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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549




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FORM 10-Q

(Mark One)

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|ü |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended March 31, 2002

OR

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________________ to ___________________________

Commission File Number 0-19371

(PHARMCHEM LOGO)

(Exact name of registrant as specified in its charter)

|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or other jurisdiction
of incorporation or organization) |  | 77-0187280
(IRS Employer
Identification Number)

|                                                                              |  |                 
|----------------------------------------------------------------------------- |  | ----------------
|4600 Beach Street
Haltom City, Texas
(Address of principal executive offices) |  | 76137
(Zip Code)

Registrants telephone number, including area code: (817) 605-5300

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to
such filing requirements for the past 90 days. Yes ü No o

As of April 30, 2001, the registrant had outstanding 5,852,593 shares of
Common Stock, $0.001 par value.



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TABLE OF CONTENTS



|                              |                                                                                               |                                                                  |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- |  |  |  |  |  | 
|PART I. Financial Information
|                              | Item 1. Condensed Consolidated Financial Statements                                          
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                           
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                 
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                 
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS            
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|PART II. Other Information   
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|Signature                    



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PHARMCHEM, INC.

QUARTERLY REPORT ON FORM 10-Q

INDEX

|          |  |                                                                                                                                 |    |     
|--------- |  | ------------------------------------------------------------------------------------------------------------------------------- | -- | ----
|          |  |                                                                                                                                 |    | Page
|          |  |                                                                                                                                 |    |     
|Part I    |  | Financial Information                                                                                                           |    |     
|         
|Item 1.   |  | Condensed Consolidated Financial Statements                                                                                     |    | 3   
|         
|          |  | Condensed Consolidated Balance Sheets (unaudited) at
March 31, 2002 and December 31, 2001                                       |    | 4   
|         
|          |  | Condensed Consolidated Statements of Operations (unaudited) for the
Three Months ended March 31, 2002 and 2001                  |    | 5   
|         
|          |  | Condensed Consolidated Statements of Comprehensive Income (Loss)
(unaudited) for the Three Months ended March 31, 2002 and 2001 |    | 6   
|         
|          |  | Condensed Consolidated Statements of Cash Flows (unaudited)
for the Three Months ended March 31, 2002 and 2001                  |    | 7   
|         
|          |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                                                |    | 8   
|         
|Item 2.   |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations                                           |    | 11  
|         
|Part II   |  | Other Information                                                                                                               |    |     
|         
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                                                             |    | 18  
|         
|Item 6.   |  | Exhibits and Reports on Form 8-K                                                                                                |    | 18  
|         
|Signature |  |                                                                                                                                 | 18

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PART I. Financial Information




Item 1. Condensed Consolidated Financial Statements

The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in complete financial statements prepared in
accordance with accounting principles generally accepted in the United States
of America have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading. It is suggested
that the condensed consolidated financial statements be read in conjunction
with the consolidated financial statements and the notes thereto for the year
ended December 31, 2001 included in the Companys Annual Report on Form 10-K.

These financial statements have been prepared in all material respects in
conformity with the standards of accounting measurements set forth in
Accounting Principles Board Opinion No. 28, Interim Financial Reporting, and
the rules and regulations as specified by the Securities and Exchange
Commission and reflect all adjustments, consisting only of normal recurring
adjustments which, in the opinion of management, are necessary to summarize
fairly our consolidated financial position and the results of operations and
cash flows for the periods presented. The results of operations for such
interim periods are not necessarily indicative of the results to be expected
for the full year.

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PHARMCHEM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)
(In thousands)

|                                                 |                                                                                                                                       |                            |                                      |        |        |           |        |              |        |  |  | 
|------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------ | ------ | ------ | --------- | ------ | ------------ | ------ |  |  | 
|                                                 |                                                                                                                                       |                            |                                      |        |        | March 31, |        | December 31,
|                                                 |                                                                                                                                       |                            |                                      |        |        | 2002      |        | 2001        
|                                                 |                                                                                                                                       |                            |                                      |        |        |           |        |             
|                                                 |                                                                                                                                       |                            |                                      | ASSETS |        |           |        |              |        |  |  | 
|CURRENT ASSETS:                                  |                                                                                                                                       |                            |                                      |        |        |           |        |             
|                                                 | Cash and cash equivalents                                                                                                             |                            | $                                    | 7,265  |        |           | $      | 197          |       
|                                                 | Accounts receivable, net                                                                                                              |                            |                                      | 4,951  |        |           |        | 5,378        |       
|                                                 | Inventory                                                                                                                             |                            |                                      | 1,841  |        |           |        | 2,160        |       
|                                                 | Prepaid expenses                                                                                                                      |                            |                                      | 510    |        |           |        | 538          |       
|                                                 | Deferred income taxes                                                                                                                 |                            |                                      |       |        |           |        | 390          |       
|                                                 | Net current assets of discontinued operations                                                                                         |                            |                                      |       |        |           |        | 526          |       
|                                                 |                                                                                                                                       |                            |                                      |        |        |           |        |             
|                                                 |                                                                                                                                       | TOTAL CURRENT ASSETS       |                                      |        | 14,567 |           |        |              | 9,189  | 
|                                                 |                                                                                                                                       |                            |                                      |        |        |           |        |             
|PROPERTY AND EQUIPMENT, net                      |                                                                                                                                       |                            | 12,857                               |        |        |           | 12,915 |             
|OTHER ASSETS                                     |                                                                                                                                       |                            | 71                                   |        |        |           | 763    |             
|GOODWILL, net                                    |                                                                                                                                       |                            | 729                                  |        |        |           | 729    |             
|NET NONCURRENT ASSETS OF DISCONTINUED OPERATIONS |                                                                                                                                       |                            |                                     |        |        |           | 1,613  |             
|                                                 |                                                                                                                                       |                            |                                      |        |        |           |        |             
|                                                 |                                                                                                                                       | TOTAL ASSETS               |                                      | $      | 28,224 |           |        | $            | 25,209 | 
|                                                 |                                                                                                                                       |                            |                                      |        |        |           |        |             
|                                                 |                                                                                                                                       |                            | LIABILITIES AND STOCKHOLDERS EQUITY |        |        |           |        |              |        |  | 
|CURRENT LIABILITIES:                             |                                                                                                                                       |                            |                                      |        |        |           |        |             
|                                                 | Revolving line of credit                                                                                                              |                            | $                                    | 4,002  |        |           | $      | 4,544        |       
|                                                 | Current portion of long-term debt                                                                                                     |                            |                                      | 2,396  |        |           |        | 2,668        |       
|                                                 | Accounts payable                                                                                                                      |                            |                                      | 4,566  |        |           |        | 5,935        |       
|                                                 | Accrued compensation                                                                                                                  |                            |                                      | 749    |        |           |        | 635          |       
|                                                 | Accrued collectors and other liabilities                                                                                              |                            |                                      | 2,346  |        |           |        | 1,659        |       
|                                                 |                                                                                                                                       |                            |                                      |        |        |           |        |             
|                                                 |                                                                                                                                       | TOTAL CURRENT LIABILITIES  |                                      |        | 14,059 |           |        |              | 15,441 | 
|LONG-TERM DEBT, net of current portion           |                                                                                                                                       |                            | 2,822                                |        |        |           | 3,030  |             
|                                                 |                                                                                                                                       |                            |                                      |        |        |           |        |             
|                                                 |                                                                                                                                       | TOTAL LIABILITIES          |                                      |        | 16,881 |           |        |              | 18,471 | 
|                                                 |                                                                                                                                       |                            |                                      |        |        |           |        |             
|STOCKHOLDERS EQUITY:                            |                                                                                                                                       |                            |                                      |        |        |           |        |             
|                                                 | Common stock, $0.001 par value, 25,000 shares authorized,
5,853 shares issued and outstanding at March 31, 2002 and
December 31, 2001 |                            |                                      | 6      |        |           |        | 6            |       
|                                                 | Additional paid-in capital                                                                                                            |                            |                                      | 19,589 |        |           |        | 19,589       |       
|                                                 | Accumulated other comprehensive loss                                                                                                  |                            |                                      |       |        |           |        | (279         | )     
|                                                 | Accumulated deficit                                                                                                                   |                            |                                      | (8,252 | )      |           |        | (12,578      | )     
|                                                 |                                                                                                                                       |                            |                                      |        |        |           |        |             
|                                                 |                                                                                                                                       | TOTAL STOCKHOLDERS EQUITY |                                      |        | 11,343 |           |        |              | 6,738  | 
|                                                 |                                                                                                                                       |                            |                                      |        |        |           |        |             
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY       |                                                                                                                                       | $                          | 28,224                               |        |        | $         | 25,209 |             
|                                                 |                                                                                                                                       |                            |                                      |        |        |           |        |             

The accompanying notes are an integral part of these condensed consolidated financial statements.

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PHARMCHEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)
(In thousands, except per share amounts)


|                                                    |                                                                                                    |                          |       |                         |       |                    |       |       |       |   |       |  
|--------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ------------------------ | ----- | ----------------------- | ----- | ------------------ | ----- | ----- | ----- | - | ----- | -
|                                                    |                                                                                                    |                          |       |                         |       | Three Months Ended
|                                                    |                                                                                                    |                          |       |                         |       | March 31,         
|                                                    |                                                                                                    |                          |       |                         |       |                   
|                                                    |                                                                                                    |                          |       |                         |       | 2002               |       | 2001 
|                                                    |                                                                                                    |                          |       |                         |       |                    |       |      
|NET SALES                                           |                                                                                                    | $                        | 7,476 |                         |       | $                  | 9,634 |      
|COST OF SALES                                       |                                                                                                    |                          | 5,668 |                         |       |                    | 7,714 |      
|                                                    |                                                                                                    |                          |       |                         |       |                    |       |      
|GROSS PROFIT                                        |                                                                                                    |                          | 1,808 |                         |       |                    | 1,920 |      
|                                                    |                                                                                                    |                          |       |                         |       |                    |       |      
|OPERATING EXPENSES:                                 |                                                                                                    |                          |       |                         |       |                    |       |      
|                                                    | Selling, general and administrative                                                                |                          |       | 2,013                   |       |                    |       | 2,824 |      
|                                                    | Amortization of goodwill                                                                           |                          |       |                        |       |                    |       | 32    |      
|                                                    |                                                                                                    |                          |       |                         |       |                    |       |      
|                                                    |                                                                                                    | Total operating expenses |       |                         | 2,013 |                    |       |       | 2,856 |  
|                                                    |                                                                                                    |                          |       |                         |       |                    |       |      
|LOSS FROM OPERATIONS                                |                                                                                                    |                          | (205  | )                       |       |                    | (936  | )    
|Interest expense                                    |                                                                                                    |                          | 119   |                         |       |                    | 69    |      
|Other expense (income)                              |                                                                                                    |                          | 68    |                         |       |                    | (13   | )    
|                                                    |                                                                                                    |                          |       |                         |       |                    |       |      
|                                                    |                                                                                                    |                          | 187   |                         |       |                    | 56    |      
|                                                    |                                                                                                    |                          |       |                         |       |                    |       |      
|LOSS FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES |                                                                                                    |                          | (392  | )                       |       |                    | (992  | )    
|BENEFIT FROM INCOME TAXES                           |                                                                                                    |                          | (82   | )                       |       |                    |      |      
|                                                    |                                                                                                    |                          |       |                         |       |                    |       |      
|LOSS FROM CONTINUING OPERATIONS                     |                                                                                                    |                          | (310  | )                       |       |                    | (992  | )    
|DISCONTINUED OPERATIONS:                            |                                                                                                    |                          |       |                         |       |                    |       |      
|                                                    | Income from discontinued operations, net of applicable
income taxes of $184 and $147, respectively |                          |       | 359                     |       |                    |       | 292   |      
|                                                    | Gain on disposition, net of applicable income taxes of
$1,116                                      |                          |       | 4,277                   |       |                    |       |      |      
|                                                    |                                                                                                    |                          |       |                         |       |                    |       |      
|NET INCOME (LOSS)                                   |                                                                                                    | $                        | 4,326 |                         |       | $                  | (700  | )    
|                                                    |                                                                                                    |                          |       |                         |       |                    |       |      
|NET INCOME (LOSS) PER COMMON SHARE:                 |                                                                                                    |                          |       |                         |       |                    |       |      
|                                                    | BASIC:                                                                                             | Continuing operations    |       | $                       | (0.05 | )                  |       | $     | (0.17 | )
|                                                    |                                                                                                    |                          |       | Discontinued operations |       |                    | 0.79  |       |       |   | 0.05  |  
|                                                    |                                                                                                    |                          |       |                         |       |                    |       |      
|                                                    |                                                                                                    |                          |       | Net income (loss)       |       | $                  | 0.74  |       |       | $ | (0.12 | )
|                                                    |                                                                                                    |                          |       |                         |       |                    |       |      
|                                                    | DILUTED:                                                                                           | Continuing operations    |       | $                       | (0.05 | )                  |       | $     | (0.17 | )
|                                                    |                                                                                                    |                          |       | Discontinued operations |       |                    | 0.79  |       |       |   | 0.05  |  
|                                                    |                                                                                                    |                          |       |                         |       |                    |       |      
|                                                    |                                                                                                    |                          |       | Net income (loss)       |       | $                  | 0.74  |       |       | $ | (0.12 | )
|                                                    |                                                                                                    |                          |       |                         |       |                    |       |      
|WEIGHTED AVERAGE SHARES OUTSTANDING:                |                                                                                                    |                          |       |                         |       |                    |       |      
|                                                    | BASIC                                                                                              |                          |       | 5,853                   |       |                    |       | 5,847 |      
|                                                    |                                                                                                    |                          |       |                         |       |                    |       |      
|                                                    | DILUTED                                                                                            |                          |       | 5,862                   |       |                    |       | 5,847 |      
|                                                    |                                                                                                    |                          |       |                         |       |                    |       |      

The accompanying notes are an integral part of these condensed consolidated financial statements.

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PHARMCHEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)
(In thousands)


|                            |                                         |   |                    |     |      |   |      |      |  
|--------------------------- | --------------------------------------- | - | ------------------ | --- | ---- | - | ---- | ---- | -
|                            |                                         |   | Three Months Ended
|                            |                                         |   | March 31,         
|                            |                                         |   |                   
|                            |                                         |   | 2002               |     | 2001
|                            |                                         |   |                    |     |     
|NET INCOME (LOSS)           |                                         | $ | 4,326              |     |      | $ | (700 | )   
|OTHER COMPREHENSIVE LOSS:   |                                         |   |                    |     |      |   |      |     
|                            | Foreign currency translation            |   |                    | (53 | )    |   |      | (136 | )
|                            | Realized foreign currency exchange loss |   |                    | 53  |      |   |      |     |  
|                            |                                         |   |                    |     |      |   |      |     
|                            |                                         |   |                   |     |      |   | (136 | )   
|                            |                                         |   |                    |     |      |   |      |     
|COMPREHENSIVE INCOME (LOSS) |                                         | $ | 4,326              |     |      | $ | (836 | )   
|                            |                                         |   |                    |     |      |   |      |     

The accompanying notes are an integral part of these condensed consolidated financial statements.

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PHARMCHEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

|                                                     |                                                                                                    |                                                          |                                                       |                                                                              |        |                    |        |      |       |        |        |  
|---------------------------------------------------- | -------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ----------------------------------------------------- | ---------------------------------------------------------------------------- | ------ | ------------------ | ------ | ---- | ----- | ------ | ------ | -
|                                                     |                                                                                                    |                                                          |                                                       |                                                                              |        | Three Months Ended
|                                                     |                                                                                                    |                                                          |                                                       |                                                                              |        | March 31,         
|                                                     |                                                                                                    |                                                          |                                                       |                                                                              |        |                   
|                                                     |                                                                                                    |                                                          |                                                       |                                                                              |        | 2002               |        | 2001
|                                                     |                                                                                                    |                                                          |                                                       |                                                                              |        |                    |        |     
|CASH FLOWS FROM OPERATING ACTIVITIES                 |                                                                                                    |                                                          |                                                       |                                                                              |        |                    |        |     
|                                                     | Net income (loss)                                                                                  |                                                          | $                                                     | 4,326                                                                        |        |                    | $      | (700 | )    
|                                                     | Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities: |                                                          |                                                       |                                                                              |        |                    |        |      |      
|                                                     |                                                                                                    |                                                          | Income from discontinued operations                   |                                                                              |        | (359               | )      |      |       | (292   | )     
|                                                     |                                                                                                    |                                                          | Depreciation and amortization                         |                                                                              |        | 540                |        |      |       | 502    |       
|                                                     |                                                                                                    |                                                          | Provision for doubtful accounts                       |                                                                              |        | 118                |        |      |       | 15     |       
|                                                     |                                                                                                    |                                                          | Gain on sale of disposition of subsidiary, net of tax |                                                                              |        | (4,277             | )      |      |       |       |       
|                                                     |                                                                                                    |                                                          | Deferred income taxes                                 |                                                                              |        |                   |        |      |       | (4     | )     
|                                                     |                                                                                                    |                                                          | Deferred gain on sale of computer software            |                                                                              |        |                   |        |      |       | (6     | )     
|                                                     |                                                                                                    |                                                          | Amortization of discount on subordinated debt         |                                                                              |        | 43                 |        |      |       |       |       
|                                                     | Changes in operating assets and liabilities                                                        |                                                          |                                                       |                                                                              |        |                    |        |      |      
|                                                     |                                                                                                    |                                                          | Accounts receivable                                   |                                                                              |        | 309                |        |      |       | 455    |       
|                                                     |                                                                                                    |                                                          | Inventory                                             |                                                                              |        | 319                |        |      |       | (73    | )     
|                                                     |                                                                                                    |                                                          | Prepaids and other current assets                     |                                                                              |        | 28                 |        |      |       | (93    | )     
|                                                     |                                                                                                    |                                                          | Other assets                                          |                                                                              |        | 2                  |        |      |       | (142   | )     
|                                                     |                                                                                                    |                                                          | Accounts payable and other accrued liabilities        |                                                                              |        | (568               | )      |      |       | (1,323 | )     
|                                                     |                                                                                                    |                                                          | Other noncurrent liabilities                          |                                                                              |        |                   |        |      |       | 1      |       
|                                                     |                                                                                                    |                                                          |                                                       |                                                                              |        |                    |        |     
|                                                     |                                                                                                    |                                                          |                                                       | Net cash provided by (used in) operating activities of continuing
operations |        |                    | 481    |      |       |        | (1,660 | )
|                                                     |                                                                                                    |                                                          |                                                       |                                                                              |        |                    |        |     
|                                                     |                                                                                                    |                                                          |                                                       | Net cash provided by operating activities of discontinued operations         |        |                    | 161    |      |       |        | 150    |  
|                                                     |                                                                                                    |                                                          |                                                       |                                                                              |        |                    |        |     
|CASH FLOWS FROM INVESTING ACTIVITIES                 |                                                                                                    |                                                          |                                                       |                                                                              |        |                    |        |     
|                                                     |                                                                                                    | Purchases of property and equipment                      |                                                       |                                                                              | (482   | )                  |        |      | (867  | )     
|                                                     |                                                                                                    | Proceeds from sale of discontinued operations            |                                                       |                                                                              | 10,000 |                    |        |      |      |       
|                                                     |                                                                                                    |                                                          |                                                       |                                                                              |        |                    |        |     
|                                                     |                                                                                                    |                                                          |                                                       | Net cash provided by (used in) investing activities of continuing
operations |        |                    | 9,518  |      |       |        | (867   | )
|                                                     |                                                                                                    |                                                          |                                                       |                                                                              |        |                    |        |     
|                                                     |                                                                                                    |                                                          |                                                       | Net cash used in investing activities of discontinued operations             |        |                    | (40    | )    |       |        |       |  
|                                                     |                                                                                                    |                                                          |                                                       |                                                                              |        |                    |        |     
|CASH FLOWS FROM FINANCING ACTIVITIES                 |                                                                                                    |                                                          |                                                       |                                                                              |        |                    |        |     
|                                                     |                                                                                                    | Principal payments on long-term debt                     |                                                       |                                                                              | (523   | )                  |        |      | (583  | )     
|                                                     |                                                                                                    | Proceeds from lease financing                            |                                                       |                                                                              |       |                    |        |      | 2,363 |       
|                                                     |                                                                                                    | Borrowings (repayments) on revolving line of credit, net |                                                       |                                                                              | (542   | )                  |        |      | 724   |       
|                                                     |                                                                                                    |                                                          |                                                       |                                                                              |        |                    |        |     
|                                                     |                                                                                                    |                                                          |                                                       | Net cash provided by (used in) financing activities of continuing
operations |        |                    | (1,065 | )    |       |        | 2,504  |  
|                                                     |                                                                                                    |                                                          |                                                       |                                                                              |        |                    |        |     
|                                                     |                                                                                                    |                                                          |                                                       | Net cash used in financing activities of discontinued operations             |        |                    | (1,987 | )    |       |        |       |  
|                                                     |                                                                                                    |                                                          |                                                       |                                                                              |        |                    |        |     
|EFFECT OF EXCHANGE RATE CHANGES                      |                                                                                                    |                                                          |                                                      |                                                                              |        |                    | (136   | )   
|                                                     |                                                                                                    |                                                          |                                                       |                                                                              |        |                    |        |     
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |                                                                                                    |                                                          | 7,068                                                 |                                                                              |        |                    | (9     | )   
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD     |                                                                                                    |                                                          | 197                                                   |                                                                              |        |                    | 22     |     
|                                                     |                                                                                                    |                                                          |                                                       |                                                                              |        |                    |        |     
|CASH AND CASH EQUIVALENTS AT END OF PERIOD           |                                                                                                    | $                                                        | 7,265                                                 |                                                                              |        | $                  | 13     |     
|                                                     |                                                                                                    |                                                          |                                                       |                                                                              |        |                    |        |     

The accompanying notes are an integral part of these condensed consolidated financial statements.

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PHARMCHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Summary of Significant Accounting Policies

Basis of Presentation, General and Business

PharmChem, Inc. is a leading independent laboratory that provides
integrated drug testing services. Our customers include private and public
employers, criminal justice agencies and drug treatment programs in the United
States who seek to detect and deter the use of illegal drugs and alcohol. The
consolidated financial statements include the accounts of PharmChem and
Medscreen Limited (Medscreen), a United Kingdom company. Medscreen was sold
on March 25, 2002 and, as a result, is presented as discontinued operations in
the accompanying financial statements for all periods presented. Medscreens
financial statements were translated based on the month-end spot rate for the
balance sheets and a weighted average of the spot rates for the statements of
operations.

The accompanying condensed consolidated financial statements are prepared
in accordance with the instructions to Form 10-Q, are unaudited and do not
include all the information and disclosures required by accounting principles
generally accepted in the United States of America for complete financial
statements. All adjustments that, in the opinion of management, are necessary
for a fair presentation of the results of operations for the interim periods
have been made and are of a recurring nature unless otherwise disclosed herein.
The results of operations for such interim periods are not necessarily
indicative of results of operations for a full year.

In the first quarter of 2002, we implemented Financial Accounting
Standards Board Statement No. 142 (SFAS 142), Goodwill and Other Intangible
Assets.SFAS 142 requires goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS 142. This Statement further
requires intangible assets with definite useful lives to be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.As permitted by SFAS 142, we
will implement the impairment provisions in the second quarter of 2002 and the
adoption of the impairment provisions of SFAS 142 is not expected to have a
material effect on our consolidated financial position or results of
operations. On an ongoing basis, the amortization of goodwill noted in the
Condensed Consolidated Statements of Operations was eliminated beginning
January 1, 2002. The following table shows the Companys net loss excluding
the goodwill amortization in 2001 (in thousands, except per share amounts):

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|                                             |                                                                    |   |                              |       |      |   |      |       |  
|-------------------------------------------- | ------------------------------------------------------------------ | - | ---------------------------- | ----- | ---- | - | ---- | ----- | -
|                                             |                                                                    |   | Three Months Ended March 31,
|                                             |                                                                    |   |                             
|                                             |                                                                    |   | 2002                         |       | 2001
|                                             |                                                                    |   |                              |       |     
|Reported net loss from continuing operations |                                                                    | $ | (310                         | )     |      | $ | (992 | )    
|Amortization of PharmChem, Inc. goodwill     |                                                                    |   |                             |       |      |   | 32   |      
|                                             |                                                                    |   |                              |       |      |   |      |      
|                                             | Adjusted net loss from continuing operations                       |   |                              | (310  | )    |   |      | (960  | )
|                                             |                                                                    |   |                              |       |      |   |      |      
|Income from discontinued operations          |                                                                    |   | 359                          |       |      |   | 292  |      
|Amortization of Medscreen, Ltd. goodwill     |                                                                    |   |                             |       |      |   | 14   |      
|                                             |                                                                    |   |                              |       |      |   |      |      
|                                             | Adjusted net income from discontinued operations                   |   |                              | 359   |      |   |      | 306   |  
|                                             |                                                                    |   |                              |       |      |   |      |      
|Gain from sale of discontinued operations    |                                                                    |   | 4,277                        |       |      |   |     |      
|                                             |                                                                    |   |                              |       |      |   |      |      
|                                             | Adjusted net income (loss)                                         |   | $                            | 4,326 |      |   | $    | (654  | )
|                                             |                                                                    |   |                              |       |      |   |      |      
|                                             | Adjusted net loss from continuing operations per
share             |   | $                            | (0.05 | )    |   | $    | (0.16 | )
|                                             |                                                                    |   |                              |       |      |   |      |      
|                                             | Adjusted net income from discontinued operations per
diluted share |   | $                            | 0.06  |      |   | $    | 0.05  |  
|                                             |                                                                    |   |                              |       |      |   |      |      
|                                             | Adjusted net income (loss) per diluted share                       |   | $                            | 0.74  |      |   | $    | (0.11 | )
|                                             |                                                                    |   |                              |       |      |   |      |      

2. Discontinued Operations

On March 25, 2002, we completed the sale of Medscreen for approximately
$10.0 million. In connection with the sale, Medscreens two loan facilities
totaling approximately $1,663,000 were fully repaid. Closing and other
settlement costs totaled approximately $324,000 and approximately $929,000 was
used to repay a portion of our revolving line of credit. In April 2002, we
fully repaid the term loan with our primary bank and made further repayments on
our revolving line of credit (refer to Note 5, Debt). The remainder of the
proceeds will be used for general corporate purposes.

Net sales of the discontinued operations were $1,949,000 and $1,916,000
for the three months ended March 31, 2002 and March 31, 2001, respectively. We
recorded a gain on the sale of Medscreen of $0.73 per diluted share.

3. Net Income (Loss) per Share

We compute and disclose our income (loss) per share in accordance with
Statement of Financial Accounting Standards No. 128, Earnings Per Share,
which requires the presentation of basic and diluted income per share. Basic
income (loss) per share is calculated using the weighted average number of
common shares outstanding during the period. Diluted income per share is
calculated using the weighted average number of common shares and dilutive
potential common shares outstanding during the period. Dilutive potential
common shares represent shares issuable upon the exercise of outstanding
options and are calculated using the treasury stock method.

Options to purchase 982,000 shares of our common stock for the three
months ended March 31, 2002, were not included in the computation of diluted
income per share because their exercise prices were greater than the average
market price of our common stock of $1.06. Options to purchase 1,067,000
shares of our common stock for the three months ended March 31, 2001, were not
included in the computation of diluted income (loss) per share because their
effect would have been anti-dilutive. Weighted average dilutive options of
9,000 were used in the computation of dilutive income per share for the three
month period ended March 31, 2002.

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4. Inventory

Inventory includes laboratory materials, collection materials and products
and is stated at the lower of cost or market. Cost is determined using standard
costs, including freight, that approximate actual costs on a first-in,
first-out basis. Inventory consisted of the following at March 31, 2002 and
December 31, 2001 (in thousands):

|                     |  |      |       |      |  |   |       | 
|-------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                     |  | 2002 |       | 2001
|                     |  |      |       |     
|Laboratory materials |  | $    | 301   |      |  | $ | 294   | 
|Collection materials |  |      | 881   |      |  |   | 1,031 | 
|Products             |  |      | 659   |      |  |   | 835   | 
|                     |  |      |       |      |  |   |       | 
|                     |  | $    | 1,841 |      |  | $ | 2,160 | 
|                     |  |      |       |      |  |   |       | 

5. Debt

Our revolving credit agreement, term note, subordinated debt and
capitalized lease obligations at March 31, 2002 and December 31, 2001 consisted
of the following (in thousands):

|                                                                                                                                                                                              |  |      |        |      |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                                                                                                                                                                              |  | 2002 |        | 2001
|                                                                                                                                                                                              |  |      |        |     
|Revolving credit agreement pursuant to a revolving loan agreement                                                                                                                             |  | $    | 4,002  |      |  | $ | 4,544  |  
|Term installment note (repaid in April 2002)                                                                                                                                                  |  |      | 989    |      |  |   | 1,103  |  
|Subordinated debt, net of discount of $259                                                                                                                                                    |  |      | 1,241  |      |  |   | 1,198  |  
|Obligations under capitalized leases, due in monthly installments
through 2005, secured by laboratory equipment, office
equipment
and computer software, interest rates ranging from 8% to 9% |  |      | 2,988  |      |  |   | 3,397  |  
|                                                                                                                                                                                              |  |      |        |      |  |   |        |  
|                                                                                                                                                                                              |  |      | 9,220  |      |  |   | 10,242 |  
|Less: current portion and revolving line of credit                                                                                                                                            |  |      | (6,398 | )    |  |   | (7,212 | )
|                                                                                                                                                                                              |  |      |        |      |  |   |        |  
|Long-term portion                                                                                                                                                                             |  | $    | 2,822  |      |  | $ | 3,030  |  
|                                                                                                                                                                                              |  |      |        |      |  |   |        |  

In connection with the sale of Medscreen (refer to Note 2, Discontinued
Operations), on March 1, 2002, we entered into an Amendment and Forbearance
Agreement (Amendment) relating to our Loan and Security Agreement (Credit
Agreement) with our bank. This Amendment provided for an overadvance cash
advance up to a maximum of $1,500,000 at a rate equal to the banks prime rate
plus two percent. As collateral for the overadvance, we pledged 600 shares of
the capital stock of Medscreen. The Amendment provided that the overadvance
would mature on the date the proceeds were received from the sale of Medscreen.
In accordance with the Amendment, a portion of the proceeds from the sale of
Medscreen were used to fully repay our term installment note in April 2002.

The Credit Agreement is secured by a lien on a significant portion of our
assets. The Credit Agreement contains certain financial covenants, which,
among others, require PharmChem to maintain certain ratios of working capital
and net worth. The Credit Agreement permits up to $2,000,000 of the revolving
line of credit to be used to repurchase our common stock under our common stock
repurchase program and permits the declaration and distribution of a dividend
in connection with our stockholder rights plan.

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The Credit Agreement was amended at various times during 2001 to change
the revolving maturity date to May 31, 2002, reduce the interest rate to the
banks prime rate (4.75% at March 31, 2002), reduce the maximum line of credit
to $5,750,000, reduce the commitment fee to 0.25% of the maximum line of
credit, modify our existing covenants and provide for the issuance of
subordinated debt. As of March 31, 2002, the calculated maximum that could be
borrowed and the amount outstanding under the Credit Agreement were $3,928,000
and $4,002,000, respectively. Our bank has waived this temporary overadvance
of $74,000 as of March 31, 2002. We were in compliance with our covenants as
of March 31, 2002. We are currently in negotiations with the bank to renew our
existing credit agreement.

6. Restructuring Charge

During the second quarter of 2001, our Board of Directors approved a plan
to close our Menlo Park, California corporate headquarters, main laboratory and
distribution center and relocate these operations to Texas. These expenses
were accrued and recorded in continuing operations for the three months ended
June 30, 2001. Detail of the payment activity and ending accrual balance
related to the restructuring is presented in the following table (in
thousands):

|                               |       |   |                   |     |             |   |                |     |         |   |     |     | 
|------------------------------ | ----- | - | ----------------- | --- | ----------- | - | -------------- | --- | ------- | - | --- | --- | 
|                               |       |   | Accrual           |     |             |   |                |     | Accrual
|                               |       |   | As of             |     | 1st Qtr '02 |   | As of         
|                               |       |   | December 31, 2001 |     | Payments    |   | March 31, 2002
|                               |       |   |                   |     |             |   |               
|Severance and related
benefits |       | $ | 74                |     |             | $ | (26            | )   |         | $ | 48  |    
|Clean-up and remediation       |       |   | 213               |     |             |   |               |     |         |   | 213 |    
|Repairs                        |       |   | 9                 |     |             |   |               |     |         |   | 9   |    
|Legal and other                |       |   | 67                |     |             |   | (2             | )   |         |   | 65  |    
|                               |       |   |                   |     |             |   |                |     |         |   |     |    
|                               | Total |   | $                 | 363 |             |   | $              | (28 | )       |   | $   | 335 | 
|                               |       |   |                   |     |             |   |                |     |         |   |     |    

The restructuring plan was designed to provide for costs associated with
leaving our facilities in Menlo Park, California. The lease on our main Menlo
Park facility terminated on June 1, 2001 and the restructuring expenses
represent estimated and actual costs related to workforce reductions, clean-up,
repairs and legal services. As part of the workforce reduction, we recorded
severance and related fringe benefits costs for approximately 160 employees
from operations and administration, of which 145 employees were terminated as
of March 31, 2002. The clean-up and remediation includes removal of a
previously unknown storage vault and potential restoration of the facility per
the lease agreement. Repairs includes sewer line repair or replacement as
contractually provided for in the lease agreement. In addition, we expect to
continue to incur legal and other fees related to interpretation of the leases
contractual obligations. The accrual balance of $335,000 is classified as a
component in Accrued collectors and other liabilities on the balance sheet.
Costs for relocation were expensed as incurred.




Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

Managements Discussion and Analysis of Financial Condition and Results
of Operations contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act

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of 1934 and Section 27A of the
Securities Act of 1933, which are subject to the safe harbor created by these
Sections. Our actual future results could differ materially from those
projected in the forward-looking statements. Some factors which could cause
future actual results to differ materially from our recent results and those
projected in the forward-looking statements are described in our Annual Report
on Form 10-K for the year ended December 31, 2001. We assume no obligation to
update the forward-looking statements or such factors.

Recent Events

During 2001, we relocated our corporate headquarters, distribution center
and laboratory operations from the Silicon Valley area of Northern California
to a new facility in Haltom City, Texas. We vacated our primary Menlo Park,
California facility in May 2001 and temporarily moved to our existing facility
in Fort Worth, Texas until construction was completed at the new Haltom City
facility. During the process of relocating to Texas, we incurred significant
costs that have been financed through a combination of internal operations,
increased borrowing under our existing and new credit facilities and a
sale-leaseback transaction. We believe these costs were of a nonrecurring
nature and principally relate to the period prior to occupying our new Haltom
City facility. Our laboratory operations and distribution center relocated to
the Haltom City facility in September and October, respectively. To mitigate
further operating losses, we implemented a cost containment program in the
fourth quarter of 2001. This cost containment program included two rounds of
layoffs whereby our employee population has decreased approximately 30% from
mid-2001 levels, significant reductions in discretionary spending, including
travel, renegotiations with certain suppliers to secure more favorable pricing
of materials and services and closure of our satellite laboratory in Menlo Park
that performed methadone drug testing.

We were not in compliance with certain covenants under our credit facility
with our primary bank for the last three quarterly periods of 2001 due
principally to the restructuring charge and nonrecurring expenses associated
with the relocation to Texas, the slowdown of the US economy throughout 2001
and the September 11, 2001 event that adversely affected the volume of
pre-employment drug testing. In July, our bank waived the covenant violations
for the quarter ended June 30, 2001. As further discussed in Note 2,
Discontinued Operations, in the accompanying Notes to Condensed Consolidated
Financial Statements, in March 2002 we completed the sale of Medscreen for
approximately $10,000,000 in cash. In connection with the sale of Medscreen,
we entered into an Amendment and Forbearance Agreement with our bank and the
bank waived covenant violations for the quarterly periods ended September 30,
2001 and December 31, 2001. We were in compliance with our covenants as of
March 31, 2002. A portion of the sale proceeds were used to repay debt and the
remainder is expected to be sufficient to fund the general corporate needs of
the US operations for at least the next year.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of
operations are based upon PharmChems consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these
financial statements requires us 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

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an on-going basis, we
evaluate these estimates, including those related to bad debts, inventories,
intangible assets, restructuring accruals, contingencies, revenue recognition,
specimen collector accruals and litigation. We base our 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.

PharmChem believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of the
consolidated financial statements. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. We estimate the quantity and value of
our unused specimen collection kit inventory existing at our customer and
contractor field locations using a model that considers actual shipments to
these locations, specimens returned to our laboratory for processing,
replacement costs and estimates of shrinkage. If the estimated value of this
inventory decreases beyond our expectations of recovery, additional inventory
write-downs may be required.

Future adverse changes in market conditions or poor operating results of
our operations could result in losses or an inability to recover the carrying
value of the related goodwill, thereby possibly requiring an impairment charge
in the future. Revenue is recognized upon the communication of results from
laboratory analysis of specimens submitted by our customers, at the time of
shipment for products and at the completion of rendered services. We accrue
expected payments to specimen collectors who perform specimen collection
services on behalf of our managed customers. The specimen collector accrual
calculation is based on a combination of our reporting of results from
laboratory analysis of specimens and cost information maintained in our
internal systems for each specimen collector. We include in the accrual
estimates of retroactive rate increases and services performed but not reported
to customers.

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Results of Operations

Refer to Note 2, Discontinued Operations, to the accompanying Notes to
Condensed Consolidated Financial Statements for further information on the
recently completed sale of Medscreen in March 2002. The following table sets
forth for the periods indicated certain financial data (dollars in thousands):

|                                                    |                                                                     |                          |       |                              |       |      |       |       |       |      |      |                            |       |  |       |      |       | 
|--------------------------------------------------- | ------------------------------------------------------------------- | ------------------------ | ----- | ---------------------------- | ----- | ---- | ----- | ----- | ----- | ---- | ---- | -------------------------- | ----- |  | ----- | ---- | ----- | 
|                                                    |                                                                     |                          |       | Three Months Ended March 31,
|                                                    |                                                                     |                          |       |                             
|                                                    |                                                                     |                          |       | 2002                         |       | 2001 |       | 2002  |       | 2001
|                                                    |                                                                     |                          |       |                              |       |      |       |       |       |     
|                                                    |                                                                     |                          |       |                              |       |      |       |       |       |      |      | (As a percentage of sales)
|NET SALES:                                          |                                                                     |                          |       |                              |       |      |       |       |       |      |      |                            |       |  |       |     
|                                                    | Workplace employers analysis                                        |                          | $     | 2,240                        |       |      | $     | 3,480 |       |      |      | 30.0                       | %     |  |       | 36.1 | %    
|                                                    | Criminal justice agencies analysis                                  |                          |       | 3,888                        |       |      |       | 4,445 |       |      |      | 52.0                       |       |  |       | 46.1 |      
|                                                    | Drug rehabilitation programs analysis                               |                          |       | 45                           |       |      |       | 290   |       |      |      | 0.6                        |       |  |       | 3.0  |      
|                                                    | Products and other                                                  |                          |       | 1,303                        |       |      |       | 1,419 |       |      |      | 17.4                       |       |  |       | 14.8 |      
|                                                    |                                                                     |                          |       |                              |       |      |       |       |       |      |      |                            |       |  |       |     
|                                                    |                                                                     | Total net sales          |       |                              | 7,476 |      |       |       | 9,634 |      |      |                            | 100.0 |  |       |      | 100.0 | 
|COST OF SALES                                       |                                                                     |                          | 5,668 |                              |       |      | 7,714 |       |       |      | 75.8 |                            |       |  | 80.1  |     
|                                                    |                                                                     |                          |       |                              |       |      |       |       |       |      |      |                            |       |  |       |     
|GROSS PROFIT                                        |                                                                     |                          | 1,808 |                              |       |      | 1,920 |       |       |      | 24.2 |                            |       |  | 19.9  |     
|                                                    |                                                                     |                          |       |                              |       |      |       |       |       |      |      |                            |       |  |       |     
|OPERATING EXPENSES:                                 |                                                                     |                          |       |                              |       |      |       |       |       |      |      |                            |       |  |       |     
|                                                    | Selling, general and administrative                                 |                          |       | 2,013                        |       |      |       | 2,824 |       |      |      | 26.9                       |       |  |       | 29.3 |      
|                                                    | Amortization of goodwill                                            |                          |       |                             |       |      |       | 32    |       |      |      |                           |       |  |       | 0.3  |      
|                                                    |                                                                     |                          |       |                              |       |      |       |       |       |      |      |                            |       |  |       |     
|                                                    |                                                                     | Total operating expenses |       |                              | 2,013 |      |       |       | 2,856 |      |      |                            | 26.9  |  |       |      | 29.6  | 
|                                                    |                                                                     |                          |       |                              |       |      |       |       |       |      |      |                            |       |  |       |     
|LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES |                                                                     |                          | (205  | )                            |       |      | (936  | )     |       |      | (2.7 | )                          |       |  | (9.7  | )   
|OTHER EXPENSE, net                                  |                                                                     |                          | 187   |                              |       |      | 56    |       |       |      | 2.5  |                            |       |  | 0.6   |     
|BENEFIT FROM INCOME TAXES                           |                                                                     |                          | (82   | )                            |       |      |      |       |       |      | (1.1 | )                          |       |  |      |     
|                                                    |                                                                     |                          |       |                              |       |      |       |       |       |      |      |                            |       |  |       |     
|LOSS FROM CONTINUING OPERATIONS                     |                                                                     |                          | (310  | )                            |       |      | (992  | )     |       |      | (4.1 | )                          |       |  | (10.3 | )   
|DISCONTINUED OPERATIONS:                            |                                                                     |                          |       |                              |       |      |       |       |       |      |      |                            |       |  |       |     
|                                                    | Income from discontinued operations,
net of applicable income taxes |                          |       | 359                          |       |      |       | 292   |       |      |      | 4.8                        |       |  |       | 3.0  |      
|                                                    | Gain on sale of disposition, net of
applicable income taxes         |                          |       | 4,277                        |       |      |       |      |       |      |      | 57.2                       |       |  |       |     |      
|                                                    |                                                                     |                          |       |                              |       |      |       |       |       |      |      |                            |       |  |       |     
|NET INCOME (LOSS)                                   |                                                                     | $                        | 4,326 |                              |       | $    | (700  | )     |       |      | 57.9 | %                          |       |  | (7.3  | )%  
|                                                    |                                                                     |                          |       |                              |       |      |       |       |       |      |      |                            |       |  |       |     

Net salesfor the three months ended March 31, 2002 decreased $2,158,000
(22.4%) to $7,746,000 in 2002 from $9,634,000 in 2001. We recorded $2,042,000
(24.9%) lower laboratory analysis sales across all customer classes and
$261,000 (28.6%) lower product sales, which more than offset a $145,000 (26.3%)
increase in non-laboratory services. Specimen (including product related
analyses) volume decreased 26.8% due to the continued slowdown in the US
economy. The decrease in laboratory service sales also reflects the November
2001 shutdown of our California thin layer chromatography business that
serviced drug rehabilitation customers. Average selling prices for laboratory
analyses (including product related analyses) increased 2.6% principally as a
result of a higher contribution from managed customers.

Cost of salesfor the three months ended March 31, 2002 decreased
$2,046,000 (26.5%) to $5,668,000 in 2002 from $7,714,000 in 2001. The lower
specimen volume in 2002 resulted in cost

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decreases in labor, inventory usages, transportation and specimen collection
fees which more than offset a $105,000 increase in depreciation from equipment,
systems and the new facility being placed into service. The prior years
results include $476,000 of nonrecurring costs related to the logistics of
shutting down our main laboratory in California and transferring the operations
to Texas, as part of the relocation of our Company to Haltom City, Texas. Cost
of sales as a percentage of net sales decreased to 75.8% in 2002 from 80.1% in
2001. Gross profit as a percentage of net sales increased to 24.2% in 2002
from 19.9% in 2001.

Selling, General & Administrative (SG&A)expenses for the three months
ended March 31, 2002 decreased $811,000 (28.7%) to $2,013,000 in 2002 from
$2,824,000 in 2001. The decrease partially reflects lower labor and fringe
benefit costs, travel, consulting and depreciation expense resulting from a
cost containment program implemented in the latter part of 2001. In addition,
the prior year included $85,000 of nonrecurring costs associated with the
relocation of our Company to Texas. SG&A expenses as a percentage of net sales
decreased to 26.9% in 2002 from 29.3% in 2001.

Discontinued Operationsfor the three months ended March 31, 2002
generated income of $4,636,000 (or $0.79 per diluted share), including $359,000
(or $0.06 per diluted share) from operations and a gain on the disposition of
$4,277,000 (or $0.73 per diluted share). Income from discontinued operations
was $292,000 in 2001 (or $0.05 per diluted share).

Net incomefor the three months ended March 31, 2002 was $4,326,000 or
$0.74 per diluted common share compared to a net loss of $700,000 or $0.12 per
common share in 2001. For continuing operations, the net loss was $310,000 or
$0.05 per share in 2002 and $992,000 or $0.17 per share in 2001. Excluding the
$561,000 of nonrecurring expenses associated with the Companys relocation and
$32,000 of goodwill amortization, the loss from continuing operations in 2001
would have been $399,000 or $0.07 per share.

Liquidity and Capital Resources

Our continuing operations during the three month period ended March 31
provided cash of $481,000 and used cash of $1,660,000 in 2002 and 2001,
respectively. The increase in cash flow from operations between 2002 and 2001
principally reflects a lower loss from continuing operations in 2002 and
improved working capital management. The cash used in 2001 reflects expenses
related to the relocation of the Companys operations to Texas from California.
As of March 31, 2002, we had $7,265,000 in cash and cash equivalents. During
the three months ended March 31, 2002, we used approximately $482,000 in cash
to purchase property and equipment, principally for information systems
development and facility-related expenditures for our new Haltom City, Texas
location.

In connection with the sale of Medscreen (refer to Note 2, Discontinued
Operations), on March 1, 2002, we entered into an Amendment and Forbearance
Agreement (Amendment) relating to our Loan and Security Agreement (Credit
Agreement) with our bank. This Amendment provided for an overadvance cash
advance up to a maximum of $1,500,000 at a rate equal to the banks prime rate
plus two percent. As collateral for the overadvance, we pledged 600 shares of
the capital stock of Medscreen. The Amendment provided that the overadvance
would mature on the date the proceeds were received from the sale of Medscreen.
In accordance with the Amendment, a portion of the proceeds from the sale of
Medscreen were used to fully repay our term installment note in April 2002.

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The Credit Agreement is secured by a lien on a significant portion of our
assets. The Credit Agreement contains certain financial covenants, which,
among others, require PharmChem to maintain certain ratios of working capital
and net worth. The Credit Agreement permits up to $2,000,000 of the revolving
line of credit to be used to repurchase our common stock under our common stock
repurchase program and permits the declaration and distribution of a dividend
in connection with our stockholder rights plan.

The Credit Agreement was amended at various times during 2001 to change
the revolving maturity date to May 31, 2002, reduce the interest rate to the
banks prime rate (4.75% at March 31, 2002), reduce the maximum line of credit
to $5,750,000, reduce the commitment fee to 0.25% of the maximum line of
credit, modify our existing covenants and provide for the issuance of
subordinated debt. As of March 31, 2002, the calculated maximum that could be
borrowed and the amount outstanding under the Credit Agreement were $3,928,000
and $4,002,000, respectively. Our bank has waived this temporary overadvance
of $74,000 as of March 31, 2002. We are currently in negotiations with the
bank to renew our existing credit agreement.

We anticipate the existing cash balances, amounts available under existing
and future credit agreements and funds to be generated from future operations
will be sufficient to fund operations and forecasted capital expenditures
through the foreseeable future.

Impact of Recent Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 144 (SFAS 144), Accounting for the Impairment or Disposal of
Long-Lived Assets.SFAS 144 supercedes SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
in that it removes goodwill from its impairment scope and allows for different
approaches in cash flow estimation. However, SFAS 144 retains the fundamental
provisions of SFAS 121 for (a) recognition and measurement of the impairment of
long-lived assets to be held and used and (b) measurement of long-lived assets
to be disposed of. SFAS 144 also supercedes the business segment concept in APB
Opinion No. 30, Reporting the Results of OperationsReporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions,in that it permits
presentation of a component of an entity, whether classified as held for sale
or disposed of, as a discontinued operation. SFAS 144 retains the requirement
of APB Opinion No. 30 to report discontinued operations separately from
continuing operations. We adopted the provisions of SFAS 144 in the first
quarter of 2002 and the implementation of this standard did not have a material
effect on our results of operations or financial position.

Effective January 1, 2002, we implemented FASB Statement No. 142 (SFAS
142), Goodwill and Other Intangible Assets.SFAS 142 requires goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS 142. As permitted by SFAS 142, we will implement the
impairment provisions in the second quarter of 2002. This Statement further
requires intangible assets with definite useful lives to be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.On an ongoing basis, the
amortization of goodwill noted in the Condensed

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Consolidated Statements of Operations was eliminated beginning January 1, 2002.
The adoption of the impairment provisions of SFAS 142 is not expected to have
a material effect on our consolidated financial position or results of
operations (refer to Note 1, Summary of Significant Accounting Policies, to
the Condensed Consolidated Financial
Statements).

In June 2001, the FASB issued Statement No. 143 (SFAS 143), Accounting
for Asset Retirement Obligations.SFAS 143 requires liability recognition for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. We are required to adopt the provisions
of SFAS 143 no later than January 1, 2003. The adoption of this standard is
not expected to have a material effect on our consolidated financial position
or results of operations.

Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risk with respect to our debt outstanding. Our
revolving credit agreement and installment note carry interest at the prime
rate plus 0.5%. As the prime rate increases, we will incur higher relative
interest expense and similarly, a decrease in the prime rate will reduce
relative interest expense. A 1.0% change in the prime rate would not
materially change interest expense assuming levels of debt consistent with
historical amounts. The market risks are not considered significant and,
therefore, we do not intend to engage in significant hedging transactions.

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PART II. Other Information




Item 4. Submission of Matters to a Vote of Security Holders

None.




Item 6. Exhibits and Reports on Form 8-K



| | (a) |  | Exhibits:
| | --- |  | ---------
|

| | 10.50(1) |  | Agreement for the Sale and Purchase of the Entire Issued
Share Capital of Medscreen Limited between PharmChem, Inc. and
Newincco 140 Limited, dated March 25, 2002.
| | -------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (1)      |  | Incorporated by reference from the Companys Form
8-K dated March 25, 2002.                                                                                        
|

| | (b) |  | Reports on Form 8-K:                                                                                                                              
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Report on Form 8-K dated March 25, 2002 to announce the closing of
the sale of Medscreen and an Amendment and Forbearance
Agreement with our bank.




Signature

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



| | PharmChem, Inc.
(Registrant)
| | ----------------------------



|Date: May 16, 2002 | By: /S/ David A. Lattanzio .David A. Lattanzio
Chief Financial Officer and Vice President,
Finance and Administration
(Principal Financial and Accounting Officer)
|------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

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