters, dealers or agents, if any, the
purchase price paid by the underwriter for securities purchased from a
selling securityholder, any discounts, commissions or concessions allowed or
reallowed or paid to dealers and the proposed selling price to the public.

Under the Exchange Act and the regulations thereunder, any person
engaged in a distribution of the securities of FiberChem offered by this
prospectus may not simultaneously engage in market-making activities with
respect to the common stock of FiberChem during the applicable "cooling off"
period five business days prior to the commencement of such distribution.
The selling securityholders will also be subject to applicable provisions of
the Exchange Act and the rules and regulations thereunder, including,
Regulation M, in connection with transactions in the securities, which
provisions may limit the timing of purchases and sales of securities by the
selling securityholders.

DESCRIPTION OF SECURITIES

The following summary descriptions of FiberChem's securities are
qualified in their entirety by reference to FiberChem's Certificate of
Incorporation and By-Laws, copies of which are available upon request.

COMMON STOCK

FiberChem is authorized to issue 150,000,000 shares of common stock,
$.0001 par value, of which 36,018,238 shares of common stock are issued and
outstanding. As of May 10, 1999, there were approximately 501 record holders
of common stock. All of the outstanding shares of common stock are duly and
validly issued, fully paid and non-assessable.

Subject to the rights of the holders of preferred stock, holders of
common stock are entitled to receive, pro rata, such dividends and
distributions as may, from time to time, be declared by the Board of
Directors, from funds legally available therefor. FiberChem has not paid any
cash dividends on its common stock and does not anticipate paying cash
dividends in the foreseeable future. See "Dividend Policy". In the event of
liquidation, dissolution or winding up of FiberChem, holders of common stock
are entitled to share ratably in all assets of FiberChem available for
distribution to holders of common stock, subject to the rights of creditors
and holders of preferred stock. The holders of common stock are not subject
to redemption, further

17
<PAGE>

calls or assessments by FiberChem. Holders of common stock have no
preemptive, subscription or conversion rights.

Holders of common stock are entitled to one vote per share on all
matters submitted to the stockholders, and the holders of the majority of the
outstanding shares of common stock currently constitute a quorum at any
meeting of stockholders.

Since the common stock does not have cumulative voting rights, holders
of more than 50% of the outstanding shares can elect the Directors of
FiberChem. However, FiberChem's Board of Directors is divided into three
classes, each of which is to be elected for three-year terms. As the term of
each class expires, Directors of that class are elected for full three-year
terms. FiberChem's Board of Directors currently has five Directors.

CLASS E WARRANTS

Each Class E Warrant entitles the holder thereof to purchase one share
of FiberChem's common stock from October 23, 1998 through October 23, 2003 at
an exercise price of $.25 per share through October 23, 1999; $.35 per share
from October 24, 1999 through October 23, 2000; $.50 per share from October
24, 2000 through October 23, 2001; $.70 per share from October 24, 2001
through October 23, 2002; and $.90 per share from October 24, 2002 through
October 23, 2003.

The Class E Warrant may be redeemed by FiberChem, if for any period of
30 consecutive trading days the last reported sales price for each trading
day during such period is at least 200% of the then current exercise price,
subject to adjustment. FiberChem may then, upon notice to the registered
holders, redeem the Class E Warrants at a price of $.05 per warrant.

The Class E Warrants contain provisions that protect the holders thereof
against dilution. The exercise price is subject to adjustment in the event of
stock splits, stock dividends, reclassifications, recapitalizations,
reorganizations, mergers or consolidations of FiberChem and certain other
events.

The Class E Warrants may be exercised upon surrender of the Class E
Warrant certificate on or prior to the expiration date at the offices of
FiberChem, with the exercise form on the reverse side of the Class E Warrant
certificate completed and executed as indicated, accompanied by full payment
of the exercise price (by check payable to FiberChem) for the number of Class
E Warrants being exercised. The Class E Warrant holders do not have the right
or privileges of holders of common stock.

FiberChem is required to have a current registration statement on file
with the Securities and Exchange Commission and to effect appropriate
qualifications under the laws and regulations of the states in which the
holders of Class E Warrants reside in order to comply with applicable laws in
connection with the exercise of the Class E Warrants and the resale of the

18
<PAGE>

shares of common stock issuable upon such exercise. FiberChem will be
required to file post-effective amendments or supplements to its registration
statement when subsequent events require such amendments or supplements in
order to continue the registration of the Class E Warrants, and the shares
issuable upon exercise of the Class E Warrants and to take appropriate action
under state securities laws. There can be no assurance that FiberChem will be
able to keep its registration statement current or to effect appropriate
action under applicable state securities laws, the failure of which may
prevent the sale of the Class E Warrants and the exercise of the Class E
Warrants and resale or other disposition of the underlying shares to be
effected.

Corporate Stock Transfer located in Denver Colorado, will act as the
Warrant Agent with respect to the Class E Warrants.

There are 3,708,333 shares of common stock issuable upon exercise of the
above warrants covered by this prospectus.

OTHER WARRANTS

FiberChem sold 3,333,333 warrants to non U.S. persons in May 1996. Each
warrant entitles the holder thereof to purchase one share of common stock at
an exercise price of $1.00, subject to adjustment in certain events, at any
time on or before May 30, 2001. The exercise price is subject to adjustment
upon the occurrence of certain events, including but not limited to: (i)
stock dividends and certain other distributions; (ii) the subdivision,
combination or reclassification of outstanding shares of common stock; (iii)
issuances to all shareholders of FiberChem of rights or warrants to acquire
shares of common stock at a price less than the then current market price for
the common stock; (iv) issuances of common stock at a price less than the
then fair market value, and (v) the distribution to all holders of common
stock of debt securities of FiberChem or options or rights or warrants to
purchase securities of FiberChem (excluding those rights and warrants
referred to above and cash dividends or distributions from current or
retained earnings). FiberChem may at any time or from time to time reduce the
exercise price temporarily or permanently. Holders of these warrants do not
have any of the rights or privileges of stockholders of FiberChem.

These warrants are subject to redemption at a price of $.05 per warrant
(the "Redemption") at any time after May 13, 1997, if the average closing
market price for the common stock as quoted on NASDAQ, or any subsequent
exchange or market system on which the common stock is traded, has been at
least two hundred percent (200%) of the exercise price for thirty (30)
consecutive days. There are 3,333,333 shares of common stock issuable upon
exercise of the above warrants covered by this prospectus.

In September 1995, FiberChem issued warrants to purchase an aggregate of
75,000 shares of common stock at an exercise price of $.90 per share to two
entities for consulting services. There are 75,000 shares of common stock
issuable upon exercise of the above warrants covered by this prospectus.

19
<PAGE>

On February 15, 1996, FiberChem issued warrants to purchase an aggregate
of 353,125 shares of common stock at initially $0.80 per share (subsequently
adjusted to $.4078 per share and warrants to purchase 692,742 shares) to
Rauscher Pierce & Clark Limited in partial consideration for its services as
placement agent in connection with the offering of 8% senior convertible
notes. There are 692,742 shares of common stock issuable upon exercise of the
above warrants covered by this prospectus.

On May 31, 1996, FiberChem issued warrants to purchase an aggregate of
333,333 shares of common stock at an exercise price of initially $.90 per
share (subsequently adjusted in accordance with the terms of warrants to
purchase 1,280,411 shares at an exercise price of $0.2343 per share) to
Rauscher Pierce & Clark, Inc. and Rauscher Pierce & Clark Limited in partial
consideration for their services as placement agent in connection with the
offering to non U.S. persons. There are 1,280,411 shares of common stock
issuable upon exercise of the above warrants covered by this prospectus.

REPORTS TO STOCKHOLDERS

FiberChem distributes to its stockholders annual reports containing
financial statements audited and reported upon by its independent certified
public accountants after the end of each fiscal year, and makes available
such other periodic reports as FiberChem may deem to be appropriate or as may
be required by law or by the rules or regulations of any stock exchange on
which FiberChem's common stock is listed. FiberChem's fiscal year end is
September 30.

LEGAL MATTERS

The legality of the securities offered by this prospectus will be passed
upon for FiberChem by Snow Becker Krauss P.C., New York, New York. Snow
Becker Krauss P.C. owns 602,275 shares of common stock and 302,275 Class E
warrants. SBK Investment Partners, an investment entity of members of Snow
Becker Krauss P.C. owns 6,250 Class D warrants.

EXPERTS

The consolidated balance sheet of FiberChem, Inc. and subsidiaries as of
September 30, 1998 and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the two years in the period
ended September 30, 1998 have been incorporated by reference and incorporated
in the Registration Statement in reliance upon the report of Goldstein Golub
Kessler LLP, independent certified public accountants, and upon the authority of
said firm as experts in accounting and auditing.

20
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Market for Common Equity and Related Shareholders Matters. . . . . . . . 10
Selling Securityholders. . . . . . . . . . . . . . . . . . . . . . . . . 12
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Description of Securities. . . . . . . . . . . . . . . . . . . . . . . . 17
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>

11,115,319 Shares of
Common Stock
and 3,708,333 Common
Stock Purchase Warrants
of
FiberChem, Inc.

-----------

PROSPECTUS

-----------

__________, 1999

21
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The expenses payable by FiberChem in connection with the issuance and
distribution of the securities being registered are estimated as follows:

<TABLE>
<S> <C>
SEC Registration Fee. . . . . . . . . . . . . . . . . . . . $ 2,148.31
-----------
Printing . . . . . . . . . . . . . . . . . . . . . . . . . 1,000.00
-----------
Legal Fees and Expenses . . . . . . . . . . . . . . . . . . 3,500.00
-----------
Accounting and Auditing Fees
and Expenses . . . . . . . . . . . . . . . . . . . . . . . 2,500.00
-----------
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . 851.69
-----------

Total. . . . . . . . . . . . . . . . . . . . . . . . . $ 10,000.00
-----------
-----------
</TABLE>

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

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law ("DGCL") permits a
corporation organized thereunder to indemnify its directors and officers for
certain of their acts. The Articles of Incorporation of FiberChem are framed
so as to conform to the DGCL.

The laws of Delaware provide for indemnification of officers and
directors who are totally successful in defending themselves, by placing a
restrictive provision in the Articles of Incorporation.

Delaware law provides that a director who is found to be liable for
negligence or misconduct in the performance of his duty to FiberChem, is
indemnified if a court, upon application, finds that despite the adjudication
of liability, but in view of all circumstances of the case, such person is
fairly and reasonably entitled to indemnification for such expenses which the
court deems proper.

FiberChem's By-Laws provide for indemnification of officers and
directors, except in relation to matters as to which they are finally
adjudged to be liable for negligence or misconduct, but only if the
corporation is advised in writing by its counsel that in his opinion the
person indemnified did not commit such negligence or misconduct. The DGCL
provides that an officer or director may be indemnified if he (a) conducted
himself in good faith, (2) reasonably believed, in his official capacity with
the corporation, that his conduct was in the corporation's best interest, or
(3) in all other cases, his conduct was at least not opposed to the
corporation's best interest; however, if in connection with a proceeding by
or in the right of the corporation in

22
<PAGE>

which he was adjudged liable to the corporation or in connection with any
proceeding charging improper personal benefit to the director, whether or not
involving action in his official capacity, in which he was adjudged liable on
the basis that personal benefit was improperly received by him, Delaware law
provides that indemnification is not available.

23
<PAGE>

ITEM 16. EXHIBITS

<TABLE>
<S> <C>
3.1 Articles of Incorporation of Registrant, as amended. (1)
3.2 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)
4.4 Form of Class E Common Stock Purchase Warrant. (6)
*5.1 Opinion of Snow Becker Krauss P.C.
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)
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. (9)
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. (10)
10.6 Qualified Stock Option Plan. (11)
10.7 Consulting agreement by and between the Company and with Irv J.
Gruverman, dated November 4, 1993. (12)
10.8 Qualified Stock Option Plan. (13)
</TABLE>

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

(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 on
Form SB-2 for October 23, 1998 (File No. 333-46555).
(7) Incorporated by reference from the Company's Registration Statement No.
33-29338.
(8) Incorporated by reference from the Company's Annual Report on Form 10-K
for September 30, 1991.
(9) 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.
(10) Incorporated by reference from the Company's Registration Statement on
Form S-8 for April 28, 1992. (No. 33-47518).
(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.

* Filed herewith.

24
<PAGE>

<TABLE>
<S> <C>
10.9 FCI FiberChem, Inc. and FCI Environmental, Inc. 401(k) Profit Sharing
Plan. (14)
10.10 Qualified Stock Option Plan (15)
10.11 License Agreement with Texas Instruments, Incorporated, dated June 15,
1995. (16)
10.12 Cooperative Development Agreement with Texas Instruments, Incorporated,
dated June 15, 1995. (16)
10.13 Form of Distribution Agreement. (17)
10.14 Form of agreement for services with Gordon Werner and others dated as of
September 15, 1995. (17)
10.15 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)
10.16 Agreement dated October 1, 1996 by and between FCI Environmental, Inc.
and Autronica AS. (18)
10.17 OEM Strategic Alliance Agreement dated June 30, 1996 by and between
Whessoe Varec, Inc. and FCI Environmental, Inc. (18)
10.18 1997 Employee Stock Plan (19)
10.19 Employment agreement with Geoffrey F. Hewitt dated October 1, 1997. (20)
10.20 Employment agreement with Melvin W. Pelley dated October 1, 1997. (20)
10.21 Employment Agreement with Thomas A. Collins dated October 1, 1997. (20)
10.22 Amendment to Whessoe Varec, Inc. OEM Strategic Alliance Agreement dated
August 13, 1997. (20)
10.23 Agreement dated October 2, 1997 between the Company and entrenet Group,
L.L.C. (20)
*10.24 Agreement dated May 10, 1999 between the Company and Continental
Capital & Equity Corporation.
*13.1 Annual Report on Form 10-KSB for the fiscal year ended September 30,
1998.
*13.2 Quarterly Report on Form 10-QSB for the fiscal quarter ended December 31,
1998.
*21.1 Subsidiaries of the Registrant.
*23.1 The consent of Snow Becker Krauss P.C. is included in Exhibit 5.1
*23.2 Consent of Goldstein Golub Kessler LLP.
*24.1 Powers of Attorney (included on the signature page of this Registration
Statement.
</TABLE>

- -----------------------------------------
(16) Incorporated by reference from the Company's Report on Form S-8 for
August 1, 1995.
(17) Incorporated by reference from the Company's Report on Form 8-K/A for
August 30, 1995.
(18) Incorporated by reference from the Company's Report on Form 10-KSB for
September 30, 1995.
(19) Incorporated by reference from the Company's Report on Form 10-KSB for
September 30, 1996.
(20) Incorporated by reference from the Company's Proxy Statement dated May
20, 1997.
(21) Incorporated by reference from the Company's Report on Form 10-KSB for
September 30, 1997.

* Filed herewith.

25
<PAGE>

ITEM 17. UNDERTAKINGS

RULE 415 OFFERING

FiberChem hereby undertakes:

(a)(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:

(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Act");

(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information
in the registration statement;

(iii) Include any additional or changed material information on the
plan of distribution.

(2) For determining liability under the Act, to treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.

(3) To file a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.

(e) REQUEST FOR ACCELERATION OF EFFECTIVE DATE. Insofar as
indemnification for liabilities arising under the Act may be permitted to
directors, officers and controlling persons of the small business issuer
pursuant to the foregoing provisions, or otherwise, the small business issuer
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by FiberChem
of expenses incurred or paid by a director, officer or controlling person of
FiberChem in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, FiberChem will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.

26
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Las Vegas, State of Nevada, on
May 11, 1999

FIBERCHEM, INC.

By: /s/ Geoffrey F. Hewitt
---------------------------------------
Geoffrey F. Hewitt
CHIEF EXECUTIVE OFFICER
(Principal Executive Officer)

By: /s/ Melvin W. Pelley
---------------------------------------
Melvin W. Pelley
CHIEF FINANCIAL OFFICER
(Principal Financial and Accounting
Officer)

POWER OF ATTORNEY

Each of the undersigned hereby authorizes Geoffrey F. Hewitt or Melvin
W. Pelley as his attorney-in-fact to execute in the name of each such person
and to file such amendments (including post-effective amendments) to this
registration statement as the Registrant deems appropriate and appoints such
person as attorney-in-fact to sign on his behalf individually and in each
capacity stated below and to file all amendments, exhibits, supplements and
post-effective amendments to this registration statement.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on
May 11, 1999 in the capacities indicated.

<TABLE>
<CAPTION>
NAME TITLE
---- -----
<S> <C>
/s/ Geoffrey F. Hewitt
- -------------------------------
Geoffrey F. Hewitt Chief Executive Officer

/s/ Melvin W. Pelley
- -------------------------------
Melvin W. Pelley Chief Financial Officer

/s/ Walter Haemmerli
- -------------------------------
Walter Haemmerli Director

27
<PAGE>

/s/ Irwin J. Gruverman
- -------------------------------
Irwin J. Gruverman Director

/s/ Byron A. Denenberg
- -------------------------------
Byron A. Denenberg Director

/s/ Gerald T. Owens
- -------------------------------
Gerald T. Owens Director
</TABLE>

28
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit No. Name
<S> <C>
5.1 Opinion of Snow Becker Krauss P.C.
10.24 Agreement dated May 10, 1999 between the Company and
Continental Capital & Equity Corporation.
13.1 Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1998.
13.2 Quarterly Report on Form 10-QSB for the fiscal quarter ended
December 31, 1998.
21.1 Subsidiaries of the Registrant.
23.1 The consent of Snow Becker Krauss P.C. is included in
Exhibit 5.1
23.2 Consent of Goldstein Golub Kessler LLP.
</TABLE>

<PAGE>

Snow Becker Krauss P.C.
605 Third Avenue
New York, New York 10158-0125

May 12, 1999

FiberChem, Inc.
1181 Grier Drive, Suite B
Las Vegas, Nevada 89119

Ladies and Gentlemen:

You have requested our opinion with respect to the offer and sale by the
selling securityholders of FiberChem, Inc., a Delaware corporation (the
"Company"), pursuant to a Registration Statement (the "Registration
Statement") on Form S-2 under the Securities Act of 1933, as amended (the
"Act"), of up to 11,115,319 shares (the "Shares") of common stock, par value
$.001 per share and 300,000 Class E common stock purchase warrants of
FiberChem and the exchange by FiberChem of 3,408,333 Warrants for an equal
number of Class E Warrants.

We have examined original, or copies certified or otherwise identified
to our satisfaction, of such documents and corporate and public records as we
deem necessary as a basis for the opinion hereinafter expressed. With
respect to such examination, we have assumed the genuineness of all
signatures appearing on all documents presented to us as originals, and the
conformity to the originals of all documents presented to us as conformed or
reproduced copies. Where factual matters relevant to such opinion were not
independently established, we have relied upon certificates of executive
officers and responsible employees and agents of FiberChem. Based on the
foregoing, it is our opinion that 1,425,500 Shares and 3,708,333 Warrants
included in the Registration Statement have been legally issued and duly
authorized; that the 9,689,819 shares underlying warrants and options,
referred to in the Registration Statement have been duly authorized and when
paid for and issued as contemplated by such warrants and options, will be
duly and validly issued and fully paid and nonassessable.

We hereby consent to the use of this opinion as Exhibit 5.1 to the
Registration Statement, and to the use of our name as your counsel in
connection with the Registration Statement and in the prospectus forming a
part thereof. In giving this consent, we do not thereby concede that we come
within the categories of persons whose consent is required by the Act or the
General Rules and Regulations promulgated thereunder.

Very truly yours,

/s/ SNOW BECKER KRAUSS P.C.

-----------------------------
SNOW BECKER KRAUSS P.C.

<PAGE>

CONTINENTAL
CAPITAL
& EQUITY
CORPORATION

195 Wekiva Springs Road
Suite 2000
Longwood, Florida 32779
Phone: (407) 682-2001
Fax: (407) 682-2544

MARKET ACCESS PROGRAM
MARKETING AGREEMENT

THIS AGREEMENT (the "Agreement") made and entered into this 10th day of
May, 1999, by and between CONTINENTAL CAPITAL & EQUITY CORPORATION, located
at 195 Wekiva Springs Road, Suite 200, Longwood, FL 32779 (hereinafter
referred to as "CCEC,") and FIBERCHEM, INC. located at 1181 Grier Drive,
Building B, Las Vegas, Nevada 89119, (hereinafter referred to as "Company.")

WITNESSETH:
For and consideration of the mutual promises and covenants contained herein,
the parties hereto agree as follows:

1. EMPLOYMENT. Company hereby hires and employs CCEC as an independent
contractor; and CCEC does hereby accept its position as an independent
contractor to the Company upon the terms and conditions hereinafter set forth.

2. TERM. The term of this Agreement shall be for 9 months.

3. DUTIES AND OBLIGATIONS OF CCEC. CCEC shall have the following duties and
obligations under this Agreement:
3.1 Establish a financial public relations methodology designed to
increase awareness of the Company within the investment community.
3.2 Assist the Company in the implementation of its business plan and in
accurately disseminating information to the marketplace, which information has
been provided by the Company.
3.3 To expose the Company to a broad network of active retail brokers,
financial analysts, institutional fund managers, private investors and active
financial newsletter writers.
3.4 Prepare Company due diligence reports, corporate profile and fact
sheets.
3.5 Conduct a tele-marketing campaign to the investment community and
brokerage community and conduct tele-conferences with a CCEC moderator,
Company executive(s), and brokers, financial analysts, fund managers and the
like.
3.6 Feature the Company's corporate profile or fact sheet on CCEC's web
site(s).
3.7 Fax broadcast press releases, broker updates, Company newsletters
to brokers, institutional fund managers, financial analysts, and accredited
investors.
3.8 E-mail press releases, corporate announcements, broker updates,
Company news developments to a targeted e-mail database of brokers,
institutional fund managers, financial analysts, and accredited investors.
3.9 The duties and obligations of CCEC as outlined above shall be
performed at CCEC's sole discretion until such time as Company has satisfied
compensation requirements as outlined in sections 4.1, 4.2 and 4.3.

Page 1 of 5
--------------- ------------
INITIAL-Company INITIAL-CCEC

<PAGE>

ALL OF THE FOREGOING CCEC PREPARED DOCUMENTATION CONCERNING THE COMPANY,
INCLUDING, BUT NOT LIMITED TO, DUE DILIGENCE REPORTS, CORPORATE PROFILE, FACT
SHEETS, AND QUARTERLY NEWSLETTERS, SHALL BE PREPARED BY CCEC FROM MATERIALS
SUPPLIED TO IT BY THE COMPANY AND SHALL BE APPROVED BY THE COMPANY PRIOR TO
DISSEMINATION BY CCEC.

4. CCEC'S COMPENSATION. Upon the execution of this Agreement, Company hereby
covenants and agrees to pay CCEC as follows:
4.1 Nine hundred ninety nine thousand (999,000) restricted shares
payable upon execution of this agreement. Said shares shall be registered for
free trade status by Company immediately upon execution of this Agreement and
Company agrees that the registration of these shares will be effective within
ninety days of the execution of this Agreement, otherwise Company agrees to
pay CCEC a cash penalty of $10,000 per month or partial month that such
registration is not effective, unless such failure is beyond the reasonable
control of the company.
4.2 In addition, CCEC has the option to purchase six hundred thousand
(600,000) shares of the Company's common stock as follows: 200,000 shares of
the Company's common stock @ $0.18; 200,000 shares of the Company's common
stock @ $0.50; 200,000 shares of the Company's common stock @ $1.00.
The Company agrees to issue CCEC piggyback registration rights for the common
shares underlying the options or warrants listed above within a 90 day period
from the date of execution of this Agreement, otherwise the Company agrees to
pay CCEC a cash penalty of $10,000 per month or partial month that such
registration is not effective, unless such failure is beyond the reasonable
control of the company. The term of the options or warrants shall expire 36
months from the day the Registration Statement registering the underlying
shares of the option or warrant is deemed effective. The Company agrees to
issue piggy-back registration rights to the Common Shares referenced above
for resale by CCEC pursuant to its filing of an SEC Registration Statement on
Form S-3, or such other applicable form as may be appropriate.
4.3 CCEC recognizes that the acquisition of Company shares involves a
high degree of risk in that (i) an investment in the Company is highly
speculative and only investors who can afford the loss of their entire
investment should consider investing in the Company; (ii) they may not be
able to liquidate their investment; (iii) transferability of the shares is
extremely limited; and (iv) CCEC could suffer the loss of their entire
investment.

5. CCEC'S EXPENSES AND COSTS. Company shall pay all reasonable costs and
expenses incurred by CCEC, its directors, officers, employees and agents, in
carrying out its duties and obligations pursuant to the provisions of this
Agreement, excluding CCEC's general and administrative expenses and costs,
but including and not limited to the following costs and expenses; provided
all costs and expense items in excess of $500.00 (Five Hundred U.S. Dollars)
must be approved by the Company in writing prior to CCEC's incurrence of the
same:

5.1 Travel expenses, including but not limited to transportation,
lodging and food expenses, when such travel is conducted on behalf of the
Company.
5.2 Seminars, expositions, money and investment shows.
5.3 Radio and television time and print media advertising costs, when
applicable.
5.4 Subcontract fees and costs incurred in preparation of research
reports, when applicable.
5.5 Cost of on-site due diligence meetings, if applicable.
5.6 Printing and publication costs of brochures and marketing materials
which are not supplied by the Company.
5.7 Corporate web site development costs.
5.8 Printing and publication costs of Company annual reports, quarterly
reports, and/or other shareholder communication collateral material which are
not supplied by Company.
5.9 Creation, production, and mailing of Inside Wall Street lead
generation pieces and associated fulfillment material and services, i.e.
corporate profiles, presidential cover letters, pre-printed envelopes, 1-800
numbers, postage, list selection, lead distribution, etc., at an
established price of $2.00 per Inside Wall Street piece mailed. Company
shall pay to CCEC reasonable costs and expenses incurred within ten (10) days
of receipt of CCEC's written invoice for the same, excluding any costs
associated with material and services defined in Section 4 above, which are
due and payable in advance of material production.

Page 2 of 5
--------------- ------------
INITIAL-Company INITIAL-CCEC
<PAGE>

6. COMPANY'S DUTIES AND OBLIGATIONS. Company shall have the following duties
and obligations under this Agreement:
6.1 Cooperate fully and timely with CCEC so as to enable CCEC to perform
its obligations under this Agreement.
6.2 Within ten (10) days of the date of execution of this Agreement to
deliver to CCEC a complete due diligence package on the Company including all
the Company's filings with the Securities and Exchange Commission within the
last twelve months, the last twelve months of press releases on the Company
and all other relevant materials with respect to such filings, including but
not limited to corporate reports, brochures, and the like; a list of the
names and addresses of all the Company's shareholders known to the Company;
and a list of the brokers and market makers in the Company's securities and
which have been following the Company.
6.3 The Company will act diligently and promptly in reviewing materials
submitted to it from time to time by CCEC and inform CCEC of any inaccuracies
contained therein prior to the dissemination of such materials.
6.4 Immediately give written notice to CCEC of any change in Company's
financial condition or in the nature of its business or operations which had
or might have an adverse material effect on its operations, assets,
properties or prospects of its business.
6.5 Immediately pay all costs and expenses incurred by CCEC under the
provisions of this Agreement when presented with invoices for the same by
CCEC.
6.6 Give full disclosure of all material facts concerning the Company to
CCEC and update such information on a timely basis.
6.7 Promptly pay the compensation due CCEC under the provisions of this
Agreement.

7. NONDISCLOSURE. Except as may be required by law, Company, its officers,
directors, employees, agents and affiliates shall not disclose the contents
and provisions of this Agreement to any individual or entity without CCEC's
expressed written consent subject to disclosing same further to Company
counsel, accountants and other persons performing investment banking,
financial, or related functions for Company.

8. COMPANY'S DEFAULT. In the event of any default in the payment of CCEC's
compensation to be paid to it pursuant to this Agreement, or any other
charges or expenses on the Company's part to be paid or met, or any part or
installment thereof, at the time and in the manner herein prescribed for the
payment thereof and as when the same becomes due and payable, and such
default shall continue for twenty five (25) days after CCEC's notice thereof
is received by Company; in the event of any default in the performance of any
of the other covenants, conditions, restrictions, agreements, or other
provisions herein contained on the part of the Company to be performed, kept,
complied with or abided by, and such default shall continue for twenty five
(25) days after CCEC has given Company written notice thereof, or if a
petition in bankruptcy is filed by the Company, or if the Company is
adjudicated bankrupt, or if the Company shall compromise all its debts or
assign over all its assets for the payment thereof, or if a receiver shall be
appointed for the Company's property, then upon the happening of any of such
events, CCEC shall have the right, at its option, forthwith or thereafter to
accelerate all compensation, costs and expenses due or coming due hereunder
and to recover the same from the Company by suit or otherwise and further, to
terminate this Agreement. The Company covenants and agrees to pay all
reasonable attorney fees, paralegal fees, costs and expenses of CCEC,
including court costs, (including such attorney fees, paralegal fees, costs
and expenses incurred on appeal) if CCEC employs an attorney to collect the
aforesaid amounts or to enforce other rights of CCEC provided for in this
Agreement in the event of any default as set forth above and CCEC prevails in
such litigation. Further, until CCEC has received the first cash payment as
described above in Section 4.1, CCEC shall not be required to commence
performing hereunder.

9. COMPANY'S REPRESENTATIONS AND WARRANTIES. Company represents and warrants
to CCEC for the purpose of inducing CCEC to enter into and consummate this
Agreement as follows:
9.1 Company has the power and authority to execute, deliver and perform
this Agreement.

Page 3 of 5
--------------- ------------
INITIAL-Company INITIAL-CCEC
<PAGE>

9.2 The execution and delivery by the Company of this Agreement have
been duly and validly authorized by all requisite action by the Company. No
license, consent or approval of any person is required for the Company's
execution and delivery of this Agreement.
9.3 This Agreement has been duly executed and delivered by the Company.
This Agreement is the legal, valid and binding obligation of the Company
enforceable against the Company in accordance with its respective terms,
subject to the effect to any applicable bankruptcy, insolvency,
reorganization, moratorium or similar law affecting creditors' rights
generally and to general principles of equity.
9.4 The execution and delivery by the Company of this Agreement do not
conflict with, constitute a breach of or a default under: (i) any applicable
law, or any applicable rule, judgment, order, writ, injunction, or decree of
any court; (ii) any applicable rule or regulation of any administrative
agency or other governmental authority; (iii) the certificate of
incorporation and By-Laws of the Company; (iv) any agreement, indenture,
instrument or contract to which the Company is now a party or by which it is
bound.
9.5 No representation or warranty by the Company in this Agreement and
no information in any statement, certificate, exhibit, schedule or other
document furnished, or to be furnished by the Company to CCEC pursuant
hereto, or in connection with the transactions contemplated hereby, contains
or will contain any untrue statement of a material fact, or omits or will
omit to state a material fact necessary to make the statements contained
herein or therein not misleading. There is no fact which the Company has
not disclosed to CCEC, in writing, or in SEC filings or press releases, which
materially adversely affects, nor, so far as the Company can now reasonably
foresee, may adversely affect the business, operations, prospects,
properties, assets, profits or condition (financial or otherwise) of the
Company.

10. MISCELLANEOUS

10.1 Notices. Any notice or other communication required or permitted
to be given hereunder shall be in writing, and shall be deemed to have been
duly given when delivered personally or sent by registered or certified mail,
return receipt requested, postage prepaid to the parties hereto at their
addresses indicated hereinafter. Either party may change his or its address
for the purpose of this paragraph by written notice similarly given.
Parties' addresses are as follows:
FIBERCHEM, INC.:
1181 Grier Drive
Building B
Las Vegas, Nevada 89119

CCEC: 195 Wekiva Springs Road
Suite 200
Longwood, Florida 32779

10.2 Entire Agreement. This Agreement represents the entire agreement
between the Parties in relation to its subject matter and supersedes and
voids all prior agreements between such Parties relating to such subject
matter.
10.3 Amendment of Agreement. This Agreement may be altered or amended,
in whole or in part, only in a writing signed by both Parties.
10.4 Waiver. No waiver of any breach or condition of this Agreement
shall be deemed to be a waiver of any other subsequent breach or condition,
whether of a like or different nature, unless such shall be signed by the
person making such waiver and/or which so provides by its terms.
10.5 Captions. The captions appearing in this Agreement are inserted as
a matter of convenience and for reference and in no way affect this
Agreement, define, limit or describe its scope or any of its provisions.
10.6 Situs. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida. Venue shall be in the
Federal Courts of the United States located in Seminole County, Florida.
10.7 Benefits. This Agreement shall inure to the benefit of and be
binding upon the Parties hereto, their heirs, personal representatives,
successors and assigns.

Page 4 of 5
--------------- ------------
INITIAL-Company INITIAL-CCEC
<PAGE>

10.8 Severability. If any provision of this Agreement shall be held to
be invalid or unenforceable, such invalidity or unenforceability shall
attach only to such provision and shall not in any way affect or render
invalid or unenforceable any other provision of this Agreement, and this
Agreement shall be carried out as if such invalid or unenforceable provision
were not contained herein.
10.9 Arbitration. Except as to a monetary default by Company hereunder,
any controversy, dispute or claim arising out of or relating to this
Agreement or the breach thereof shall be settled by arbitration. Arbitration
proceedings shall be conducted in accordance with the rules then prevailing
of the American Arbitration Association or any successor. The award of the
Arbitration shall be binding on the Parties. Judgment may be entered upon an
arbitration award of in a court of competent jurisdiction and confirmed by
such court. Venue for Arbitration proceedings shall be Seminole County,
Florida. The costs of arbitration, reasonable attorneys' fees of the Parties,
together with all other expenses, shall be paid as provided in the
Arbitration award.
10.10 Currency. In all instances, references to monies used in this
Agreement shall be deemed to be United States dollars.
10.11 Multiple Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original, and all
of such counterparts shall constitute one (1) instrument.

This Agreement may be executed in counterparts and by fax transmission, each
counterpart being deemed an original.

IN WITNESS WHEREOF, the Parties have executed this Agreement on the day and
year first above written.

CONFIRMED AND AGREED ON THIS 10TH DAY OF MAY, 1999.

CONTINENTAL CAPITAL & EQUITY CORPORATION

/s/ Juan Ferreira
- ----------------------------- -----------------------------
Corporate Officer Witness

/s/ Scott A. B. Gibson
- ----------------------------- -----------------------------
Company Representative Witness

CONFIRMED AND AGREED ON THIS 10TH DAY OF MAY, 1999.

FIBERCHEM, INC.

/s/ Geoffrey F. Hewitt /s/ Melvin W. Pelley
- ----------------------------- -----------------------------
Corporate Officer Witness

Page 5 of 5

<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, 1998
------------------------

[ ] 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: $1,317,600

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 31, 1998
of $0.17 was $5,108,489.

As of December 31, 1998, the Issuer had 34,209,587 shares of Common Stock,
par value $.0001 per share, outstanding.

<PAGE>

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, 1998, 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

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 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 at least partially dependent.
Several federal and state programs were not re-authorized or funded. Similar
to 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
slowdown 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-Registered Trademark-presented the Company with
an opportunity to establish its technology as the preferred replacement for
the existing Freon-Registered Trademark-/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 chemical sensor
marketplace. The short-term result from this process has been development
work on a number of new products, including:

- a gasoline vapor sensor for a gasoline-retailing application

- a carbon monoxide sensor for residential, medical and
automotive use

- sensors for the detection of chemical warfare agents

2
<PAGE>

- a fuel/air ratio sensor for automotive use

- a fail-safe flammable gas sensor for a household appliance
control system

- a breath alcohol sensor for an ignition interlock device for
automotive use

- an ammonia sensor for refrigerant levels in food processing
facilities

- sensors for detection of toxic gasses for personal protection.

See "Business-Sensors."

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
aboveground storage tank ("AST") and underground storage tank ("UST") sites,
monitoring of 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.

3
<PAGE>

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
pre-mixed calibration solutions, manufactured to ISO 9001 standards and
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. The pre-mixed standards are
available at three hydrocarbon concentrations and represent continuing
revenue potential for the Company. 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.

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 continuous leak detection product
approved 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 water
returned to the ocean during the oil production process. The conventional
Freon-Registered Trademark- method involves periodic sampling of produced
water output and analysis of the samples in the oil production platform's
laboratory. The Company's products can be used to monitor the 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. Some operators see the opportunity to minimize downtime
in bad weather by continuously monitoring the produced water even when the
platform has been evacuated.

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

4
<PAGE>

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
parts per million 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 represented by customers in the
consumer, commercial, industrial, automotive and military fields. Often
development costs are partially covered by a customer in exchange for some
level of exclusivity. See "Business-Sensors" for a description of chip based
sensor products.

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 21 United States patents covering sensor technologies and has
applications pending for three 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 marketplace, are very
diverse and are addressed directly by Company personnel. The Company is not
dependent on any one major customer.

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 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
on a continuous basis 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
($10,000 for FCI). 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 1998 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, Shell Oil Company, Texaco, Reedy Creek Energy and
Jacksonville Electric have purchased and installed the Company's equipment to
upgrade their tanks to include leak detection. During December 1998, GATX placed
an order to install the Company's equipment at their Florida terminals. Citgo,
Dreyfus, Hess, Coastal and Marathon, among others, have applications pending at
the Florida Department of Environmental Protection ("DEP") to install the
Company's products. Although these applicants are not contractually bound to the
Company to

5
<PAGE>

purchase its products, if an application is approved and not subsequently
modified, amended or withdrawn, the applicant is required to install the
equipment specified in an application by December 31, 1999. On May 1, 1998, the
final review opportunity for input into the Storage Tank Regulations was held.
In the absence of any dissenting opinion, the Regulations were passed on to the
Attorney General of Florida for incorporation into law and became effective on
July 13, 1998 thereby implementing the Florida AST regulation. There can be no
assurance that when, or even if, the DEP gives final approval that these or any
other companies will purchase the Company's products, or when such purchases may
occur.

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 existing pollution
appears to warrant substantial cleanups of soil and water. 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 European Union Baltic Intereg contract to provide consulting and monitoring
services to locate "hot spots" of pollution in the Kola Peninsula region of
Russia. The contract has not yet been funded and recent events in Russia bring
into doubt whether these contracts will actually become effective.

OFFSHORE PRODUCED WATER MARKET.

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-Registered Trademark- and analyzing the resultant extract by infrared
spectroscopy ("IR"). With the diminution of its availability and increase in
its price, coupled with wide spread concern as to its threat to the Earth's
ozone layer, Freon-Registered Trademark- and the Freon-Registered
Trademark-/IR method are now viewed as requiring replacement.

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 at least 30 days between routine service. 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-Registered Trademark-/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-Registered Trademark-/IR method without the use of Freon-Registered
Trademark- 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.

Exxon, Marathon, Chevron, Shell and others are evaluating the Company's
replacement for the existing Freon-Registered Trademark-/IR technology. Each
of these companies has already purchased multiple units from the Company.
Norsk Hydro 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. Amoco, Pennzoil and Spirit Energy 76
(Unocal) recently advised the Company that they will install the Company's
equipment on all their Gulf platforms. Spirit Energy has installed 14
PHA-100WLs and Amoco has installed the Company's OilSense-4000-TM- and
PHA-100WLs At 8 of their more than 25 sites. During December, Pennzoil placed
their first order for the Company's PHA-100WLs for 2 of their 15 sites.

6
<PAGE>

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 People's
Republic of China. The agreement automatically renewed for another two years.
Projects with China Petroleum and the ROC military are ongoing and other
projects are pending. UECI has purchased in excess of $100,000 of the Company's
products. UECI 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 slowdown in the Asian economies may delay
completion of some or all of these projects.

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. As of the end of the initial and subsequent terms, unless the
Company and MINDECO agree to convert the market development agreement into a
distributorship agreement or terminate it, the market development agreement
automatically renews itself for one year on a non-exclusive basis. The agreement
was automatically renewed as of the end of its original and subsequent term. To
date, the agreement has not resulted in material revenues for the Company, and
the slowdown in the Asian economies may further delay significant revenues.

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, which agreement was automatically extended
for an additional two year period ending February 9, 1999. 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. To date, the agreement has not resulted in material
revenues for the Company. The slowdown in the Asian economies may further delay
significant revenues.

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. Sippican is a $30 million defense naval warfare company which
had aspirations in the environmental market. Osmonics is a $200 million water
quality company, entirely dependent on revenues from that market. Neither
agreement has resulted in significant revenues for the Company to date.

COMPETITION

In the opinion of Management, the primary bases of competition in the
markets for the Company's products are the distinctive and special qualities of
the products, their reliability and ease of use and price.

7
<PAGE>

Management believes that the distinctive 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. The AST leak detection market requires regulations to be
enforced to exist. End users usually do not purchase leak detection equipment
except for regulatory compliance. However, when regulations are promulgated,
and when deadlines are set and enforced, the result can be a significant
opportunity to supply products to the regulated community in a readily
definable period of time. This is, in fact, the situation in the Florida AST
market. Companies have to be in compliance by December 1999. Of the three
options - continuous leak detection, double bottomed tanks and dike liners -
continuous leak detection is by far the lowest cost. Further, to be a
supplier for each of the three options, products have to be certified or
approved. In the case of leak detection, a stringent third-party testing
process is required prior to acceptance. Only certified products from
suppliers who have passed acceptance are considered when compliance plans are
reviewed by Florida DEP. To date, only the Company's PetroSense-Registered
Trademark- product line has been approved for continuous detection of leaks
from ASTs although there can be no assurance that other products will not be
approved.

Competitors such as Tracer Research, Inc. (Tucson, AZ) and Arizona
Instrument Corporation (Phoenix, AZ) offer products which provide competition
in certain situations. Tracer Research, Inc. has received approval by Florida
DEP for its periodic leak detection system for ASTs. The approval is
conditional in that it specifies certain operating conditions which must be
met. There is a specified inoculation period during which the tank is
essentially out of service. This is followed by sampling vapor wells and the
site for presence of the tracer. These samples are analyzed off site. Use of
this technique is conditional upon maintaining the specified inoculation time
and testing only when ground water levels allow. The test has to be performed
every thirty days. The Company believes these conditions of use provide a
competitive advantage to continuous PetroSense-Registered Trademark-
products, since groundwater levels often reach the tank bottom during rainy
periods in low lying coastal areas such as Florida.

Arizona Instrument Corporation markets a competitive leak detection product
line mainly to the military marketplace. Its acceptance in the commercial arena
has been limited by its use of a pumping system to draw samples of vapor to the
sensor device. High groundwater levels can fill the sample tubes with water and
shut down the system. The sensor device is limited to detection of lower levels
of hydrocarbons and has not been approved for use in Florida for contaminated
sites where higher levels of hydrocarbons already exist. As a result, it is not
a competitor for the Florida AST market.

The Company's PetroSense-Registered Trademark- product line monitors
continuously and detects the level of petroleum hydrocarbons whether the
sensor is in a wet or dry environment.

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. Turner Designs (Sunnyvale, CA), Filco (Lafayette, LA) and
Wilks (Norwalk, CT) also offer alternatives to the Freon-Registered
Trademark-/IR method. The technology of each is limited and in each case
these competitors do not provide the full line of both portable and
continuous monitoring products offered by the Company.

8
<PAGE>

The offshore produced water market exists because Freon-Registered
Trademark- is no longer manufactured under the Montreal Protocol. The
acceptance of a replacement technology is dependent on the increasing cost
and lack of availability of Freon-Registered Trademark-, together with
economic conditions such as the price of oil.

In each market, the competition to the Company's products utilizes direct
selling through its own sales force and through manufacturers representatives.
The Company has established an alliance with a leader in the AST instrumentation
field, Whessoe Varec. In its other markets, the Company utilizes the same direct
sales approach.

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.

Many of the Company's sales projections were made with the assumption
that, at the Federal level, there would be a strong regulatory climate on
matters involving the environment. In recent years, however, with the
Congressional de-emphasis of environmental matters, and the accompanying
delays in enactment and/or enforcement of environmental mandates, these
projections turned out to be optimistic, at least in their timetable.
Consequently, FiberChem's management identified market segments that were
driven by other forces. Notwithstanding the slowdown 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-Registered Trademark- presented the Company with an opportunity to
establish its technology as the preferred replacement for the existing
Freon-Registered Trademark-/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 the only company
to have certification for the continuous monitoring of both uncontaminated and
contaminated sites in Florida. Other States are expected to follow Florida and
promulgate AST regulations. Virginia promulgated its own similar regulations
during 1998. Pennsylvania, New Jersey, Minnesota, Wisconsin have also
promulgated regulations.

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. The slowdown in the Asian and
Russian economies may delay some or all of these projects.

9
<PAGE>

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, and final
assembly and testing is also 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 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 ISO 9001,
the international standard for the maintenance and improvement of product
quality. Due to reductions in personnel during Fiscal 1998, the certification
process has been delayed. Certification is expected to be completed during
Fiscal 1999.

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-TM- 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 with the technology patented by FCI, sensors have the potential to
revolutionize a wide range of consumer, industrial, commercial, automotive,
military 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 gasoline vapor sensor for a gasoline retailing application

- a carbon monoxide sensor for residential, medical and
automotive use

10
<PAGE>

- sensors for the detection of chemical warfare agents

- a fuel/air ratio sensor for automotive use

- a fail-safe flammable gas sensor for a household appliance
control system

- a breath alcohol sensor for an ignition interlock device for
automotive use

- an ammonia sensor for refrigerant levels in food processing
facilities

- sensors for detection of toxic gasses for personal protection.

These applications represent sensors with selling prices anticipated to be
in the $5 to $150 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 of a single-step immunoassay has potential application to 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
substitute for laboratory analysis in 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 Optoelectronics 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. Changes
in the UL Standard for residential CO detectors and significant changes in
market dynamics impacted on the introduction of this product by TI. However,
the Company is pursuing medical and automotive in-cabin applications for
prospective OEM customers.

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 activity on the
part of the Optoelectronics Development Group may result in additional
opportunities for product development.

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

11
<PAGE>

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 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. Through September 30,
1998, ASI had not reported any sales of the device subject to the licensing
agreement.

JOINT DEVELOPMENT AGREEMENT WITH GILBARCO, INC.

The Company, through FCI Environmental, completed the development for
Gilbarco, Inc. ("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) establishing a compliance date for new
dispensers, followed by an as yet undetermined phase-in period for retrofitting
of existing dispensers.

The Company's sensor development project with Gilbarco has moved on to a
pre-manufacturing mode driven by the expectation that CARB will require
suppliers of refueling equipment to certify their products to meet Onboard
Refueling Vapor Recovery Phase II ("ORVRII") requirements. Provided that
certain key steps are completed by CARB, Gilbarco should commence
manufacturing products incorporating the Company's
Sensor-on-a-Chip-Registered Trademark- in order to meet the CARB
requirements. Revenues from this project are expected to begin in Fiscal
1999, if the time schedule is met, but there can be no assurance that this
will actually occur.

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. The Company built five prototypes for Bechtel under the
contract during Fiscal 1998 and has received an order for ten more units
which should be completed in the second fiscal quarter of 1999.

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>
TYPE STAGE OF TARGETED
- ---- DEVELOPMENT SENSITIVITY/MEDIA
----------- -----------------
<S> <C> <C>
Oxygen Prototype Ambient levels in air
Carbon Dioxide Prototype Ambient levels in air
pH Prototype 2-12 in water
Trichloroethylene (TCE) Development ppb in water(1)
</TABLE>

12
<PAGE>

<TABLE>
<CAPTION>
TYPE STAGE OF TARGETED
- ---- DEVELOPMENT SENSITIVITY/MEDIA
----------- -----------------
<S> <C> <C>
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.

The Company's technology is being evaluated 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 Port of Rotterdam has proposed to remediate its facility through
state-of-the-art bioremediation and an operating consortium, managed by the
Dutch engineering firm IWACO, has selected the Company to be the technology
vendor for monitoring systems. In addition, IWACO has invited the Company to
become an equal partner in a second program relating to bioremediation
technologies. The Company would benefit from access to data, technology,
resources and personnel of the Consortium's member companies which include Shell
International Products and Solvay S.A.

The Company's spending on research and development activities during Fiscal
1997 and 1998 was $1,257,324 and $752,892, 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, 1998, the Company and its subsidiaries employed 17
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. The Company also employed two
administrative persons; one scientist; five laboratory and manufacturing
technicians; one manager of manufacturing; one materials, production control,
shipping and receiving specialist; one engineer; one sales applications
specialist; and two strategic business unit sales managers. The Company also
employed one engineer and one laboratory technician on a part-time basis.

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 1997 and 1998

13
<PAGE>

was $172,551 and $170,869, 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

A former distributor, D2E, filed an action in the Commercial Court of
Nanterre, France on June 4, 1997 claiming improper termination of an exclusive
distribution agreement by FCI environmental, Inc. The action seeks monetary
damages of approximately $200,000 at current exchange rates. A hearing on the
merits of the dispute originally scheduled for June 23, 1998 was adjourned until
January 8, 1999. 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.

On September 23, 1998, OCS, Inc., a Texas corporation and customer of
the Company's subsidiary, FCI Environmental, Inc., filed a lawsuit against FCIE
in the District Court of Harris County, Texas, 165th Judicial District. The
lawsuit is based on an alleged breach of warranty for goods purchased from FCIE.
The plaintiff seeks incidental and consequential damages of $750,000 plus other
fees and expenses. On December 16, 1998, the Company filed a motion to dismiss
the suit.

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

The Company's Annual Meeting of Stockholders was held at the Company's
offices on August 31, 1998. At the meeting, the following directors were
re-elected to serve three-year terms or until their successors have been duly
qualified and elected:

<TABLE>
<CAPTION>
NOMINEE FOR ELECTION AGAINST ELECTION AUTHORITY WITHHELD
------- ------------ ---------------- ------------------
<S> <C> <C> <C>
Byron A. Denenberg 22,622,182 -0- 453,142
Gerald T. Owens 22,622,182 -0- 453,142
</TABLE>

Messrs. Geoffrey F. Hewitt, Irwin J. Gruverman and Walter Haemmerli
continue to serve the remainder of their terms of office as directors. Also at
the meeting, the Stockholders (1) approved (by a vote of 21,059,707 For;
1,912,989 Against; 102,628 Abstaining) a proposal to renew the authorization to
effect, if necessary and desirable, a reverse stock split of the Company's
Common Stock; (2) approved (by a vote of 21,295,239 For; 1,614,077 Against;
166,008 Abstaining) an amendment to the Company's Certificate of Incorporation
to increase the number of authorized shares of Common Stock of the Company by
100,000,000 shares to a total of 150,000,000 shares; and (3) ratified (by a vote
of 22,225,550 For; 578,812 Against; 270,962 Abstaining) the appointment of
Goldstein Golub Kessler LLP as the Company's auditors for the fiscal year ended
September 30, 1998.

14
<PAGE>

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS

The Company's Common Stock was traded on the Nasdaq/SCM under the
symbol "FOCS" until February 25, 1998, when it was delisted from Nasdaq/SCM.
Since then it has been traded on the OTCBB. The following table sets forth the
high and low trade prices of the Common Stock for the periods shown as reported
by Nasdaq and the high and low bid prices as reported by the National Quotation
Bureau. The bid prices quoted on the OTCBB reflect inter-dealer prices without
retail mark-up, mark-down or commission and may not represent actual
transactions.

<TABLE>
<CAPTION>
Trading Period High Low
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK 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 ENDED SEPTEMBER 30, 1998
First Quarter $0.28 $0.12
Second Quarter 0.22 0.12
Third Quarter 0.24 0.16
Fourth Quarter 0.15 0.11
FISCAL YEAR ENDED SEPTEMBER 30, 1999
First Quarter $0.23 $0.15
(October 1, 1998-December 31, 1998) $0.26 $0.13
</TABLE>

On December 31, 1998, the closing bid price of a share of the Company's
Common Stock was $0.15.

On December 31, 1998, the Company had approximately 445 holders of
record and had in excess of 3,500 beneficial holders of its Common Stock.

The payment of dividends by the Company is within the discretion of its
Board of Directors and depends in part upon the Company's earnings, capital
requirements and financial condition. Since its inception, the Company has not
paid any dividends on its Common Stock and does not anticipate paying such
dividends in the foreseeable future. The Company intends to retain earnings, if
any, to finance its operations.

Pursuant to the terms of the Company's Convertible Preferred Stock,
dividends are payable annually on November 1st. The holders of the Convertible
Preferred Stock may elect to receive their dividend payments in cash at a rate
of 11% of the liquidation value, or in additional shares at the rate of 8% of
the number of shares of Convertible Preferred Stock held by such holder on the
date of declaration. In September 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.
Likewise, in September 1998, the Board of Directors determined not to declare
the annual dividend payable on November 1, 1998. As a result, the undeclared
dividends aggregating $772,694 (if elected entirely in cash, or 36,442
additional shares of Convertible Preferred Stock if elected wholly in additional
shares) will accumulate in accordance with the terms of the Convertible
Preferred Stock.

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.

15
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

The Company's 8% senior convertible notes payable, currently
convertible into Common Stock at $0.4078 per share, become due on February 15,
1999. The unpaid balance at September 30, 1998, or $1,600,000 is therefore
classified in the financial statements at September 30, 1998 as a current
liability. The Company is pursuing alternatives to refinance, extend or convert
the notes at or prior to their maturity. However, there is no assurance that
negotiations of revised terms will be acceptable to either the Company or the
note holders, or that revised terms will be reached at all. The Company had
negative working capital of $918,624 at September 30, 1998 compared with
positive working capital of $1,883,551 at September 30, 1997, a decrease of
$2,802,175. Also the Company had decreases in cash and cash equivalents of
$336,134 and in stockholders' equity of $2,222,610. In addition to the
reclassification of the notes payable from long term to current liabilities,
these decreases are primarily a result of the Company's net cash used in
operating activities of $1,059,466.

The net cash used in operating activities of $1,059,466 during Fiscal
1998 compares with net cash used in operating activities of $2,715,012 during
Fiscal 1997. The deficit during Fiscal 1998 is primarily a result of the
Company's net loss of $2,392,225, and adjustments to reconcile net loss to net
cash used in operating activities. These adjustments consider changes in current
assets and liabilities, as well as non-cash transactions including amortization
expense of $322,720; depreciation expense of $57,659; common stock issued for
services of $121,512; and provisions for obsolete inventory and loss on
uncollectible accounts receivable totaling $84,267. During Fiscal 1998
approximately $140,000 of accounts receivable were offset against previously
recorded reserves for specific doubtful accounts, resulting in a reduction of
both gross accounts receivable and reserve with no effect on net receivables or
net cash flow. Also during Fiscal 1998 the Company physically disposed of
approximately $335,000 of inventory items which had been partially reserved,
resulting in reductions of gross inventory of approximately $335,000; inventory
reserves of approximately $175,000; and net inventory of $160,000.

The net cash used in operating activities of $2,715,012 during Fiscal
1997 was primarily a result of the Company's net loss of $3,226,958, and
adjustments to reconcile net loss to net cash used in operating activities.
These adjustments 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.

Net cash used in investing activities during Fiscal 1998 was $23,237,
as compared to net cash used in investing activities during Fiscal 1997 of
$139,484. During Fiscal 1998 the Company sold unused equipment for $10,125 and
made payments in the amount of $33,362 for United States and foreign patent
applications. During Fiscal 1997 the Company purchased equipment for $83,504 and
made payments for patent applications totalling $55,979.

The Company had net cash provided by financing activities during Fiscal
1998 of $746,569 as compared to net cash provided by financing activities during
Fiscal 1997 of $216,412. During Fiscal 1998, the Company borrowed $375,000 from
certain of its officers and directors, and received proceeds of $433,000 from
promissory notes payable to a bank of which a director is vice chairman. The
Company also incurred an aggregate of $147,970 in legal, accounting, and
distribution costs pertaining to a rights offering as discussed below. In July
1998 the Company arranged a line of credit with Silicon Valley Bank, borrowed
approximately $413,000 against the line of credit and repaid approximately
$381,000.

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.

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.

16
<PAGE>

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. On October 23, 1998, the Company commenced an
offering of rights (the "Rights Offering") to purchase shares and warrants, to
holders of its Common and Preferred Stock, and to holders of Class D Purchase
Warrants and all other outstanding Warrants. The Rights Offering consisted of
8,976,962 Units (a Unit consisting of one share of Common Stock and one Class E
Common Stock Purchase Warrant) at $0.22 per Unit or total maximum gross proceeds
of $1,974,932. Following the close of the Rights Offering on December 22, 1998,
the Company issued (or will issue) 7,628,380 shares of Common Stock and a like
number of Class E Warrants, and received total gross proceeds of $1,678,244.
Management recognizes that the proceeds from the Rights Offering may not be
sufficient to enable the Company to continue its operations, and that it must
generate additional revenues or reductions in operating costs and may need
additional financing to enable it to continue its operations. There can be no
assurance that forecasted sales 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 operations.

RESULTS OF OPERATIONS

The Company's total revenues for Fiscal 1998 were $1,317,600 as
compared to total revenues of $1,523,994 for Fiscal 1997. Revenues for Fiscal
1998 include sales to the Florida Department of Environmental Protection
("FLDEP") of approximately $387,000, and to Whessoe Varec, Inc. of
approximately $147,000. Revenues during Fiscal 1997 include sales to Whessoe
Varec, Inc. of approximately $985,000 and to Amoco Production Company of
approximately $171,000. During Fiscal 1998, the FLDEP placed an order for 64
PHA-100PLUS portable PetroSense-Registered Trademark- units for its
underground storage tank (UST) inspection program. FLDEP chose the
PetroSense-Registered Trademark- unit after a field evaluation showed it
provided more capability than other portable instruments. This order, shipped
during Fiscal 1998, resulted from the Company's direct selling efforts in the
UST market, as distinguished from its OEM alliance with Whessoe Varec in the
aboveground storage tank (AST) market.

During Fiscal 1998, the Company had cost of revenues of $617,690, or a
gross profit of 53% of sales, as compared to cost of revenues of $945,434, or a
gross profit of 38%, during Fiscal 1997. The change in gross profit margin
resulted primarily from an increased portion of higher margin, end user sales in
Fiscal 1998 (such as FLDEP) versus lower margin, OEM sales (such as to Whessoe
Varec) in Fiscal 1997.

The Company has a Strategic Alliance (the "Alliance") for the AST market
with Whessoe Varec, Inc. as of June 30, 1996 as amended. The primary target
for the Alliance has been the Florida AST market. On July 13, 1998, after a
four year process, the State of Florida passed into law its new storage tank
regulations. Under the law, the regulated community has various options for
compliance. The lowest cost option is believed to be an internal tank liner
with an external, certified, continuous leak detection device. Currently, the
Company's PetroSense-Registered Trademark- product line is the only
continuous leak detection device certified for use at such sites.

The Florida target population of tanks includes 677 sites with at least one
internally lined tank and 892 multi-tank facilities including coastal bulk
storage, inland jobbers and industry. There is some duplication between the two
populations. In addition, there is a population of military tanks, as well as
those for airports and power generation facilities. Each tank for which Whessoe
Varec and FCI receive an order is worth about $10,000 in revenue to FCI. The
Florida regulations require compliance by December 1999 for alternative methods
including the Company's leak detection equipment. Some facilities have already
applied for approval to FLDEP specifying the Company's equipment. As
applications are approved, there is an assumption that there will be a stream of
orders to the Alliance, although there can be no assurance that this will be the
case.

Other States are expected to follow Florida and promulgate AST regulations.
Virginia promulgated its own similar regulations during 1998. Pennsylvania, New
Jersey, Minnesota, Wisconsin have also promulgated regulations.

17
<PAGE>

The Alliance is also pursuing business with the Department of Defense
(DoD) in California, Florida and elsewhere. Whessoe Varec's sister company
Whessoe Coggins has a significant presence in the military fuel depot market.
There is an opportunity to provide leak detection equipment to this market.
The Company's products meet all relevant state and federal standards and are
compatible with the Whessoe Coggins equipment proposed for the total
military's system upgrade. A system incorporating both Whessoe Coggins and
Whessoe Varec/FCI products was successfully demonstrated to the military in
California during April 1998. The data generated at this test was submitted
to the local regulatory authority and met their criteria. Through December
1998, the Company's revenues from sales to this market have been
approximately $400,000. The Company has received DoD orders through Whessoe
Varec for PetroSense-Registered Trademark- probes for over 30 tanks. There
are approximately 160 DoD tanks in California; however, the exact size of the
opportunity for the Company is not yet clear, since there is more than one
option available for the DoD to achieve compliance. There is a similar number
of military tanks in Florida where regulations provide for fewer alternatives
to the Company's products. There are estimated to be in excess of 5,000
military tanks in the United States.

The development of the offshore market for the Company's
OilSense-4000-TM-and PHA-100WL continues to be slower than originally
anticipated. The combination of the availability of Freon-Registered
Trademark- and the low price of oil is mitigating against a wholesale switch
from the Freon-Registered Trademark-/IR method. Notwithstanding the above,
Amoco, Spirit Energy 76 (Unocal) and Pennzoil have committed to the use of
the Company's products on all their platforms in the Gulf of Mexico. Spirit
Energy has installed 14 PHA-100WLs and Amoco has installed the Company's
OilSense-4000-TM- and PHA-100WLs at 8 of their more than 25 sites. During
December, Pennzoil placed their first order for the Company's PHA-100WLs for
2 of their 15 sites. Cetco Environmental purchased six units for its offshore
technicians during Fiscal 1998. Chevron, Exxon, Marathon and Shell are
evaluating the Company's equipment.

The Company is continuing its marketing efforts in other major offshore
production areas such as the North Sea and the Persian Gulf.

The Company's sensor development project with Gilbarco has moved on to a
pre-manufacturing mode driven by the expectation that the California Air
Resources Board (CARB) will require suppliers of refueling equipment to
certify their products to meet ORVRII. Provided that certain key steps are
completed by CARB, Gilbarco should commence manufacturing products
incorporating the Company's Sensor-on-a-Chip-Registered Trademark- in order
to meet the CARB requirements. Revenues from this project are expected to
begin in Fiscal 1999 if the time schedule is met, but there can be no
assurance that this will actually occur.

The Company's Port of Rotterdam project with the Dutch engineering firm
IWACO is ongoing. In addition, IWACO has invited the Company to become an equal
partner in a second program relating to bioremediation technologies. The Company
would benefit from access to data, technology, resources and personnel of the
Consortium's member companies which include Shell International Products and
Solvay S.A.

During Fiscal 1998 the Company successfully completed the first and second
milestones in its project with Horiba, the Japanese instrument company, to
develop a sensor probe for Horiba's Multi-Parameter Water Quality Instrument
product line.

Research, development and engineering expenditures decreased by $504,432,
or 40%, during Fiscal 1998 from Fiscal 1997. The decrease is primarily
attributable to the reduction, implemented during the second half of Fiscal
1997, of applications and development personnel and associated expenses.

General and administrative expenditures increased by $15,433, or 1%, during
Fiscal 1998 from Fiscal 1997. Expenditures for the 1998 period includes $121,512
representing the market value of Common Stock issued for public relations and
investor relations services and legal services. The Company continues to operate
with the reductions in personnel and other expenses and cash expenditures,
including the deferral of administrative, as well as other salaries, implemented
during the second half of 1997. Since June 1997, the Company has deferred the
payment of approximately $180,000 in salaries, although these have been accrued
and recorded as expense during the respective periods.

18
<PAGE>

Sales and marketing expenditures decreased by $280,150, or 28%, during
Fiscal 1998 from Fiscal 1997, reflecting reductions in personnel and in other
spending as well.

During Fiscal 1998 the Company physically disposed of approximately
$335,000 of inventory items which had been partially reserved, resulting in
reductions of gross inventory of $335,000 and inventory reserves of $175,000 and
a charge to expense of $160,000.

The Company's interest income decreased to a minimal amount during Fiscal
1998 from $81,787 during Fiscal 1997, reflecting the difference in cash and cash
equivalents during the periods. Interest expense increased by $84,170, or 38%,
during Fiscal 1998 over Fiscal 1997, reflecting interest expense on $808,000
advanced to the Company by officers and directors and their affiliates.

As a result of the foregoing, the Company incurred a net loss of
$2,392,225, or a net loss of $0.09 per share, for Fiscal 1998 as compared to a
net loss of $3,226,958, or a net loss of $0.13 per share, for Fiscal 1997.

Management does not consider that inflation has had a significant effect on the
Company's operations, and does not expect inflation to have a material impact
over the next year.

The Company continues to review the cost and operating impacts of
addressing the Year-2000 issue. Management conducted an assessment of the
potential costs associated with its internal operations, products shipped to its
customers, and material and services provided by its suppliers. Upon review, the
Year-2000 issue is not expected to have a material impact on the Company's
current financial position, liquidity or results of operations.

RECENTLY ISSUED ACCOUNTING STANDARDS

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 SFASs 130 and 131 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. In
March 1998 the American Institute of Certified Public Accountants issued
Statement of Position 98-1 ("SOP 98-1"), Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. The Company is required to
adopt this Statement in Fiscal 2000. SOP 98-1 provides guidance on the
accounting for costs of computer software used internally, including identifying
the characteristics of internal-use software and providing examples to assist in
determining when computer software is for internal use. 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.

<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
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
</TABLE>

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. On April 9,
1997, the Board of Directors appointed Goldstein Golub Kessler LLP, 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 ended September
30, 1997.

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

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:

<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Geoffrey F. Hewitt 55 Chairman of the Board, President, Chief Executive Officer
and Class A Director

Byron A. Denenberg 64 Class C Director

Irwin J. Gruverman 65 Class A Director

Walter Haemmerli 69 Class B Director

Gerald T. Owens 71 Class C Director

Melvin W. Pelley 54 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
- ---- --- --------
<S> <C> <C>
Geoffrey F. Hewitt 55 Chairman of the Board, Chief Executive Officer and Director

Melvin W. Pelley 54 Chief Financial Officer, Secretary and Director

Thomas A. Collins 52 President
</TABLE>

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
Chairman of the Board and Chief Executive Officer of FCI Environmental since
April 1998 and August 1995, respectively. 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.

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 Zellweger 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.

21
<PAGE>

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, Basel and Zurich
from 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.

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.

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 Advanced Technology Laboratories, Inc., Bothell, Washington, which
manufactures and markets real-time ultrasound medical diagnostic equipment. From
1977 to 1983, Mr. Pelley was Chief Financial and Administrative Officer for
Advanced Diagnostic Research Corporation, Tempe, Arizona, a designer,
manufacturer and marketer of diagnostic ultrasound scanners.

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, to three-year terms expiring in consecutive years. Mr. Owens and Mr.
Denenberg were elected to three-year terms as Directors at the Company's August
1998 Annual Meeting of Stockholders. Mr. Gruverman and Mr. Hewitt were elected
to three-year terms as Directors at the Company's June 1997 Annual Meeting of
Stockholders. Mr. Haemmerli was elected to a three-year term as Director at the
Company's May 1996 Annual Meeting of Stockholders.

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. Owens was 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, 1998.

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

22
<PAGE>

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 such forms were required for those
persons, the Company believes that, during the time period from October 1, 1997
to September 30, 1998, all filing requirements applicable to its officers,
Directors and greater than ten percent beneficial owners were complied with
except as set forth below.

Geoffrey F. Hewitt, Chairman of the Board, President and Chief
Executive Officer of the Company, filed a late Form 4 in which one transaction,
a purchase of 105 shares of Common Stock by his minor child, was reported.

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, 1998, was as follows:

(a) SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
Long Term Compensation
-----------------------------------------
Annual Compensation Awards Payouts
--------------------------------------- ----------------------------- -----------
Name of Long-Term
Individual Other Restricted Securities Incentive All
and Principal Fiscal Annual Stock Underlying Plan Other
Position Year Salary($) Bonus($) Compensation($) Awards($) Options/SARs(#) Payouts($) Compensation($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Geoffrey F. Hewitt 1998 $211,932(1) $-- $ -- -- 240,000 $ -- $ --
President and CEO 1997 $205,000 (2) $-- $ -- -- 125,000 $ -- $ --
1996 $195,768 $-- $ -- -- 100,000 $ -- $ --

Melvin W. Pelley 1998 $139,200 (3) $-- $ -- -- 180,000 $ -- $ --
Chief Financial Officer 1997 $136,708 (4) $-- $ -- -- 75,000 $ -- $ --
1996 $126,461 $-- $ -- -- 50,000 $ -- $ --

David R. LeBlanc 1998 $-- (5) $-- $ -- -- -- $ -- $ --
Vice President - Sales 1997 $ 5,288 $-- $ -- -- -- $ -- $ --
and Marketing of FCI 1996 $125,000 $-- $ -- -- 5,000 $ -- $ --
Environmental, Inc.

Thomas A. Collins 1998 $132,200 (6) $-- $ -- -- 120,000 $ -- $ --
President of FCI 1997 $129,708 (7) $-- $ -- -- 75,000 $ -- $ --
Environmental, Inc. 1996 $ 70,192 $-- $ -- -- 100,000 $ -- $ --
</TABLE>

(1) Includes $55,000 in accrued but unpaid salary earned during Fiscal
1998.
(2) Includes $14,808 in accrued but unpaid salary, earned during
the period from June 15 through September 30, 1997.
(3) Includes $32,000 in accrued but unpaid salary earned during Fiscal
1998.
(4) Includes $8,615 in accrued but unpaid salary, earned during the
period from June 15 through September 30, 1997.
(5) Resigned July 1996; compensated at the rate of $125,000 annually
through October 5, 1996.
(6) Hired March 1, 1996 as Vice President of International Marketing
and Product Development; President of FCI Environmental since
November 1996. Includes $25,000 in accrued but unpaid salary
earned in Fiscal 1998.
(7) Includes $6,730 in accrued but unpaid salary, earned during the
period from June 15 through September 30, 1997.

23
<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 240,000 24.2% $ 0.15 September 4, 2008
Melvin W. Pelley 180,000 18.2% $ 0.15 September 4, 2008
David R. LeBlanc -- -- --
Thomas A. Collins 120,000 12.1% $ 0.15 September 4, 2008
</TABLE>

<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 -- -- 465,000 / 0 $ 2,400 / $0
Melvin W. Pelley -- -- 255,000 / 0 $ 1,800 / $0
David R. LeBlanc -- -- 5,000 / 0 $ 0 / $0
Thomas A. Collins -- -- 295,000 / 0 $ 1,200 / $0
</TABLE>

(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 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 shares of Common Stock of the Company.

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 (12,500
shares) and members of its Audit Committee (8,000 shares to each of its two
members) and Compensation and Stock Options Committee (4,000 shares to each of
its two members). On September 4, 1998, the Company granted options to purchase
30,000 shares of Common Stock at $0.15 per share, which was the market value of
the Common Stock on that date to each of its four non-management Directors. In
addition, the Company granted options to purchase an aggregate of 30,000 shares
of the Common Stock to three of its non-management directors for service as
members of the audit committee (9,000 shares to each of its two members) and
Compensation and Stock Options Committee (6,000 shares to each of its two
members).

24
<PAGE>

(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 per annum)
of Mr. Hewitt's salary has been deferred. In December 1998, Mr. Hewitt applied
his total unpaid salary from June 1997 through December 1998 of $84,615 to the
purchase of unsubscribed Units in the Company's Rights Offering ($50,501 after
taxes). The same proportion of Mr. Hewitt's salary continues to be deferred in
Calendar 1999, and may be paid during calendar 1999 if the Company's operations
and financial position allow.

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 per annum)
of Mr. Pelley's salary has been deferred. In December 1998, Mr. Pelley applied
his total unpaid salary from June 1997 through December 1998 of $49,230 to the
purchase of unsubscribed Units in the Company's Rights Offering ($29,395 after
taxes). The same proportion of Mr. Pelley's salary continues to be deferred in
Calendar 1999, and may be paid during calendar 1999 if the Company's operations
and financial position allow.

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 per annum)
of Mr. Collins' salary has been deferred. In December 1998, Mr. Collins applied
$12,000 (approximately one-third) of his total unpaid salary from June 1997
through December 1998 to the purchase of unsubscribed Units in the Company's
Rights Offering ($7,146 after taxes). The same proportion of Mr. Collins' salary
continues to be deferred in Calendar 1999, and may be paid during calendar 1999
if the Company's operations and financial position allow.

(g) CONSULTING AGREEMENTS

None.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of December 31, 1998, 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:

25
<PAGE>

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

<S> <C> <C>
Geoffrey F. Hewitt (3) 1,568,270 (4) 4.5%

Byron A. Denenberg 940,476 (5) 2.7%
RCT Systems, Inc.
327 Messner Drive
Wheeling, IL 60090

Irwin J. Gruverman 936,200 (6) 2.7%
30 Ossipee Road
Newton, MA 02164

Walter Haemmerli 5,737,844 (7) 15.0%
Manport AG
Basteiplatz 3, CH 8001
Zurich, Switzerland

Gerald T. Owens 334,237 (8) 1.0%
147 Paddington Way
San Antonio, TX 78209

Melvin W. Pelley (3) 1,437,943 (9) 4.1%

Thomas A. Collins (3) 359,962 (10) 1.1%

All Directors and Officers as 11,314,932 27.4%
a Group (7 persons)
</TABLE>

(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 or Senior Convertible 8% Notes that are held by such person
(but not those held by any other person) and which are exercisable or
convertible within 60 days from the date hereof have been exercised or
converted.
(2) Based on 34,032,594 shares issued and outstanding as of December 31, 1998.
(3) The address of this person is c/o FCI Environmental, Inc., 1181 Grier
Drive, Suite B, Las Vegas, Nevada 89119.
(4) Includes 507,501 Class E Common Stock Purchase Warrants and an aggregate of
465,000 shares of Common Stock issuable upon exercise of a like number of
options. Also includes 132 shares of Common Stock and 27 Class E Common
Stock Purchase Warrants held by Mr. Hewitt's minor child, as to which Mr.
Hewitt disclaims beneficial ownership.

26
<PAGE>

(5) Includes 360,238 Class E Common Stock Purchase Warrants and an aggregate of
88,142 shares of Common Stock issuable upon exercise of a like number of
options.
(6) Includes 8,620 Class E Common Stock Purchase Warrants and an aggregate of
99,000 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, 246,270 Class E Common Stock Purchase Warrants and
294,470 shares of Common Stock held by G&G Diagnostics, L.P. II, and 47,815
shares of Common Stock, 47,815 Class E Common Stock Purchase Warrants 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.
(7) Includes 610,000 Class E Common Stock Purchase Warrants, 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 65,000
shares of Common Stock issuable upon exercise of a like number of options.
Also includes 1,070,000 shares of Common Stock, 863,800 Class D Common
Stock Purchase Warrants, 366,000 Class E 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.
(8) Includes 39,965 Class D Common Stock Purchase Warrants, 36,207 Class E
Common Stock Purchase Warrants and an aggregate of 117,000 shares of Common
Stock issuable upon exercise of a like number of options.
(9) Includes 482,040 Class E Common Stock Purchase Warrants and an aggregate
of 255,000 shares of Common Stock issuable upon exercise of a like number
of options.
(10) Includes 32,481 Class E Common Stock Purchase Warrants and an aggregate of
295,000 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 agreements entered into during Fiscal 1997 and
Fiscal 1998 with officers and Directors of the Company.

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 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.

27
<PAGE>

In December 1997 and January and February 1998, four directors
(Geoffrey Hewitt, Byron Denenberg, Irwin Gruverman and Walter Haemmerli) and an
officer (Melvin Pelley) of the Company each advanced the Company $50,000. These
advances, aggregating $250,000 are evidenced by convertible promissory notes
bearing interest at the rate of 8% per annum due five years from issuance. Each
note and unpaid accrued interest aggregating $15,195 was cancelled on December
22, 1998 in payment for unsubscribed Units of the Rights Offering resulting in
the issuance to the directors and officer of 1,205,431 shares of Common Stock
and a like number of Class E Common Stock Purchase Warrants.

Mr. Haemmerli advanced the Company $75,000 on February 24, 1998, and
Mr. Pelley advanced the Company $25,000 on February 27, 1998, and an additional
$25,000 on July 1, 1998. Each of these advances is evidenced by a separate
promissory note bearing interest at the rate of 8% per annum and were originally
due on or before August 31, 1998. Both noteholders have agreed to extend the due
dates of their respective promissory notes until the completion of the Rights
Offering.

In March and August 1998, the Company obtained loans aggregating
$433,000 from Privatbank Vermag AG, a private investment bank with which Mr.
Haemmerli is associated. These loans (the "Bridge Loans") were provided as
interim financing until the Company completed its Rights Offering, and are to be
repaid from proceeds of the Rights Offering. The Bridge Loans bear interest at
approximately 8.5% per annum. In addition, the Company agreed to issue to
Privatbank, as additional consideration, 130,000 Units (consisting of 130,000
shares of Common Stock and Class E Warrants to purchase 130,000 Units. The Units
were issued in October 1998 as part of the Rights Offering.

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)

3.2 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)

4.4 Form of Class E Common Stock Purchase Warrant. (6)

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 on
Form SB-2 for October 23, 1998 (File No. 333-46555).
(7) Incorporated by reference from the Company's Registration Statement No.
33-29338. (8) Incorporated by reference from the Company's Annual Report
on Form 10-K for September 30, 1991.

28
<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. (9)

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. (10)

10.6 Agreement dated December 10, 1992 by and between the Company and
Tanknology Environmental, Inc. (11)

10.7 Qualified Stock Option Plan. (12)

10.8 Consulting agreement by and between the Company and with Irv J.
Gruverman, dated November 4, 1993. (13)

10.9 Qualified Stock Option Plan. (14)

10.10 Termination of Distributor Agreement with Sippican, Inc. dated
February 24, 1994. (15)

10.11 Employment contract with David R. LeBlanc dated June 8, 1994. (15)

10.12 FCI FiberChem, Inc. and FCI Environmental, Inc. 401(k) Profit Sharing
Plan. (15)

10.13 Qualified Stock Option Plan (16)

10.14 License Agreement with Texas Instruments, Incorporated, dated
June 15, 1995. (17)

10.15 Cooperative Development Agreement with Texas Instruments, Incorporated,
dated June 15, 1995. (17)

10.16 Form of Distribution Agreement. (18)

10.17 Form of agreement for services with Gordon Werner and others dated as
of September 15, 1995. (18)

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. (19)

- ---------------------------------
(9) 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.
(10) Incorporated by reference from the Company's Registration Statement on Form
S-8 for April 28, 1992. (No. 33-47518).
(11) Incorporated by reference from the Company's Current Report on Form 8-K for
May 26, 1992.
(12) Incorporated by reference from the Company's Proxy Statement dated May 3,
1993.
(13) Incorporated by reference from the Company's Report on Form 10-K for
September 30, 1993.
(14) Incorporated by reference from the Company's Proxy Statement dated
May 23, 1994.
(15) Incorporated by reference from the Company's Report on Form 10-KSB for
September 30, 1994.
(16) Incorporated by reference from the Company's Report on Form S-8 for
August 1, 1995.
(17) Incorporated by reference from the Company's Report on Form 8-K/A for
August 30, 1995.
(18) Incorporated by reference from the Company's Report on Form 10-KSB for
September 30, 1995.
(19) Incorporated by reference from the Company's Report on Form 10-KSB for
September 30, 1996.

29
<PAGE>

10.19 Agreement dated October 1, 1996 by and between FCI Environmental, Inc.
and Autronica AS. (19)

10.20 OEM Strategic Alliance Agreement dated June 30, 1996 by and between
Whessoe Varec, Inc. and FCI Environmental, Inc. (19)

10.21 1997 Employee Stock Plan (20)

10.22 Employment agreement with Geoffrey F. Hewitt dated October 1, 1997.
(21)

10.23 Employment agreement with Melvin W. Pelley dated October 1, 1997. (21)

10.24 Employment Agreement with Thomas A. Collins dated October 1, 1997. (21)

10.25 Amendment to Whessoe Varec, Inc. OEM Strategic Alliance Agreement
dated August 13, 1997. (21)

10.26 Agreement dated October 2, 1997 between the Company and entrenet
Group, L.L.C. (21)

*21.1 Subsidiaries of the Registrant.

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

- ---------------------------------------
* filed with this Report.
(20) Incorporated by reference from the Company's Proxy Statement dated May 20,
1997.
(21) Incorporated by reference from the Company's Report on Form 10-KSB for
September 30, 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, 1998.

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

30
<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 8, 1999

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 8, 1999
- ---------------------------- Officer (Principal Executive Officer)
Geoffrey F. Hewitt

/s/ Melvin W. Pelley Chief Financial Officer January 8, 1999
- ---------------------------- (Principal Accounting Officer)
Melvin W. Pelley

/s/ Walter Haemmerli Director January 8, 1999
- ----------------------------
Walter Haemmerli

/s/ Gerald T. Owens Director January 8, 1999
- ----------------------------
Gerald T. Owens

/s/ Irwin J. Gruverman Director January 8, 1999
- ----------------------------
Irwin J. Gruverman

/s/ Byron A. Denenberg Director January 8, 1999
- ----------------------------
Byron A. Denenberg
</TABLE>

31
<PAGE>

INDEPENDENT AUDITORS' REPORT

TO THE BOARD OF DIRECTORS
FIBERCHEM, INC.

We have audited the accompanying consolidated balance sheets of FiberChem,
Inc. and Subsidiaries as of September 30, 1998 and 1997 and the related
consolidated statements of operations, stockholders' equity (deficiency), and
cash flows for the years 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 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 consoldiated financial statements referred to above
present fairly, in all material respects, the financial position of FiberChem,
Inc. and Subsidiaries as of September 30, 1998 and 1997, and the results
of their operations and their cash flows for the years 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 and has a net capital deficiency that 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 this uncertainty.

GOLDSTEIN GOLUB KESSLER LLP
New York, New York

November 21, 1998, except for Note 12,
as to which the date is December 22, 1998

F-1
<PAGE>

FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
September 30, September 30,
1997 1998
------------------- -------------------

<S> <C> <C>
Current assets:

Cash and cash equivalents $ 427,488 $ 91,354
Accounts receivable, net of allowance for doubtful
accounts of $240,796 and $60,505 in 1997 and 1998,
respectively 263,947 432,302
Inventories (Note 3) 1,563,191 1,248,007
Prepaid expenses and other 56,941 86,261
------------------- -------------------
Total current assets 2,311,567 1,857,924
------------------- -------------------

Equipment 716,465 706,465
Less accumulated depreciation (549,175) (605,167)
------------------- -------------------
Net equipment 167,290 101,298
------------------- -------------------

Other assets:

Patent costs, net of accumulated amortization of
$1,678,845 at September 30, 1997 and
$1,885,838 at September 30, 1998 (note 5) 287,905 114,274
Technology costs, net of accumulated amortization
and $386,373 at September 30, 1997 (note 4) 83,333 52,083
and $417,623 at September 30, 1998 (note 4)
Note financing costs, net of accumulated amortization of
$148,298 at September 30, 1997 and
$232,775 at September 30, 1998 (note 6) 119,625 32,151
Prepaid financing costs - Rights Offering (note 12) -- 147,970

------------------- -------------------
Total other assets 490,863 346,478
------------------- -------------------
Total assets $2,969,720 $2,305,700
------------------- -------------------
------------------- -------------------
</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,
1997 1998
------------------- -------------------
<S> <C> <C>
Current liabilities:

Senior convertible notes payable (note 6) -- $1,600,000
Bank loan payable (note 6) -- 32,452
Current installments of note payable (note 6) 6,878 7,808
Accounts payable 95,469 396,164
Deferred salaries 37,019 179,806
Accrued salaries and benefits 119,680 157,365
Accrued warranty 48,847 113,767
Accrued legal, accounting and consulting 32,000 112,320
Accrued commissions 39,147 41,929
Other accrued expenses 31,198 84,872
Interest payable 17,778 50,065
------------------- -------------------
Total current liabilities 428,016 2,776,548

Senior convertible notes payable (note 6) 1,650,000 --
Notes payable to officers, directors and affiliates (note 6) -- 808,000
Note payable, net of current installments (note 6) 7,942 60,000
------------------- -------------------
Total liabilities 2,085,958 3,644,548
------------------- -------------------
Stockholders' equity (deficiency) (notes 4, 6 and 7):

Preferred stock, $.001 par value. Authorized
10,000,000 shares; 218,998 convertible
shares issued and outstanding at September 30,
1997 and September 30, 1998;
at liquidation value of $15 per share 3,284,970 3,284,970
Common stock, $.0001 par value. Authorized
50,000,000 shares at September 30, 1997, and
150,000,000 shares at September 30, 1998;
25,515,660 and 26,441,207 shares issued and
outstanding at September 30, 1997, and
September 30, 1998, respectively 2,552 2,644
Additional paid-in capital 27,192,749 27,362,272
Deficit (29,596,509) (31,988,734)
------------------- -------------------
Stockholders' equity (deficiency) 883,762 (1,338,848)

Commitments and contingencies (notes 6, 7 and 8)
------------------- -------------------
Total liabilities and stockholders' equity $2,969,720 $2,305,700
------------------- -------------------
------------------- -------------------
</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,
-------------------------------------------
1997 1998
-------------------- --------------------

<S> <C> <C>
Revenues $1,523,994 $1,317,600
Cost of revenues 945,434 617,690
-------------------- --------------------
Gross profit 578,560 699,910
-------------------- --------------------
Operating expenses:

Research, development and engineering 1,257,324 752,892
General and administrative 1,137,866 1,153,299
Sales and marketing 1,004,172 724,022
Disposal of obsolete inventory -- 160,000
-------------------- --------------------
Total operating expenses 3,399,362 2,790,213
-------------------- --------------------
Loss from operations (2,820,802) (2,090,303)
-------------------- --------------------
Other income (expense):

Interest expense (223,161) (307,331)
Interest income 81,787 3,617
Other, net (264,782) 1,792
-------------------- --------------------
Total other income (expense) (406,156) (301,922)
-------------------- --------------------
Net loss ($3,226,958) ($2,392,225)
-------------------- --------------------
-------------------- --------------------

Shares of common stock used in computing
loss per common share 25,623,614 25,925,859
-------------------- --------------------
-------------------- --------------------

Net loss per common share (Note 1) ($0.13) ($0.09)
-------------------- --------------------
-------------------- --------------------
</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 (DEFICIENCY)
YEARS ENDED SEPTEMBER 30, 1997 AND 1998

<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
------------------------------------------------ Paid-In
Shares Amount Shares Amount Capital
---------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
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

Common stock issued:
Exercise of options -- -- 5,000 1 1,099
For services -- -- 676,500 67 121,445
Conversion of senior
convertible notes payable (note 6) -- -- 244,047 24 46,979
Net loss
---------- ------------ ---------- ---------- ------------
Balance at September 30, 1998 218,998 $3,284,970 26,441,207 $2,644 27,362,272
---------- ------------ ---------- ---------- ------------
---------- ------------ ---------- ---------- ------------

Notes
Receivable
for Exercise
Deficit of Options Total
-------------- --------------- -----------
<S> <C> <C> <C>
Balance at September 30, 1996 (26,369,551) (1,543,650) 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 (29,596,509) 0 883,762

Common stock issued:
Exercise of options 1,100
For services 121,512
Conversion of senior
convertible notes payable (note 6) 47,003
Net loss (2,392,225) (2,392,225)
-------------- --------------- -----------
Balance at September 30, 1998 (31,988,734) 0 (1,338,848)
-------------- --------------- -----------
-------------- --------------- -----------
</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,
-------------------------------------
1997 1998
----------------- -------------------
<S> <C> <C>
Cash flows from operating activities:

Net loss ($3,226,958) ($2,392,225)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation 69,853 57,659
Amortization of patent and technology costs 273,967 238,243
Amortization of financing costs 82,620 84,477
Accrued interest on notes receivable for exercise of options (26,985) --
Write off of accrued interest on notes receivable
for exercise of options 248,212 --
Common stock issued for services -- 121,512
Gain on sale of fixed assets -- (1,791)
Reduction in notes receivable for the exercise
of options in exchange for services 636 --
Provision for loss on accounts receivable 36,085 50,542
Write down of obsolete inventory 36,290 193,725
Changes in current assets and liabilities:
(Increase) Decrease in accounts receivable 5,441 (218,897)
(Increase) Decrease in inventories (142,346) 121,459
(Increase) Decrease in prepaid expenses and
other current assets 2,119 (29,320)
Increase (decrease) in accounts payable (175,034) 300,695
Increase in accrued expenses 101,326 382,168
Increase (decrease) in interest payable (238) 32,287
----------------- -------------------
Net cash used in operating activities (2,715,012) (1,059,466)
----------------- -------------------

Cash flows from investing activities:

(Purchase) sale of equipment (83,505) 10,125
Payments for patents (55,979) (33,362)
----------------- -------------------
Net cash used in investing activities (139,484) (23,237)
----------------- -------------------
</TABLE>

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

(continued)

F-6
<PAGE>

<TABLE>
<CAPTION>
Years ended September 30,
-------------------------------------
1997 1998
----------------- -------------------
<S> <C> <C>
Cash flows from financing activities:

Net proceeds from bank loan $ -- $32,452
Proceeds from notes payable, officers, directors and affiliates -- 808,000
Proceeds from other notes payable -- 60,000
Payment of financing costs -- (147,970)
Payments on note payable to bank and others (16,319) (7,013)
Cash restricted as security for note payable 18,456 --
Proceeds from the exercise of options and warrants 86,040 1,100
Proceeds from interest and notes receivable for exercise of options 174,406 --
Payment of dividend on preferred stock (46,171) --
----------------- -------------------
Net cash provided by financing activities 216,412 746,569
----------------- -------------------
Net increase (decrease) in cash and cash equivalents (2,638,084) (336,134)
Cash and cash equivalents at beginning of period 3,065,572 427,488
----------------- ------------------
Cash and cash equivalents at end of period $427,488 $91,354
----------------- ------------------
----------------- ------------------

Supplemental Cash Flow Information

Noncash investing and financing activities:

Senior convertible notes payable converted to common stock $25,000 $50,000
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 2,000 2,997
Preferred stock issued as dividends 208,635 --
Equipment purchased through capital lease 21,273 --
Reduction in notes receivable for exercise of options
in exchange for services 636 --
----------------- ------------------
----------------- ------------------

Interest paid $140,785 $158,085
----------------- ------------------
----------------- ------------------
</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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

(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, 1997 and 1998 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 net losses of
$3,226,958 and $2,392,225 for the years ended September 30, 1997 and 1998,
respectively and as of September 30, 1998 had an accumulated deficit of
$31,988,734 and a stockholders' deficiency of $1,338,848.

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. On December 22, 1998, the Company concluded an offering
to holders of its Common and Preferred Stock, Class D and other Warrants to
purchase additional shares of Common Stock and new Class E Common Stock Purchase
Warrants resulting in the receipt of approximately $1.7 million (see Note 12,
Subsequent Events). However, no assurance can be given that forecasted 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 accounts for its 25% ownership in a Finnish
company using the equity method of accounting. The Company's
share of net income has been immaterial and the net value
reflected in the financial statements is zero. The Company
expects to liquidate its interest during Fiscal 1999 and does
not expect a material gain or loss upon liquidation.

(b) CASH AND CASH EQUIVALENTS

Cash equivalents consist of financial instruments with
original maturities of no more than 90 days.

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.

F-8
<PAGE>

(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
pending. Proven technologies are amortized using the
straight-line method over an eight year period.

(f) PATENT COSTS

Costs incurred in acquiring and filing 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 four years. In 1998 the Company reassessed the
expected economic life of new patents and changed the period
of amortization from 8 years to 4 years due to the shorter
expected economic life of such patents in the current
technological environment. The Company incurred approximately
$88,000 of additional amortization expense for the year ended
September 30, 1998 for this change in estimate.

(g) REVENUE RECOGNITION

The Company recognizes revenue from product sales when title
passes, which is upon shipment of product to the customer.
There is generally no right of return except for normal
warranties. Additionally, the Company performs research and
testing services for others under short-term contracts.
Revenue on these contracts is recorded when services are
performed.

(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 based on estimated future costs for product warranty,
which is charged to cost of sales at the time of sale.

(i) RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred.

(j) PER SHARE DATA

In 1998 the Company adopted Statement of Financial Accounting
Standards No. 128, Earnings Per Share. The adoption of this
statement does not change net loss per common share for the
year ended September 30, 1997. Shares issuable on the exercise
of stock options and warrants have been excluded because of
their anti-dilutive effect on loss per share. Net loss per
common share is computed using the weighted-average number of
shares outstanding.

(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

F-9
<PAGE>

income in the years in which those temporary differences are
expected to be recovered or 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 has, however, 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 1997 presentation
to conform to the 1998 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. In March 1998 the American Institute of
Certified Public Accountants issued Statement of Position 98-1
("SOP 98-1"), Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. The Company is
required to adopt this Statement in Fiscal 2000. SOP 98-1
provides guidance on the accounting for costs of computer
software used internally, including identifying the
characteristics of internal-use software and providing
examples to assist in determining when computer software is
for internal use. Adoption of these Statements is expected to
have no impact on the Company's consolidated financial
position, results of operations or cash flows.

F-10
<PAGE>

(3) INVENTORIES

Inventories consist of:

<TABLE>
<CAPTION>
September 30,
1997 1998
---- ----
<S> <C> <C>
Raw materials $ 551,832 $446,284
Work in process 24,643 8,271
Finished goods 1,312,804 978,928
--------- -------

Subtotal 1,889,279 1,433,483
Valuation and obsolescence reserves, primarily
against finished goods (326,088) (185,476)
--------- ---------
Net inventories $1,563,191 $1,248,007
---------- ----------
---------- ----------
</TABLE>

(4) TECHNOLOGY COSTS

Technology costs include proven technologies acquired by the Company 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.

(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, in accordance
with the original note agreement, 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. During Fiscal 1998, the Company
received an unsolicited offer to convert $25,000 of the Notes at a conversion
price of $0.21 per share, and another offer to convert $25,000 of the Notes at a
conversion price of $0.20 per share, which were approximately the then current
market values of the Common Stock. Accordingly, the Company issued 244,047
shares for the conversions. All other Note holders were offered the same
temporary conversion price. As of September 30, 1998, an aggregate face

F-11
<PAGE>

amount of $1,225,000 of the Notes had been converted to Common Stock resulting
in the issuance of 1,742,851 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,
1998 approximately $163,278 of unamortized deferred financing cost has been
recorded as a reduction in additional paid-in capital associated with the
$1,225,000 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 in accordance with the original Placement
Agent Agreement. 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.

On July 7, 1998, the Company arranged a line of credit with Silicon Valley
Bank. The agreement provides for maximum loans of $1 million, and is secured by
accounts receivable, inventories, equipment and intellectual property. The
agreement provides for advances against specific sales invoices at an annualized
interest rate of approximately 19.75%. During Fiscal 1998, the Company borrowed
approximately $413,000 against the line of credit and repaid approximately
$381,000. As of September 30, 1998, the Company owed $32,452 against the line of
credit.

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. As amended in July, 1998, the agreement provides that for its services,
entrenet will receive a cash fee of $40,000 in eight installments of $5,000 each
(as defined in the agreement); $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.

In March and August 1998, the Company obtained loans aggregating $433,000
from Privatbank Vermag AG, a private investment bank with which a director of
the Company is associated. These loans (the "Bridge Loans") were provided as
interim financing until the Company completed its Rights Offering, and are to be
repaid from proceeds of the Rights Offering. The Bridge Loans bear interest at
approximately 8.5% per annum. In addition, the Company agreed to issue to
Privatbank, as additional consideration, 130,000 Units (consisting of 130,000
shares of Common Stock and Class E Warrants to purchase 130,000 shares of Common
Stock). The Units were issued in October 1998 as part of the Rights Offering.
The total value of approximately $24,700 is included in accrued expenses at
September 30, 1998, of which approximately $20,500 was recorded as additional
interest expense during Fiscal 1998.

During Fiscal 1998, directors and officers of the Company advanced an
aggregate of $250,000 to the Company. These advances bear interest at the rate
of 8% per annum and are due at various dates between December 14, 2002 and
February 4, 2003, and will be repaid from the proceeds of the Rights Offering
(see Note 12) if the Rights Offering is fully subscribed; otherwise, they will
be exchanged for any Rights Offering Units remaining unsubscribed at the
completion of the Rights Offering.

Also during Fiscal 1998, a director and an officer of the Company advanced
an aggregate of $125,000, with interest at 8% per annum, due upon completion of
the Rights Offering.

F-12
<PAGE>

The maturities of the notes payable (other than notes payable to
officers, directors and affiliates) are as follows:

<TABLE>
<CAPTION>
September 30, September 30,
1997 1998
------------------- -------------------
<S> <C> <C>
Fiscal 1998 $ 6,878 ---
Fiscal 1999 7,942 $1,640,260
Fiscal 2000 1,650,000 ---
Fiscal 2001 --- ---
Fiscal 2002 --- ---
Fiscal 2003 --- 60,000
------------- -------------
$ 1,664,820 $2,000,260
------------- -------------
------------- -------------
</TABLE>

Of the $808,000 notes payable to officers, directors and affiliates,
$558,000 is to be repaid from proceeds of the Rights Offering. The remaining
$250,000 will be repaid from proceeds of the Rights Offering if the Rights
Offering is fully subscribed, or will be converted to Common Stock and Class E
Warrants as part of the Rights Offering. Related party interest expense incurred
during the year ended September 30, 1998 amounted to $39,235.

(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 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. As of
September 30, 1998, 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. Likewise, in September 1998, the Board of Directors determined
not to declare the annual dividend payable on November 1, 1998. As a result, the
undeclared dividends, aggregating $722,694 (if elected entirely in cash, or
36,442 additional shares of Convertible Preferred Stock if elected wholly in
additional shares), will accumulate in accordance with the terms of the
Convertible Preferred Stock. Had the Company declared a preferred stock
dividend, net loss per common share would be as follows:

F-13
<PAGE>

<TABLE>

<S> <C>
Net loss $(2,392,225)
Preferred stock dividend (722,694)
---------------
Net loss available to common stockholders $(3,114,919)
---------------
---------------
Shares of common stock used in computing loss
per common share 25,925,859
---------------
---------------
Net loss per common share ($0.12)
---------------
---------------
</TABLE>

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 in accordance with the Placement Agent
Agreement, 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 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. 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.

F-14
<PAGE>

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, 1998, 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"). During Fiscal 1998,
568,907 options expired unexercised and at September 30, 1998 an aggregate of
252,207 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, 1998, the Company has issued 948,047 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. During the year ended September 30,
1998, 70,000 options expired unexercised. An aggregate of 760,442 options remain
exercisable under the 1995 Plan.

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, 1998 the Company has issued options to purchase 1,441,000
shares of Common Stock at prices ranging from $0.15 to $0.25 under the 1997 Plan
to employees and consultants of Environmental and Directors of the Company. An
aggregate of 1,431,000 options remain exercisable under the 1997 Plan.

Effective October 1, 1996, cash compensation to directors 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 1998, the Company
granted to its four non-management directors options to purchase an aggregate of
150,000 shares of Common Stock at $0.15 per share, which was the fair market
value of the Common Stock as of the date of the grants.

During Fiscal 1998, the Company issued a total of 676,500 shares of Common
Stock of the Company, valued at $121,512 for legal services and financial
consulting services performed for the Company.

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, 1997 and 1998 and changes
during those years are as follows:

F-15
<PAGE>

<TABLE>
<CAPTION>
1997 1998
-------------------------------- ------------------------------
Weighted Weighted
Average Average
Fixed Options Options Exercise Options Exercise
Price Price
- ----------------------------- --------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Outstanding at beginning of
year 1,670,552 $0.99 2,096,556 $0.76
Granted during year 676,500 .28 991,000 .15
Exercised (150,496) .37 (5,000) .22
Forfeited (100,000) 1.00 (638,907) 1.01
--------------- ------------- ------------ ------------
Outstanding at end of year
2,096,556 $0.76 2,443,649 $0.47
--------- ---------
--------- ---------
</TABLE>

The following table summarizes information about stock options outstanding
and exercisable at September 30, 1997 and 1998.

<TABLE>
<CAPTION>
Weighted Average Weighted Average
Range of Exercise Number Outstanding and Remaining Exercise Price
September 30 Prices Exercisable Contractual Life
- ----------------- -------------------- ------------------------ --------------------- -----------------

<S> <C> <C> <C> <C>
1997 $0.22 - 1.25 2,096,556 4.80 years $0.76
1998 $0.15 - 1.25 2,443,649 7.15 years $0.47
</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
------------------------------------ ----------------------------------
1997 1998 1997 1998
----------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net Loss $(3,226,958) $(2,392,225) $(3,501,930) $(2,530,965)

Loss per share $(0.13) $(0.09) $(0.14) $(0.10)
</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
were (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 1997 and 1998 was $172,551 and $170,869, respectively. The Company is
pursuing alternatives, including a renewal of the month-to-month lease at
approximately the current base monthly rental charge.

A customer has filed a lawsuit alleging breach of warranty for goods
purchased from the Company. The customer is seeking damages of $750,000 plus
fees and expenses. The Company has filed a motion to dismiss this lawsuit.
The outcome of this matter cannot be presently determined.

F-16
<PAGE>

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, 1997 and 1998 totaled $21,263 and $15,888,
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, 1997 and 1998 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:

<TABLE>
<CAPTION>
1997 1998
---- ----

<S> <C> <C>
Computed "expected" tax benefit $(1,097,166) $(813,000)
Reduction in income tax benefit resulting from:
Non-deductible expenses 28,166 66,000
Increase in valuation allowance 1,069,000 747,000
-------------- --------------
Net tax benefit $ --- $ ---
-------------- --------------
-------------- --------------
</TABLE>

Components of the net deferred tax asset as of September 30, 1997 and 1998
are as follows:

<TABLE>
<CAPTION>
1997 Change 1998
---- ------ ----
<S> <C> <C> <C>
Deferred tax asset $8,952,000 715,000 9,667,000
Less valuation allowance (8,942,000) (747,000) (9,689,000)
----------- --------- -----------

Total net deferred tax asset 10,000 (32,000) (22,000)
Deferred tax liability (10,000) 32,000 22,000
------------ ------------- ------------

Net deferred tax asset $ --- $ --- $ ---
------------ ------------- ------------
------------ ------------- ------------
</TABLE>

The deferred tax asset is 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. The deferred
tax liability primarily represents 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, 1998, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $27,543,000 which are available to
offset future taxable income, if any, through 2013. The following table
summarizes the dates of generation and expiration of the Company's federal net
operating loss carryforward:

F-17
<PAGE>

<TABLE>
<CAPTION>
Year Ended NOL NOL Expiration
September 30, Generated Utilized Carryover September 30,

<S> <C> <C> <C> <C> <C>
1987 128,307 (128,307) 0
1988 445,230 (180,406) 264,824 2003
1989 (308,713) 308,713 0
1990 1,769,184 1,769,184 2005
1991 2,678,702 2,678,702 2006
1992 2,396,528 2,396,528 2007
1993 4,140,886 4,140,886 2008
1994 5,784,715 5,784,715 2009
1995 2,368,650 2,368,650 2010
1996 2,559,055 2,559,055 2011
1997 3,253,739 3,253,739 2012
1998 2,327,000 2,327,000 2013
-------------------- --------------------- ---------------------

Total 27,543,283 0 27,543,283
-------------------- --------------------- ---------------------
</TABLE>

However, the use of 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 is 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, 1998 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, 1998.

(11) MAJOR CUSTOMERS

During Fiscal 1997, the Company had sales to one customer of approximately
$985,000. During Fiscal 1998, the Company had sales to the same customer of
approximately $147,000 and to a second customer of approximately $387,000.

(12) SUBSEQUENT EVENTS

On October 23, 1998, the Company granted, for no consideration to holders
of its Common Stock, Preferred Stock and warrants transferable rights (the
"Rights") to subscribe for units (the "Units") at a subscription price of $0.22
per Unit. Each Unit consists of one share of Common Stock and one redeemable
Class E Warrant exercisable for one share of Common Stock at an exercise price
for one year (through October 23, 1999) at $0.25 per share; then through October
23, 2000 at $0.35; then through October 23, 2001 at $0.50 per share; then
through October 23, 2002 at $0.70 per share; then through October 23, 2003 (at
which time the Class E Warrants expire) at $0.90 per share. Each holder of
record as of October 16, 1998 of Common Stock and Warrants received one Right
for four shares of Common Stock or Warrants held, and each holder of Preferred
Stock received 2.5 Rights for each share of Preferred Stock

F-18
<PAGE>

held. An aggregate of 8,976,962 Rights were issued. An aggregate of 7,628,380
Rights were exercised as of the close of the offering on December 22, 1998,
resulting in gross proceeds to the Company of $1,678,380 and the issuance of
7,628,380 shares of Common Stock and a like number of Class E Warrants.

F-19
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit No. Name
- ----------- ----

<S> <C>
21.1 Subsidiaries of the Registrant.

23.1 Consent of Goldstein Golub Kessler LLP
</TABLE>

<PAGE>

EXHIBIT NO. 21.1

SUBSIDIARIES OF FIBERCHEM, INC.

<TABLE>
<CAPTION>
Name State of Incorporation
---- ----------------------
<S> <C>
FCI Environmental, Inc. (formerly FCI Instruments, Inc.) Nevada
Fiberoptic Medical Systems, Inc. (inactive) Nevada
PetroTester, Inc. (inactive) New Mexico
</TABLE>

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS'

The Board of Directors and Shareholders
FiberChem, Inc.

We hereby consent to the incorporation by reference in Registration
Statements No. 33-61479 and 33-82330 on Form S-8 of our report dated November
17, 1998, except for Note 12, as to which the date is December 22, 1998,
related to the consolidated balance sheet of FiberChem, Inc. and Subsidiaries
as of September 30, 1998, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year then ended,
which report appears in the September 30, 1998 annual report on Form 10-KSB
of FiberChem, Inc. and Subsidiaries.

GOLDSTEIN GOLUB KESSLER LLP
New York, New York

January 12, 1999

<PAGE>

United States Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-QSB

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 1998
----------------------------------

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

For the transition period from to
------------ -----------------

Commission file number 0-17569
------------------------

FIBERCHEM, INC.
(Exact name of small business issuer as specified in its charter)

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

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

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

Indicate by check mark 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
------- -------

As of February 11, 1999, the issuer had 34,371,386 shares of Common
Stock, par value $.0001 per share, issued and outstanding.

<PAGE>

FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
(UNAUDITED)
September 30, December 31,
1998 1998
-------------- -------------
<S> <C> <C>
Current assets:

Cash and cash equivalents $91,354 $383,714
Accounts receivable, net of allowance for doubtful
accounts of $60,505 and $49,861 at September 30
and December 31, 1998, respectively 432,302 467,248
Inventories 1,248,007 1,177,613
Prepaid expenses and other 86,261 127,787
-------------- -------------
Total current assets 1,857,924 2,156,362
-------------- -------------

Equipment 706,465 706,465
Less accumulated depreciation (605,167) (616,434)
-------------- -------------
Net equipment 101,298 90,031
-------------- -------------

Other assets:

Patent costs, net of accumulated amortization of
$1,885,838 at September 30, 1998 and
$1,905,867 at December 31, 1998 114,274 97,172
Technology costs, net of accumulated amortization
of $417,623 at September 30, 1998 and 52,083 39,062
and $430,644 at December 31, 1998
Note financing costs, net of accumulated amortization of
$232,775 at September 30, 1998 and
$254,399 at December 31, 1998 32,151 10,527
Prepaid financing costs - Rights Offering 147,970 --

-------------- -------------
Total other assets 346,478 146,761
-------------- -------------
Total assets $2,305,700 $2,393,154
-------------- -------------
-------------- -------------
</TABLE>

See accompanying notes to consolidated financial statements

2
<PAGE>

FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
(UNAUDITED)
September 30, December 31,
1998 1998
-------------- ---------------
<S> <C> <C>
Current liabilities:

Senior convertible notes payable $1,600,000 $1,600,000
Bank loan payable 32,452 8,791
Current installments of note payable 7,808 5,898
Accounts payable 396,164 330,750
Deferred salaries 179,806 44,801
Accrued salaries and benefits 157,365 133,357
Accrued warranty 113,767 119,786
Accrued legal, accounting and consulting 112,320 52,890
Accrued commissions 41,929 35,886
Other accrued expenses 84,872 88,109
Interest payable 50,065 70,257
-------------- ---------------
Total current liabilities 2,776,548 2,490,525

Notes payable to officers, directors and affiliates 808,000 433,000
Note payable, net of current installments 60,000 --
-------------- ---------------
Total liabilities 3,644,548 2,923,525
-------------- ---------------
Stockholders' equity (deficiency):

Preferred stock, $.001 par value. Authorized
10,000,000 shares; 218,998 and 207,848 convertible
shares issued and outstanding at September 30,
and December 31, 1998; respectively;
at liquidation value of $15 per share 3,284,970 3,117,720
Common stock, $.0001 par value. Authorized
150,000,000 shares; 26,441,207 and 34,371,386
shares issued and outstanding at September 30
and December 31, 1998, respectively 2,644 3,437
Additional paid-in capital 27,362,272 28,957,502
Deficit (31,988,734) (32,609,030)
-------------- ---------------
Stockholders' equity (deficiency) (1,338,848) (530,371)

-------------- ---------------
Total liabilities and stockholders' equity $2,305,700 $2,393,154
-------------- ---------------
-------------- ---------------
</TABLE>

See accompanying notes to consolidated financial statements

3
<PAGE>

FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
Three month period ended
-------------------------------------
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Revenues $225,179 $328,895
Cost of revenues 92,842 183,594
------------ ------------
Gross profit 132,337 145,301
------------ ------------
Operating expenses:

Research, development and engineering 191,892 154,797
General and administrative 239,817 371,935
Sales and marketing 148,922 164,185
------------ ------------
Total operating expenses 580,631 690,917
------------ ------------
Loss from operations (448,294) (545,616)
------------ ------------
Other income (expense):

Interest expense (60,125) (81,169)
Interest and other income 1,792 6,489

------------ ------------
Total other expense (58,333) (74,680)
------------ ------------
Net loss ($506,627) ($620,296)
------------ ------------
------------ ------------

Shares of common stock used in computing loss per share 25,546,214 27,642,715
------------ ------------
------------ ------------

Basic loss per share ($0.02) ($0.02)
------------ ------------
------------ ------------
</TABLE>

See accompanying notes to consolidated financial statements

4
<PAGE>

FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)

<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
---------------------------------------------- Paid-In
Shares Amount Shares Amount Capital Deficit Total
--------- ---------- ---------- -------- ----------- ------------- ------------

<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1998 218,998 $3,284,970 26,441,207 $2,644 27,362,272 (31,988,734) (1,338,848)

Common stock issued:
For conversion of preferred stock (11,150) (167,250) 111,500 11 167,239 -- --
For cash -- -- 4,195,209 419 686,053 -- 686,472
Conversion of notes and interest
payable to officers, directors and
affiliates -- -- 1,935,677 194 420,793 -- 420,987
Conversion of other notes payable -- -- 272,727 27 59,973 -- 60,000
For services -- -- 915,719 92 151,366 -- 151,458
For payment of deferred salaries -- -- 489,347 49 107,607 -- 107,656
Exercise of options -- -- 10,000 1 2,199 -- 2,200
Net loss -- -- -- -- -- (620,296) (620,296)
--------- ---------- ---------- -------- ----------- ------------- ------------
Balance at December 31, 1998 207,848 $3,117,720 34,371,386 $3,437 28,957,502 (32,609,030) (530,371)
--------- ---------- ---------- -------- ----------- ------------- ------------
--------- ---------- ---------- -------- ----------- ------------- ------------
</TABLE>

See accompanying notes to consolidated financial statements

5
<PAGE>

FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
Three-month period ended December 31
--------------------------------------------
1997 1998
----------------- -------------------
<S> <C> <C>
Cash flows from operating activities:

Net loss ($506,627) ($620,296)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation 15,933 11,267
Amortization of patent and technology costs 69,278 33,050
Amortization of financing costs 21,050 21,624
Common stock issued for services 121,361
Gain on sale of fixed assets (1,790) --
Changes in current assets and liabilities:
Increase in accounts receivable (34,134) (34,946)
(Increase) decrease in inventories (31) 70,394
(Increase) decrease in prepaid expenses and
other current assets (2,545) 3,474
Decrease in accounts payable (29,183) (65,414)
Increase (decrease) in accrued expenses 49,329 (98,739)
Increase in interest payable 32,622 42,441
----------------- -----------------
Net cash used in operating activities (386,098) (515,784)
----------------- -----------------

Cash flows from investing activities:

Sale of equipment 10,125 --
Payments for patents (7,358) (2,927)
----------------- -----------------
2,767 (2,927)
----------------- -----------------
</TABLE>

See accompanying notes to consolidated financial statements

6
<PAGE>

FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
Three-month period ended December 31
--------------------------------------------
1997 1998
----------------- -------------------
(continued)
<S> <C> <C>
Cash flows from operating activities:

Net proceeds from bank loan $ -- $8,791
Proceeds from notes payable, officers, directors and affiliates 125,000 --
Proceeds from issuance of common stock and warrants -- 922,946
Payment of financing costs -- (88,504)
Payments on note payable to bank and others (1,648) (34,362)
Proceeds from the exercise of options 1,100 2,200
--------------- --------------
Net cash provided by financing activities 124,452 811,071
--------------- --------------
Net increase (decrease) in cash and cash equivalents ($258,879) $292,360
Cash and cash equivalents at beginning of period 427,488 91,354
--------------- --------------
Cash and cash equivalents at end of period $168,609 $383,714
--------------- --------------
--------------- --------------

Supplemental Cash Flow Information

Noncash investing and financing activities:

Senior convertible notes payable converted to common stock $25,000 $ --
Notes and interest payable to officers, directors and
affiliates converted to common stock and warrants -- 420,987
Notes payable to others converted to common stock
and warrants -- 60,000
Payment of financing costs with common stock and warrants -- 50,000
Unamortized deferred financing costs associated with senior
convertible notes payable converted to common stock 1,664 --
--------------- --------------
--------------- --------------

Interest paid $6,453 $60,615
--------------- --------------
--------------- --------------
</TABLE>

See accompanying notes to consolidated financial statements

7
<PAGE>

FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(1) PRESENTATION OF UNAUDITED FINANCIAL STATEMENTS

The accompanying unaudited consolidated financial statements include the
accounts of FiberChem, Inc. ("FCI" or the "Company") and its subsidiaries. All
inter-company accounts and transactions have been eliminated.

The unaudited consolidated financial statements have been prepared in
accordance with Item 310 of Regulation S-B and, therefore, do not include all
information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows of the Company, in conformity
with generally accepted accounting principles. The information furnished, in the
opinion of management, reflects all adjustments (consisting primarily of normal
recurring accruals) necessary to present fairly the financial position as of
September 30, 1998 and December 31, 1998, and the results of operations and cash
flows of the Company for the three-month periods ended December 31, 1997 and
1998. The results of operations are not necessarily indicative of results which
may be expected for any other interim period or for the year as a whole. For
further information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-KSB for the year ended
September 30, 1998.

Certain Fiscal 1998 Financial Statement amounts have been reclassified
to conform with the presentation in the Fiscal 1999 Financial Statements.

(2) NOTES PAYABLE

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, in accordance
with the original note agreement, 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. During Fiscal 1998, the Company
received an unsolicited offer to convert $25,000 of the Notes at a conversion
price of $0.21 per share, and another offer to convert $25,000 of the Notes at a
conversion price of $0.20 per share, which were approximately the then current
market values of the Common Stock. Accordingly, the Company issued 244,047
shares for the conversions. All other Note holders were offered the same
temporary conversion price. As of December 31, 1998, an aggregate face amount of
$1,225,000 of the Notes had been converted to Common Stock resulting in the
issuance of 1,742,851 shares of Common Stock.

On February 2, 1999, the Company offered to exchange the Notes at their
maturity on February 15, 1999 for new Notes (the "New Notes") with a conversion
price to be determined based on the ten-day average closing price of the Common
Stock prior to February 15, 1999. The New Notes provide for semi-annual interest
payments at 8% per annum in cash or at 12% per annum in stock (at the Company's
option) and will be due February 15, 2002. In order to encourage exchange of the
Notes for New Notes, the Company has offered a bonus, payable in Common Stock
valued at approximately current market, of 8% of the face amount of Notes
exchanged for New Notes. However, there can be no assurance that the existing
Notes will be exchanged for New Notes.

The Company paid fees and expenses associated with the February 1996
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
December 31, 1998 approximately $163,278 of unamortized deferred financing cost
has been recorded as a reduction in additional paid-in capital associated with
the $1,225,000 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 in accordance with the original Placement
Agent Agreement. 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.

8
<PAGE>

On July 7, 1998, the Company arranged a line of credit with Silicon
Valley Bank. The agreement provides for maximum loans of $1 million, and is
secured by accounts receivable, inventories, equipment and intellectual
property. The agreement provides for advances against specific sales invoices at
an annualized interest rate of approximately 19.75%. As of December 31, 1998,
the Company owed $8,791 against the line of credit.

In March and August 1998, the Company obtained loans aggregating
$433,000 from Privatbank Vermag AG, a private investment bank with which a
director of the Company is associated. These loans (the "Bridge Loans") were
provided as interim financing until the Company completed its Rights Offering
(See Capital Stock below). The Bridge Loans bear interest at approximately 8.5%
per annum. In addition, the Company agreed to issue to Privatbank, as additional
consideration, 130,000 Units (consisting of 130,000 shares of Common Stock and
Class E Warrants to purchase 130,000 shares of Common Stock). The Units were
issued in October 1998 as part of the Rights Offering. Also, $50,000 of the
Bridge Loans and $1,920 in accrued interest were converted to Common Stock and
Warrants as part of the Rights Offering.

During Fiscal 1998, directors and officers of the Company advanced an
aggregate of $375,000 to the Company. These advances bear interest at the rate
of 8% per annum and are due at various dates between December 14, 2002 and
February 4, 2003 unless converted into Common Stock prior to maturity. An
aggregate of $325,000 of these advances and $20,329 in accrued interest was
converted to Common Stock and Warrants in conjunction with the Rights Offering.

(3) CAPITAL STOCK

On October 23, 1998, the Company granted, for no consideration to
holders of its Common Stock, Preferred Stock and warrants transferable rights
(the "Rights") to subscribe for units (the "Units") at a subscription price of
$0.22 per Unit. Each Unit consists of one share of Common Stock and one
redeemable Class E Warrant exercisable for one share of Common Stock at an
exercise price for one year (through October 23, 1999) at $0.25 per share; then
through October 23, 2000 at $0.35; then through October 23, 2001 at $0.50 per
share; then through October 23, 2002 at $0.70 per share; then through October
23, 2003 (at which time the Class E Warrants expire) at $0.90 per share. Each
holder of record as of October 16, 1998 of Common Stock and Warrants received
one Right for four shares of Common Stock or Warrants held, and each holder of
Preferred Stock received 2.5 Rights for each share of Preferred Stock held. An
aggregate of 8,976,962 Rights were issued. An aggregate of 7,678,679 Rights were
exercised as of the close of the offering on December 22, 1998, resulting in
gross proceeds to the Company of $1,689,309 and the issuance of 7,678,679 shares
of Common Stock and a like number of Class E Warrants.

Of the total 7,678,679 Rights exercised, 4,195,209 were exercised for
cash of $922,946; 1,805,677 were exercised in exchange for the payment of
advances (and accrued interest thereon) from officers, directors and affiliates
aggregating $397,249; 272,727 were exercised in payment of a $60,000 note
payable to others; 489,347 were exercised in payment of $107,656 of deferred
salaries due to members of management of the Company; and 915,719 were exercised
in payment for legal, consulting and other services totalling $201,458.

The Company incurred $286,474 in legal, accounting, distribution and
other costs associated with the Rights Offering, resulting in net proceeds of
$1,402,835.

9
<PAGE>

Convertible Preferred Stock were converted to 111,500 shares of Common Stock. As
of December 31, 1998, the Company had 207,848 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. Likewise, in September 1998, the Board of Directors determined
not to declare the annual dividend payable on November 1, 1998. As a result,
the undeclared dividends, aggregating $685,898 (if elected entirely in cash, or
34,586 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 in accordance with the Placement Agent
Agreement, 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.

During the three-month period ended December 31, 1998 (the "First
Quarter 1999"), the Company received $2,200 from the exercise of an option to
purchase 10,000 shares Common Stock at an exercise price of $0.22 per share.

(4) REVENUES

The Company continues to incur substantial losses and Management
recognizes that the Company must generate additional revenues or reductions in
operating costs and may need additional financing to continue its operations.
The Company expects significant revenues during calendar 1999 from its alliance
with Whessoe Varec, Inc. in the aboveground storage tank leak detection market,
because of a December 1999 regulatory compliance deadline for tank owners in the
State of Florida. The Company also expects revenues from initial sales of
Sensor-on-a-Chip-Registered Trademark- products, and sales in the offshore
oil production platform market, although there can be no assurance when or if
this will occur. During the last quarter of fiscal 1997, the Company
implemented significant reductions in personnel and other spending, and, to
further conserve cash, continues to defer payment of a significant portion of
management salaries. There can be no assurance that forecasted sales 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 operations.

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

10
<PAGE>

PART I. FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion and analysis should be read in conjunction with
the Unaudited Consolidated Financial Statements and notes thereto.

MATERIAL CHANGES IN FINANCIAL CONDITION

On October 23, 1998, the Company granted, for no consideration to
holders of its Common Stock, Preferred Stock and warrants transferable rights
(the "Rights") to subscribe for units (the "Units") at a subscription price of
$0.22 per Unit. Each Unit consists of one share of Common Stock and one
redeemable Class E Warrant exercisable for one share of Common Stock at an
exercise price for one year (through October 23, 1999) at $0.25 per share; then
through October 23, 2000 at $0.35; then through October 23, 2001 at $0.50 per
share; then through October 23, 2002 at $0.70 per share; then through October
23, 2003 (at which time the Class E Warrants expire) at $0.90 per share. Each
holder of record as of October 16, 1998 of Common Stock and Warrants received
one Right for four shares of Common Stock or Warrants held, and each holder of
Preferred Stock received 2.5 Rights for each share of Preferred Stock held. An
aggregate of 8,976,962 Rights were issued. An aggregate of 7,678,679 Rights were
exercised as of the close of the offering on December 22, 1998, resulting in
gross proceeds to the Company of $1,689,309 and the issuance of 7,678,679 shares
of Common Stock and a like number of Class E Warrants.

The Company incurred $286,474 in legal, accounting, distribution and
other costs associated with the Rights Offering, resulting in net proceeds of
$1,402,835.

The Company's 8% senior convertible notes payable, currently convertible
into Common Stock at $0.4078 per share, become due on February 15, 1999. The
Company has offered to exchange these Notes, aggregating $1,600,000, for New
Notes, which will have a conversion price established at the average closing bid
price of the ten trading days preceding February 15, 1999. The New Notes are due
February 15, 2002 and bear interest at 8% if paid in cash or at 12% if, at the
Company's option, the interest is paid in shares of Common Stock valued at
market value at each semiannual interest payment date. In order to encourage
current note holders to exchange their notes, the Company is offering a bonus
payment of 8% of the face amount of Notes exchanged for New Notes, payable in
shares of Common Stock valued at current market value. However, there can be no
assurance that the existing notes will be exchanged.

The Company had negative working capital of $334,163 at December 31,
1998, compared with negative working capital of $918,624 at September 30, 1998,
an increase in working capital of $584,461. Also the Company had increases in
cash and cash equivalents of $292,360 and in stockholders' equity of $808,477.
These increases are primarily a result of the Company's rights offering, offset
in part by the Company's net loss for the three month period ended December 31,
1998 (the "First Quarter 1999") of $620,296.

Net cash used in operating activities during the First Quarter 1999 was
$515,784 compared to net cash used in operating activities during the First
Quarter 1998 of $386,098. The deficit during the First Quarter 1999 is primarily
a result of the Company's net loss of $620,296, and adjustments to reconcile net
loss to net cash used in operating activities. These adjustments consider
changes in current assets and liabilities, as well as non-cash transactions
including depreciation and amortization expense of $65,941 and common stock
issued in exchange for services of $121,361. Members of management of the
Company agreed to accept 489,347 shares of Common Stock and 489,347 warrants for
the payment of $173,529 in salaries, less approximately $65,000 in withholding
taxes which the Company remitted in cash. Management had deferred the payment of
a substantial portion of their

11
<PAGE>

salaries since June 1997, and continue to do so. Common Stock and warrants were
also issued in payment for approximately $152,000 in consulting and other
services.

Net cash used in operating activities during the First Quarter 1998 of
$386,098 was primarily a result of the Company's net loss of $506,627, and
adjustments for changes in current assets and liabilities and non-cash
transactions including depreciation and amortization expense of $106,261.

Net cash used in investing activities during the First Quarter 1999 was
$2,927, as compared to net cash provided by investing activities of $2,767
during the First Quarter 1998. During the First Quarter 1998, the Company sold
unused equipment for $10,125 and paid $7,358 for United States and foreign
patent applications. During the First Quarter 1999, the Company paid $2,927 for
patent applications.

Net cash provided by financing activities during the First Quarter 1999
was $811,071 as compared to net cash provided by financing activities during the
First Quarter 1998 of $124,452. Cash proceeds of $922,946 were received for the
exercise of Rights issued to shareholders resulting in the issuance of 4,195,209
shares and warrants. Costs associated with the Rights offering paid during the
quarter were $88,504. Payments on advances against the Company's line of credit
with Silicon Valley Bank and other notes were $34,362 and the Company borrowed
an additional $8,791 against the line of credit. During the First Quarter 1999,
the Company received $2,200 for the exercise of an option to purchase 10,000
shares of its Common Stock.

During the First Quarter 1998, the Company borrowed $125,000 from
certain of its officers and directors, and received $1,100 for the exercise of
options to purchase 5,000 shares of Common Stock.

As discussed in Note 4 to the Consolidated Financial Statements, the
Company continues to incur substantial losses and may need additional financing
to continue its operations. There can be no assurance that forecasted sales 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 operations. As discussed
in Note 2 to the Consolidated Financial Statements, the Company has offered to
exchange new, three-year notes for old notes payable aggregating $1.6 million
which become due on February 15, 1999. There can be no assurance that the notes
will be exchanged.

MATERIAL CHANGES IN RESULTS OF OPERATIONS

During the First Quarter 1999, Whessoe Varec placed orders with the
Company for equipment for the military storage tank market (and other customers)
in the amount of $275,000. Of this amount, approximately $230,000 was shipped in
the quarter and $45,000 will be shipped in the second quarter of 1999.

On behalf of the U.S. Department of Energy (DoE), Bechtel Nevada placed
a $50,000 order for an additional 10 hand held devices of the type previously
developed for this customer. The units will be delivered in the second or third
fiscal quarter of 1999.

Incoming orders for the First Quarter 1999 were approximately $424,000
with revenues of approximately $329,000 and a backlog of $95,000.

Total revenues for the First Quarter 1999 were $328,895 as compared to
$225,179 for the First Quarter 1998. Revenues for the First Quarter 1999
included sales of approximately $230,000 to Whessoe Varec, the Company's
Alliance partner, as described below, in the aboveground storage tank (AST) leak
detection market. Most of the products purchased by Whessoe Varec were for
installation at military fuel storage facilities.

Revenue also included continued sales to Spirit Energy, Pennzoil,
Chevron and other operators of offshore oil and gas production platforms.

Gross profit for the First Quarter 1999 was $145,301, or 44% of sales,
compared to $132,337, or 59% of sales for the First Quarter 1998. The decrease
in gross margin percentage results from the relatively higher portion of sales
to OEM customers such as Whessoe Varec in the First Quarter 1999.

12
<PAGE>

The Company has a Strategic Alliance (the "Alliance") for the AST market
with Whessoe Varec, Inc. as of June 30, 1996 as amended. The primary target for
the Alliance has been the Florida AST market. On July 13, 1998, after a four
year process, the State of Florida passed into law its new storage tank
regulations. Under the law, the regulated community has various options for
compliance. The lowest cost option is believed to be an internal tank liner with
an external, certified, continuous leak detection device. Currently, the
Company's PetroSense-Registered Trademark- product line is the only
continuous leak detection device certified for use at such sites. Compliance
is required by December 31, 1999.

Whessoe Varec and FCI have targeted 360 sites with an estimated 2,500
tanks as their primary focus for the early part of 1999. Whessoe Varec and FCI
have assigned a team of eleven sales engineers to Florida and this team is
undertaking a concentrated sales effort focussed initially on the highest
priority prospects. These sites include coastal bulk storage, inland jobbers,
industry, military, airports, power generation and government facilities. Each
tank for which Whessoe Varec and FCI receive an order is worth about $10,000 in
revenue to FCI. The Florida regulations require compliance by December 1999.
Some facilities have already applied for approval to FLDEP specifying the
Company's equipment. As applications are approved, there is an assumption that
there will be a stream of orders to the Alliance, although there can be no
assurance that this will be the case.

Shell Oil, Texaco, Florida Power Company, Reedy Creek Energy and
Jacksonville Electric have already purchased and installed the Company's
equipment. During December 1998, GATX placed an order to install the Company's
equipment at their Florida sites. These orders have reduced the Whessoe Varec
inventory originally purchased as part of their contractual obligations under
the Alliance agreement. Assuming that the concentrated sales effort is
successful, the Company expects new orders will be placed with the Company by
Whessoe Varec in order to position the Alliance to meet market demand prior to
the compliance date of December 31, 1999, although there can be no assurance
that this will actually occur. As occurred with the Federal UST regulations
which had a mandatory compliance date of December 22, 1998, and a ten-year
compliance period, some companies are expected to act earlier than others.

Other States are expected to follow Florida and promulgate AST
regulations. Virginia promulgated its own similar regulations during 1998.
Pennsylvania, New Jersey, Minnesota and Wisconsin have also promulgated
regulations.

The Alliance is also pursuing business with the Department of Defense
(DoD) in California, Florida and elsewhere. Whessoe Varec's sister company
Whessoe Coggins has a significant presence in the military fuel depot market.
There is an opportunity to provide leak detection equipment to this market. The
Company's products meet all relevant state and federal standards and are
compatible with the Whessoe Coggins equipment proposed for the total military's
system upgrade. A system incorporating both Whessoe Coggins and Whessoe
Varec/FCI products was successfully demonstrated to the military in California
during April 1998. The data generated at this test was submitted to the local
regulatory authority and met their criteria. During the second half of Fiscal
1998 and through December 1998, the Company's revenues from sales to this market
have been approximately $400,000. The Company has received orders from Whessoe
Varec for PetroSense-Registered Trademark- probes for over 30 DoD tanks. More
tanks are expected to be so equipped in the first half of 1999. There are
approximately 160 DoD tanks in California; however, the exact size of the
opportunity for the Company is not yet clear, since there is more than one
option available for the DoD to achieve compliance. There is a similar number
of military tanks in Florida where regulations provide for fewer alternatives
to the Company's products. There are estimated to be in excess of 5,000
military tanks in the United States.

The development of the offshore market for the Company's
OilSense-4000-TM- and PHA-100WL continues to be slower than originally
anticipated. The combination of the availability of Freon-Registered
Trademark- and the low price of oil is mitigating against a wholesale switch
from the Freon-Registered Trademark- /IR method. Notwithstanding the above,
Amoco, Spirit Energy 76 (Unocal) and Pennzoil have committed to the use of
the Company's products on all their platforms in the Gulf of Mexico. Spirit
Energy has installed 14 PHA-100WLs and Amoco has installed the Company's
OilSense-4000-TM- and PHA-100WLs at 8 of their more than 25 sites. During
December, Pennzoil placed their first order for the Company's PHA-100WLs for
2 of their 15 sites. Kerr McGee and CNG have begun to evaluate the Company's
equipment with the intent to purchase if the evaluations are successful.
These two companies represent

13
<PAGE>

approximately 30 platforms. Exxon, Marathon and Shell are also evaluating the
Company's equipment. Chevron ordered an OilSense-4000-TM- for evaluation for use
at its platforms throughout the Gulf. Merger activity among the major oil
companies has slowed installations but is not believed to have significantly
affected the size of the opportunity.

The Company is continuing its marketing efforts in other major offshore
production areas such as the North Sea and the Persian Gulf. During January
1999, the Company received its first order from Oman.

The Company's sensor development project with Gilbarco has moved on to a
pre-manufacturing mode driven by the expectation that at some point in Calendar
1999, the California Air Resources Board (CARB) will require suppliers of
refueling equipment to certify their products to meet ORVRII. Provided that
certain key steps are completed by CARB, Gilbarco should commence manufacturing
products incorporating the Company's Sensor-on-a-Chip-Registered Trademark-
in order to meet the expected CARB requirements sometime in the summer of
1999. Revenues from this project are expected to begin in Fiscal 1999 if the
time schedule is met, but there can be no assurance that this will actually
occur.

The Company has also developed a cooperative relationship with Bosch,
the German conglomerate. Under a Letter of Intent entered into in January 1999,
the Company has provided access to certain proprietary technology owned by the
Company. After an initial evaluation followed by a short product development
cycle, Bosch is expected to put into the market devices meeting certain customer
requirements of a commercial and security nature. If successful, this may lead
to a broader cooperative effort by Bosch and the Company to penetrate other
markets, although there can be no assurance that this will actually occur.

The Company's Port of Rotterdam project with the Dutch engineering firm
IWACO is ongoing. In addition, the Company has become an equal partner in a
second IWACO program relating to bioremediation technologies. The Company
benefits from access to data, technology, resources and personnel of the
Consortium's member companies which include Shell International Products and
Solvay S.A. In the event one of the bioremediation technologies is selected for
use, there would be a significant need for monitoring instrumentation to ensure
long-term satisfactory operation.

During Fiscal 1998 the Company successfully completed the first and
second milestones in its project with Horiba, the Japanese instrument company,
to develop a sensor probe for Horiba's Multi-Parameter Water Quality Instrument
product line.

Research, development and engineering expenditures decreased by $37,095,
or 19%, to $154,797 during the First Quarter 1999 from the First Quarter 1998,
reflecting Management's focus on reducing expenses while continuing to pursue
those programs considered to have the highest potential for near-term results.

General and administrative expenses increased by $132,118, or 55%,
during the First Quarter 1999 over the First Quarter 1998, primarily as a result
of unusually high expenditures related to financial planning including travel
and legal and consulting fees, including approximately $106,000 of services
compensated in Common Stock as opposed to cash. The Company does not expect this
higher level of spending to continue in the short term, as it continues to
operate with reduced personnel and other expenses in all areas, including the
deferral of management as well as other salaries.

Sales and marketing expenditures increased by $15,263, or 10%, during
the First Quarter 1999 over the First Quarter 1998. The increases are primarily
in travel and reflect increased sales activity in all of the Company's major
markets.

Interest expense increased by $21,044, or 35%, during the First Quarter
1999 over the First Quarter 1998. The increase reflects interest accrued on
approximately $800,000 advanced to the Company by officers, directors and
affiliates, of which approximately $375,000 was repaid by the issuance of Common
Stock and Warrants as of December 22, 1998.

14
<PAGE>

As a result of the foregoing, the Company incurred a net loss of
$620,296, or a net loss of $0.02 per share for the First Quarter 1999 as
compared to a net loss of $506,627, or a net loss of $0.02 per share, for the
First Quarter 1998.

The Company continues to review the cost and operating impacts of
addressing the Year-2000 issue. Management has conducted assessments of the
potential costs associated with its internal operations, products shipped to its
customers, and material and services provided by its suppliers. The Company has
conducted tests of its products and based on such testing, believes that its
current products are Year-2000 compliant, in accordance with the Year-2000
Information and Disclosure Act. It has provided upgrades to older products, and
believes that all its products are Year-2000 compliant. The Company has not
incurred, and does not expect to incur, material costs relative to its products.

The Company has incurred less than $5,000 and expects to incur
additional costs of approximately $50,000 during Calendar 1999 to upgrade its
internal hardware and software systems which are critical to and support its
manufacturing, engineering, financial and other operations. The risks of
disruptions in the business community in general, as well as with respect to the
Company's customers and suppliers, are difficult to discern. Management
continues to review these risks with respect to its operations, and does not
expect that the Year-2000 issue will have a material impact on the Company's
current financial position, liquidity or results of operations.

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.

THE DISCUSSIONS IN THIS REPORT INCLUDE FORWARD LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES, INCLUDING THE TIMELY DEVELOPMENT AND ACCEPTANCE
OF THE COMPANY'S 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, TIMELY
FUNDING OF CUSTOMERS' PROJECTS, CUSTOMER PAYMENTS TO THE COMPANY, AND OTHER
RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S SEC REPORTS.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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. The next hearing is scheduled for
February 12, 1999. 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.

On September 23, 1998, OCS, Inc. a Texas corporation and customer of the
Company's subsidiary, FCI Environmental, Inc., filed a lawsuit against FCIE in
the District Court of Harris County, Texas, 165th Judicial District. The lawsuit
alleged breach of warranty for goods purchased from FCIE. The plaintiff sought
incidental and consequential damages of $750,000 plus other fees and expenses.
On December 16, 1998, the Company filed a motion to dismiss the suit, and on
January 19, 1999, the Company and OCS, Inc. agreed to non-suit the claims and
counterclaims. The lawsuit was dismissed without prejudice to either party.

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 three-month period ended December 31, 1998.

15
<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits. None.

(b) Reports on Form 8-K.

No reports on Form 8-K were filed by the Company during the three-month
period ended December 31, 1998.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

FIBERCHEM, INC.

February 12, 1999 By: /s/ Geoffrey F. Hewitt
- ----------------- -----------------------
Date Geoffrey F. Hewitt
President and Chief Executive Officer

February 12, 1999 By: /s/ Melvin W. Pelley
- ----------------- ---------------------
Date Melvin W. Pelley
Chief Financial Officer and Secretary

<PAGE>

Exhibit 21.1

SUBSIDIARIES OF FIBERCHEM, INC.

<TABLE>
<CAPTION>
Name State of Incorporation
---- ----------------------
<S> <C>
FCI Environmental, Inc. (formerly FCI Instruments,
Inc.) Nevada
Fiberoptic Medical Systems, Inc. (inactive) Nevada
PetroTester, Inc. (inactive) New Mexico
</TABLE>

<PAGE>

Exhibit 23.1

INDEPENDENT AUDITOR'S CONSENT

To the Board Of Directors
FiberChem, Inc.

We hereby consent to the use in the Prospectus constituting part of the
Registration Statement on Form S-2 of our report dated November 21, 1998, except
for Note 12, as to which the date is December 22, 1998, on the financial
statements of FiberChem, Inc. as of September 30, 1998 which appear in such
prospectus. We also consent to the reference to our firm under the caption
"Experts" in such prospectus.

GOLDSTEIN GOLUB KESSLER LLP
New York, New York

May 7, 1999