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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549




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FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2003

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

|                                         |  |           
|---------------------------------------- |  | ----------
|4600 North Beach Street                  |  |           
|Haltom City, Texas                       |  | 76137     
|(Address of principal executive offices) |  | (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   þ   No
o

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
Yes o No   þ

As of April 30, 2003, 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
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                              | Item 4. Controls and Procedures                                                              
|PART II. Other Information   
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|Signature                    
|EXHIBIT INDEX                
|EXHIBIT 10.37                
|EXHIBIT 99.1                 
|EXHIBIT 99.2                 



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##### Table of Contents



PHARMCHEM, INC.

QUARTERLY REPORT ON FORM 10-Q

INDEX

|          |  |                                                                                       |  |                                                                                                                                 |    |      |   | 
|--------- |  | ------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | - | 
|          |  |                                                                                       |  |                                                                                                                                 |    | Page
|          |  |                                                                                       |  |                                                                                                                                 |    |     
|Part I.   |  | Financial Information                                                                 |  |                                                                                                                                 | 3  |     
|Item 1.   |  | Condensed Consolidated Financial Statements                                           |  |                                                                                                                                 | 3  |     
|          |  |                                                                                       |  | Condensed Consolidated Balance Sheets (unaudited) at
March 31, 2003 and December 31, 2002                                       |    |      | 4 | 
|          |  |                                                                                       |  | Condensed Consolidated Statements of Operations (unaudited) for the
Three Months ended March 31, 2003 and 2002                  |    |      | 5 | 
|          |  |                                                                                       |  | Condensed Consolidated Statements of Comprehensive Income (Loss)
(unaudited) for the Three Months ended March 31, 2003 and 2002 |    |      | 6 | 
|          |  |                                                                                       |  | Condensed Consolidated Statements of Cash Flows (unaudited)
for the Three Months ended March 31, 2003 and 2002                  |    |      | 7 | 
|          |  |                                                                                       |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                                                |    |      | 8 | 
|Item 2.   |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations |  |                                                                                                                                 | 12 |     
|Item 3.   |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |                                                                                                                                 | 17 |     
|Item 4.   |  | Controls and Procedures                                                               |  |                                                                                                                                 | 17 |     
|Part II.  |  | Other Information                                                                     |  |                                                                                                                                 | 17 |     
|Item 6.   |  | Exhibits and Reports on Form 8-K                                                      |  |                                                                                                                                 | 17 |     
|Signature |  |                                                                                       |  |                                                                                                                                 | 18 |     

2



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PART I. Financial Information




Item 1. Condensed Consolidated Financial Statements

The condensed consolidated financial statements of PharmChem, Inc. (the
Company) 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, 2002 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.

3



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PHARMCHEM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except par value)

|                                           |                                                                                                                                       |                            |                                      |        |        |           |        |              |        |  |  | 
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------ | ------ | ------ | --------- | ------ | ------------ | ------ |  |  | 
|                                           |                                                                                                                                       |                            |                                      |        |        | March 31, |        | December 31,
|                                           |                                                                                                                                       |                            |                                      |        |        | 2003      |        | 2002        
|                                           |                                                                                                                                       |                            |                                      |        |        |           |        |             
|                                           |                                                                                                                                       |                            |                                      | ASSETS |        |           |        |              |        |  |  | 
|CURRENT ASSETS:                            |                                                                                                                                       |                            |                                      |        |        |           |        |             
|                                           | Cash and cash equivalents                                                                                                             |                            | $                                    | 2,917  |        |           | $      | 4,213        |       
|                                           | Accounts receivable, net of allowance for doubtful
accounts of $231 and $197                                                          |                            |                                      | 3,926  |        |           |        | 3,792        |       
|                                           | Inventory                                                                                                                             |                            |                                      | 1,152  |        |           |        | 1,318        |       
|                                           | Prepaid expenses                                                                                                                      |                            |                                      | 396    |        |           |        | 501          |       
|                                           |                                                                                                                                       |                            |                                      |        |        |           |        |              |       
|                                           |                                                                                                                                       | TOTAL CURRENT ASSETS       |                                      |        | 8,391  |           |        |              | 9,824  | 
|PROPERTY AND EQUIPMENT, net                |                                                                                                                                       |                            | 11,670                               |        |        |           | 12,074 |             
|OTHER
ASSETS                               |                                                                                                                                       |                            | 39                                   |        |        |           | 40     |             
|GOODWILL, net of amortization of $1,892    |                                                                                                                                       |                            | 729                                  |        |        |           | 729    |             
|                                           |                                                                                                                                       |                            |                                      |        |        |           |        |              |       
|                                           |                                                                                                                                       | TOTAL ASSETS               |                                      | $      | 20,829 |           |        | $            | 22,667 | 
|                                           |                                                                                                                                       |                            |                                      |        |        |           |        |              |       
|                                           |                                                                                                                                       |                            | LIABILITIES AND STOCKHOLDERS EQUITY |        |        |           |        |              |        |  | 
|CURRENT LIABILITIES:                       |                                                                                                                                       |                            |                                      |        |        |           |        |             
|                                           | Revolving line of credit                                                                                                              |                            | $                                    | 3,129  |        |           | $      | 3,334        |       
|                                           | Current portion of long-term debt                                                                                                     |                            |                                      | 2,312  |        |           |        | 2,388        |       
|                                           | Accounts payable                                                                                                                      |                            |                                      | 2,668  |        |           |        | 2,918        |       
|                                           | Accrued compensation                                                                                                                  |                            |                                      | 653    |        |           |        | 837          |       
|                                           | Accrued collectors and other liabilities                                                                                              |                            |                                      | 1,835  |        |           |        | 2,017        |       
|                                           |                                                                                                                                       |                            |                                      |        |        |           |        |              |       
|                                           |                                                                                                                                       | TOTAL CURRENT LIABILITIES  |                                      |        | 10,597 |           |        |              | 11,494 | 
|LONG-TERM DEBT, net of current portion     |                                                                                                                                       |                            | 606                                  |        |        |           | 814    |             
|                                           |                                                                                                                                       |                            |                                      |        |        |           |        |              |       
|                                           |                                                                                                                                       | TOTAL LIABILITIES          |                                      |        | 11,203 |           |        |              | 12,308 | 
|                                           |                                                                                                                                       |                            |                                      |        |        |           |        |              |       
|STOCKHOLDERS EQUITY:                      |                                                                                                                                       |                            |                                      |        |        |           |        |             
|                                           | Common stock, $0.001 par value, 25,000 shares authorized,
5,853 shares issued and outstanding at March 31, 2003 and
December 31, 2002 |                            |                                      | 6      |        |           |        | 6            |       
|                                           | Additional paid-in capital                                                                                                            |                            |                                      | 19,589 |        |           |        | 19,589       |       
|                                           | Accumulated deficit                                                                                                                   |                            |                                      | (9,969 | )      |           |        | (9,236       | )     
|                                           |                                                                                                                                       |                            |                                      |        |        |           |        |              |       
|                                           |                                                                                                                                       | TOTAL STOCKHOLDERS EQUITY |                                      |        | 9,626  |           |        |              | 10,359 | 
|                                           |                                                                                                                                       |                            |                                      |        |        |           |        |              |       
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                                       | $                          | 20,829                               |        |        | $         | 22,667 |             
|                                           |                                                                                                                                       |                            |                                      |        |        |           |        |              |       

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,         
|                                                    |                                                                             |                          |                         |       |                   
|                                                    |                                                                             |                          |                         |       | 2003               |       | 2002 
|                                                    |                                                                             |                          |                         |       |                    |       |      
|NET SALES                                           |                                                                             | $                        | 6,335                   |       |                    | $     | 7,476 |      
|COST OF SALES                                       |                                                                             |                          | 5,125                   |       |                    |       | 5,668 |      
|                                                    |                                                                             |                          |                         |       |                    |       |       |      
|GROSS PROFIT                                        |                                                                             |                          | 1,210                   |       |                    |       | 1,808 |      
|                                                    |                                                                             |                          |                         |       |                    |       |       |      
|OPERATING EXPENSES:                                 |                                                                             |                          |                         |       |                    |       |       |      
|                                                    | Selling, general and administrative                                         |                          |                         | 1,798 |                    |       |       | 2,013 |      
|                                                    |                                                                             |                          |                         |       |                    |       |       |      
|                                                    |                                                                             | Total operating expenses |                         |       | 1,798              |       |       |       | 2,013 |     
|                                                    |                                                                             |                          |                         |       |                    |       |       |      
|LOSS FROM OPERATIONS                                |                                                                             |                          | (588                    | )     |                    |       | (205  | )    
|Interest expense                                    |                                                                             |                          | 160                     |       |                    |       | 162   |      
|Other expense (income)                              |                                                                             |                          | (15                     | )     |                    |       | 25    |      
|                                                    |                                                                             |                          |                         |       |                    |       |       |      
|                                                    |                                                                             |                          | 145                     |       |                    |       | 187   |      
|                                                    |                                                                             |                          |                         |       |                    |       |       |      
|LOSS FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES |                                                                             |                          | (733                    | )     |                    |       | (392  | )    
|BENEFIT FROM INCOME TAXES                           |                                                                             |                          |                        |       |                    |       | (82   | )    
|                                                    |                                                                             |                          |                         |       |                    |       |       |      
|LOSS FROM CONTINUING OPERATIONS                     |                                                                             |                          | (733                    | )     |                    |       | (310  | )    
|DISCONTINUED OPERATIONS:                            |                                                                             |                          |                         |       |                    |       |       |      
|                                                    | Income from discontinued operations, net of applicable
income taxes of $184 |                          |                         |      |                    |       |       | 359   |      
|                                                    | Gain on disposition, net of applicable income taxes of $1,116               |                          |                         |      |                    |       |       | 4,277 |      
|                                                    |                                                                             |                          |                         |       |                    |       |       |      
|NET INCOME (LOSS)                                   |                                                                             | $                        | (733                    | )     |                    | $     | 4,326 |      
|                                                    |                                                                             |                          |                         |       |                    |       |       |      
|NET INCOME (LOSS) PER COMMON SHARE:                 |                                                                             |                          |                         |       |                    |       |       |      
|                                                    | BASIC: 
    Continuing operations                                           |                          | $                       | (0.13 | )                  |       | $     | (0.05 | )    
|                                                    |                                                                             |                          | Discontinued operations |       |                    |      |       |       |       | 0.79 | 
|                                                    |                                                                             |                          |                         |       |                    |       |       |      
|                                                    |                                                                             |                          | Net income (loss)       |       | $                  | (0.13 | )     |       | $     | 0.74 | 
|                                                    |                                                                             |                          |                         |       |                    |       |       |      
|                                                    | DILUTED: Continuing operations                                              |                          | $                       | (0.13 | )                  |       | $     | (0.05 | )    
|                                                    |                                                                             |                          | Discontinued operations |       |                    |      |       |       |       | 0.79 | 
|                                                    |                                                                             |                          |                         |       |                    |       |       |      
|                                                    |                                                                             |                          | Net income (loss)       |       | $                  | (0.13 | )     |       | $     | 0.74 | 
|                                                    |                                                                             |                          |                         |       |                    |       |       |      
|WEIGHTED AVERAGE SHARES OUTSTANDING:                |                                                                             |                          |                         |       |                    |       |       |      
|                                                    | BASIC                                                                       |                          |                         | 5,853 |                    |       |       | 5,853 |      
|                                                    |                                                                             |                          |                         |       |                    |       |       |      
|                                                    | DILUTED                                                                     |                          |                         | 5,853 |                    |       |       | 5,853 |      
|                                                    |                                                                             |                          |                         |       |                    |       |       |      

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,         
|                            |                                         |   |                   
|                            |                                         |   | 2003               |   | 2002
|                            |                                         |   |                    |   |     
|NET INCOME (LOSS)           |                                         | $ | (733               | ) |      | $ | 4,326 |    
|OTHER COMPREHENSIVE LOSS:   |                                         |   |                    |   |      |   |       |    
|                            | Foreign currency translation            |   |                    |  |      |   |       | (53 | )
|                            | Realized foreign currency exchange loss |   |                    |  |      |   |       | 53  |  
|                            |                                         |   |                    |   |      |   |       |    
|                            |                                         |   |                   |   |      |   |      |    
|                            |                                         |   |                    |   |      |   |       |    
|COMPREHENSIVE INCOME (LOSS) |                                         | $ | (733               | ) |      | $ | 4,326 |    
|                            |                                         |   |                    |   |      |   |       |    

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,         
|                                                     |                                                                                                    |                                                           |                                                                              |      |                   
|                                                     |                                                                                                    |                                                           |                                                                              |      | 2003               |      | 2002 
|                                                     |                                                                                                    |                                                           |                                                                              |      |                    |      |      
|CASH FLOWS FROM OPERATING ACTIVITIES:                |                                                                                                    |                                                           |                                                                              |      |                    |      |       |      
|                                                     | Net income (loss)                                                                                  |                                                           | $                                                                            | (733 | )                  |      | $     | 4,326 |       
|                                                     | Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities: |                                                           |                                                                              |      |                    |      |       |       |       
|                                                     |                                                                                                    | Income from discontinued operations                       |                                                                              |      |                   |      |       |       | (359   | )     
|                                                     |                                                                                                    | Depreciation and amortization                             |                                                                              |      | 560                |      |       |       | 540    |       
|                                                     |                                                                                                    | Bad debt expense                                          |                                                                              |      | 34                 |      |       |       | 118    |       
|                                                     |                                                                                                    | Gain on disposition of subsidiary, net of tax             |                                                                              |      |                   |      |       |       | (4,277 | )     
|                                                     |                                                                                                    | Gain on sale of property and equipment                    |                                                                              |      | (4                 | )    |       |       |       |       
|                                                     |                                                                                                    | Amortization of discount on subordinated debt             |                                                                              |      | 43                 |      |       |       | 43     |       
|                                                     | Changes in operating assets and liabilities                                                        |                                                           |                                                                              |      |                    |      |       |       |       
|                                                     |                                                                                                    | Accounts receivable                                       |                                                                              |      | (168               | )    |       |       | 309    |       
|                                                     |                                                                                                    | Inventory                                                 |                                                                              |      | 166                |      |       |       | 319    |       
|                                                     |                                                                                                    | Prepaids and other current assets                         |                                                                              |      | 106                |      |       |       | 28     |       
|                                                     |                                                                                                    | Other assets                                              |                                                                              |      |                   |      |       |       | 2      |       
|                                                     |                                                                                                    | Accounts payable and other accrued liabilities            |                                                                              |      | (616               | )    |       |       | (568   | )     
|                                                     |                                                                                                    |                                                           |                                                                              |      |                    |      |       |       |       
|                                                     |                                                                                                    |                                                           | Net cash provided by (used in) operating activities of continuing
operations |      |                    | (612 | )     |       |        | 481    |  
|                                                     |                                                                                                    |                                                           |                                                                              |      |                    |      |       |       |       
|                                                     |                                                                                                    |                                                           | Net cash provided by operating activities of discontinued operations         |      |                    |     |       |       |        | 161    |  
|                                                     |                                                                                                    |                                                           |                                                                              |      |                    |      |       |       |       
|CASH FLOWS FROM INVESTING ACTIVITIES:                |                                                                                                    |                                                           |                                                                              |      |                    |      |       |      
|                                                     |                                                                                                    | Purchases of property and equipment                       |                                                                              |      | (156               | )    |       |       | (482   | )     
|                                                     |                                                                                                    | Proceeds from sale of property and equipment              |                                                                              |      | 4                  |      |       |       |       |       
|                                                     |                                                                                                    | Proceeds from sale of discontinued operations             |                                                                              |      |                   |      |       |       | 10,000 |       
|                                                     |                                                                                                    |                                                           |                                                                              |      |                    |      |       |       |       
|                                                     |                                                                                                    |                                                           | Net cash provided by (used in) investing activities of continuing
operations |      |                    | (152 | )     |       |        | 9,518  |  
|                                                     |                                                                                                    |                                                           |                                                                              |      |                    |      |       |       |       
|                                                     |                                                                                                    |                                                           | Net cash used in investing activities of discontinued operations             |      |                    |     |       |       |        | (40    | )
|                                                     |                                                                                                    |                                                           |                                                                              |      |                    |      |       |       |       
|CASH FLOWS FROM FINANCING ACTIVITIES:                |                                                                                                    |                                                           |                                                                              |      |                    |      |       |      
|                                                     |                                                                                                    | Principal payments on long-term debt                      |                                                                              |      | (327               | )    |       |       | (523   | )     
|                                                     |                                                                                                    | Repayments on revolving line of credit, net of borrowings |                                                                              |      | (205               | )    |       |       | (542   | )     
|                                                     |                                                                                                    |                                                           |                                                                              |      |                    |      |       |       |       
|                                                     |                                                                                                    |                                                           | Net cash used in financing activities of continuing operations               |      |                    | (532 | )     |       |        | (1,065 | )
|                                                     |                                                                                                    |                                                           |                                                                              |      |                    |      |       |       |       
|                                                     |                                                                                                    |                                                           | Net cash used in financing activities of discontinued operations             |      |                    |     |       |       |        | (1,987 | )
|                                                     |                                                                                                    |                                                           |                                                                              |      |                    |      |       |       |       
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |                                                                                                    |                                                           | (1,296                                                                       | )    |                    |      | 7,068 |      
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD     |                                                                                                    |                                                           | 4,213                                                                        |      |                    |      | 197   |      
|                                                     |                                                                                                    |                                                           |                                                                              |      |                    |      |       |       |       
|CASH AND CASH EQUIVALENTS AT END OF PERIOD           |                                                                                                    | $                                                         | 2,917                                                                        |      |                    | $    | 7,265 |      
|                                                     |                                                                                                    |                                                           |                                                                              |      |                    |      |       |       |       

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. (the Company) 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. We have made certain reclassifications to prior year amounts to
conform to current year presentation. 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
implemented the impairment provisions in the second quarter of 2002. On an
ongoing basis, the amortization of goodwill noted in the Condensed Consolidated
Statements of Operations was eliminated beginning January 1, 2002.

Stock Based-Compensation

In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, Accounting for Stock-Based CompensationTransition and Disclosurean
amendment of SFAS No. 123.This statement amends SFAS No. 123, Accounting for
Stock-Based Compensation,to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual
and interim financial statements about the method of

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accounting for stock-based employee compensation and the effect of the method
used on reported results. We continue to account for stock-based compensation
using Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees,and have not adopted the recognition provisions of SFAS
No. 123, as amended by SFAS No. 148. However, we have adopted the disclosure
provisions for the current fiscal year. The exercise price of options granted
under our stock option plans is equal to the market price of our stock on the
date of grant. Therefore, we have not recorded compensation cost under APB No.
25.

We continue to apply APB No. 25 in accounting for our stock-based
compensation plans. Accordingly, no compensation cost has been recorded in the
consolidated statements of operations for the stock option plans. If we had
determined compensation cost for all of our stock based compensation plans in
accordance with the fair value method prescribed by SFAS No. 123, our proforma
net income (loss) and income (loss) per share for the three months ended March
31 would have been as follows (in thousands, except per share amounts):

|                                                                      |  |      |       |      |  |   |       |  
|--------------------------------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|                                                                      |  | 2003 |       | 2002
|                                                                      |  |      |       |     
|Net income (loss), as reported                                        |  | $    | (733  | )    |  | $ | 4,326 |  
|Stock-based employee compensation expense, net of related tax effects |  |      | (34   | )    |  |   | (28   | )
|                                                                      |  |      |       |      |  |   |       |  
|Net income (loss), pro forma                                          |  | $    | (767  | )    |  | $ | 4,298 |  
|                                                                      |  |      |       |      |  |   |       |  
|Basic income (loss) per share, as reported                            |  | $    | (0.13 | )    |  | $ | 0.74  |  
|                                                                      |  |      |       |      |  |   |       |  
|Basic income (loss) per share, pro forma                              |  | $    | (0.13 | )    |  | $ | 0.74  |  
|                                                                      |  |      |       |      |  |   |       |  
|Diluted income (loss) per share, as reported                          |  | $    | (0.13 | )    |  | $ | 0.74  |  
|                                                                      |  |      |       |      |  |   |       |  
|Diluted income (loss) per share, pro forma                            |  | $    | (0.13 | )    |  | $ | 0.74  |  
|                                                                      |  |      |       |      |  |   |       |  

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 ($989,000) with our primary bank.

Net sales of the discontinued operations were $1,786,000 for the three
months ended March 31, 2002. We recorded a gain on the sale of Medscreen of
$4,277,000, or $0.73 per 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 warrants and are calculated using the treasury stock method.

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Options and warrants to purchase 1,155,000 and 1,132,000 shares of our
common stock for the three months ended March 31, 2003 and 2002, respectively,
were not included in the computation of diluted income per share because their
effect would have been anti-dilutive.

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, 2003 and
December 31, 2002 (in thousands):

|                     |  |      |       |      |  |   |       | 
|-------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                     |  | 2003 |       | 2002
|                     |  |      |       |     
|Laboratory materials |  | $    | 185   |      |  | $ | 225   | 
|Collection materials |  |      | 521   |      |  |   | 542   | 
|Products             |  |      | 446   |      |  |   | 551   | 
|                     |  |      |       |      |  |   |       | 
|                     |  | $    | 1,152 |      |  | $ | 1,318 | 
|                     |  |      |       |      |  |   |       | 

5. Debt

Our debt at March 31, 2003 and December 31, 2002 consisted of the
following (in thousands):

|                                                                                                                                                                                              |  |      |        |      |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                                                                                                                                                                              |  | 2003 |        | 2002
|                                                                                                                                                                                              |  |      |        |     
|Revolving line of credit                                                                                                                                                                      |  | $    | 3,129  |      |  | $ | 3,334  |  
|Subordinated debt, net of discount of $86 and $129 at March 31,
2003 and December 31, 2002, respectively, due September,
2003                                                                 |  |      | 1,414  |      |  |   | 1,371  |  
|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% |  |      | 1,504  |      |  |   | 1,831  |  
|                                                                                                                                                                                              |  |      |        |      |  |   |        |  
|                                                                                                                                                                                              |  |      | 6,047  |      |  |   | 6,536  |  
|Less: current portion and revolving line of credit                                                                                                                                            |  |      | (5,441 | )    |  |   | (5,722 | )
|                                                                                                                                                                                              |  |      |        |      |  |   |        |  
|Long-term portion                                                                                                                                                                             |  | $    | 606    |      |  | $ | 814    |  
|                                                                                                                                                                                              |  |      |        |      |  |   |        |  

On July 31, 2002, the Company entered into a Second Amended and Restated
Loan and Security Agreement (the Agreement) with its principal lender whereby
the line of credit is $4,250,000, the maturity date is June 30, 2003, interest
is at the prime rate plus one-half percent (4.75% as of March 31, 2003), and
the annual fee is 0.10% of the credit line, payable quarterly. The July 31,
2002 Agreement permits borrowings on eligible receivables up to 85% thereof and
is secured by a lien on a significant portion of our assets. It also 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.

As of March 31, 2003, the calculated maximum that could be borrowed and
the amount outstanding were $3,164,643 and $3,129,147 respectively. We were in
compliance with all covenants as of March 31, 2003, except for the 2003
profitability covenant for which we are discussing a waiver from the
lender. In addition, the Company is currently negotiating a new line
of credit to replace its existing credit agreement.

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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             |     | 2003     |   | As of         
|                               |       |   | December 31, 2002 |     | Payments |   | March 31, 2003
|                               |       |   |                   |     |          |   |               
|Severance and related benefits |       | $ | 26                |     |          | $ | (2             | )  |         | $ | 24  |    
|Clean-up and remediation       |       |   | 171               |     |          |   | (3             | )  |         |   | 168 |    
|Repairs                        |       |   | 9                 |     |          |   |               |    |         |   | 9   |    
|Legal and other                |       |   | 28                |     |          |   |               |    |         |   | 28  |    
|                               |       |   |                   |     |          |   |                |    |         |   |     |    
|                               | Total |   | $                 | 234 |          |   | $              | (5 | )       |   | $   | 229 | 
|                               |       |   |                   |     |          |   |                |    |         |   |     |    

The restructuring plan was designed to provide for costs associated with
leaving our facilities in Menlo Park, California. 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 157 employees were terminated as
of March 31, 2003. The clean-up and remediation includes removal of a
previously unknown storage vault and potential restoration of the facility per
the lease agreement. Repairs expense includes sewer line repair or replacement
as contractually provided for in the lease agreement. The accrual balance of
$229,000 is classified as a component in Accrued collectors and other
liabilities on the balance sheet. Costs for relocation were expensed as
incurred.

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On September 19, 2002, the Companys attorneys received a letter from
counsel for the landlord of the Companys former Menlo Park, California
facility claiming damages in the amount of $4.7 million. This amount is based
primarily on the landlords claim for lost and reduced rent arising from the
Companys alleged failure to vacate the Menlo Park premises timely under the
terms of the lease. On April 30, 2003, the Companys attorneys received a
second letter together with a draft complaint from the landlords counsel
reiterating these allegations and requesting that the parties meet and confer
to resolve the matter; otherwise the complaint will be filed. The Company and
its counsel are continuing to review the details of this claim and the Company
will defend itself vigorously.




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 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, 2002. We assume no obligation to
update the forward-looking statements or such factors.

Recent Events

The Company has not been in compliance with the $1.00 minimum bid price as
required for listing on the Nasdaq SmallCap Market. The Company has since been
granted a waiver until July 7, 2003 to comply with this rule. In
addition,the
Companys common stock has not maintained a minimum market value of publicly
held shares of $1 million as required for inclusion by Marketplace Rule
4310(c)(7). The Company has until May 21, 2003 to attain this minimum for ten
consecutive trading days. Otherwise, the Companys securities will be
delisted. At that time, the Company may appeal to a Listing Qualifications
Panel.

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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 an on-going basis, we evaluate these estimates,
including those related to bad debts, inventories, goodwill, 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
contract specimen collector 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.

Continued adverse changes in market conditions or poor operating results
of our operations could result in additional 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 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,
|                                |                                                                     |                          |       |                             
|                                |                                                                     |                          |       | 2003                         |       | 2002 |       | 2003  |       | 2002
|                                |                                                                     |                          |       |                              |       |      |       |       |       |     
|                                |                                                                     |                          |       | (As a percentage of sales)  
|NET SALES:                      |                                                                     |                          |       |                              |       |      |       |       |       |      |       |      |       |  |      |     
|                                | Workplace employers analysis                                        |                          | $     | 1,704                        |       |      | $     | 2,240 |       |      |       | 26.9 | %     |  |      | 30.0 | %    
|                                | Criminal justice agencies analysis                                  |                          |       | 3,272                        |       |      |       | 3,888 |       |      |       | 51.7 |       |  |      | 52.0 |      
|                                | Drug rehabilitation programs analysis                               |                          |       | 81                           |       |      |       | 45    |       |      |       | 1.3  |       |  |      | 0.6  |      
|                                | Products and other                                                  |                          |       | 1,278                        |       |      |       | 1,303 |       |      |       | 20.1 |       |  |      | 17.4 |      
|                                |                                                                     |                          |       |                              |       |      |       |       |       |      |       |      |       |  |      |      |      
|                                |                                                                     | Total net sales          |       |                              | 6,335 |      |       |       | 7,476 |      |       |      | 100.0 |  |      |      | 100.0 | 
|COST OF SALES                   |                                                                     |                          | 5,125 |                              |       |      | 5,668 |       |       |      | 80.9  |      |       |  | 75.8 |     
|                                |                                                                     |                          |       |                              |       |      |       |       |       |      |       |      |       |  |      |      |      
|GROSS PROFIT                    |                                                                     |                          | 1,210 |                              |       |      | 1,808 |       |       |      | 19.1  |      |       |  | 24.2 |     
|                                |                                                                     |                          |       |                              |       |      |       |       |       |      |       |      |       |  |      |      |      
|OPERATING EXPENSES:             |                                                                     |                          |       |                              |       |      |       |       |       |      |       |      |       |  |      |     
|                                | Selling, general and administrative                                 |                          |       | 1,798                        |       |      |       | 2,013 |       |      |       | 28.4 |       |  |      | 26.9 |      
|                                |                                                                     |                          |       |                              |       |      |       |       |       |      |       |      |       |  |      |      |      
|                                |                                                                     | Total operating expenses |       |                              | 1,798 |      |       |       | 2,013 |      |       |      | 28.4  |  |      |      | 26.9  | 
|                                |                                                                     |                          |       |                              |       |      |       |       |       |      |       |      |       |  |      |      |      
|LOSS FROM CONTINUING OPERATIONS |                                                                     |                          |       |                              |       |      |       |       |       |      |       |      |       |  |      |     
|                                | BEFORE INCOME TAXES                                                 |                          |       | (588                         | )     |      |       | (205  | )     |      |       | (9.3 | )     |  |      | (2.7 | )    
|OTHER EXPENSE, net              |                                                                     |                          | 145   |                              |       |      | 187   |       |       |      | 2.3   |      |       |  | 2.5  |     
|BENEFIT FROM INCOME TAXES       |                                                                     |                          |      |                              |       |      | (82   | )     |       |      |      |      |       |  | (1.1 | )   
|                                |                                                                     |                          |       |                              |       |      |       |       |       |      |       |      |       |  |      |      |      
|LOSS FROM CONTINUING OPERATIONS |                                                                     |                          | (733  | )                            |       |      | (310  | )     |       |      | (11.6 | )    |       |  | (4.1 | )   
|DISCONTINUED OPERATIONS:        |                                                                     |                          |       |                              |       |      |       |       |       |      |       |      |       |  |      |     
|                                | Income from discontinued operations,
net of applicable income taxes |                          |       |                             |       |      |       | 359   |       |      |       |     |       |  |      | 4.8  |      
|                                | Gain on sale of disposition, net of
applicable income taxes         |                          |       |                             |       |      |       | 4,277 |       |      |       |     |       |  |      | 57.2 |      
|                                |                                                                     |                          |       |                              |       |      |       |       |       |      |       |      |       |  |      |      |      
|NET INCOME (LOSS)               |                                                                     | $                        | (733  | )                            |       | $    | 4,326 |       |       |      | (11.6 | )%   |       |  | 57.9 | %   
|                                |                                                                     |                          |       |                              |       |      |       |       |       |      |       |      |       |  |      |      |      

Net salesfor the three months ended March 31, 2003 were $6,335,000, a
decrease of $1,141,000 (15.3%) from last years first quarter sales of
$7,476,000. In this years first quarter, laboratory specimen volume fell by
20.8% from the same period a year ago. Overall, laboratory analysis sales were
down by $1,116,000 (18.1%), with workplace lower by $536,000 (23.9%) and
criminal justice by $616,000 (15.8%). The continued slowdown in pre-employment
testing by workplace customers, resulting from the stagnant economy, and a drop
in most governmental testing due to budgetary constraints, have both adversely
impacted the Companys revenues. The lower specimen volume was also affected
by severe weather in the east and midwest. Product and other sales were down
by only $25,000 (1.9%) from the same period last year. Average selling prices
for laboratory analyses were up in all customer categories, primarily due to a
change of customer mix.

Cost of salesfor the three months ended March 31, 2003 was $5,125,000
(80.9% of net sales), a decrease of $543,000 (9.6%) from last years first
quarter cost of sales of $5,668,000 (75.8% of net sales). Decreases in labor,
inventory usages, transportation and collection service fees were in line with
the

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decreased number of specimens processed in the first quarter. Fixed costs
increased by $143,000, caused mainly by an increase in depreciation
expense on newly developed software
and higher business insurance expense. Accordingly, gross profit as a percentage of sales
decreased to 19.1% from 24.2% in the prior year.

Selling, General & Administrative (SG&A)expenses for the three months
ended March 31, 2003 decreased $215,000 (10.7%) to $1,798,000 in 2003 from
$2,013,000 in 2002. Sales and marketing expense was lower by $179,000,
consisting of lower bad debt expense of $83,000, lower payroll cost of $60,000
and reduced spending on promotions and advertising. Research and development
costs were lower by $38,000 in the first quarter as compared to last year.

Discontinued Operationsfor the three months ended March 31, 2002
generated income of $359,000, or $0.06 per diluted share. There were no
discontinued operations in the first quarter of 2003.

Net lossfrom continuing operations for the three months ended March 31,
2003 was $733,000 or $0.13 per share compared to a net loss of $310,000 or
$0.05 per share in 2002. The net income in 2002, after the inclusion of income
from discontinued operations, was $4,326,000, or $0.74 per share. The gain on
the sale of Medscreen was $4,277,000, net of tax effect of $1,116,000.

Liquidity and Capital Resources

Our continuing operations during the three-month periods ended March 31
used cash of $612,000 and provided cash of $481,000 in 2003 and 2002,
respectively. The decrease in cash flow from operations between 2003 and 2002
reflects a larger loss from continuing operations in 2003. Days sales
outstanding at the end of the first quarter 2003 was 58 days compared to 64
days at the end of March 2002. Decreases in accounts payable and related
accruals in the first quarter of both years reflect the declining business
volume and ongoing cost containment measures. As of March 31, 2003, we had
$2,417,000 in unrestricted cash and cash equivalents, and $500,000 in
restricted cash. During the three months ended March 31, 2003, we used
approximately $156,000 in cash to purchase property and equipment, principally
for information systems development.

On July 31, 2002, the Company entered into a Second Amended and Restated
Loan and Security Agreement (the Agreement) with its principal lender whereby
the line of credit is $4,250,000, the maturity date is June 30, 2003, interest
is at the prime rate plus one-half percent (4.75% as of March 31, 2003), and
the annual fee is 0.10% of the credit line, payable quarterly. The July 31,
2002 Agreement permits borrowings on eligible receivables up to 85% thereof and
is secured by a lien on a significant portion of our assets. It 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.

As of March 31, 2003, the calculated maximum that could be borrowed was
$3,164,643 and the amount outstanding was $3,129,147. We were in compliance
with all covenants as of March 31, 2003, except for the 2003 profitability
covenant for which we are discussing a waiver from the lender. In
addition, the Company is currently negotiating a new line of credit
to replace its existing credit agreement.

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##### Table of Contents



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 for
the next twelve months.

Impact of Recent Accounting Pronouncements

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 adopted the provisions of SFAS 143
effective January 1, 2003. The adoption of this standard did not have a
material effect on our consolidated financial position or results of
operations.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others.FIN 45 requires that a
liability be recorded in the guarantors balance sheet upon issuance of certain
guarantees. FIN 45 also requires disclosure about certain guarantees that an
entity has issued. The Company has implemented the disclosure requirements
required by FIN 45, which were effective for fiscal years ending after December
15, 2002. The Company will apply the recognition provisions of FIN 45
prospectively to guarantees issued after December 31, 2002. The Company does
not expect FIN 45 to have a material effect on its financial condition and
results of operations.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risk with respect to our debt outstanding. Our
revolving credit agreement carries interest at the prime rate plus 0.50%. 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.




Item 4. Controls and Procedures

Within the 90 days prior to the date of this report, under the supervision
and with the participation of management, including our Chief Executive Officer
and our Chief Financial Officer, we have evaluated the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, our Chief Executive
Officer and our Chief Financial Officer have concluded that our disclosure
controls and procedures are effective in timely alerting them to material
information relating to us required to be included in our periodic SEC filings.
There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the
date of their evaluation.




PART II. Other Information




Item 6. Exhibits and Reports on Form 8-K



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

|      |  |   |  |                                                                                                                                                   
|----- |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|10.37 |  | - |  | Amended PharmChem, Inc. 401 (k) Plan.                                                                                                             
|      |  |   |  |                                                                                                                                                   
|99.1  |  | - |  | Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|      |  |   |  |                                                                                                                                                   
|99.2  |  | - |  | Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.



| |  |  | (b)      Reports on Form 8-K:                                                           
| |  |  | ----------------------------------------------------------------------------------------
|
| |  |  | Press release reporting 2002 financial results issued on Form 8-K,
dated March 20, 2003.

17



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##### Table of Contents






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 14, 2003 |  | By:                                          |  | /s/ David A. Lattanzio
|                   |  |                                              | 
|                   |  | David A. Lattanzio                          
|                   |  | Chief Financial Officer and Vice President, 
|                   |  | Finance and Administration                  
|                   |  | (Principal Financial and Accounting Officer)

18



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##### Table of Contents



CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Joseph W. Halligan, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of PharmChem, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |  |  | a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and                                                                                                  
|
| |  |  | c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| |  |  | a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                    |  |                                      
|------------------- |  | -------------------------------------
|Dated: May 14, 2003 |  |                                      
|                    |  | /s/ Joseph W. Halligan               
|                    |  |                                      
|                    |  | Joseph W. Halligan                   
|                    |  | President and Chief Executive Officer

19



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##### Table of Contents



CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, David A. Lattanzio, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of PharmChem, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |  |  | a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and                                                                                                  
|
| |  |  | c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| |  |  | a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                    |  |                                           
|------------------- |  | ------------------------------------------
|Dated: May 14, 2003 |  |                                           
|                    |  | /s/ David A. Lattanzio                    
|                    |  |                                           
|                    |  | David A. Lattanzio                        
|                    |  | Vice President and Chief Financial Officer

20



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##### Table of Contents






EXHIBIT INDEX

|        |  |   |  |                                                                                                                                                   
|------- |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |   |  |                                                                                                                                                   
|Number  |  |   |  | Description                                                                                                                                       
|        |  |   |  |                                                                                                                                                   
|10.37   |  | - |  | Amended PharmChem, Inc. 401 (k) Plan.                                                                                                             
|        |  |   |  |                                                                                                                                                   
|99.1    |  | - |  | Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|        |  |   |  |                                                                                                                                                   
|99.2    |  | - |  | Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.