================================================================================
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2001
                                             -----------------

                          Commission file Number 1-4591


                          FAIRMOUNT CHEMICAL CO., INC.
                 -----------------------------------------------
                 (Name of small business issuer in its charter.)

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

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


                     Issuer's telephone number: 973-344-5790
                                                ------------

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

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

                           Common Stock, $1 Par Value
                           --------------------------
                                (Title of Class)

     Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [_]

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not 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 [_]

     Issuer's revenue for its most recent fiscal year: $10,095,700

     The aggregate market value of the Registrant's common stock, $1 par value
per share (the "Common Stock"), held by non-affiliates of the Registrant on
March 15, 2002 (1,355,752 shares) was approximately $81,345, based on the
average of the bid and ask price on such date of $.06 per share.

     The total number of shares of Common Stock outstanding on March 15, 2002
was 8,292,866.
================================================================================

                               Page 1 of 36 Pages
<PAGE>



                       DOCUMENTS INCORPORATED BY REFERENCE


         The information required by Part III is incorporated by reference from
the registrant's definitive proxy statement with respect to the registrant's
Annual Meeting of Stockholders scheduled to be held on or about June 18, 2002.
Such definitive proxy statement shall be filed with the Securities and Exchange
Commission not later than 120 days after the end of the fiscal year covered by
this Form 10-KSB


         Transitional Small Business Disclosure Format (check one):

         Yes [_]       No [X]













































                                        2
<PAGE>
                                     PART I

ITEM 1.  BUSINESS
-----------------

The Company

         Fairmount Chemical Co., Inc. was incorporated in June 1938 under New
Jersey Law. Fairmount's offices are located at 117 Blanchard Street, Newark, New
Jersey. Except as otherwise indicated by the context, the terms "Company" or
"Fairmount" as used herein refer to Fairmount Chemical Co., Inc.

Business and Products

         Fairmount has more than 60 years experience in the manufacture and sale
of specialty and fine organic chemicals, including pharmaceuticals, agriculture
intermediates, and chemicals used in the photographic and imaging industries,
hydrazine derivatives and blends, and plastic additives. During this period,
Fairmount has developed expertise in the production of specialty and
heterocyclic chemicals containing nitrogen and sulfur.

         Fairmount uses its expertise and know-how in chemical synthesis not
only to manufacture its own products, but also to develop and custom manufacture
products under contract for other companies. Its equipment configuration,
production flexibility and ability to produce efficiently in quantities ranging
from 10 kg to 500 metric tons, gives it an excellent position in custom
manufacturing. Among the products which Fairmount custom manufactures are
agricultural intermediates and photographic chemicals. All manufacturing is done
at Fairmount's facilities in Newark, New Jersey.

Fairmount's principal products and their markets include:

     o   Imaging & Photographic Chemicals
         --------------------------------

         Fairmount's photographic and imaging chemicals are used in the
manufacture of photographic film, television picture tubes and medical imaging
products. These chemicals include photo-sensitizers, film-stabilizers, and
antifogging agents.

         The demand for certain types of chemicals used in photographic films
has decreased and is expected to decrease further during the coming years as the
market for film diminishes due, in part, to new digital imaging technologies.
Fairmount is aware of this trend and is taking steps to substitute new products
that are used in making photographic paper and increase its market share for the
Company's existing products by broadening its customer base.

     o   Hydrazine Based Products
         ------------------------

         Hydrazine blends and derivatives are used for corrosion control in
commercial boilers and power generating systems, as well as intermediates in the
manufacture of other chemical products, such as metal chelating agents,
polymerization inhibitors, pharmaceuticals, and agriculture intermediates.
Fairmount markets its hydrazine blends under the registered trade name Deoxy-sol
(R).

         Fairmount does not believe that it will increase and may decrease its
market share of hydrazine blends due to increased competition from other
manufacturers.

     o   Plastics Additives
         ------------------

         Fairmount produces additives, including antioxidants, metal
deactivators and UV stabilizers, that are used in the production of products
made from various plastic resins, including polycarbonates, polyolefins, PVCs
and polyester resins. Fairmount's customers include the manufacturers of plastic
resins as well as compounders who add pigment and additives to the resins to
meet final product performance. Fairmount markets some of its plastic additives
under the registered trade name MIXXIM(R).


                                        3
<PAGE>
     o   Specialty Chemicals
         -------------------

         Fairmount's non-hydrazine based specialty chemicals are also used as
intermediates in the pharmaceutical and agricultural industries. These include
derivatives of thiadiazoles, triazoles and tetrazoles.

Raw Materials
-------------

         Fairmount purchases the raw materials used in the manufacture of its
products from major suppliers such as Bayer Corporation, Brown Chemical Co.,
Inc., Veckridge Chemical Co., Inc., and Cytec Industries Inc. Most purchases are
made on a spot basis. Fairmount has no long-term supply contracts with any of
its suppliers. Fairmount believes that each of the raw materials it requires is
available from a variety of sources and the loss of any one of Fairmount's
suppliers would not have a material adverse effect on its business, financial
condition or results of operations. Fairmount has, and expects to continue to
have, adequate supplies of raw material during 2002 and subsequent years.

Method of Distribution
----------------------

         Fairmount markets its products, domestically and for export, primarily
through Fairmount's internal sales force and sells directly to its customers.
However, some of its hydrazine blends and other products are also sold globally
through independent agents and distributors. Fairmount continues to improve
sales coverage and distribution of its products.

Competition
-----------

         While some of Fairmount's products and manufacturing processes are
proprietary, Fairmount experiences substantial competition from global companies
in most of its product areas and markets. Most of its competitors are well-known
companies with greater resources than Fairmount's. Fairmount sells on the basis
of quality, price and customer service, and relies on fast response and cost
effectiveness to remain competitive.

Patents, Licenses and Trademarks
--------------------------------

         Fairmount holds patents, licenses and trademarks that it uses in the
manufacture and marketing of its products. Although Fairmount considers its
patents, licenses, trademarks and intellectual property constitute valuable and
commercially viable assets, it does not regard its business as being materially
dependent upon them.

Research and Development
------------------------

         Fairmount's applied research and development program focuses on three
objectives:

         o   improvement and refinement of existing products and processes;
         o   development of new applications for existing products; and
         o   development of new products;

         Fairmount spent approximately $400,000 during each of its fiscal years
ended December 31, 2001, and 2000 for research and development activities. It
expects research and development expenditures to increase moderately during
2002.

Sales by Product
----------------

         Each class of similar products contributed the following percentage of
total sales in each of the last two fiscal years:
                                                     2001              2000
                                                    ------            ------
         Imaging  & photographic chemicals           19.3%             27.3%
         Hydrazine blends                            17.8%             19.7%
         Hydrazine derivatives                       31.1%              6.7%
         Plastics additives                          21.3%             34.7%
         Specialty chemicals                         10.5%             11.6%
                                                    ------            ------
                                                    100.0%            100.0%
                                                    ======            ======

                                        4
<PAGE>
         Fairmount sells its products in the global markets and continues its
efforts to expand both domestic and export sales. Fairmount had net sales of
$10,095,700 in 2001 and $11,808,100 in 2000, including export sales of
$3,723,400 in 2001 and $4,109,700 in 2000. Major foreign geographical areas
contributed the following percentages to net sales:

                                                     2001              2000
                                                    ------            ------
         Europe (primarily Germany,
         Belgium, and England)                       29.5%             27.1%
         Asia (primarily Israel)                      6.4%              6.5%
         North and South America                       .9%              1.2%

Dependence On Certain Customers
-------------------------------

         During 2001, three customers accounted for approximately 47.8% of
Fairmount's sales. During 2000, two customers accounted for approximately 37.5%
of Fairmount's sales. The loss of one of these customers could have a material
adverse effect on Fairmount's business. In order to reduce this risk, Fairmount
continues to increase its marketing efforts to broaden its customer base.

Environmental Laws and Government Regulations
---------------------------------------------

         Fairmount is committed to the chemical industry's "Responsible Care(R)"
program. Responsible Care is the Chemical Manufacturer Association's initiative
of 1988 for continuously improving health, safety and environmental quality. It
is the policy of Fairmount to protect the environment and to comply with all
governmental laws and regulations. The chemical industry is one of the most
highly regulated industries in the world with respect to ecology. For a further
discussion of Fairmount's environmental matters, see "Item 6. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."

Employees
---------

         As of December 31, 2001, Fairmount had 42 employees, all of whom were
full-time employees. The Company has a collective bargaining agreement with
International Brotherhood of Teamsters Local 575 ("Union"), which covers all
hourly employees. The union agreement expires December 12, 2003. Fairmount
believes its has good relationships with its employees.


ITEM 2.  PROPERTIES
-------------------

         Fairmount owns its production facilities that consist of 14 brick,
cinder block and metal-clad buildings situated on approximately 13 acres of
fenced-in land in an industrial area of Newark, New Jersey. These facilities
provide approximately 97,100 square feet of floor space, in which are located
chemical process equipment, refrigeration units, and steam boilers, as well as
warehouse, shipping, maintenance, office, and research and development
facilities. In addition, certain process equipment and tanks are located and
operated out-of-doors. The site includes two railway spurs, neither of which is
currently in use.

         Fairmount's line of credit with Fleet Bank is collateralized by the
accounts receivable, inventory and personal property of Fairmount. Fairmount's
debt to affiliated parties is subordinated to the Fleet Bank line of credit and
is collateralized by the accounts receivable and the machinery and equipment of
Fairmount. Except for the lien granted in favor of Fleet Bank and other such
lenders, there are no mortgages or liens on Fairmount's properties. See "Item 6.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources and Notes 5 and 6 of the Notes to
Financial Statements."

         Fairmount normally operates its plant on a 24-hour day, five days a
week schedule. While it believes that its plant, buildings, and equipment are
adequately maintained and are reasonably suitable and sufficient for its current
operations, further capital investment may be required for maintenance of
Fairmount's operations and compliance with applicable laws. In the opinion of
management, Fairmount maintains adequate levels of property and environmental
insurance on the entire premises.

                                        5
<PAGE>
         On November 10, 1999, a fire destroyed some equipment and a portion of
the roof in one of the production buildings. No employees were injured.
Fairmount received from its property insurance carrier $100,000 in March 2000
and $233,100 in May 2000 in settlement for its property losses caused by the
fire. The fire had an adverse effect on operations during the first half of
2000. Production returned to its normal level in the second half of 2000.

         In 2001, Fairmount spent $126,500 on capital expenditures for the
upgrade and the expansion of its production facilities, and improvements to its
equipment. Fairmount has budgeted approximately $200,000 for capital
expenditures in 2002. Major expenditures are targeted for the replacement and
improvement of process equipment, new construction, and safety and environmental
projects.

         It is not Fairmount's policy to acquire assets primarily for possible
capital gain or primarily for income.


ITEM 3.  LEGAL PROCEEDINGS
--------------------------

         A bodily injury claim was filed against the Company on December 2, 1998
in the Superior Court of New Jersey Law Division, Hudson County. The plaintiff
alleges that on March 25, 1997, the date of an explosion at Fairmount's plant,
the force of the explosion threw him backward and resulted in injuries. The
plaintiff was an invitee upon the adjoining property to the Company. This claim
was settled on July 20, 2000 for an immaterial amount.

         On May 13, 1999, a toxic tort case was brought against the Company and
other defendants by former employees, family members of the former employees or
heirs of deceased former employees of La Gloria and Gas Company and the La
Gloria Refinery located in Tyler, Texas. The claimants contended that the
employee plaintiffs and their families were exposed to a number of toxic
chemicals by working in and around them or with them at the La Gloria Plant and
by second-hand exposure occurring as a result of the toxic substance being
brought home on the clothing and bodies of the employee plaintiffs. Plaintiffs
sued the employer defendants and numerous manufacturers, suppliers, and
distributors of chemicals, solvents and products supplied to the La Gloria
Plant. The Company sold a hydrazine blend to La Gloria during 1990 and 1991. On
October 21, 1999, the Federal Court granted defendants' motion to dismiss
because of lack of subject matter jurisdiction. Claimants re-filed this cause of
action in Texas state court in the District Court of Harrison County, Texas on
December 15, 1999. Claimants' allegations in the state court petition were
identical to the allegations discussed above. This claim was settled on June 26,
2001, for an immaterial amount.

         On October 10, 2000, a breach of contract claim was brought against the
Company in the Worcester Superior Court of the Commonwealth of Massachusetts.
The plaintiff alleged that a defective component chemical used in the
plaintiff's manufacturing process was supplied by Fairmount. This action was
been moved from Worcester Superior Court to the Federal District Court for the
Western District of Massachusetts and was settled on July 9, 2001, for an
immaterial amount.

         Fairmount is not presently a defendant in any material legal
proceeding, nor is it aware of any threatened legal proceeding or action other
than the potential environmental matters discussed in "Item 7. Management's
Discussion and Analysis or Plan of Operations - Environmental Laws and
Government Regulations" below.


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

         Fairmount submitted no matters to a vote of its security holders during
the last quarter of its fiscal year ended December 31, 2001.

                                        6
<PAGE>
                                     PART II


ITEM 5.  MARKET FOR ISSUER'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------------------------

         Fairmount's Common Stock is currently traded in the over the counter
under the symbol "FMTC". For each fiscal quarter indicated, the charts below
reflect the high and low bid prices for the Common Stock as reported by Dreyfus
Brokerage Services. These prices reflect inter-dealer quotations without retail
mark-ups, mark-downs or commissions and do not necessarily represent actual
transactions.
                                          Common Stock Bid Prices
                                   -------------------------------------
                                       2001                     2000
                                   -------------           -------------
         Quarter                   High     Low            High     Low
         -------                   ----     ----           ----     ----
         First                     $.08     $.05           $.37     $.16
         Second                    $.17     $.05           $.28     $.19
         Third                     $.18     $.08           $.28     $.09
         Fourth                    $.14     $.05           $.14     $.03

         There were approximately 231 stockholders of record at March 28, 2002.
Fairmount did not declare or pay any dividends in 2001 or 2000.


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

Liquidity and Capital Resources
-------------------------------

         To meet its liquidity requirements, including its capital program,
Fairmount accesses 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 March 2002, the bank advised the Company, subject to the
negotiation and execution of a definitive agreement, that it was willing to
extend the facility's maturity date to February 28, 2003. It is contemplated
that the extension terms will 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 the Company'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. It is further
contemplated that the bank will receive warrants to purchase up to 200,000
shares of Fairmount's Common Stock in connection with the extension of the
facility. No assurance can be given that the bank and the Company will enter
into a definitive extension agreement or that such agreement, if entered into,
will be on the terms presently contemplated.

         Fairmount has reported substantial losses during the last fiscal three
years and does not expect performance to improve during the first 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. This action was deemed necessary by management due to Fairmount's
deteriorating business prospects.

         One of Fairmount's major foreign customers reduced its purchases by 75%
during the fourth quarter of 2001. Fairmount has not sold nor does it forecast
selling any product to this customer during the first and second quarters of
2002. Another major customer, Polaroid Corporation, has filed a voluntary
petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The
potential loss of this customer is expected to have a material adverse effect on
Fairmount since Polaroid accounted for $995,700 or 9.9 % of the Company's sales
during year ended December 31, 2001, and $1,850,500 or 15.6 % of sales for the
year ended December 31, 2000.

         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 compared to none in 2000. 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
sales of this product to this customer in 2002.

                                        7
<PAGE>
         The Company's working capital, defined as current assets less current
liabilities, decreased by $6,074,400 in 2001, resulting in negative working
capital of $1,711,000 compared to working capital of $4,363,400 in 2000. The
decrease in working capital was due in part to net losses, decreased accounts
receivable of $671,300, decreased inventories of $1,851,200, increased accounts
payable of $128,900, increased accrued interest to affiliated parties of
$62,200, and increased bank borrowings of $500,000. In addition, the
reclassification of the promissory note to affiliated parties from a non-current
to current liability reduced working capital by $1,571,600.

         In February 2002, the Newark Division of Water/Sewer notified
Fairmount, that its 2002 sewer charge will be $659,900, an increase of $421,600
in anticipated cash outflows as compared to 2001. Fairmount is appealing this
increase.

         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 Fairmount with a $2,494,000 credit facility under which all borrowings
required 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 Fairmount replaced the credit facility with new promissory notes
due January 1, 2005. The Leistner Estate received a note for $648,000. Three
notes were issued to beneficiaries of the Knoepke Estate. These three notes were
issued as follows:

         o   The da Mota Family Partnership - $224,640;
         o   Glen da Mota - $142,560; and
         o   Lynn da Mota - $64,800.

         All of the promissory notes described above have similar terms and
conditions. Interest was originally set at the corporate base rate posted by
Citibank, N.A. on the last banking day of the previous calendar year. Interest
on the unpaid principal from January 1, 2001 through December 31, 2001 was set
at the rate of 9.5% per annum. All of the promissory notes are subordinated to
Fairmount's line of credit financing with Fleet Bank and are collaterized by
security agreements on Fairmount's accounts receivables, inventories and
personal property.

         Interest paid on promissory notes to affiliated parties in 2001 was
$87,100 and $133,600 in 2000. Because of the Company's financial difficulties,
interest payments have not been made since July 2001. The total unpaid interest
as of December 31, 2001 was $62,200. 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 as current liabilities.

         On March 26, 2002, Jerrel Branson, a director, was appointed Chief
Executive Officer of Fairmount. Reidar Halle, a director, retains the position
of President of Fairmount.

         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 the interest payments as discussed in Note 5 or if Fairmount is
unable to effect cost savings, enter into strategic alliances or a merger,
achieve other short-term solutions, or formalize the extension agreement with
the bank, the Company may not have 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. Accordingly, the financial statements contain an
explanatory paragraph in the Independent Auditors' Report relating to
Fairmount's ability to continue as a going concern.

New Accounting Pronouncements
-----------------------------

         Fairmount adopted SFAS No. 141, "Business Combinations" for all
business combinations after June 30, 2001. This standard requires that all
business combinations be accounted for as using the purchase method, and it
further clarifies the criteria for recognition of intangible assets separately
from goodwill. Since June 30, 2001, there have been no business combinations.

         Effective January 1, 2002, Fairmount will adopt 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. Under the provisions of this standard upon adoption, any impairment of
goodwill as well as the

                                        8
<PAGE>
unamortized balance of negative goodwill will be written off and recognized as a
cumulative effect of a change in accounting principle effective January 1, 2002.
Fairmount has no unamortized goodwill and other intangible asset as for December
31, 2001.

         Effective January 1, 2002, Fairmount will adopt 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 should not have a
material impact on 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.

Environmental Laws and Government Regulations
---------------------------------------------

         Fairmount's operations are subject to extensive Federal, state and
local laws, regulations and ordinances in the United States and abroad relating
to the generating, storage, handling, emission, transportation and discharge of
certain materials, substances and waste into the environment, and various other
health and safety matters. Government authorities have the power to enforce
compliance with their regulations, and violators may be subject to fines,
injunctions or both. The Company believes it currently is in compliance with the
present environmental statutes applicable to its business. Fairmount has an
ongoing program to treat and monitor its wastewater effluent for compliance with
the requirements of local laws and regulations. Samples are analyzed for
biological oxygen demand. An outside testing laboratory performs a complete
chemical analysis monthly and quarterly summary, and results are forwarded to
the Passaic Valley Sewage Commission and the New Jersey Department of
Environmental Protection.

         Fairmount monitors compliance with environmental laws and regulations.
Tank dikes and equipment are inspected for leakage and any evidence of potential
soil contamination. Fairmount utilizes a training program, which includes
instruction on its responsibilities regarding environmental laws and
regulations. Fairmount's chemical processing operations are carried out at
atmospheric pressure or vacuum, thereby mitigating the potential for atmospheric
pollution from equipment rupture.

         Fairmount anticipates that the regulation of its business operations
under federal, state and local environmental regulations in the United States
and abroad will increase over time. Fairmount must devote substantial financial
resources to ensure compliance. However Fairmount can not, at this time,
estimate the impact of increased regulation on its operations, future capital
expenditures requirements or the cost of compliance.

         The Occupational Safety and Health Act and its regulations also impact
Fairmount's operations relating to workplace safety and workers' health.

         Fairmount received notice from the New Jersey Department of
Environmental Protection ("NJDEP") that the NJDEP is investigating whether any
material from the Company caused or contributed to the contamination detected at
the Ciuba landfill property in Newark. The NJDEP alleges a possibility that
during the 1970's Fairmount disposed of waste generated at its facility through
contracts with certain garbage removal companies ulitizing the Ciuba landfill.
Fairmount also received notice from the United States Environmental Protection
Agency ("USEPA") that the USEPA has information indicating that hazardous
substances from Fairmount may have been discharged into the Passaic River. It is
Fairmount's understanding that these USEPA allegations are related to
historical, rather than present events. Fairmount's position is 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, the possibility exists that the potentially responsible
parties will bring claims against Fairmount 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 removed from the
Site indicate that Fairmount entered into a toll charging/custom manufacturing
agreement with Hexagon although 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

                                        9
<PAGE>
lawsuit and has not been presented with sufficient evidence to cause the Company
to enter into settlement negotiations.

         Fairmount has no knowledge of contamination of soil on its property. No
underground storage tanks exist on Fairmount's property. Fairmount's
manufacturing effluent system is connected to an above ground piping system. The
effluent is discharged to the local sewage commission.

         Environmental compliance, waste disposal and regulatory fees totaled
approximately $50,400 in 2001 and $97,300 in 2000. These costs are included in
general and administrative expenses.

Inflation
---------

         Fairmount believes that inflation did not have a material impact on
results of operations in 2001. Based on present economic conditions this trend
should continue in 2002.

Results of Operations - The Year Ended December 31, 2001 as Compared to the Year
--------------------------------------------------------------------------------
Ended December 31, 2000
-----------------------

         Net sales for 2001 were $10,095,700, a decrease of $1,712,400 or 14.5%
as compared to 2000.
                                             2001          2000        Change
                                          -----------  -----------  -----------
         Imaging & Photographic Chemicals $ 1,951,500  $ 3,223,000  $(1,271,500)
         Hydrazine blends                   1,791,900    2,321,800     (529,900)
         Hydrazine derivatives              3,143,900      792,300    2,351,600
         Plastics additives                 2,150,500    4,095,100   (1,944,600)
         Specialty chemicals                1,057,900    1,375,900     (318,000)
                                          -----------  -----------  -----------
             Total                        $10,095,700  $11,808,100  $(1,712,400)
                                          ===========  ===========  ===========

         One of Fairmount's major customers for imaging and photographic
chemicals, Polaroid Corporation, has filed a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. The loss of this
customer is expected to have a material adverse effect on Fairmount going
forward since it accounted for $995,700 or 9.9 % of sales during the year ended
December 31, 2001, and $1,850,500 or 15.6 % of sales for the year ended December
31, 2000. 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.

         Hydrazine blend sales decreased from $2,321,800 during the year ended
December 31, 2000 to $1,791,900 during the same period in 2001, a decrease of
$529,900. The decrease in hydrazine blend sales is due primarily to the loss of
customers and lower customer demand.

         Hydrazine derivatives increased from $792,300 during the year ended
December 31, 2000 to $3,143,900 the year ended December 31, 2001, an increase of
$2,351,600. This increase is due to a new customer. However, the gross profits
on sales to this new customer are lower than the average gross profit of other
hydrazine derivatives products.

         Sale of plastic additives decreased from $4,095,100 during the year
ended December 31, 2000 to $2,150,500 during the year ended December 31, 2001, a
decrease of $1,944,600. The decrease in plastic additive sales is due to lower
shipments to a major European customer and an Asian customer. The sales decrease
also reflects the negative effect of the weak EURO. To meet competition, sales
to one of Fairmount's European customers are at a fixed EURO price and Fairmount
is therefore subject to currency exchange rate fluctuations. As in prior years,
Fairmount expects the downward pressure on the price of plastic additive to
continue.

         Sales of specialty chemicals were $1,057,900 in 2001 compared to
$1,375,900 in 2000, a decrease of $318,000. This decrease in specialty chemicals
was due in part to decrease shipments of a pharmaceutical product. The demand
for this product has decreased during the past few years and Fairmount expects
that trend to continue.

                                       10
<PAGE>
         Each class of similar products contributed the following percentage of
total sales in each of the last two fiscal years:
                                                     2001              2000
                                                    ------            ------
         Imaging  & photographic chemicals           19.3%             27.3%
         Hydrazine blends                            17.8%             19.7%
         Hydrazine derivatives                       31.1%              6.7%
         Plastics additives                          21.3%             34.7%
         Specialty chemicals                         10.5%             11.6%
                                                    ------            ------
                                                    100.0%            100.0%
                                                    ======            ======

         The gross profit for 2000 was $1,480,500, compared to a gross loss of
$2,131,700 for 2001. The decrease in gross profit was due in part to lower sales
volume and products sold during 2001 had lower gross profit margins compared to
products sold in 2000. In addition, production was lower, while production
expenses were higher in 2001 compared to the same period in 2000.

         Selling, general and administrative expenses increased by $8,900 in
2001 compared to 2000. Selling expenses decreased $23,700 primarily due to
decreased commissions of $97,000 offset by increased payroll and payroll related
expenses of $43,500 and increased advertising expenses of $19,500. General and
administrative expenses increased by $32,600 in 2001, compared to 2000. This
increase was due primarily to increased professional fees of $86,400, increased
directors fees of $31,000, offset somewhat by lower environmental expenses of
$46,900

         Interest expense was higher in 2001 versus 2000 due to the increased
interest rate on the remaining debt owed to affiliated parties and increased
borrowings and interest on bank borrowing.

         During 2001, Fairmount received insurance proceeds of $53,100 for
property damaged caused by a delivery truck. During 2000 Fairmount received
insurance proceeds of $333,100 for property loss sustained from a fire on
November 10, 1999. The insurance proceeds were used to repair the damage caused
in the above incidences.

         Fairmount recorded a foreign exchange currency loss of approximately
$73,000 in 2001 and $8,400 in 2000. To meet competition, Fairmount sells to one
of its European customers at a fixed EURO price and is therefore subject to
currency exchange rate fluctuations.

         The Company has Federal and state net operating loss carryforwards of
approximately $17,800,000 and $7,400,000, respectively, which expire in years
2002 through 2021. There is no tax expense recorded in the financial statements
of the Company because of its loss position. The Company has reserved fully
against its net deferred tax asset.

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.

                                       11
<PAGE>
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 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.

Recoverability of Long-Lived Assets
-----------------------------------

         The Company reviews the carrying value of its assets for impairment
whenever events or changes in circumstances indicate that the amount of assets
may not be fully recovered. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to the future
undiscounted net cash flows expected to be generated by the asset. The asset
will be written down to fair value if it is determined that its carrying value
is not recoverable by operations. Discounted cash flows or appraised values are
used to determine the fair market value, depending on the nature of the asset.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less the cost to sell. The Company considers various valuation
factors in determining fair value, principally discounted cash flows to assess
any impairment amount. If the Company's assumptions related to assets to be held
and used are inaccurate, write-downs may be required in the future.

Environmental Matters and Commitments and Contingencies
-------------------------------------------------------

         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 believes the amounts reserved are
adequate for such pending matters; however, results of operations could be
affected by significant litigation adverse to the Company.

2002 OUTLOOK
------------

         Fairmount has reported substantial losses during the last three fiscal
years and does not expect performance to markedly improve during the first half
of 2002. There is too much uncertainty for Fairmount to predict its short-term
prospects. If Fairmount is unable to effect cost savings, enter into strategic
alliances or a merger, or enter into an extension agreement with the bank,
and/or achieve other short-term solutions in a timely fashion, Fairmount may be
required to seek protection under Federal bankruptcy laws or other laws
affecting debtors' and creditors' rights.

         Fairmount has budgeted approximately $200,000 for capital expenditures
in 2002. Major expenditures will consist of the replacement and improvement of
process equipment, new construction, and safety and environmental projects. As
of December 31, 2001, the Company had no significant firm commitments for
capital expenditures.

         The demand for certain types of chemicals used in photographic films is
expected to decrease during the coming years due to the increased use of new
imaging technologies, including digital photography. Fairmount is aware of this
possibility and is taking steps to substitute new products that are used in
making photographic paper and increase its market share of existing products by
broadening its customer base.

                                       12
<PAGE>

         Fairmount is refocusing the direction of its marketing efforts by
concentrating on aggressively expanding the customer base for Fairmount's
existing product line. Fairmount will also continue to develop new products
which reflect a profitable market potential to be realized in relation to the
costs and efforts expended.

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.

































                                       13
<PAGE>


ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------


Index to Financial Statements and Related Information


Financial Statements
                                                                           Page
                                                                           ----

         Independent Auditors' Report ...................................    15

         Statements of Operations for the years ended
            December 31, 2001 and 2000 ..................................    16

         Balance Sheets as of December 31, 2001 and 2000 ................    17

         Statements of Changes in Stockholders' (Deficit)
           Equity and Comprehensive loss for the years
           ended December 31, 2001 and 2000 .............................    18

         Statements of Cash Flows for the years ended
           December 31, 2001 and 2000 ...................................    19

         Notes to Financial Statements .................................. 20-30

         Schedule II - Valuation and Qualifying Accounts ................    35































                                       14
<PAGE>


                          Independent Auditors' Report
                          ----------------------------


The Board of Directors and Stockholders
Fairmount Chemical Co., Inc.:


We have audited the accompanying balance sheets of Fairmount Chemical Co., Inc.
as of December 31, 2001 and 2000, and the related statements of operations,
changes in stockholders' (deficit) equity and comprehensive loss, and cash flows
for the years then ended. In connection with our audits of the financial
statements, we have also audited the financial statement schedule - valuation
and qualifying accounts. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fairmount Chemical Co., Inc. as
of December 31, 2001 and 2000, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements presents fairly, in all material respects, the information
set forth therein.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
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 financial statements do not include any
adjustments that might result from the outcome of this uncertainty.


                                                               /s/ KPMG LLP




March  22, 2002







                                       15
<PAGE>
                          FAIRMOUNT CHEMICAL CO., INC.
                          ----------------------------

                            STATEMENTS OF OPERATIONS
                     YEARS ENDED DECEMBER 31, 2001 AND 2000


<TABLE><CAPTION>
                                                     2001              2000
                                                 ------------      ------------
<S>                                              <C>               <C>
Net sales                                        $ 10,095,700      $ 11,808,100

Cost of goods sold                                 12,227,400        10,327,600
                                                 ------------      ------------
Gross (loss) profit                                (2,131,700)        1,480,500

Research & development                                398,900           401,900

Selling, general and
  administrative expenses                           1,997,400         1,988,500
                                                 ------------      ------------
   Operating loss                                  (4,528,000)         (909,900)

Interest expense                                     (212,700)         (181,300)
Interest income                                        68,700           133,400
Foreign currency exchange (Loss)                      (73,000)           (8,400)
Other income (expense), net                            14,000           (39,000)
Insurance proceeds, net                                53,100           333,100
                                                 ------------      ------------

Loss before income taxes                           (4,677,900)         (672,100)

Income taxes                                               --                 _
                                                 ------------      ------------
Net loss                                         $ (4,677,900)     $   (672,100)
                                                 ============      ============

Loss per share
   Basic                                         $       (.56)     $       (.08)
                                                 ============      ============
   Diluted                                       $       (.56)     $       (.08)
                                                 ============      ============

Common shares and equivalents outstanding
   Basic                                            8,292,866         8,292,866
                                                 ============      ============
   Diluted                                          8,292,866         8,292,866
                                                 ============      ============
</TABLE>









                 See accompanying notes to financial statements.

                                       16
<PAGE>
                          FAIRMOUNT CHEMICAL CO., INC.
                          ----------------------------

                                 BALANCE SHEETS
                           DECEMBER 31, 2001 AND 2000

<TABLE><CAPTION>
                                                                2001              2000
                                                            ------------      ------------
<S>                                                         <C>               <C>
ASSETS
------
   CURRENT ASSETS:
         Cash                                               $    494,800      $  2,093,900
         Accounts receivable, less allowance
            for doubtful accounts of $59,700
            in 2001, and $20,600 in 2000                       1,242,100         1,913,400
         Inventories                                             884,900         2,700,100
         Prepaid expenses                                        124,100           124,100
         Other current assets                                      9,100            11,300
                                                            ------------      ------------
                  Total Current Assets                         2,755,000         6,842,800

         Property, plant and equipment
            Less accumulated depreciation of
            $6,245,800 and $5,756,800 in
            2001 and 2000, respectively                        3,576,400         3,938,900
         Other assets                                                700               700
                                                            ------------      ------------
                  Total Assets                              $  6,332,100      $ 10,782,400
                                                            ============      ============

LIABILITIES AND STOCKHOLDERS'(DEFICIT) EQUITY
---------------------------------------------
   CURRENT LIABILITIES:
         Short-term bank borrowings                         $    700,000      $    200,000
         Accounts payable                                      1,719,300         1,590,400
         Accrued compensation                                      5,800           136,400
         Accrued pension liability                               130,400           153,000
         Other accrued liabilities                               276,700           399,600
         Accrued interest to affiliated parties                   62,200                --
         Promissory notes to affiliated parties                1,571,600                --
                                                            ------------      ------------
                  Total Current Liabilities                    4,466,000         2,479,400

         Promissory notes to affiliated parties                       --         1,571,600
         Accrued pension liability                               182,500           146,700

         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) Equity:
            Common stock, par value $1 per share:
            Authorized - 15,000,000 shares;
            8,293,366 shares issued and 8,292,866
            outstanding in 2001 and 2000                       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                                 (18,924,700)      (14,246,800)
         Accumulated other comprehensive loss -
            additional minimum pension liability                (400,600)         (177,400)
                                                            ------------      ------------
         Total Stockholders' (Deficit) Equity                 (3,716,400)        1,184,700
                                                            ------------      ------------
   Total Liabilities and Stockholders' (Deficit) Equity     $  6,332,100      $ 10,782,400
                                                            ============      ============
</TABLE>


                 See accompanying notes to financial statements.

                                       17
<PAGE>
                          FAIRMOUNT CHEMICAL CO., INC.
                          ----------------------------

             STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
                                       AND
                               COMPREHENSIVE LOSS
                     YEARS ENDED DECEMBER 31, 2001 AND 2000



<TABLE><CAPTION>
                                                       2001                              2000
                                            ---------------------------       ---------------------------
                                                           Comprehensive                     Comprehensive
                                                              (loss)                            (loss)
                                            ------------   ------------       ------------   ------------
<S>                                         <C>            <C>                <C>            <C>
Common stock:
      Balance at December 31                $  8,293,400                      $  8,293,400
           (8,293,366 shares)

Treasury stock:
      Balance at December 31,                       (500)                             (500)
           (500 shares)

Capital in excess of par value:                7,316,000                         7,316,000
      Balance at December 31,


Accumulated deficit:
      Balance at January 1                   (14,246,800)                      (13,574,700)
      Net loss                                (4,677,900)    (4,677,900)          (672,100)      (672,100)
                                            ------------                      ------------
      Balance at December 31,                (18,924,700)                      (14,246,800)

Accumulated other comprehensive
      loss:
           Balance at January 1                 (177,400)                          (97,200)
           Change in additional minimum
              pension liability                 (223,200)      (223,200)           (80,200)       (80,200)
                                                           ------------                      ------------
           Comprehensive loss                                (4,901,100)                         (752,300)
                                            ------------                      ------------
Balance at December, 31                         (400,600)                         (177,400)

                                            ------------                      ------------
Total Stockholders' (deficit) equity        $ (3,716,400)                     $  1,184,700
                                            ============                      ============
</TABLE>











                 See accompanying notes to financial statements.

                                       18
<PAGE>
                          FAIRMOUNT CHEMICAL CO., INC.
                          ----------------------------

                            STATEMENTS OF CASH FLOWS
                     YEARS ENDED DECEMBER 31, 2001 AND 2000


<TABLE><CAPTION>
                                                                    2001              2000
                                                                ------------      ------------
<S>                                                             <C>               <C>
CASH FLOW USED IN OPERATING ACTIVITIES:
    Net loss                                                    $ (4,677,900)     $   (672,100)
    Adjustments to reconcile net loss to
        net cash used in operating activities:
             Depreciation                                            489,000           552,400
             Insurance proceeds, net                                 (53,100)         (333,100)

   Increase (decrease) from changes in:
        Accounts receivable, net                                     671,300            71,700
        Inventories                                                1,815,200          (742,300)
        Prepaid expenses                                                  --           (10,000)
        Other current assets                                           2,200            (1,100)
        Accounts payable                                             128,900           764,200
        Accrued compensation                                        (130,600)           52,200
        Accrued interest to affiliated parties                        62,200                --
        Other liabilities                                           (332,900)           83,300
                                                                ------------      ------------
             Net Cash Flow Used In Operating Activities           (2,025,700)         (234,800)

CASH FLOW USED IN BY INVESTING ACTIVITIES:
    Capital expenditures                                            (126,500)         (685,500)
    Insurance proceeds, net                                           53,100           333,100
                                                                ------------      ------------
             Net Cash Used in Investing Activities                   (73,400)         (352,400)

CASH FLOW PROVIDED BY FINANCING ACTIVITIES:
    Bank borrowings                                                  500,000           600,000
    Bank repayments                                                       --          (400,000)
                                                                ------------      ------------
             Net Cash Flow Provided by Financing Activities          500,000           200,000
                                                                ------------      ------------

DECREASE IN CASH                                                  (1,599,100)         (387,200)

    Cash at Beginning of Period                                    2,093,900         2,481,100
                                                                ------------      ------------
CASH AT END OF PERIOD                                           $    494,800      $  2,093,900
                                                                ============      ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

    Interest paid                                               $     87,100      $    181,300
                                                                ============      ============
    Income taxes paid                                           $         --      $         --
                                                                ============      ============
</TABLE>



                 See accompanying notes to financial statements.

                                       19
<PAGE>
                          FAIRMOUNT CHEMICAL CO., INC.
                          ----------------------------
                     Years Ended December 31, 2001 and 2000
                          Notes to Financial Statements

NOTE 1.  GOING CONCERN

         Fairmount has reported substantial losses during the last three years
and does not expect performance to improve during the first half of 2002. The
Company's working capital, defined as current assets less current liabilities,
decreased by $6,074,400 in 2001, resulting in negative working capital of
$1,711,000 compared to working capital of $4,363,400 in 2000. 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 the interest payments as discussed in Note 5 or if Fairmount is
unable to effect cost savings, enter into strategic alliances or a merger,
achieve other short-term solutions or enter into an extension agreement with the
bank, it may result in the Company not having sufficient capital to continuing
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. Accordingly, the financial statements
contain an explanatory paragraph in the Independent Auditors' Report relating to
Fairmount's ability to continue as a going concern.

         On October 4, 2001, Fairmount laid off 13 production employees, or
approximately 50 % of its production employees, and subsequently terminated two
management employees. This action was necessary because of Fairmount's
deteriorating business.

         One of Fairmount's major foreign customers reduced its purchases by 75%
for the fourth quarter of 2001. Fairmount has not sold nor does it forecast
selling any product to this customer during the first and second quarter of
2002. Another major customer, Polaroid Corporation, has filed a voluntary
petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The
potential loss of this customer is expected to have a material adverse effect on
Fairmount going forward since it accounted for $995,700 or 9.9 % of sales during
year ended December 31, 2001, and $1,850,500 or 15.6 % of sales for the year
ended December 31, 2000.

         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 compared to none in 2000. 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 this product to this customer in 2002

         To meet its liquidity requirements, including its capital program,
Fairmount accesses 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 is currently in the process of seeking an extension of
this credit facility from Fleet Bank, with modified terms including a new
maturity date of February 28, 2003. No assurance can be given that the bank and
the Company will enter into a definitive extension agreement or that such
agreement, if entered into, will be on the terms presently contemplated.

         In February 2002, the Newark Division of Water/Sewer notified
Fairmount, that its 2002 sewer charge will be $659,900, an increase of $421,600
in anticipated cash outflows as compared to 2001. Fairmount is appealing this
increase.

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

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

                                       20
<PAGE>
Notes to Financial Statements (Continued)


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.
Notes to Financial Statements (Continued)

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 $59,700 as of
December 31, 2001 and $20,600 as of December 31, 2000.

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.

PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment are stated at cost and are depreciated
using the straight-line method over the estimated useful lives of the respective
assets. Maintenance and repairs are charged to expense as incurred, and
expenditures for renewals and betterments are capitalized. Gains or losses on
sales or retirements are recognized in income.

         The Company reviews the carrying value of its assets for impairment
whenever events or changes in circumstances indicate that the amount of assets
may not be fully recovered. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to the future
undiscounted net cash flows expected to be generated by the asset. The asset
will be written down to fair value if it is determined that its carrying value
is not recoverable by operations. Discounted cash flows or appraised values are
used to determine the fair market value, depending on the nature of the asset.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less the cost to sell. The Company considers various valuation
factors in determining fair value, principally discounted cash flows to assess
any impairment amount.

         Depreciation expense was $489,000 and $552,400 in 2001 and 2000,
respectively. The estimated useful lives of classes of assets are as follows:

         Asset Description                         Life (years)
         -----------------                         ------------
         Buildings                                     20
         Machinery & Equipment                       5 to 10
         Vehicles                                    3 to  5
         Furniture and Fixtures                      5 to 10


RESEARCH AND DEVELOPMENT COSTS

         Research and development costs are charged to operations as incurred.

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.

                                       21
<PAGE>
Notes to Financial Statements (Continued)


STOCK-BASED COMPENSATION

         The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25 "accounting for
Stock Issued to Employees", and related interpretations, in accounting for its
fixed plan employee stock options. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. For disclosure purposes pro forma net loss
and pro forma net loss per share information are provided in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" as if fair-value-based method had been applied.

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 assets, short term
borrowings, accounts payable, accrued compensation, 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.

SEGMENT OF AN ENTERPRISE AND RELATED INFORMATION

         The Company is managed and operates as one business, which
manufactures, distributes and sells specialty and fine organic chemicals.
Accordingly, the Company does not have separate reporting segments as defined in
SFAS No. 131, "Disclosures about Segment of an Enterprise and Related
Information".

SHIPPING AND HANDLING COSTS

         Shipping and handling costs were $233,300 and $239,700 in 2001 and
2000, respectively, which are included in selling, general and administrative in
the accompanying statements of operations.

ACCOUNTING CHANGES

         Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities" as amended by SFAS No. 137 and SFAS No. 138. This statement
requires the recognition of derivative financial instruments on the balance
sheet as assets or liabilities, at fair value. Gains or losses resulting from
changes in the value of derivatives are accounted for depending on the intended
use of the derivative and whether it qualifies for hedge accounting. The
implementation of this standard did not have a material effect on the Company's
financial statements because the Company did not have any financial instruments
entered into for trading or hedging purposes, nor does the Company currently
have any derivative financial instruments or derivative commodity instruments
outstanding at December 31, 2001.

         Fairmount adopted SFAS No. 141, "Business Combinations" for all
business combinations after June 30, 2001. This standard requires that all
business combinations be accounted for as using the purchase method, and it
further clarifies the criteria for recognition of intangible assets separately
from goodwill. Since June 30, 2001, there have been no business combinations.

                                       22
<PAGE>
Notes to Financial Statements (Continued)


NOTE 3.  INVENTORIES

         Inventories at December 31, consisted of:

                                                         2001           2000
                                                      ----------     ----------
         Finished goods                               $  752,400     $2,481,500
         Raw materials                                   132,500        218,600
                                                      ----------     ----------
                Total                                 $  884,900     $2,700,100
                                                      ==========     ==========

         The reserve for obsolete inventory was $249,400 and $167,700 at
December 31, 2001 and 2000, respectively.


NOTE 4.  PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment, by major classification, at December 31,
2001 and 2000 is summarized as follows:
                                                         2001           2000
                                                      ----------     ----------
         Land                                         $  259,300     $  259,300
         Buildings                                     3,899,500      3,899,500
         Machinery and  equipment                      5,389,500      5,266,800
         Vehicles                                         72,600         68,800
         Furniture and fixtures                          201,300        201,300
                                                      ----------     ----------
                                                       9,822,200      9,695,700
         Less:  Accumulated depreciation               6,245,800      5,756,800
                                                      ----------     ----------
                                                      $3,576,400     $3,938,900
                                                      ==========     ==========

         There was no construction in progress at December 31, 2001 and at
December 31, 2000.


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.

         Promissory Notes:
                Leistner Trust                        $  491,600
                Leistner Trust                        $  648,000
                DaMota Family Partnership             $  224,600
                Glen DaMota                           $  142,600
                Lynn DaMota                           $   64,800
                                                      ----------
                                                      $1,571,600
                                                      ==========

                                       23
<PAGE>
Notes to Financial Statements (Continued)


         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 from January 1, 2001 through December 31, 2001
is at the rate of 9.5% per annum. Interest payable from January 1, 2000 through
December 31, 2000 is at the rate of 8.5% 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.

         Interest paid on promissory notes to affiliated parties in 2001 was
$87,100 and $133,600 in 2000. Because of the Company's financial difficulties,
interest payments have not been made since July 2001. The total unpaid interest
as of December 31, 2001 was $62,200. 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.

         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"). This
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.


NOTE 6.  LONG-TERM DEBT
                                                      2001             2000
                                                    --------         --------
         Working Capital Line of Credit -
         Current installment                        $700,000         $200,000
                                                    ========         ========

         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. Borrowing is limited to $700,000, which is the amount currently
outstanding, and the interest rate is prime +3 (7.75 % at December, 31, 2001).
In addition any amounts that are repaid under the line of credit cannot be
reborrowed. The bank has been given a first security interest in the accounts
receivable, inventories and personal property of the Company. The Company is
currently in the process of obtaining an extension of this credit facility from
Fleet Bank, with modified terms including a new maturity date of February 28,
2003. No assurance can be given that the bank and the Company will enter into a
definitive extension agreement or that such agreement, if entered into, will be
on the terms presently contemplated.


NOTE 7.  STOCK OPTIONS

         On April 19, 1983, the stockholders approved an Incentive Stock Option
Plan (the "1983 Plan"), which was adopted by the Board of Directors on August
17, 1982. As amended the 1983 Plan provides for granting incentive stock options
to key employees to purchase not more than 500,000 shares of common stock of the
Company. The option price per share cannot be less than the market price on date
of grant. The option is exercisable after the optionee has been in the employ of
the Company for at least one year after the date of grant (subject to limited
exceptions) and may be exercised for a period of 10 years from the date of grant
unless an earlier date is stated in the option.

         In addition to the incentive stock options, effective January 12, 1998,
Dr. Reidar Halle, President of the Company was granted stock options to purchase
One Million (1,000,000) shares of common stock, with a fair marker value of
eleven cents ($.11) per share, at an exercise price of eleven cents ($.11) per
share subject to the following vesting schedule

                    Vesting Date                   Exercisable Options
                    ------------                   -------------------
                  January 12, 1999                      334,000
                  January 12, 2000                      333,000
                  January 12, 2001                      333,000


                                       24
<PAGE>
Notes to Financial Statements (Continued)


         Stock option transactions for the years ended December 31, 2001 and
2000 are as follows:
<TABLE><CAPTION>
                                     2001                             2000
                           -------------------------        -------------------------
                                          Weighed                          Weighed
                                          Average                          Average
                             Shares    Exercise Price         Shares    Exercise Price
                           -------------------------        -------------------------
<S>                        <C>         <C>                  <C>         <C>
Outstanding at
beginning of the year      1,059,000            $.18        1,072,500            $.17

Granted                           --                                               --

Forfeited                     17,500           $1.00           13,500           $1.00

Expired                           --              --               --              --
-------------------------------------------------------------------------------------
Outstanding at
end of the year            1,041,500            $.15        1,059,000            $.18
-------------------------------------------------------------------------------------
Exercisable                1,041,500            $.15          726,000            $.18
=====================================================================================
Weighted fair market value
of the grants during the year                   $ --                             $ --
=====================================================================================
</TABLE>

         All stock options outstanding as of December 31, 2001 and 2000 are
exercisable at $.11 to $1.00 per share. Stock options for 41,500 shares
outstanding as of December 31, 2001 expire in one and a half years. Stock
options for 1,000,000 shares outstanding as of December 31, 2001 expire in seven
years.

         The fair value of each option was estimated on the date of the grant
using the Black-Scholes value of 350 large general industrial public companies.
The 2001 assumptions included in this estimation are as follows: risk free
interest rate of 6.23 %, expected life of 10 years, volatility of 98 %, and
dividend yield of 0 %. The 2000 assumptions included in this estimation are as
follows: risk free interest rate of 6.23 %, expected life of 8.5 years,
volatility of 98.0 %, and dividend yield of 0 %.

         Using the measurement principles of SFAS 123 "Accounting for Stock
Based Compensation", the proforma effect on net loss of reporting incremental
compensation expense would have been a increase in net loss of $20,200 and
$36,600 in 2001 and 2000, respectively. Accordingly, proforma net loss would
have been $(4,698,100) in 2001 and $(708,700) in 2000. In addition, proforma
basic and diluted loss per share would have been $(.57) in 2000, and $ (.09) in
2000.

NOTE 8.  PENSION PLAN

         The Company has a defined benefit pension plan covering all of its
employees. The benefits are based on years of service and the employees'
compensation. The Company's funding policy is to contribute annually the
statutory minimum. In 2001, the Company's contribution was $340,100 in and its
2000 contribution was $232,700. Assets of the plan are held by an insurance
company in guaranteed annuity contracts.

                                       25
<PAGE>
Notes to Financial Statements (Continued)



         The following table sets forth the plan's funded status and amounts
recognized in the Company's balance sheet at December 31, 2001, and 2000.

Actuarial present value of benefit obligation:
<TABLE><CAPTION>
                                                               2001              2000
                                                           ------------      ------------
<S>                                                        <C>               <C>
Vested benefit obligation                                  $  3,886,200      $  3,665,700
                                                           ------------      ------------

Accumulated benefit obligation                             $  3,984,200      $  3,725,500
                                                           ------------      ------------
Change in projected benefit obligation
     Projected benefit obligation at beginning of year     $ (3,930,400)     $ (3,760,500)
     Service Cost less expense component                       (101,400)         (119,500)
     Interest Cost                                             (291,500)         (283,900)
     Actuarial loss                                            (189,900)          (40,900)
     Benefits Paid                                              303,300           274,700
                                                           ------------      ------------
     Projected benefits Obligation at end of year            (4,209,900)       (3,930,100)
Change in plan assets
     Fair Value of Plan Assets at beginning of year           3,425,900         3,278,800
     Actual Return on Plan Assets                               223,700           204,100
     Employer Contribution                                      340,100           232,700
     Benefits Paid and Expenses                                (318,400)         (289,700)
                                                           ------------      ------------
     Fair Market Value of Plan Assets at end of year          3,671,300         3,425,900
                                                           ------------      ------------
Fund status                                                    (538,600)         (504,200)

Unrecognized net obligation                                          --            10,900
Unrecognized prior service cost                                 (14,700)          (28,100)
Unrecognized net loss                                           641,000           399,300
                                                           ------------      ------------
Prepaid (Accrued) benefit cost recognized in the
financial statements                                             87,700          (122,100)
                                                           ============      ============

Amount recognized in the statement of
financial position consist of
          Accrued benefit liability                            (312,900)         (299,500)
          Accumulated other comprehensive loss                  400,600           177,400
                                                           ------------      ------------
Net amount recognized                                            87,700          (122,100)
                                                           ============      ============

Reconciliation of Prepaid/(Accrued):
          Accrued Pension Cost at beginning of year            (122,100)         (201,800)
          Minus Net Periodic Pension Cost                      (130,300)         (153,000)
          Plus Contribution                                     340,100           232,700
                                                           ------------      ------------
                                                                 87,700          (122,100)
                                                           ============      ============
</TABLE>

         Net pension cost included in operating results for 2001 and 2000
amounted to $130,300 and $153,000, respectively, and was comprised of the
following:
<TABLE><CAPTION>
         <S>                                                  <C>               <C>
         Service cost with expense component                  $ 116,400         $ 134,500

         Interest Cost                                          291,500           283,900

         Expected return on plan assets                        (275,300)         (263,100)

         Net amortization and deferral                           (2,500)           (2,300)

         Recognized actuarial loss                                  200                --
                                                              ---------         ---------
         Total net pension cost                               $ 130,300         $ 153,000
                                                              =========         =========
</TABLE>

                                       26
<PAGE>
Notes to Financial Statements (Continued)


         The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation, the accumulated benefit
obligation, and vested benefit obligation as of December 31, 2001 was 7.25% and
2000 was 7.75 % and future salaries increases of 5.0 % per annum plus the
component for merit and promotion and expected return on assets of 8.0 %,
respectively.

         The provisions of SFAS No. 87, "Employees Accounting for Pensions",
requires recognition in the balance sheet of an additional minimum liability
when accumulated benefits are in excess of plan assets. The Company recorded an
increase of $223,200 and $80,200, to the additional minimum liability in 2001
and 2000, respectively. The adjustment had no effect on operations but was
accounted for as a component of stockholders' (deficit) equity.


NOTE 9.  INCOME TAXES

         Income tax expense (benefit) for the years ended December 31, 2001 and
2000 differed from the amounts computed by applying the U.S. Federal income tax
rate of 34% to pretax loss as a result of the following:

                                                       2001            2000
                                                   ------------    ------------
         Computed "expected" tax (benefit)         $ (1,590,500)   $   (228,500)
         State tax net of federal benefit              (276,000)        (39,000)
         Change in valuation allowance                1,855,800         262,400
         Non-deductible penalties                         4,600           1,700
         Non-deductible travel and entertainment          6,100           3,400
                                                   ------------    ------------
                                                   $        -0-    $        -0-
                                                   ============    ============

         The temporary differences which give rise to a significant portion of
deferred tax assets and liabilities at December 31, 2001 and 2000 are presented
below.
                                                       2001            2000
                                                   ------------    ------------
Deferred tax assets:
         Charitable contribution                   $      3,300    $      2,000
         Pension                                             --         101,000
         Interest                                       219,900         195,000
         Inventory                                      112,400          86,000
         Research and development tax credits           434,000         434,000
         Net operating loss - state                     439,300         158,400
         Net operating loss - Federal                 6,066,600       4,459,000
                                                   ------------    ------------
Total deferred tax assets                             7,275,500       5,435,400
Valuation allowance                                  (6,580,200)     (4,724,400)
                                                   ------------    ------------
Net deferred tax assets                                 695,300         711,000

Deferred tax liability:
  Pension                                               (66,800)             --
  Depreciation deferred tax credit                     (628,500)       (711,000)
                                                   ============    ============
Net deferred tax asset                             $        -0-    $        -0-
                                                   ============    ============

         At December 31, 2001, a valuation allowance of $6,580,200 was recorded
against deferred tax assets in excess of deferred tax liabilities since the
Company believes that it is more likely than not that these asstes will not be
realized. The net change in the valuation allowance for the years ended December
31, 2001 and 2000 were increases of $1,855,800 and $262,400, respectively,
related primarily to additional net losses incurred by the Company. 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 Company has Federal and state net operating loss
carryforwards of approximately $17,800,000 and $7,400,000, respectively, which
expire in years 2002 through 2021.

                                       27
<PAGE>
Notes to Financial Statements (Continued)


NOTE 10. 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 2001 and 2000. Due to the Company
reporting losses for 2001 and 2000, the exercise of options and the conversion
of the preferred stock is not assumed, as the result would be anti-dilutive. As
of December 31, 2001 there were 1,041,500 options outstanding and exercisable.


NOTE 11. REDEEMABLE CONVERTIBLE PREFERRED STOCK

         The preferred shareholder may convert all or any portion of the shares
of preferred stock owned share-for-share to common stock at any time. The
Company may redeem all or any part of its preferred stock by paying the holders
par value for each such share redeemed. The preferred shareholder may redeem at
par value all or any portion of the shares of preferred stock owned and/or
convert share-for-share all or any portion of the shares of preferred stock
owned to common stock if there is a significant change of ownership or control,
sale of the business or reorganization. After written notice of an impending
significant change of ownership, each preferred stockholder shall have 15 days
to require redemption and/or conversion. Dividends only accrue if declared by
the Board. To date no dividends have been declared and therefore none have been
accrued. In the event of involuntary liquidation, each preferred shareholder is
entitled to cash payment, at par value plus declared but unpaid dividends in
preference over the common stockholders. There are no restrictions on retained
earnings.


NOTE 12. FOREIGN SALES AND MAJOR CUSTOMERS

         The business of the Company is the manufacturing and distribution of
chemical products both domestically and internationally. Export sales in 2001
and 2000 amounted to $3,723,400 and $4,109,700, respectively. During 2001, three
customers accounted for approximately 47.8% of the Company's sales. During 2000,
two customers accounted for approximately 37.5% of the Company's sales. The loss
of one of these customers could have a material adverse effect on the Company's
business.

         Major foreign geographical areas contributed the following percentages
to net sales:
                                                     2001             2000
                                                     ----             ----
         Europe, (Primarily Germany,
         Belgium, and England                        29.5%            27.1%
         Asia (Primarily Israel)                      6.4%             6.5%
         North and South America                       .9%             1.2%


NOTE 13. 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 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.

                                       28
<PAGE>
Notes to Financial Statements (Continued)


         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 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.

         Environmental compliance, waste disposal and regulatory fees totaled
approximately $50,400 in 2001 and $97,300 in 2000. These costs are included in
general and administrative expenses.

         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 two 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.

         On May 13, 1999, a toxic tort case was brought against the Company and
other defendants by former employees, family members of the former employees or
heirs of deceased former employees of La Gloria and Gas Company and the La
Gloria Refinery located in Tyler, Texas. The claimants contended that the
employee plaintiffs and their families were exposed to a number of toxic
chemicals by working in and around them or with them at the La Gloria Plant and
by second-hand exposure occurring as a result of the toxic substance being
brought home on the clothing and bodies of the employee plaintiffs. Plaintiffs
have sued the employer defendants and numerous manufacturers, suppliers, and
distributors of chemicals, solvents and products supplied to the La Gloria
Plant. The Company sold a hydrazine blend to La Gloria during 1990 and 1991. On
October 21, 1999, the Federal Court granted defendants' motion to dismiss
because of lack of subject matter jurisdiction. Claimants re-filed this cause of
action in Texas state court in the District Court of Harrison County, Texas on
December 15, 1999. Claimants' allegations in the state court petition are
identical to the allegations discussed above. This claim was settled on June 26,
2001, for an immaterial amount.

         On October 10, 2000, a breach of contract claim was brought against the
Company in the Worcester Superior Court of the Commonwealth of Massachusetts.
The plaintiff alleges that a defective component chemical used in the
plaintiff's manufacturing process was supplied by Fairmount. This action has
been moved from Worcester Superior Court to the Federal District Court for the
Western District of Massachusetts and was settled on July 9, 2001, for an
immaterial amount.

         The Company 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.


NOTE 14. INSURANCE PROCEEDS

         On November 10, 1999 a fire destroyed certain equipment and a portion
of the roof in one of the production buildings. No employees were injured. The
fire had an adverse effect on operations during the first half of 2000. The
Company started to conduct normal operations in the building during the second
half of 2000.

         The Company received $100,000 in March 2000 and $233,100 in May 2000,
from its property insurance carrier in settlement for its property losses caused
by the fire. During 2001, Fairmount received insurance proceeds of $53,100, for
property damaged caused by a delivery truck.

                                       29
<PAGE>
Notes to Financial Statements (Continued)




NOTE 15. NEW ACCOUNTING PRONOUNCEMENTS

         Effective January 1, 2002, Fairmount will adopt 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. Under the provisions of this standard upon adoption, any impairment of
goodwill as well as the unamortized balance of negative goodwill will be written
off and recognized as a cumulative effect of a change in accounting principle
effective January 1, 2002. Fairmount has no unamortized goodwill and other
intangible asset at December 31, 2001.

         Effective January 1, 2002, Fairmount will adopt 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 should 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.






























                                       30
<PAGE>
ITEM 8.  CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
-----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------

         N/A


                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS OF THE ISSUER,
-------------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
--------------------------------------------------

         Incorporated by reference to Fairmount's 2001 Definitive Proxy
Statement.


ITEM 10. EXECUTIVE COMPENSATION
-------------------------------

         Incorporated by reference to Fairmount's 2001 Definitive Proxy
Statement.


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-----------------------------------------------------------------------

         Incorporated by reference to Fairmount's 2001 Definitive Proxy
Statement.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------------------------------------------------------

         Incorporated by reference to Fairmount's 2001 Definitive Proxy
Statement.


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------

         (a)  Exhibits

              The following are made exhibits to this Form 10KSB and are
              numbered in conformity to the numbering system provided in Item
              601 of regulation S-B.

              3.1   Restated Certificate of Incorporation filed June 8, 1994
                    with the Secretary of the State of New Jersey, incorporated
                    by reference from Fairmount's Form 10-KSB for the fiscal
                    year ending December 31, 1994 (Exhibit 3.1.)

              3.2   By-laws as last amended February 21, 1984, incorporated by
                    reference from Fairmount's Form 10-K for the fiscal year
                    ending December 31, 1983

              4.1   Letter Agreement extending the date for maturity of current
                    indebtedness to Fairmount Fund and the Estate of Leistner to
                    April 1, 1998 incorporated by reference from the Company's
                    Form 10-KSB for the fiscal year ending December 31, 1996.
                    (Exhibit 4(a)).

              4.2   Employment agreement between Todd K. Walker (Employee) and
                    Fairmount incorporated by reference from Fairmount's Form
                    10-KSB for the fiscal year ending December 31, 1994 as
                    Exhibit 4(b).

              10.1  Employment agreement between Reidar Halle (Employee) and
                    Fairmount incorporated by reference from Fairmount's Form
                    10-QSB for the quarter ending June 30, 1998 as Exhibit 10

              10.2  Incentive Stock Option Plan, incorporated by reference to
                    Fairmount's Definitive Proxy Statement for its Annual
                    Meeting of Stockholders held April 19, 1983 (Exhibit A), and
                    amendment thereto, incorporated by reference from the
                    Fairmount's Definitive Proxy Statement for its Annual
                    Meeting of Stockholders held May 15, 1985 (Exhibit A);
                    Incentive Stock Option Plan, as amended in 1988,
                    incorporated by reference from Fairmount's Form 10-K for the
                    fiscal year ending December 31, 1988 (Exhibit 10); and
                    amendment to Incentive Stock Option Plan in 1991,
                    incorporated by reference to Fairmount's Definitive Proxy
                    Statement for its Annual Meeting of Stockholders held May 6,
                    1991 (Exhibit A).

                                       31
<PAGE>

              10.3  Amended employment agreement between Reidar Halle (employee)
                    and Fairmount, attached to this Form10-KSB.

              10.4  Engagement agreement between Jerrel Branson and Fairmount,
                    attached to this Form 10 KSB

              10.5  By-laws as last amended as of January 23, 2002, attached to
                    this Form10-KSB.

              23.1  Consent of KPMG LLP, Independent Auditors.


         (b)  Reports on Form 8-K during the last quarter of 2001

                    On October 19, 2001, the Company filed a Form 8-K (Date of
              Report: December 4, 2001) with the SEC in which the Company
              reported, as an Item 5 event that on October 4, 2001, Fairmount
              laid off 13 production employees, or approximately 50% of its
              production employees, and subsequently terminated two management
              employees.

                    On December 17, 2001, the Company filed a Form 8-K (Date of
              Report: December 6, 2001) with the SEC, in which the Company
              reported as an Item 5 event that its line of credit with Fleet
              National Bank in the amount of $700,000 was to become due and
              payable on November 30, 2001.


         (c)  Financial statement schedule - Schedule II Valuation and
              Qualifying Accounts






























                                       32
<PAGE>


SIGNATURES
----------

         In accordance with Section 13 or 15 (d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.




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




         April 11, 2002                     By: /s/ Jerrel Branson
                                                -----------------------------
                                                Jerrel Branson
                                                Chief Executive Officer
                                                (Principal Executive Officer)


         April 11, 2002                     By: /s/ Reidar Halle
                                                -----------------------------
                                                Dr. Reidar Halle
                                                President



         April 11, 2002                     By: /s/ William C. Kaltnecker
                                                -----------------------------
                                                William C. Kaltnecker
                                                Controller/Treasurer
                                                (Principal Financial Officer)
























                                       33
<PAGE>

         In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.



SIGNATURE                    TITLE                                DATE
---------                    -----                                ----


By: /s/ Jerrel Branson       Director, Chief Executive Officer    April 11, 2002
-----------------------                                           --------------
(Jerrel Branson)




By: /s/ Reidar Halle         Director, President                  April 11, 2002
-----------------------                                           --------------
(Dr. Reidar Halle)




By: /s/ Beno Hubler          Director                             April 11, 2002
-----------------------                                           --------------
(Beno Hubler)




By: /s/ Marshall Beil        Director                             April 12, 2002
-----------------------                                           --------------
(Marshall Beil)




By: /s/ Richard Mizrack      Director                             April 12, 2002
-----------------------                                           --------------
(Richard Mizrack)




By: /s/ Glen da Mota         Director                             April 11, 2002
-----------------------                                           --------------
(Glen da Mota)












                                       34
<PAGE>
                          FAIRMOUNT CHEMICAL CO., INC.
                        Valuation and Qualifying Accounts
                     Years Ended December 31, 2001 and 2000


                                                                     Schedule II



<TABLE><CAPTION>
                                    Balance at    Charged to    Charged to                  Balance at
                                    Beginning     Cost and        Other                        End
Description                          of Year      Expenses      Accounts     Deductions      of Year
-----------                         ---------     ---------     ---------     ---------     ---------
<S>                                 <C>           <C>           <C>           <C>           <C>
Allowance for doubtful accounts
    Year ended
         December 31, 2000                 --     $  20,600            --            --     $  20,600
         December 31, 2001          $  20,600     $  43,300            --     $   4,200     $  59,700


Reserve for obsolete inventory
    Year ended
         December 31, 2000          $ 142,100     $  25,600                                 $ 167,700
         December 31, 2001          $ 167,700     $ 131,900            --     $  50,200     $ 249,400

</TABLE>


































                                       35