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                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB


     [X]   Quarterly Report under to Section 13 or 15(d) of the Securities
           Exchange Act of 1934


                For the quarterly period ended September 30, 2002


     [ ]   Transition Report Under Section 13 or 15 (d) of the Exchange Act

            For the transition period from__________ to _____________

                         Commission file Number 1-4591


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


           New Jersey                                          22-0900720
-------------------------------                              -------------
(State of other jurisdiction of                              (IRS Employer
incorporation or organization)                            Identification No.)

                     117 Blanchard Street, Newark, NJ 07105
                    (Address of principal executive offices)

                                 (973) 344-5790
                           (Issuer's telephone number)


     State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date:

     Common Stock, $1 Par Value - 8,292,866 shares outstanding as of December
23, 2002

    Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]

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<PAGE>

                                      INDEX
                                      -----
                                                                            PAGE
PART I          FINANCIAL INFORMATION

        Item 1. Financial Statements

                Statements of Operations
                          Three and nine months ended September
                          30, 2002 and 2001                                   3

                Balance Sheets
                          September 30, 2002 and December 31, 2001            4

                Statement of Changes in Stockholders' Deficit
                and Comprehensive Loss for the nine months
                ended September 30, 2002 and 2001                             5
                Statements of Cash Flows
                          Nine months ended September 30, 2002 and 2001       6

                Notes to Financial Statements                               7-15

        Item 2.

                Management's Discussion and Analysis or
                          Plan of Operations                               16-21


PART II    OTHER INFORMATION

           Item 1.   Legal Proceedings                                       22

           Item 2. Changes in Securities                                     22

           Item 3. Defaults upon Senior Securities                           22

           Item 5. Other Information                                         23

           Item 6. Exhibits and Reports on Form 8-K                          23

                                        2
<PAGE>

                          PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS


                          FAIRMOUNT CHEMICAL CO., INC.

                            STATEMENTS OF OPERATIONS
                                   (Unaudited)

<TABLE><CAPTION>
                                      Three Months Ended             Nine Months Ended
                                  September 30,  September 30,  September 30,  September 30,
                                      2002           2001           2002           2001
                                  -----------    -----------    -----------    -----------
<S>                               <C>            <C>            <C>            <C>
Net sales                         $   336,900    $ 2,672,500    $ 3,075,700    $ 8,654,900
Cost of goods sold                  1,206,300      3,574,800      4,192,100      9,463,700
                                  -----------    -----------    -----------    -----------
     Gross loss                      (869,400)      (902,300)    (1,116,400)      (808,800)

Research and development               88,500         99,000        259,100        301,900
Selling, general and
  administrative expense              365,500        513,600      1,171,400      1,542,900
                                  -----------    -----------    -----------    -----------
     Operating loss                (1,323,400)    (1,514,900)    (2,546,900)    (2,653,600)

Interest expense                      (80,800)       (58,000)      (179,500)      (172,600)
Insurance proceeds                       --             --           53,100
Foreign currency exchange
     Income (loss)                       --            5,000           --          (45,200)
Loss on disposal od assets            (88,600)          --          (88,600)          --
Other (expenses) income, net           (3,900)         2,200            500         32,400
                                  -----------    -----------    -----------    -----------

     Loss before income taxes      (1,496,700)    (1,565,700)    (2,814,500)    (2,785,900)

Income taxes                             --             --             --             --
                                  -----------    -----------    -----------    -----------

     Net loss                     $(1,496,700)   $(1,565,700)   $(2,814,500)   $(2,785,900)
                                  ===========    ===========    ===========    ===========
Loss per common share
     Basic                        $      (.18)   $      (.19)   $      (.34)   $      (.34)
                                  ===========    ===========    ===========    ===========

     Diluted                      $      (.18)   $      (.19)   $      (.34)   $      (.34)
                                  ===========    ===========    ===========    ===========

Common shares and equivalents
  outstanding

     Basic                          8,292,866      8,292,866      8,292,866      8,292,866
                                  ===========    ===========    ===========    ===========

     Diluted                        8,292,866      8,292,866      8,292,866      8,292,866
                                  ===========    ===========    ===========    ===========
</TABLE>
                 See accompanying notes to financial statements.

                                        3
<PAGE>

                          FAIRMOUNT CHEMICAL CO., INC.

                                 BALANCE SHEETS
<TABLE><CAPTION>

                                                         September 30,   December 31,
                                                             2002            2001
                                                         ------------    ------------
                                                          (Unaudited)
ASSETS
   CURRENT ASSETS:
<S>                                                      <C>             <C>
           Cash                                          $      7,300    $    494,800
           Accounts receivable, less allowance
                for doubtful accounts of $59,700
                in 2002 and 2001                              214,100       1,242,100
           Inventories                                        521,400         884,900
           Prepaid expenses                                    89,500         124,100
           Other current assets                                 5,400           9,100
                                                         ------------    ------------
                     Total Current Assets                     837,700       2,755,000

   Property, plant and equipment
        Less accumulated depreciation of
        $6,622,900 and $6,245,800 in 2002
       and 2001, respectively                               3,110,600       3,576,400
   Other assets                                                   700             700
                                                         ------------    ------------
                                                                         ------------
           Total Assets                                  $  3,949,000    $  6,332,100
                                                         ============    ============

LIABILITIES AND STOCKHOLDERS' DEFICIT
   CURRENT LIABILITIES:
           Short-term bank borrowings                         655,000         700,000
           Promissory note payable                            533,600            --
           Accounts payable                                 1,031,000       1,725,100
           Accrued pension liability                          150,700         130,400
           Accrued interest to affiliated parties             118,200          62,200
           Other accrued liabilities                          901,100         276,700
           Promissory notes to affiliated parties           1,571,600       1,571,600
                                                         ------------    ------------
                     Total Current Liabilities              4,961,200       4,466,000

   Accrued pension liability                                  118,700         182,500

   Redeemable convertible preferred stock,
        par and liquidation value $1 per share:
        Authorized - 10,000,000 shares: 5,400,000
        shares issued and outstanding (liquidation
        value $5,400,000)                                   5,400,000       5,400,000
Commitments and contingencies

Stockholders' Deficit:
   Common stock, par value $1 per share:
        Authorized - 15,000,000 shares; 8,293,366
        shares issued and outstanding in 2002 and 2001      8,293,400       8,293,400
   Less: Treasury stock (at cost) - 500 shares                   (500)           (500)
   Capital in excess of par value                           7,316,000       7,316,000
   Accumulated deficit                                    (21,739,200)    (18,924,700)
   Accumulated other comprehensive loss -
        additional minimum pension liability                 (400,600)       (400,600)
                                                         ------------    ------------
           Total Stockholders' Deficit                     (6,530,900)     (3,716,400)
                                                         ------------    ------------
   Total Liabilities and Stockholders' Deficit           $  3,949,000    $  6,332,100
                                                         ============    ============
</TABLE>
                 See accompanying notes to financial statements.

                                        4
<PAGE>

                          FAIRMOUNT CHEMICAL CO., INC.

                  STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
                                       AND
                               COMPREHENSIVE LOSS
                                   (Unaudited)
<TABLE><CAPTION>

                                                 Nine Months Ended September 30,
                                                 -------------------------------
                                              2002                            2001
                                         -------------                   -------------
                                         Comprehensive                   Comprehensive
                                             Loss                            Loss
Common stock:                            -------------                   -------------
<S>                                       <C>                             <C>
      Balance at September 30,             8,293,400                       8,293,400
             (8,293,366 shares)

Capital in excess of par value:            7,316,000                       7,316,000
     Balance at September 30,


Accumulated deficit:
     Balance at January 1,               (18,924,700)                    (14,246,800)
     Net loss                             (2,814,500)   (2,814,500)       (2,785,900)   (2,785,900)
                                         -----------                     -----------
     Balance at September 30,            (21,739,200)                    (17,032,700)

Accumulated other comprehensive
     loss:
             Balance at January 1,          (400,600)                       (177,400)
                                         -----------                     -----------
             Comprehensive loss           (2,814,500)                     (2,785,900)
                                         ===========                     ===========

Balance at September 30,                    (400,600)                       (177,400)

Treasury stock:
     Balance at September 30,                   (500)                           (500)
             (500 shares)
                                         -----------                     -----------
Total Stockholders' Deficit              $(6,530,900)                    $(1,601,200)
                                         ===========                     ===========
</TABLE>
                 See accompanying notes to financial statements

                                        5
<PAGE>
                          FAIRMOUNT CHEMICAL CO., INC.
                            STATEMENTS OF CASH FLOWS
                                   (Unaudited)


                                                    Nine Months Ended Sept. 30,
                                                        2002           2001
                                                    -----------    -----------
CASH FLOW FROM OPERATING ACTIVITIES:
    Net loss                                        $(2,814,500)   $(2,785,900)
   Adjustments to reconcile net loss
        to net cash used in
        operating activities:
             Depreciation                               377,200        495,000
             Insurance proceeds                            --          (53,100)
             Loss of disposal of assets                  88,600           --

   Increase (decrease) from changes in:
        Accounts receivable-trade                     1,028,000       (416,100)
        Inventories                                     363,500        497,700
        Prepaid expenses                                 34,600        (46,800)
        Other current assets                              3,700         (2,100)
        Accounts payable                                (20,500)       860,900
        Accrued interested to affiliated parties         56,000           --
        Other liabilities                               580,900        (45,400)
                                                    -----------    -----------

               Net Cash Used in
                     Operating Activities              (302,500)    (1,495,800)

CASH FLOW USED IN INVESTING
  ACTIVITIES:
     Capital expenditures                                  --          (99,200)
     Insurance proceeds                                    --           53,100
                                                    -----------    -----------
         Net Cash Used In
          Investing Activities                             --          (46,100)

CASH FLOW (USED IN) PROVIDED BY
 FINANCING ACTIVITIES:
   Bank repayment                                       (45,000)          --
   Repayment of promissory note                        (140,000)          --
   Bank borrowing                                          --          500,000
                                                    -----------    -----------

        Net Cash (Used In) Provided by
             Financing Activities                      (185,000)       500,000
                                                    -----------    -----------

DECREASE IN CASH                                       (487,500)    (1,041,900)

Cash at Beginning of Period                             494,800      2,093,900
                                                    -----------    -----------
CASH AT END OF PERIOD                               $     7,300    $ 1,052,000
                                                    ===========    ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Interest paid                                       $    46,000    $   147,700
                                                    ===========    ===========
Income taxes paid                                   $      --      $      --
                                                    ===========    ===========
NON CASH FINANCING ACTIVITIES
     Reclassification of accounts payable to note
       payable                                      $   673,600    $      --
                                                    ===========    ===========

                 See accompanying notes to financial statements

                                        6
<PAGE>

                          FAIRMOUNT CHEMICAL CO., INC.
                          NOTES TO FINANCIAL STATEMENTS
                            June 30, 2002 (Unaudited)


NOTE 1. BASIS OF PRESENTATION

     The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America for interim financial information and with the
instruction to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they
do not include all the information and footnotes necessary for a comprehensive
presentation of financial position, results of operations and cash flows

     It is management's opinion, however, that all material adjustments
(consisting of normal recurring accruals) have been made which are necessary for
a fair financial statement presentation. These financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included in Fairmount's Form 10-KSB filed for December 31, 2001.

     The results for the interim period are not necessarily indicative of the
results to be expected for the full year.

NOTE 2. GOING CONCERN

     The December 31, 2001 financial statements contain an explanatory paragraph
in the Independent Auditor's Report relating to Fairmount's ability to continue
as a going concern. Fairmount has reported substantial losses during the last
three years and does not expect performance to improve during the second half of
2002. The Company's working capital, defined as current assets less current
liabilities, decreased by $2,412,500 in the nine months ended September 30,
2002, resulting in negative working capital of $4,123,500 compared to a negative
working capital of $1,711,000 as of December 31, 2001. These matters raise
substantial doubt about Fairmount's ability to continue as a going concern.
There is too much uncertainty for Fairmount to predict its short-term future
prospects. If the promissory note holders demand payment as a result of the
default on principal and interest payments as discussed in Note 5, 6, and 7, or
if Fairmount is unable to effect cost savings, enter into strategic alliances or
a merger, and achieve other short-term solutions, it may result in the Company
not having sufficient capital to continue its operations as presently conducted.
In which event, the Company may find it necessary to seek protection under
Federal bankruptcy laws or other laws affecting debtor's and creditor's rights.

     On October 4, 2001, Fairmount laid off 13 production employees, or
approximately 50% of its production employees, and subsequently terminated two
management employees. During the first quarter of 2002, Fairmount terminated one
administrative and two sales/marketing employees. On August 2 2002, Fairmount
Chemical Co., Inc. laid off an additional 9 hourly employees at its Newark, NJ
facility for an indefinite period. As of December 1, 2002, Fairmount had laid
off all production employees and reduced its production support staff. This
action was necessary because of Fairmount's deteriorating business.

     On September 26, 2002 a Consent Order was signed and file in the Superior
Count of New Jersey. This Consent Order allows Fairmount to operate equipment
and control apparatus that have air permits and certificates for such equipment
and control apparatus. Fairmount has agreed to reduce its operations to
production of three products. Fairmount also agreed to limit its hazardous air
pollutants ("HAP") to less than 75 % of last year's HAPs. Fairmount is required
to notify the DEP two business days prior to initiation of production and shall
also provide the DEP production figures every 5 business days, until all
equipment and control apparatus utilized in the

                                        7
<PAGE>

Notes to Financial Statements (Continued)

facility is fully permitted and operating in compliance with its permits.
Fairmount is subject to finds imposed on it by NJDEP for various violations. The
amount of the fine has not been determined, however based on Fairmount's current
financial condition, its ability to satisfy the obligation is questionable.

     Fairmount's pollution and remediation legal liability insurance and
property insurance were canceled by it insurance carrier for not payment of
premium. In addition, Fairmount did not renew its commercial general liability
and umbrella liability insurance coverage because of its limited financial
resources.

     As of March 1, 2002, Fairmount issued a promissory note (the "Note") to
Bayer for the amount owed as of March 1, 2002. Non-payment is an event of
default and interest of 10% on the unpaid principal balance will accrue until
the default is cured. Fairmount failed to make the required payments since June
2002 and as of December 2, 2002, the Company is in default of payments totaling
$483,700, including interest of $43,700. Fairmount has been advised that a
judgment entered in the State of Pennsylvania has been recorded in the State of
New Jersey and that a Writ of Execution or other process for enforcement of the
judgment may be issued. (See Note 6. Promissory Note Payable.)

     One of Fairmount's major foreign customers reduced its purchases by 75% in
the fourth quarter of 2001. Because of the low selling price, high cost of
production and the strong dollar, Fairmount has not pursued this business.
Another major customer, Polaroid Corporation, filed a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. Polaroid, or a
company formed with the assets purchased from Polaroid, is operating, however
Fairmount expects that it business with Polaroid will remain at the current
sales level. Sales to Polaroid during the nine first months ended September 30,
2002 were $465,300, compared to $736,700 during the same period of 2001.
Polaroid accounted for $995,700 or 9.9% of sales during year ended December 31,
2001.

     During the second quarter of 2001, Fairmount started receiving orders for a
hydrazine derivative product from a new customer. Worldwide sales to this
customer were $2,445,600 in 2001. In January 2002, Fairmount advised the
customer that it could no longer supply the product under the same terms and
conditions. As a consequence, Fairmount does not anticipate significant sales of
the product to this customer in 2002.

     To meet its liquidity requirements, including its capital program,
Fairmount relies upon funds generated from operations, its available cash
balances, and its bank line of credit with Fleet Bank in Princeton, New Jersey.
From November 30, 2001 to March 2002, the credit facility was extended on a
month to month basis. The Company entered into an extension agreement effective
February 28, 2002, with modified terms including a new maturity date of February
28, 2003. Upon execution of the agreement, Fairmount paid an extension fee of
$14,000 and interest is automatically deducted from Fairmount's account.
Fairmount has not made all the scheduled principal payments and as of December
2, 2002, is in default of payments totaling $60,000. In addition, Fairmount's
eligible accounts receivables and eligible inventory are less that the
outstanding borrowing. (See Note 7. Long-Term Debt)

     In February 2002, the Newark Division of Water/Sewer notified Fairmount
that the Company's 2002 annual sewer charge would be $659,900, an increase of
$421,600 in anticipated cash outflows as compared to 2001. On December 3, 2002,
Fairmount filed a complaint in the Chancery Division in Essex County, New Jersey
against the City of Newark ("Newark"), the Passaic Valley Sewerage Commissioners
(PVSC") and Townley Laboratories, Inc. ("Townley").

                                        8
<PAGE>

Notes to Financial Statements (Continued)

Fairmount has asked PVSC to reconsider the amount PVSC is changing, however PVSC
has refused and Fairmount has therefore exhausted whatever administrative
remedies exist to challenge the annual sewer charge and due to the impending tax
sale by Newark, had no option other than bring an action.

     Fairmount has not paid its real estate taxes since June 2001, and as of
December 2, 2002 is $168,600 in arrears.

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

     Fairmount Chemical Co., Inc. ("Fairmount" or "the Company") was
incorporated in 1938 under the laws of the State of New Jersey and is in the
business of manufacturing and distributing specialty chemicals.

REVENUE

     Revenue is recognized upon shipment of product. The Company's terms are FOB
shipping point and, accordingly, title for goods pass to the customer when
product is shipped. Sales are generally final, without a right of return. If the
product does not meet specifications, the Company may accept returns.

ACCOUNTS RECEIVABLE

     Trade accounts receivable are recorded at the invoice amount. Potential
uncollectable amounts are recognized when, in the judgment of management,
collection is in doubt. There was a provision for bad debts of $59,700 as of
September 30, 2002 and December 31, 2001.

INCOME TAXES

     The Company accounts for income taxes in accordance with the asset and
liability method. Under the 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
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.

USE OF ESTIMATES

     The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Those estimates include allowance for
doubtful accounts, valuation of inventories and recoverability of long-lived
assets. Actual results could differ from those estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

           The fair value of financial instruments is determined by reference to
market data and other valuation techniques as appropriate. The Company believes
the fair value of its financial instruments, principally cash, accounts
receivable, inventories, prepaid expenses, other current

                                        9
<PAGE>

Notes to Financial Statements (Continued)

assets, short term bank borrowings, promissory note payable, accounts payable,
accrued pension liability, other accrued liabilities, accrued interest to
affiliated parties, and promissory notes to affiliated parties approximates
their recorded value due to the short-term nature of the instruments or interest
rates, which are comparable with current rates.

NOTE 4. INVENTORIES

     Inventories at September 30, 2002 and December 31, 2001 consisted of:

                                  September 30,         December 31,
                                      2002                  2001
                                   ---------             ---------
     Finished goods                $ 341,700             $ 752,400
     Raw materials                   179,700               132,500
                                   ---------             ---------
        Total                      $ 521,400             $ 884,900
                                   =========             =========

     The reserve for obsolete inventory was $755,100 at September 30, 2002 and
$249,400 as of December 31, 2001.

NOTE 5. PROMISSORY NOTES/LONG-TERM PAYABLE TO AFFILIATED PARTIES

     As of January 1, 1993, the Company owed William E. Leistner $5,603,700 (the
"Leistner Loan"). At the Board meeting following the 1993 Annual Meeting, the
board approved the sale of 5,400,000 shares of cumulative convertible preferred
stock, $1.00 par value per share, in a private transaction to Leistner, the
Company's principal stockholder, in consideration of retirement of debt owed to
Leistner of $5,400,000. The balance of the Leistner Loan was paid out of
corporate funds of approximately $203,700 during May 1993. This transaction
retired the principal of the Leistner Loan. Accrued interest of $491,600
remained. On July 2, 1997, the Company replaced the $491,600 balance of the
Leistner Loan that was due April 1, 1998, with a promissory note to the Leistner
Estate for the same amount, due January 1, 2005.

     On March 20, 1992, a Credit Facility Loan Agreement ("Credit Facility") was
created with monies contributed to a fund (the "Fairmount Fund") by William E.
Leistner and the Estate of Olga H. Knoepke. At that date, the Fairmount Fund
provided the Company with a $2,494,000 credit facility under which all
borrowings paid interest at the rate of 5% per annum. The outstanding borrowings
from the Credit Facility were $1,080,000. On July 2, 1997, the Credit Facility
was terminated and the Company replaced the $1,080,000 of credit facility
borrowings with new promissory notes due January 1, 2005. The Leistner Estate
received a note for $648,000. Three additional notes were issued to
beneficiaries of the Knoepke Estate. These three notes were issued to the Da
Mota Family Partnership - $224,640, Glen Da Mota - $142,560 and Lynn Da Mota -
$64,800. Accordingly, notes held by affiliates are as follows:

     Promissory Notes:
                         Leistner Trust                    $   491,600
                         Leistner Trust                        648,000
                         Da Mota Family Partnership            224,640
                         Glen Da Mota                          142,560
                         Lynn Da Mota                           64,800
                                                           -----------
                                                           $ 1,571,600

     All of the promissory notes described above have similar terms and
conditions. Interest is payable, at the corporate base rate posted by Citibank,
N.A. (or its successor) on the last banking day of the previous calendar year.
Interest on the unpaid principal for 2002 is at the rate of 4.75% per annum.
Interest payable from January 1, 2001 through December 31, 2001 was at the rate
of

                                       10
<PAGE>

Notes to Financial Statements (Continued)

9.5% per annum. All of the promissory notes are subordinated to the Company's
line of credit financing with Fleet Bank and are collaterized by security
agreements on the Company's accounts receivables, inventories and personal
property. The promissory note to the Leistner Estate for $491,600 is
subordinated to the Company's line of credit financing with Fleet Bank and to
the new promissory notes, totaling $1,080,000, that replaced the Credit
Facility.

     On October 9, 1997, the executors of the Leistner Estate endorsed two
promissory notes of $648,000 and $491,600 to the order of the Howard Leistner,
Hedi Mizrack and Gilbert Leistner Irrevocable Grantor Trust (the "Trust"). The
Trust was established to expedite the settlement of the Leistner Estate and to
be the repository of the common and preferred shares of the Company, as well as
the promissory notes held by the Leistner Estate. Howard Leistner, Hedi Mizrack
and Gilbert Leistner have sole voting rights to their common stock holdings.

     Interest paid on promissory notes to affiliated parties in during the nine
months ended September 30, 2001 was $87,100. However, because of the Fairmount's
financial difficulties, interest payments have not been made since July 2001. In
addition, as long as Fairmount is in default under its loan agreement with Fleet
Bank, it is prohibited from paying interest on the affiliated promissory notes.
The total unpaid interest as of September 30, 2002 was $118,200. The failure to
pay interest when due is an event of default which can be cured if payment is
made within 15 days of written notice to Fairmount. No written notice has been
received, however, failure to make interest payments is an event of default and,
accordingly, the promissory notes have been reclassified to current liabilities.

NOTE 6. PROMISSORY NOTE PAYABLE

     As of March 1, 2002, Fairmount owed Bayer Corporation approximately
$673,600 for raw material purchases. Fairmount issued a promissory note (the
"Note") to Bayer for the amount owed as of March 1, 2002. The Note matures
February 1, 2003, and includes a payment schedule. Non-payment is an event of
default and interest of 10% on the unpaid principal balance will accrue until
the default is cured. The Note contains a "confession of judgment" provision,
which may result in a court judgment being entered against Fairmount, upon
written notice but without a hearing, and that the Company's real estate may be
sold on a writ of execution. Fairmount failed to make the required payments
since June 2002 and as of December 2, 2002, the Company is in default of
payments totaling $483,700, including interest of $43,700. Fairmount has been
advised that a judgment entered in the State of Pennsylvania has been recorded
in the State of New Jersey and that a Writ of Execution or other process for
enforcement of the judgment may be issued.

NOTE 7. LONG-TERM DEBT

                                            September 30,        December 31,
                                                2002                2001
                                             ----------          ----------
     Working Capital Line of Credit -
     Current installment                     $  655,000          $  700,000
                                             ==========          ==========

     The Company presently has a line of credit facility with Fleet Bank. From
November 30, 2001 to March 2002, the credit facility was extended on a month to
month basis. In April 2002, Fairmount executed a definitive loan agreement, that
extends the facility's maturity date to February 28, 2003. The extension terms
include (a) an interest rate equal to the bank's prime rate plus 2%, (b) an
extension fee equal to 2% of the maximum amount available under the facility
(i.e., $700,000), (c) a continuation of the bank's existing security interest in
Fairmount's accounts receivable, inventory, machinery and equipment, (d)
principal repayment of $15,000 per month commencing May 2002 and (e) a cap on
borrowings based upon a percentage of eligible accounts receivable and eligible
finished goods inventory. The bank is entitled to receive warrants to purchase
up to 200,000 shares of Fairmount's Common Stock at $.11 per share in connection

                                       11
<PAGE>

Notes to Financial Statements (Continued)

with the extension of the facility. The fair value of the warrants were
determined by the Company to be inmaterial. The warrants will expire March 1,
2005. As of September 30, 2002 the warrants have not been issued. In addition,
if Fairmount sells, assigns or leases any of its trade secrets, processes, or
technologies, Fairmount is obligated to pay Fleet Bank 50% of the net proceeds
from such transaction, which shall be applied against the facility's outstanding
principal. Fairmount has not made all the scheduled principal payments and as of
December 2, 2002, is in default of payments totaling $60,000. In addition,
Fairmount's eligible accounts receivables and eligible inventory are less that
the outstanding borrowing.

NOTE 8. NET LOSS PER SHARE

     Basic loss per share is based on the net loss of the Company since there
were no preferred dividends paid in 2002 and 2001. Due to the Company reporting
losses for 2002 and 2001 the exercise of options and the conversion of the
preferred stock is not assumed, as the result would be anti-dilutive.
Accordingly, basic loss per share is equal to diluted loss per share. As of
September 30, 2002 there were 1,041,500 stock options outstanding and
exercisable, 41,500 with an exercise price of $1.00 per share and 1,000,000 with
an exercise price of $.11 per share.

NOTE 9. FOREIGN SALES AND MAJOR CUSTOMERS

     One of Fairmount's major foreign customers reduced its purchases by 75% in
the fourth quarter of 2001. Because of the low selling price, high cost of
production and the strong dollar, Fairmount has not pursued this business.
Another major customer, Polaroid Corporation, filed a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. Polaroid, or a
company formed with the assets purchased from Polaroid, is operating, however
Fairmount expects that it business with Polaroid will remain at the current
sales level. Sales to Polaroid during the nine months of 2002 were $465,300,
compared to $736,700 during the same period of 2001. Polaroid accounted for
$995,700 or 9.9% of sales during year ended December 31, 2001.

NOTE 10. ENVIRONMENTAL MATTERS AND COMMITMENTS AND CONTINGENCIES

     The Company has received notice from the New Jersey Department of
Environmental Protection ("NJDEP") that the NJDEP is investigating whether any
material from the Company has caused or contributed to the contamination
detected at the Ciuba landfill property in Newark. The NJDEP alleges that there
is a possibility that, during the 1970's, the Company disposed of waste
generated at the Company's facility through contracts with certain garbage
removal companies located at the Ciuba landfill. The Company has also received
notice from the United States Environmental Protection Agency ("USEPA") that the
USEPA has information indicating that hazardous substances from the Company may
have been discharged into the Passaic River.

     It is the Company's understanding that these allegations by the EPA are
related to historical rather than present events. The Company has taken the
position that its material neither caused nor contributed to the contamination
of the Passaic River and that it has not discharged hazardous substances into
the Passaic River. In both cases, it is possible that a potentially responsible
party will bring claims against the Company alleging that it is at least
partially responsible for the contamination. To date, no litigation has
commenced with respect to these matters.

     The New York State Department of Environment Conservation filed a lawsuit
against certain Potentially Responsible Parties ("PRP") for contamination of the
Hexagon Laboratories, Inc. site in the Bronx, New York ("Hexagon" and the
"Site"). Information obtained from records

                                       12
<PAGE>

Notes to Financial Statements (Continued)

removed from the Site indicate that Fairmount entered into a toll
charging/custom manufacturing agreement with Hexagon though it is not clear as
to whether any materials were ever shipped by Fairmount to Hexagon. Fairmount
has received notice that it is considered a PRP and has received an offer to
enter into settlement negotiations. Fairmount has not been named as a party to
the existing lawsuit and has not been presented with sufficient evidence to
conduct settlement negotiations.

     During 2001, the NJDEP conducted an air compliance inspection of the
Company's facility. As a result of certain alleged violations observed during
the inspection, an administrative order and penalty assessment was issued by the
NJDEP and an administrative hearing was requested. In the interim, the Company
initiated efforts to bring the facility into compliance and obtained necessary
compliance extensions. In early 2002, the NJDEP refused to grant any additional
extensions and approved the request for an administrative hearing. Discovery is
currently underway.

     On September 26, 2002 a Consent Order was signed and file in the Superior
Count of New Jersey. This Consent Order allows Fairmount to operate equipment
and control apparatus that have air permits and certificates for such equipment
and control apparatus. Fairmount has agreed to reduce its operations to
production of three products. Fairmount also agreed to limit its hazardous air
pollutants ("HAP") to less than 75 % of last year's HAPs. Fairmount is required
to notify the DEP two business days prior to initiation of production and shall
also provide the DEP production figures every 5 business days, until all
equipment and control apparatus utilized in the facility is fully permitted and
operating in compliance with its permits. Fairmount is subject to finds imposed
on it by NJDEP for various violations. The amount of the fine has not been
determined, however based on Fairmount's current financial condition; its
ability to satisfy the obligation is questionable.

     It is the Company's policy to accrue and charge against earnings,
environmental cleanup costs when it is probable that a liability has been
incurred and an amount is reasonably estimable. These accruals are reviewed
periodically and adjusted, if necessary, as additional information becomes
available. These accruals can change substantially due to such factors as
additional information on the nature or extent of the contamination, methods of
remediation required and other actions by government agencies or private
parties. Cash expenditures often lag behind the period in which an accrual is
recorded by a number of years. The Company has not accrued cost associated with
the above three matters, because the amounts cannot be reasonably estimated.

     Management does not believe that the resolution of such matters will have a
material adverse affect on the financial position of the Company but could be
material to the results of operations and cash flow of the Company in any one
accounting period.

     The Company also is subject to various other claims, and other routine
litigation arising in the normal course of its business. Management believes
that the resolution of such matters will not have a material adverse affect on
the financial position of the Company but could be material to the results of
operations of the Company in any one accounting period.

     In February 2002, the Newark Division of Water/Sewer notified Fairmount
that the Company's 2002 annual sewer charge would be $659,900, an increase of
$421,600 in anticipated cash outflows as compared to 2001. On December 3, 2002,
Fairmount filed a complaint in the Chancery Division in Essex County, New Jersey
against the City of Newark ("Newark"), the Passaic Valley Sewerage Commissioners
(PVSC") and Townley Laboratories, Inc. ("Townley"). Fairmount has asked PVSC to
reconsider the amount PVSC is changing, however PVSC has refused and Fairmount
has therefore exhausted whatever administrative remedies exist to challenge the
annual sewer charge and due to the impending tax sale by Newark, had no option
other than bring an action.

                                       13
<PAGE>

Notes to Financial Statements (Continued)

NOTE 11. DISPOSITION OF ASSETS

     On September 19, 2002 Fairmount entered into a Product Purchase Agreement
("Agreement") with ChemDesign Acquisition Corporation (CDAC"), a New Jersey
corporation. The Agreement requires Fairmount to assign, transfer and convey
unto CDAC all right, title and interest in and to production of Hydrazine blends
(the "Product"), Trademarks and Product Equipment, as defined. CDAC is not
acquiring any interest in the inventories, accounts payable, accounts receivable
or other assets of Fairmount. As a condition of the requirements of CDAC to
accept delivery of the Product, Trademarks and Product Equipment and complete
its obligation under this Agreement, Fairmount shall provide releases to CDAC
from any and all lenders, creditors and other claimants with respect to the
Product, Trademarks and Product Equipment. Fairmount is in the process of
getting these releases. In consideration of the execution of the Agreement and
the delivery of the Product, CDAC agrees to pay Fairmount within 30 days from
the end of each calendar quarter with respect to the previous quarter, an amount
equal to twenty five percent of the gross margin recorded by CDAC.

     This agreement was predicated on an agreement between Fairmount and the New
Jersey Department of Environmental Protection ("NJDEP") whereby Fairmount agreed
to stop all production of produces that used Hydrazine and to remove all
hydrazine products from its facility.

     Since all the consideration is contingent to future earning of the
hydrazine business, and there is no assurance about the amount of consideration
Fairmount will receive, Fairmount has written off the net book value is its
hydrazine business and will recognize future potential income when received. The
net book value of Fairmount's hydrazine related asset was $88,600.

NOTE 12. NEW ACCOUNTING PRONOUNCEMENTS

     Effective January 1, 2002, Fairmount adopted SFAS No. 142, "Goodwill and
Other Intangible Assets" for existing and other intangible assets. This standard
eliminates the amortization of goodwill and intangible assets with indefinite
useful lives and requires annual testing for impairment. This standard requires
the assignment of assets acquired and liabilities assumed, including goodwill,
to reporting units for the purpose of goodwill impairment testing. Fairmount had
no unamortized goodwill and other intangible asset at December 31, 2001,
consequently, adoption of the standard had no affect on Fairmount's financial
statements.

     Effective January 1, 2002, Fairmount adopted SFAS No. 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets". This statement supersedes or
amends existing accounting literature related to the impairment and disposal of
long-lived assets. Adoption of this standard did not have a material impact on
the Fairmount's financial position or results of operations.

     In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
Accounting for Asset Retirement Obligations". This standard establishes for
accounting for obligations associated with the retirement of tangible long-lived
assets. The standard is required to be adopted beginning on January 1, 2003.
Management is currently assessing the details of the standard and is preparing a
plan of implementation.

     In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, "Rescission on FASB Statement 4, 44 and 64, Amendment of FASB Statement No.
13 and Technical Corrections". Under certain provisions of SFAS No. 145, gains
and losses related to the extinguishment of debt should no longer be segregated
on the income statement as extraordinary items net of the effect of income
taxes. Instead, those gains and losses should be included as a component of
income before income taxes. The provisions of SFAS No. 145 are

                                       14
<PAGE>

Notes to Financial Statements (Continued)

effective for fiscal years beginning after May 15, 2002 with early adoption
encouraged. Any gain or loss on the extinguishment of debt that was classified
as an extraordinary item should be reclassified upon adoption. The adoption of
SFAS No. 145 is not expected to have a significant impact on Fairmount's
financial statements

     In June 2002, SFAS No. 146 "Accounting for Costs Associates with Exit or
Disposal Activities" was issued. This statement provides guidance on the
recognition and measurement of liabilities associated with disposal activities
and is effective for Fairmount on January 1, 2003. Given that SFAS No. 146 was
issued in June 2002 and is not yet effective, the impact on the Company's
financial position or results of operations from adopting SFAS No. 146 has not
been determined.

NOTE 12 SUBSEQUENT EVENTS

     During the month of November 2002, Fairmount ceased all production
operations at its Newark, NJ facility and started producing its products at a
facility located in Fitchburg, MA under a verbal manufacturing/tolling
arrangement with ChemDesign Corporation ("ChemDesign"). The agreement calls for
some of Fairmount's products to be produced by ChemDesign at a fixed per pound
price and other products produced under a profit sharing arrangement.

     On December 12, 2002 Fairmount entered into an agreement with International
Process Plants and Equipment Corp. ("IPPE"), whereby Fairmount retains IPPE to
be Fairmount's exclusive equipment and machinery liquidator for certain of its
machinery and equipment located in Fairmount's facility. IPPE will receive a
commission of 50% of the net sales proceeds, which shall be the amount received
less the cost for dismantlement, loading and rigging. The agreement shall remain
in full force and effect for a period of two years. Thereafter, this agreement
may be renewed for an additional one-year period.








                                       15
<PAGE>

                          FAIRMOUNT CHEMICAL CO., INC.

Item 2                     MANAGEMENT'S DISCUSSION AND
                         ANALYSIS OR PLAN OF OPERATIONS

                               September 30, 2002

LIQUIDITY AND CAPITAL RESOURCES

     To meet its liquidity requirements, including its capital program,
Fairmount relies upon funds generated from operations, its available cash
balances, and its bank line of credit with Fleet Bank in Princeton, New Jersey.
From November 30, 2001 to March 2002, the credit facility was extended on a
month to month basis. In April 2002, Fairmount executed a definitive loan
agreement that extends the facility's maturity date to February 28, 2003. The
extension terms include (a) an interest rate equal to the bank's prime rate plus
2%, (b) an extension fee equal to 2% of the maximum amount available under the
facility (i.e., $700,000), (c) a continuation of the bank's existing security
interest in Fairmount's accounts receivable, inventory, machinery and equipment,
(d) principal repayment of $15,000 per month commencing May 2002 and (e) a cap
on borrowings based upon a percentage of eligible accounts receivable and
eligible finished goods inventory. The bank is entitled to receive warrants to
purchase up to 200,000 shares of Fairmount's Common Stock at $.11 per share, in
connection with the extension of the facility. The warrants will expire March 1,
2005. The fair value of the warrants were determined by the Company to be
immaterial. As of September 30, 2002 the warrants have not been issued. In
addition, if Fairmount sells, assigns or leases any of its trade secrets,
processes, or technologies, Fairmount is obligated to pay to Fleet Bank 50% of
the net proceeds from such transaction, which amount shall be applied against
the facility's outstanding principal.

     Fairmount has not made all the scheduled principal payments and as of
December 2, 2002, Fairmount is in default of payments totaling $60,000. Interest
is automatically deducted from Fairmount's account.

     The December 31, 2001 financial statements contain an explanatory paragraph
in the Independent Auditor's Report relating to Fairmount's ability to continue
as a going concern. Fairmount has reported substantial losses during the last
fiscal three years and does not expect performance to improve during the second
half of 2002.

     On October 4, 2001, Fairmount laid off 13 production employees, or
approximately 50% of its production employees, and subsequently terminated two
management employees. During the first quarter of 2002, Fairmount terminated one
administrative employee and two sales/marketing employees. On August 2, 2002,
Fairmount Chemical Co., Inc. laid off an additional 9 hourly employees at its
Newark, NJ facility for an indefinite period. As of December 2, 2002, Fairmount
had laid off all production employees and reduced its production support staff.
These actions are deemed necessary due to Fairmount's deteriorating business
condition and lack of financial resources to purchase raw materials and
supplies.

     One of Fairmount's major customers, Polaroid Corporation, filed a voluntary
petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code.
Polaroid, or a company formed with the assets purchased from Polaroid, is
operating and Fairmount expects that it business with Polaroid will remain at
the current sales level. Sales to Polaroid during the nine months ended
September 30, were $465,300, compared to $736,700 during the same period of
2001. Polaroid accounted for $995,700 or 9.9% of sales during year ended
December 31, 2001.

     During the second quarter of 2001, Fairmount started receiving orders for a
hydrazine derivative product from a new customer. Worldwide sales to this
customer were $2,445,600 in 2001. In January 2002, Fairmount advised the
customer that it could no longer supply the product

                                       16
<PAGE>

under the same terms and conditions. As a consequence, Fairmount does not
anticipate sales of this product to the customer in 2002.

     As of March 1, 2002, Fairmount owed Bayer Corporation approximately
$673,600 for raw material purchases. Fairmount issued a promissory note (the
"Note") to Bayer for the amount owed as of March 1, 2002. The Note matures
February 1, 2003, and includes a payment schedule. Non-payment is an event of
default and interest of 10% on the unpaid principal balance will accrue until
the default is cured. The Note contains a "confession of judgment" provision,
which may result in a court judgment being entered against Fairmount, upon
written notice but without a hearing, and that the Company's real estate may be
sold on a writ of execution. Fairmount failed to make the required payments for
since June 2002 and, as of December 2, 2002, the Company is in default of
payments totaling $483,700, including interest of $43,700.

     The Company's working capital, defined as current assets less current
liabilities, decreased by $2,412,500 in the nine months ended September 30,
2002, resulting in negative working capital of $4,123,500, compared to a
negative working capital of $1,711,000 as of December 31, 2001. The decrease in
working capital during the nine months ended September 30, 2002 was due to
decreased accounts receivables of $1,028,000, decreased cash of $487,500,
decreased inventories of 363,500, increased promissory note payable of $533,600
and increased other accrued liabilities of $624,400, somewhat offset by lower
accounts payable of $694,100.

     In February 2002, the Newark Division of Water/Sewer notified Fairmount
that the Company's 2002 annual sewer charge would be $659,900, an increase of
$421,600 in anticipated cash outflows as compared to 2001. On December 3, 2002,
Fairmount filed a complaint in the Chancery Division in Essex County, New Jersey
against the City of Newark ("Newark"), the Passaic Valley Sewerage Commissioners
(PVSC") and Townley Laboratories, Inc. ("Townley"). Fairmount has asked PVSC to
reconsider the amount PVSC is changing, however PVSC has refused and Fairmount
has therefore exhausted whatever administrative remedies exist to challenge the
annual sewer charge and due to the impending tax sale by Newark, had no option
other than bring an action.

     On September 26, 2002 a Consent Order was signed and file in the Superior
Count of New Jersey. This Consent Order allows Fairmount to operate equipment
and control apparatus that have air permits and certificates for such equipment
and control apparatus. Fairmount has agreed to reduce its operations to
production of three products. Fairmount also agreed to limit its hazardous air
pollutants ("HAP") to less than 75 % of last year's HAPs. Fairmount is required
to notify the DEP two business days prior to initiation of production and shall
also provide the DEP production figures every 5 business days, until all
equipment and control apparatus utilized in the facility is fully permitted and
operating in compliance with its permits. Fairmount is subject to finds imposed
on it by NJDEP for various violations. The amount of the fine has not been
determined, however based on Fairmount's current financial condition, its
ability to satisfy the obligation is questionable.

     Fairmount's pollution and remediation legal liability insurance and
property insurance were canceled by it insurance carrier for not payment of
premium. In addition, Fairmount did not renew its commercial general liability
and umbrella liability insurance coverage because of its limited financial
resources.

     Fairmount has not paid its real estate taxes since June 2001, and as of
December 2, 2002 is $168,600 in arrears.

     During the month of November 2002, Fairmount ceased all production
operations at its Newark, NJ facility and started producing its produce at a
facility located in Fitchburg, MA under a verbal manufacturing/tolling
arrangement with ChemDesign Corporation ("ChemDesign"). The agreement calls for
some of Fairmount's products to be produced by

                                       17
<PAGE>

ChemDesign at a fixed per pound price and other products produced under a profit
sharing arrangement.

     There is too much uncertainty for Fairmount to predict its short-term
future prospects. If the promissory note holders demand payment as a result of
the default on principal and interest payments as discussed in Note 5, 6, and 7,
or if Fairmount is unable to effect cost savings, enter into strategic alliances
or a merger, and achieve other short-term solutions, it may result in the
Company not having sufficient capital to continue its operations as presently
conducted. In which event, the Company may find it necessary to seek protection
under Federal bankruptcy laws or other laws affecting debtor's and creditor's
rights.

NEW ACCOUNTING PRONOUNCEMENTS

     In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
Accounting for Asset Retirement Obligations". This standard establishes for
accounting for obligations associated with the retirement of tangible long-lived
assets. The standard is required to be adopted beginning on January 1, 2003.
Management is currently assessing the details of the standard and is preparing a
plan of implementation.

     In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, "Rescission on FASB Statement 4, 44 and 64, Amendment of FASB Statement No.
13 and Technical Corrections". Under certain provisions of SFAS No. 145, gains
and losses related to the extinguishment of debt should no longer be segregated
on the income statement as extraordinary items net of the effect of income
taxes. Instead, those gains and losses should be included as a component of
income before income taxes. The provisions of SFAS No. 145 are effective for
fiscal years beginning after May 15, 2002 with early adoption encouraged. Any
gain or loss on the extinguishment of debt that was classified as an
extraordinary item should be reclassified upon adoption. The adoption of SFAS
No. 145 is not expected to have a significant impact on Fairmount's financial
statements

     In June 2002, SFAS No. 146 "Accounting for Costs Associates with Exit or
Disposal Activities" was issued. This statement provides guidance on the
recognition and measurement of liabilities associated with disposal activities
and is effective for Fairmount on January 1, 2003. Given that SFAS No. 146 was
issued in June 2002 and is not yet effective, the impact on the Company's
financial position or results of operations from adopting SFAS No. 146 has not
been determined.

RESULTS OF OPERATIONS

     Net sales for the three months ended September 30, 2002 were $336,900,
compared to $2,672,500 during the same period in 2001, a decrease of $2,335,600,
or 87.4%. Net sales for the nine months September 30, 2002 were $3,075,700,
compared to $8,654,900 during the same period in 2001, a decrease of $5,579,200
or 64.5 %. Fairmount's production was shut down during most of the third quarter
of 2002, due to limited financial resources to purchase material and supplies.
As of September 30, 2002, Fairmount had laid off most of its production
employees and reduce its number of shifts from three a day to only one 8 hour
shift per day with a limited number of employees.

     One of Fairmount's major customers, Polaroid Corporation, filed a voluntary
petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code.
Polaroid, or a company formed with the assets purchased from Polaroid, is
operating and Fairmount expects that it business with Polaroid will remain at
the 2001 sales level. Sales to Polaroid during the nine months ended September
30, 2002 were $465,300, compared to $736,700 during the same period of 2001.
Polaroid accounted for $995,700 or 9.9% of sales during year ended December 31,
2001.

                                       18
<PAGE>

     In addition, the demand for certain types of chemicals used in photographic
films is expected to decrease during the coming years as the market for film
diminishes due, in part, to new digital imaging technologies.

     During the second quarter of 2001, Fairmount started receiving orders for a
hydrazine derivative product from a new customer. Worldwide sales to this
customer were $2,445,600 in 2001. In January 2002, Fairmount advised the
customer that it could no longer supply the product under the same terms and
conditions. As a consequence, Fairmount does not anticipate significant sales of
the product to this customer in 2002.

     The gross loss for the three months ended September 30, 2002 was $869,400,
compared to a gross loss of $902,300 for the third quarter of 2001. The gross
loss for the nine months ended September 30, 2002 was $1,116,400 compared to
$808,800 during the same period in 2001.

     Research and development expenses during the three months ended September
30, 2002 were $88,500 compared to $99,000 during the same period in 2001. During
the nine months ended September 30, 2001 research and Development expense were
$259,100 compare to $301,900 during the same period in 2001. The main reason for
the decrease was lower salaries and lower payroll related expenses during the
three and nine months ended September 30, 2002.

     Selling, general and administrative expenses decreased by $148,600 in the
third quarter of 2002 compared to the same period in 2001. Selling expenses
decreased $95,100, and general and administrative expenses decreased by $53,500
in the third quarter of 2002 compared to the second quarter of 2001. During the
first nine months of 2002 selling, general and administrative expenses were
$1,171,400 compared to $1,542,900 during the same period in 2001, a decrease of
$371,500. Selling expenses decreased by $278,600 and general and administrative
expenses decreased by $92,900. The primary reasons for the decrease on selling
expenses were lower commissions, lower payroll and payroll related expenses,
lower travel related expenses, and lower advertising expenses. The decrease in
general and administrative expense was due primary to lower payroll and payroll
related expenses.

     Interest expense was higher in the three and nine months ended September 30
2002, versus the same period in 2001, due to the increase debt subject to
interest, somewhat off set by lower interest rates.

     During the nine months ended September 30, 2001, Fairmount recorded a
foreign exchange currency loss of approximately $45,200. There was no
corresponding loss during the nine months of 2002, because there were no sales
to customers denominated in EURO currency.

     During the nine months ended September 30, 2001 Fairmount received
insurance proceeds of $53,100 for property damaged caused by a delivery truck.

     As a result of the above, the Company reported an operating loss of
$1,496,700 in the three months ended September 30, 2002, compared to an
operating loss of $1,565,700 in the same period of 2001. For the nine months
ended September 30, 2002, Fairmount recorded a loss of $2,814,500 compared to a
loss of $2,785,900 during the same period in 2001.

     As a result of the continuing operating losses no provision for income
taxes has been recorded in the financial statements of the Company and the
Company has reserved fully against its net deferred tax asset.

                                       19
<PAGE>

FORWARD LOOKING STATEMENTS

     This document contains forward-looking statements that involve risks and
uncertainties that could cause the results of Fairmount to differ materially
from those expressed or implied by such forward-looking statements. These
statements constitute "forward-looking statements" within the meaning of such
term in Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These risks include the timely development,
production and acceptance of new products and services; competition; the flow of
products into third-party distribution channels; and other risks detailed from
time to time in Fairmount's Securities and Exchange Commission filings. The
words "anticipates," "believes," "estimates," "expects," "intends," "will,"
"may," "could" and similar expressions, as they relate to Fairmount or our
management, may identify forward-looking statements. Such statements reflect the
current views of Fairmount with respect to future events and are subject to
certain risks, uncertainties and assumptions. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary from those described herein as anticipated, believed,
estimated or expected. Fairmount does not intend to update these forward-looking
statements.

CRITICAL ACCOUNTING POLICIES

     The SEC staff recently released a cautionary advice regarding critical
accounting policies and practices. The staff has defined critical policies and
practices as items that are both most important to the portrayal of a company's
financial condition and results, and require management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effects of matters that are inherently uncertain.

     The preparation of the Company's financial statements requires its
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to doubtful accounts, inventory
valuation, property, plant and equipment, and environmental matters and
commitments and contingencies. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The Company believes the
following critical accounting policies are the most important to the portrayal
of the Company's financial condition and results and require management's more
significant judgments and estimates in the preparation of the Company's
financial statements.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

     The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments.
Management continuously assesses the financial condition of the Company's
customers and the markets in which these customers participate. If the financial
condition of the Company's customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.

VALUATION OF INVENTORIES

     Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method. There are no general and
administrative costs in inventory. The Company writes down its inventories for
estimated obsolescence or unmarketable inventory equal to the difference between
the cost of inventory and the estimated market value based upon

                                       20
<PAGE>

assumptions about future demand and market conditions. If actual market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required.

VALUATION OF LONG-LIVED ASSETS

     Fairmount assesses the impairment of identifiable assets and long-lived
assets whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. Factors that management considers important which
could trigger an impairment review include significant underperformance relative
to projected operating results, significant changes in the manner of use of the
acquired assets, or the strategy of the overall business, or any significant
negative industry or economic trends.













                                       21
<PAGE>

                           PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     During 2001, the NJDEP conducted an air compliance inspection of the
Company's facility. As a result of certain alleged violation observed during the
inspection, an administrative order and penalty assessment was issued by the
NJDEP and an administrative hearing was requested. In the interim, the Company
initiated efforts to bring the facility into compliance and obtained necessary
compliance extensions. In early 2002, the NJDEP refused to grand any additional
extensions and approved the request for an administrative hearing. Discovery is
currently underway.

     On September 26, 2002 a Consent Order was signed and file in the Superior
Count of New Jersey. This Consent Order allows Fairmount to operate equipment
and control apparatus that have air permits and certificates for such equipment
and control apparatus. Fairmount has agreed to reduce its operations to
production of three products. Fairmount also agreed to limit its hazardous air
pollutants ("HAP") to less than 75 % of last year's HAPs. Fairmount is required
to notify the DEP two business days prior to initiation of production and shall
also provide the DEP production figures every 5 business days, until all
equipment and control apparatus utilized in the facility is fully permitted and
operating in compliance with its permits. Fairmount is subject to finds imposed
on it by NJDEP for various violations. The amount of the fine has not been
determined, however based on Fairmount's current financial condition; its
ability to satisfy the obligation is questionable.

     In February 2002, the Newark Division of Water/Sewer notified Fairmount
that the Company's 2002 annual sewer charge would be $659,900, an increase of
$421,600 in anticipated cash outflows as compared to 2001. On December 3, 2002,
Fairmount filed a complaint in the Chancery Division in Essex County, New Jersey
against the City of Newark ("Newark"), the Passaic Valley Sewerage Commissioners
(PVSC") and Townley Laboratories, Inc. ("Townley"). Fairmount has asked PVSC to
reconsider the amount PVSC is changing, however PVSC has refused and Fairmount
has therefore exhausted whatever administrative remedies exist to challenge the
annual sewer charge and due to the impending tax sale by Newark, had no option
other than bring an action.

     During the quarter ended September 30, 2002 there were no material changes
in the potential claims reported by Fairmount in its Annual Report on Form
10-KSB in "Item 1. Business- Environment Laws and Government Regulations" and
"Item 3. Legal Proceedings."

ITEM 2. CHANGES IN SECURITIES

     None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     On October 9, 1997 the executors of the Leistner Estate endorsed two
promissory notes of $648,000 and $491,600 to the order of the Howard Leistner,
Hedi Mizrack and Gilbert Leistner Irrevocable Grantor Trust (the "Trust"). The
Trust was established to expedite the settlement of the Leistner Estate and to
be the repository of the common and preferred shares of the Company, as well as
the promissory notes held by the Leistner Estate. Howard Leistner, Hedi Mizrack
and Gilbert Leistner have sole voting rights to their common stock holdings.
Interest paid on promissory notes to affiliated parties in during the nine
months ended September 30, 2001 was $87,100, however because of the Fairmount's
financial difficulties, interest payments have not been made since July 2001. In
addition, as long as Fairmount is in default under its loan agreement with Fleet
Bank, it is prohibited from paying interest on the affiliated promissory
notes.The total unpaid interest as of September 30, 2002 was $118,500. The
failure to pay interest

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<PAGE>

when due is an event of default which can be cured if payment is made within 15
days of written notice to Fairmount. No written notice has been received,
however, failure to make interest payments is an event of default and,
accordingly, the promissory notes have been reclassified to current liabilities.

     As of March 1, 2002, Fairmount owed Bayer Corporation approximately
$673,600 for raw material purchases. Fairmount issued a promissory note (the
"Note") to Bayer for the amount owed as of March 1, 2002. The Note matures
February 1, 2003, and includes a payment schedule. Non-payment is an event of
default and interest of 10% on the unpaid principal balance will accrue until
the default is cured. The Note contains a Fairmount agreed to confession of
judgment provision, which may result in a court judgment against Fairmount, upon
written notice but without a hearing, and that the Company's real estate may be
sold on a writ of execution. Fairmount failed to make the required payments
since June 30, and, as of December 2, 2002, the Company is in default of
payments totaling $483,700, including accrued interest of $43,700. Fairmount has
been advised that a judgment entered in the State of Pennsylvania has been
recorded in the State of New Jersey and that a Writ of Execution or other
process for enforcement of the judgment may be issued.

     The Company presently has a line of credit facility with Fleet Bank. The
Company entered into an extension agreement effective February 28, 2002, with
modified terms including a new maturity date of February 28, 2003. Fairmount has
not made all the scheduled principal payments and as of December 2, 2002 is in
default of payments totaling $60,000.

ITEM 5. OTHER INFORMATION

     None


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits

         None

     (b) No reports have been filed on Form 8-K during the quarter ended
         September 30, 2002.







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<PAGE>

                          FAIRMOUNT CHEMICAL CO., INC.

                                    SIGNATURE

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


                                     FAIRMOUNT CHEMICAL CO., INC.
                                     ----------------------------
                                              Registrant




December 23,  2002                   /S/ Jerrel Branson
                                     -------------------------
                                     Jerrel Branson
                                     Chief Executive Officer


December 23, 2002                    /S/ Reidar Halle
                                     -------------------------
                                     Reidar T. Halle
                                     President


December 23, 2002                    /S/ William C. Kaltnecker
                                     -------------------------
                                     William C. Kaltnecker
                                     Principal Accounting Officer


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