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SECURITIES AND EXCHANGE COMMISSIONWashington, 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 June 30, 2002

OR

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

For the transition period from ____________________ to ____________________

Commission File Number 0-19371

(PHARMCHEM, INC. LOGO)

(Exact name of registrant as specified in its charter)

|                                                                              |  |                                                
|----------------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or other jurisdiction
of incorporation or organization)       |  | 77-0187280
(IRS Employer
Identification Number)
|                                                                             
|4600 Beach Street
Haltom City, Texas
(Address of principal executive offices) |  | 76137
(Zip Code)                               

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to
such filing requirements for the past 90 days.
YesþNoo

As of July 31, 2002, the registrant had outstanding 5,852,593 shares of
Common Stock, $0.001 par value.



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TABLE OF CONTENTS



|                              |                                                                                               |                                                                  |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- |  |  |  |  |  | 
|PART I. Financial Information
|                              | Item 1. Condensed Consolidated Financial Statements                                          
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                           
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                 
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                 
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS            
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|PART II. Other Information   
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                              | Item 6. Exhibits and Reports on
Form 8-K                                                     
|Signature                    
|                              | Index to Exhibits                                                                            
|EXHIBIT 10.51                
|EXHIBIT 10.52                
|EXHIBIT 10.53                
|EXHIBIT 10.54                
|EXHIBIT 99.1                 
|EXHIBIT 99.2                 



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PHARMCHEM, INC.

QUARTERLY REPORT ON FORM 10-Q

INDEX

|          |  |                                                                                                                                        |  |     
|--------- |  | -------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|          |  |                                                                                                                                        |  | Page
|          |  |                                                                                                                                        |  |     
|         
|Part I.   |  | Financial Information                                                                                                                  |  |     
|         
|Item 1.   |  | Condensed Consolidated Financial Statements                                                                                            |  | 3   
|         
|          |  | Condensed Consolidated Balance Sheets (unaudited) at
June 30, 2002 and December 31, 2001                                               |  | 4   
|         
|          |  | Condensed Consolidated Statements of Operations (unaudited) for the
Three and Six Months ended June 30, 2002 and 2001                  |  | 5   
|         
|          |  | Condensed Consolidated Statements of Comprehensive Income (Loss)
(unaudited) for the Three and Six Months ended June 30, 2002 and 2001 |  | 6   
|         
|          |  | Condensed Consolidated Statements of Cash Flows (unaudited)
for the Three and Six Months ended June 30, 2002 and 2001                  |  | 7   
|         
|          |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                                                       |  | 8   
|         
|Item 2.   |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations                                                  |  | 12  
|         
|Part II.  |  | Other Information                                                                                                                      |  |     
|         
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                                                                    |  | 19  
|         
|Item 6.   |  | Exhibits and Reports on Form 8-K                                                                                                       |  | 19  
|         
|Signature |  |                                                                                                                                        |  | 20  

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PART I. Financial Information




Item 1. Condensed Consolidated Financial Statements

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

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

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

|                                                 |                                                                                                                                      |                            |        |        |        |          |        |              |        |  |  | 
|------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | ------ | ------ | ------ | -------- | ------ | ------------ | ------ |  |  | 
|                                                 |                                                                                                                                      |                            |        |        |        | June 30, |        | December 31,
|                                                 |                                                                                                                                      |                            |        |        |        | 2002     |        | 2001        
|                                                 |                                                                                                                                      |                            |        |        |        |          |        |             
|ASSETS                                           |                                                                                                                                      |                            |        |        |        |          |        |             
|CURRENT ASSETS:                                  |                                                                                                                                      |                            |        |        |        |          |        |             
|                                                 | Cash and cash equivalents                                                                                                            |                            | $      | 5,085  |        |          | $      | 197          |       
|                                                 | Accounts receivable, net                                                                                                             |                            |        | 4,790  |        |          |        | 5,378        |       
|                                                 | Inventory                                                                                                                            |                            |        | 1,605  |        |          |        | 2,160        |       
|                                                 | Prepaid expenses                                                                                                                     |                            |        | 447    |        |          |        | 538          |       
|                                                 | Deferred income taxes                                                                                                                |                            |        |       |        |          |        | 390          |       
|                                                 | Net current assets of discontinued operations                                                                                        |                            |        |       |        |          |        | 526          |       
|                                                 |                                                                                                                                      |                            |        |        |        |          |        |             
|                                                 |                                                                                                                                      | TOTAL CURRENT ASSETS       |        |        | 11,927 |          |        |              | 9,189  | 
|                                                 |                                                                                                                                      |                            |        |        |        |          |        |             
|PROPERTY AND EQUIPMENT, net                      |                                                                                                                                      |                            | 12,630 |        |        |          | 12,915 |             
|OTHER ASSETS                                     |                                                                                                                                      |                            | 39     |        |        |          | 763    |             
|GOODWILL, net                                    |                                                                                                                                      |                            | 729    |        |        |          | 729    |             
|NET NONCURRENT ASSETS OF DISCONTINUED OPERATIONS |                                                                                                                                      |                            |       |        |        |          | 1,613  |             
|                                                 |                                                                                                                                      |                            |        |        |        |          |        |             
|                                                 |                                                                                                                                      | TOTAL ASSETS               |        | $      | 25,325 |          |        | $            | 25,209 | 
|                                                 |                                                                                                                                      |                            |        |        |        |          |        |             
|LIABILITIES AND STOCKHOLDERS EQUITY             |                                                                                                                                      |                            |        |        |        |          |        |             
|CURRENT LIABILITIES:                             |                                                                                                                                      |                            |        |        |        |          |        |             
|                                                 | Revolving line of credit                                                                                                             |                            | $      | 3,881  |        |          | $      | 4,544        |       
|                                                 | Current portion of long-term debt                                                                                                    |                            |        | 1,183  |        |          |        | 2,668        |       
|                                                 | Accounts payable                                                                                                                     |                            |        | 3,537  |        |          |        | 5,935        |       
|                                                 | Accrued compensation                                                                                                                 |                            |        | 398    |        |          |        | 635          |       
|                                                 | Accrued collectors and other liabilities                                                                                             |                            |        | 2,584  |        |          |        | 1,659        |       
|                                                 |                                                                                                                                      |                            |        |        |        |          |        |             
|                                                 |                                                                                                                                      | TOTAL CURRENT LIABILITIES  |        |        | 11,583 |          |        |              | 15,441 | 
|LONG-TERM DEBT, net of current portion           |                                                                                                                                      |                            | 2,607  |        |        |          | 3,030  |             
|                                                 |                                                                                                                                      |                            |        |        |        |          |        |             
|                                                 |                                                                                                                                      | TOTAL LIABILITIES          |        |        | 14,190 |          |        |              | 18,471 | 
|                                                 |                                                                                                                                      |                            |        |        |        |          |        |             
|STOCKHOLDERS EQUITY:                            |                                                                                                                                      |                            |        |        |        |          |        |             
|                                                 | Common stock, $0.001 par value, 25,000 shares authorized,
5,853 shares issued and outstanding at June 30, 2002 and
December 31, 2001 |                            |        | 6      |        |          |        | 6            |       
|                                                 | Additional paid-in capital                                                                                                           |                            |        | 19,589 |        |          |        | 19,589       |       
|                                                 | Accumulated other comprehensive loss                                                                                                 |                            |        |       |        |          |        | (279         | )     
|                                                 | Accumulated deficit                                                                                                                  |                            |        | (8,460 | )      |          |        | (12,578      | )     
|                                                 |                                                                                                                                      |                            |        |        |        |          |        |             
|                                                 |                                                                                                                                      | TOTAL STOCKHOLDERS EQUITY |        |        | 11,135 |          |        |              | 6,738  | 
|                                                 |                                                                                                                                      |                            |        |        |        |          |        |             
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY       |                                                                                                                                      | $                          | 25,325 |        |        | $        | 25,209 |             
|                                                 |                                                                                                                                      |                            |        |        |        |          |        |             

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

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PHARMCHEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)

|                                                    |                                                                                                                                                                                                       |                          |                         |       |                    |       |                  |       |       |       |        |       |       |      |        |       |       |       |  
|--------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------ | ----------------------- | ----- | ------------------ | ----- | ---------------- | ----- | ----- | ----- | ------ | ----- | ----- | ---- | ------ | ----- | ----- | ----- | -
|                                                    |                                                                                                                                                                                                       |                          |                         |       | Three Months Ended |       | Six Months Ended
|                                                    |                                                                                                                                                                                                       |                          |                         |       | June 30,           |       | June 30,        
|                                                    |                                                                                                                                                                                                       |                          |                         |       |                    |       |                 
|                                                    |                                                                                                                                                                                                       |                          |                         |       | 2002               |       | 2001             |       | 2002  |       | 2001  
|                                                    |                                                                                                                                                                                                       |                          |                         |       |                    |       |                  |       |       |       |       
|NET SALES                                           |                                                                                                                                                                                                       | $                        | 8,066                   |       |                    | $     | 9,030            |       |       | $     | 15,542 |       |       | $    | 18,664 |      
|COST OF SALES                                       |                                                                                                                                                                                                       |                          | 6,249                   |       |                    |       | 9,214            |       |       |       | 11,917 |       |       |      | 16,928 |      
|                                                    |                                                                                                                                                                                                       |                          |                         |       |                    |       |                  |       |       |       |        |       |       |      |        |      
|GROSS PROFIT (LOSS)                                 |                                                                                                                                                                                                       |                          | 1,817                   |       |                    |       | (184             | )     |       |       | 3,625  |       |       |      | 1,736  |      
|                                                    |                                                                                                                                                                                                       |                          |                         |       |                    |       |                  |       |       |       |        |       |       |      |        |      
|OPERATING EXPENSES:                                 |                                                                                                                                                                                                       |                          |                         |       |                    |       |                  |       |       |       |        |       |       |      |        |      
|                                                    | Selling, general and administrative                                                                                                                                                                   |                          |                         | 1,933 |                    |       |                  | 4,415 |       |       |        | 3,946 |       |      |        | 7,239 |      
|                                                    | Amortization of goodwill                                                                                                                                                                              |                          |                         |      |                    |       |                  | 32    |       |       |        |      |       |      |        | 64    |      
|                                                    | Restructuring charge                                                                                                                                                                                  |                          |                         |      |                    |       |                  | 1,029 |       |       |        |      |       |      |        | 1,029 |      
|                                                    |                                                                                                                                                                                                       |                          |                         |       |                    |       |                  |       |       |       |        |       |       |      |        |      
|                                                    |                                                                                                                                                                                                       | Total operating expenses |                         |       | 1,933              |       |                  |       | 5,476 |       |        |       | 3,946 |      |        |       | 8,332 |      
|                                                    |                                                                                                                                                                                                       |                          |                         |       |                    |       |                  |       |       |       |        |       |       |      |        |      
|LOSS FROM OPERATIONS                                |                                                                                                                                                                                                       |                          | (116                    | )     |                    |       | (5,660           | )     |       |       | (321   | )     |       |      | (6,596 | )    
|Interest expense                                    |                                                                                                                                                                                                       |                          | 134                     |       |                    |       | 86               |       |       |       | 253    |       |       |      | 155    |      
|Other expense (income)                              |                                                                                                                                                                                                       |                          | (55                     | )     |                    |       | (4               | )     |       |       | 13     |       |       |      | (17    | )    
|                                                    |                                                                                                                                                                                                       |                          |                         |       |                    |       |                  |       |       |       |        |       |       |      |        |      
|                                                    |                                                                                                                                                                                                       |                          | 79                      |       |                    |       | 82               |       |       |       | 266    |       |       |      | 138    |      
|                                                    |                                                                                                                                                                                                       |                          |                         |       |                    |       |                  |       |       |       |        |       |       |      |        |      
|LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES |                                                                                                                                                                                                       |                          | (195                    | )     |                    |       | (5,742           | )     |       |       | (587   | )     |       |      | (6,734 | )    
|PROVISION FOR (BENEFIT FROM) INCOME TAXES           |                                                                                                                                                                                                       |                          | 13                      |       |                    |       |                 |       |       |       | (69    | )     |       |      |       |      
|                                                    |                                                                                                                                                                                                       |                          |                         |       |                    |       |                  |       |       |       |        |       |       |      |        |      
|LOSS FROM CONTINUING OPERATIONS                     |                                                                                                                                                                                                       |                          | (208                    | )     |                    |       | (5,742           | )     |       |       | (518   | )     |       |      | (6,734 | )    
|DISCONTINUED OPERATIONS:                            |                                                                                                                                                                                                       |                          |                         |       |                    |       |                  |       |       |       |        |       |       |      |        |      
|                                                    | Income from discontinued operations, net of applicable
income taxes of $103 for the three months ended
June 30, 2001, and $184 and $250 for the six months
ended June 30, 2002 and 2001, respectively |                          |                         |      |                    |       |                  | 185   |       |       |        | 359   |       |      |        | 477   |      
|                                                    | Gain on disposition, net of applicable income taxes of
$1,116                                                                                                                                         |                          |                         |      |                    |       |                  |      |       |       |        | 4,277 |       |      |        |      |      
|                                                    |                                                                                                                                                                                                       |                          |                         |       |                    |       |                  |       |       |       |        |       |       |      |        |      
|NET INCOME (LOSS)                                   |                                                                                                                                                                                                       | $                        | (208                    | )     |                    | $     | (5,557           | )     |       | $     | 4,118  |       |       | $    | (6,257 | )    
|                                                    |                                                                                                                                                                                                       |                          |                         |       |                    |       |                  |       |       |       |        |       |       |      |        |      
|NET INCOME (LOSS) PER COMMON SHARE:                 |                                                                                                                                                                                                       |                          |                         |       |                    |       |                  |       |       |       |        |       |       |      |        |      
|                                                    | BASIC:                                                                                                                                                                                                | Continuing operations    |                         | $     | (0.04              | )     |                  | $     | (0.98 | )     |        | $     | (0.09 | )    |        | $     | (1.15 | )    
|                                                    |                                                                                                                                                                                                       |                          | Discontinued operations |       |                    |      |                  |       |       | 0.03  |        |       |       | 0.79 |        |       |       | 0.08  |  
|                                                    |                                                                                                                                                                                                       |                          |                         |       |                    |       |                  |       |       |       |        |       |       |      |        |      
|                                                    |                                                                                                                                                                                                       |                          | Net income (loss)       |       | $                  | (0.04 | )                |       | $     | (0.95 | )      |       | $     | 0.70 |        |       | $     | (1.07 | )
|                                                    |                                                                                                                                                                                                       |                          |                         |       |                    |       |                  |       |       |       |        |       |       |      |        |      
|                                                    | DILUTED:                                                                                                                                                                                              | Continuing operations    |                         | $     | (0.04              | )     |                  | $     | (0.98 | )     |        | $     | (0.09 | )    |        | $     | (1.15 | )    
|                                                    |                                                                                                                                                                                                       |                          | Discontinued operations |       |                    |      |                  |       |       | 0.03  |        |       |       | 0.79 |        |       |       | 0.08  |  
|                                                    |                                                                                                                                                                                                       |                          |                         |       |                    |       |                  |       |       |       |        |       |       |      |        |      
|                                                    |                                                                                                                                                                                                       |                          | Net income (loss)       |       | $                  | (0.04 | )                |       | $     | (0.95 | )      |       | $     | 0.70 |        |       | $     | (1.07 | )
|                                                    |                                                                                                                                                                                                       |                          |                         |       |                    |       |                  |       |       |       |        |       |       |      |        |      
|WEIGHTED AVERAGE SHARES OUTSTANDING:                |                                                                                                                                                                                                       |                          |                         |       |                    |       |                  |       |       |       |        |       |       |      |        |      
|                                                    | BASIC                                                                                                                                                                                                 |                          |                         | 5,853 |                    |       |                  | 5,851 |       |       |        | 5,853 |       |      |        | 5,849 |      
|                                                    |                                                                                                                                                                                                       |                          |                         |       |                    |       |                  |       |       |       |        |       |       |      |        |      
|                                                    | DILUTED                                                                                                                                                                                               |                          |                         | 5,853 |                    |       |                  | 5,851 |       |       |        | 5,853 |       |      |        | 5,849 |      
|                                                    |                                                                                                                                                                                                       |                          |                         |       |                    |       |                  |       |       |       |        |       |       |      |        |      

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 |   | Six Months Ended
|                            |                                                                                                |   | June 30,           |   | June 30,        
|                            |                                                                                                |   |                    |   |                 
|                            |                                                                                                |   | 2002               |   | 2001             |   | 2002   |    | 2001
|                            |                                                                                                |   |                    |   |                  |   |        |    |     
|NET INCOME (LOSS)           |                                                                                                | $ | (208               | ) |                  | $ | (5,557 | )  |      | $ | 4,118 |     |   | $ | (6,257 | )  
|OTHER COMPREHENSIVE LOSS:   |                                                                                                |   |                    |   |                  |   |        |    |      |   |       |     |   |   |        |    
|                            | Foreign currency translation                                                                   |   |                    |  |                  |   |        | 49 |      |   |       | (53 | ) |   |        | (87 | )
|                            | Reclassification adjustment for realized foreign
currency exchange loss included in net income |   |                    |  |                  |   |        |   |      |   |       | 332 |   |   |        |    |  
|                            |                                                                                                |   |                    |   |                  |   |        |    |      |   |       |     |   |   |        |    
|                            |                                                                                                |   |                   |   |                  |   | 49     |    |      |   | 279   |     |   |   | (87    | )  
|                            |                                                                                                |   |                    |   |                  |   |        |    |      |   |       |     |   |   |        |    
|COMPREHENSIVE INCOME (LOSS) |                                                                                                | $ | (208               | ) |                  | $ | (5,508 | )  |      | $ | 4,397 |     |   | $ | (6,344 | )  
|                            |                                                                                                |   |                    |   |                  |   |        |    |      |   |       |     |   |   |        |    

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)

|                                                 |                                                                                                    |                                                          |                                                       |                                                                                |        |                  |        |        |        |       |        |  
|------------------------------------------------ | -------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ----------------------------------------------------- | ------------------------------------------------------------------------------ | ------ | ---------------- | ------ | ------ | ------ | ----- | ------ | -
|                                                 |                                                                                                    |                                                          |                                                       |                                                                                |        | Six Months Ended
|                                                 |                                                                                                    |                                                          |                                                       |                                                                                |        | June 30,        
|                                                 |                                                                                                    |                                                          |                                                       |                                                                                |        |                 
|                                                 |                                                                                                    |                                                          |                                                       |                                                                                |        | 2002             |        | 2001  
|                                                 |                                                                                                    |                                                          |                                                       |                                                                                |        |                  |        |       
|CASH FLOWS FROM OPERATING ACTIVITIES             |                                                                                                    |                                                          |                                                       |                                                                                |        |                  |        |       
|                                                 | Net income (loss)                                                                                  |                                                          | $                                                     | 4,118                                                                          |        |                  | $      | (6,257 | )     
|                                                 | Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities: |                                                          |                                                       |                                                                                |        |                  |        |        |       
|                                                 |                                                                                                    |                                                          | Income from discontinued operations                   |                                                                                |        | (359             | )      |        |        | (477  | )     
|                                                 |                                                                                                    |                                                          | Depreciation and amortization                         |                                                                                |        | 1,121            |        |        |        | 1,075 |       
|                                                 |                                                                                                    |                                                          | Amortization of discount on subordinated debt         |                                                                                |        | 86               |        |        |        |      |       
|                                                 |                                                                                                    |                                                          | Provision for doubtful accounts                       |                                                                                |        | 35               |        |        |        | 47    |       
|                                                 |                                                                                                    |                                                          | Gain on sale of disposition of subsidiary, net of tax |                                                                                |        | (4,277           | )      |        |        |      |       
|                                                 |                                                                                                    |                                                          | Deferred income taxes                                 |                                                                                |        |                 |        |        |        | (4    | )     
|                                                 |                                                                                                    |                                                          | Gain on disposal of assets                            |                                                                                |        |                 |        |        |        | (90   | )     
|                                                 |                                                                                                    |                                                          | Restructuring charge                                  |                                                                                |        |                 |        |        |        | 586   |       
|                                                 | Changes in operating assets and liabilities:                                                       |                                                          |                                                       |                                                                                |        |                  |        |        |       
|                                                 |                                                                                                    |                                                          | Accounts receivable                                   |                                                                                |        | 553              |        |        |        | 1,096 |       
|                                                 |                                                                                                    |                                                          | Inventory                                             |                                                                                |        | 555              |        |        |        | 131   |       
|                                                 |                                                                                                    |                                                          | Prepaids and other current assets                     |                                                                                |        | 91               |        |        |        | (611  | )     
|                                                 |                                                                                                    |                                                          | Other assets                                          |                                                                                |        | (2               | )      |        |        | (3    | )     
|                                                 |                                                                                                    |                                                          | Accounts payable and other accrued liabilities        |                                                                                |        | (1,674           | )      |        |        | 1,265 |       
|                                                 |                                                                                                    |                                                          | Other noncurrent liabilities                          |                                                                                |        |                 |        |        |        | (1    | )     
|                                                 |                                                                                                    |                                                          |                                                       |                                                                                |        |                  |        |       
|                                                 |                                                                                                    |                                                          |                                                       | Net cash provided by (used in) operating activities of continuing
operations   |        |                  | 247    |        |        |       | (3,243 | )
|                                                 |                                                                                                    |                                                          |                                                       |                                                                                |        |                  |        |       
|                                                 |                                                                                                    |                                                          |                                                       | Net cash provided by operating activities of discontinued operations           |        |                  | 161    |        |        |       | 460    |  
|                                                 |                                                                                                    |                                                          |                                                       |                                                                                |        |                  |        |       
|CASH FLOWS FROM INVESTING ACTIVITIES             |                                                                                                    |                                                          |                                                       |                                                                                |        |                  |        |       
|                                                 |                                                                                                    | Purchases of property and equipment                      |                                                       |                                                                                | (836   | )                |        |        | (2,717 | )    
|                                                 |                                                                                                    | Proceeds from sale of discontinued operations            |                                                       |                                                                                | 10,000 |                  |        |        |       |      
|                                                 |                                                                                                    |                                                          |                                                       |                                                                                |        |                  |        |       
|                                                 |                                                                                                    |                                                          |                                                       | Net cash provided by (used in) investing activities of continuing
operations   |        |                  | 9,164  |        |        |       | (2,717 | )
|                                                 |                                                                                                    |                                                          |                                                       |                                                                                |        |                  |        |       
|                                                 |                                                                                                    |                                                          |                                                       | Net cash used in investing activities of discontinued operations               |        |                  | (40    | )      |        |       | (15    | )
|                                                 |                                                                                                    |                                                          |                                                       |                                                                                |        |                  |        |       
|CASH FLOWS FROM FINANCING ACTIVITIES             |                                                                                                    |                                                          |                                                       |                                                                                |        |                  |        |       
|                                                 |                                                                                                    | Principal payments on long-term debt                     |                                                       |                                                                                | (1,994 | )                |        |        | (1,066 | )    
|                                                 |                                                                                                    | Proceeds from lease financing and short-term debt        |                                                       |                                                                                |       |                  |        |        | 2,786  |      
|                                                 |                                                                                                    | Borrowings (repayments) on revolving line of credit, net |                                                       |                                                                                | (663   | )                |        |        | 3,202  |      
|                                                 |                                                                                                    | Proceeds from exercise of stock options                  |                                                       |                                                                                |       |                  |        |        | 11     |      
|                                                 |                                                                                                    |                                                          |                                                       |                                                                                |        |                  |        |       
|                                                 |                                                                                                    |                                                          |                                                       | Net cash (used in) provided by financing activities of continuing
operations   |        |                  | (2,657 | )      |        |       | 4,933  |  
|                                                 |                                                                                                    |                                                          |                                                       |                                                                                |        |                  |        |       
|                                                 |                                                                                                    |                                                          |                                                       | Net cash (used in) provided by financing activities of discontinued
operations |        |                  | (1,987 | )      |        |       | 630    |  
|                                                 |                                                                                                    |                                                          |                                                       |                                                                                |        |                  |        |       
|NET INCREASE IN CASH AND CASH EQUIVALENTS        |                                                                                                    |                                                          | 4,888                                                 |                                                                                |        |                  | 48     |       
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |                                                                                                    |                                                          | 197                                                   |                                                                                |        |                  | 22     |       
|                                                 |                                                                                                    |                                                          |                                                       |                                                                                |        |                  |        |       
|CASH AND CASH EQUIVALENTS AT END OF PERIOD       |                                                                                                    | $                                                        | 5,085                                                 |                                                                                |        | $                | 70     |       
|                                                 |                                                                                                    |                                                          |                                                       |                                                                                |        |                  |        |       

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

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

1. Summary of Significant Accounting Policies

Basis of Presentation, General and Business

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

The accompanying condensed consolidated financial statements are prepared
in accordance with the instructions to Form 10-Q, are unaudited and do not
include all the information and disclosures required by accounting principles
generally accepted in the United States of America for complete financial
statements. 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. The
following table shows the Companys net loss excluding the goodwill
amortization in 2001 (in thousands, except per share amounts):

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|                                             |                                                            |   |                           |       |                         |   |        |        |      |   |       |       |   |   |        |        |  
|-------------------------------------------- | ---------------------------------------------------------- | - | ------------------------- | ----- | ----------------------- | - | ------ | ------ | ---- | - | ----- | ----- | - | - | ------ | ------ | -
|                                             |                                                            |   | Three Mos. Ended June 30, |       | Six Mos. Ended June 30,
|                                             |                                                            |   |                           |       |                        
|                                             |                                                            |   | 2002                      |       | 2001                    |   | 2002   |        | 2001
|                                             |                                                            |   |                           |       |                         |   |        |        |     
|Reported net loss from continuing operations |                                                            | $ | (208                      | )     |                         | $ | (5,742 | )      |      | $ | (518  | )     |   | $ | (6,734 | )     
|Amortization of PharmChem, Inc. goodwill     |                                                            |   |                          |       |                         |   | 32     |        |      |   |      |       |   |   | 64     |       
|                                             |                                                            |   |                           |       |                         |   |        |        |      |   |       |       |   |   |        |       
|                                             | Adjusted net loss from continuing operations               |   |                           | (208  | )                       |   |        | (5,710 | )    |   |       | (518  | ) |   |        | (6,670 | )
|                                             |                                                            |   |                           |       |                         |   |        |        |      |   |       |       |   |   |        |       
|Income from discontinued operations          |                                                            |   |                          |       |                         |   | 185    |        |      |   | 359   |       |   |   | 477    |       
|Amortization of Medscreen, Ltd. goodwill     |                                                            |   |                          |       |                         |   | 14     |        |      |   |      |       |   |   | 28     |       
|                                             |                                                            |   |                           |       |                         |   |        |        |      |   |       |       |   |   |        |       
|                                             | Adjusted net income from discontinued operations           |   |                           |      |                         |   |        | 199    |      |   |       | 359   |   |   |        | 505    |  
|                                             |                                                            |   |                           |       |                         |   |        |        |      |   |       |       |   |   |        |       
|Gain from sale of discontinued operations    |                                                            |   |                          |       |                         |   |       |        |      |   | 4,277 |       |   |   |       |       
|                                             |                                                            |   |                           |       |                         |   |        |        |      |   |       |       |   |   |        |       
|                                             | Adjusted net income (loss)                                 |   | $                         | (208  | )                       |   | $      | (5,511 | )    |   | $     | 4,118 |   |   | $      | (6,165 | )
|                                             |                                                            |   |                           |       |                         |   |        |        |      |   |       |       |   |   |        |       
|                                             | Adjusted net loss from continuing operations per share     |   | $                         | (0.04 | )                       |   | $      | (0.97  | )    |   | $     | (0.09 | ) |   | $      | (1.14  | )
|                                             |                                                            |   |                           |       |                         |   |        |        |      |   |       |       |   |   |        |       
|                                             | Adjusted net income from discontinued operations per
share |   |                           |      |                         |   | $      | 0.03   |      |   | $     | 0.79  |   |   | $      | 0.09   |  
|                                             |                                                            |   |                           |       |                         |   |        |        |      |   |       |       |   |   |        |       
|                                             | Adjusted net income (loss) per share                       |   | $                         | (0.04 | )                       |   | $      | (0.94  | )    |   | $     | 0.70  |   |   | $      | (1.05  | )
|                                             |                                                            |   |                           |       |                         |   |        |        |      |   |       |       |   |   |        |       

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 and made further
repayments on our revolving line of credit (see Note 5 of the Notes to
Condensed Consolidated Financial Statements). The remainder of the proceeds
have been and will be used for general corporate purposes.

Net sales of the discontinued operations were $1,753,000 for the three
months ended June 30, 2001, and $1,949,000 and $3,674,000 for the six months
ended June 30, 2002 and 2001, respectively. We recorded a gain on the sale of
Medscreen of $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.

Options and warrants to purchase 1,190,000 and 1,070,000 shares of our
common stock for the three months ended June 30, 2002 and 2001, respectively,
and 1,190,000 and 1,070,000 shares for the six months ended June 30, 2002 and
2001, respectively, were not included in the computation of diluted income per
share because their effect would have been anti-dilutive.

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4. Inventory

Inventory includes laboratory materials, collection materials and products
and is stated at the lower of cost or market. Cost is determined using standard
costs, including freight, that approximate actual costs on a first-in,
first-out basis. Inventory consisted of the following at June 30, 2002 and
December 31, 2001 (in thousands):

|                     |  |      |       |      |  |   |       | 
|-------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                     |  | 2002 |       | 2001
|                     |  |      |       |     
|Laboratory materials |  | $    | 305   |      |  | $ | 294   | 
|Collection materials |  |      | 755   |      |  |   | 1,031 | 
|Products             |  |      | 545   |      |  |   | 835   | 
|                     |  |      |       |      |  |   |       | 
|                     |  | $    | 1,605 |      |  | $ | 2,160 | 
|                     |  |      |       |      |  |   |       | 

5. Debt

Our debt at June 30, 2002 and December 31, 2001 consisted of the following
(in thousands):

|                                                                                                                                                                                              |  |      |        |      |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                                                                                                                                                                              |  | 2002 |        | 2001
|                                                                                                                                                                                              |  |      |        |     
|Revolving line of credit                                                                                                                                                                      |  | $    | 3,881  |      |  | $ | 4,544  |  
|Term installment note (repaid in April 2002)                                                                                                                                                  |  |      |       |      |  |   | 1,103  |  
|Subordinated debt, net of discount of $216 and $302 at June 30,
2002 and December 31, 2001, respectively,
due September, 2003                                                                 |  |      | 1,284  |      |  |   | 1,198  |  
|Obligations under capitalized leases, due in monthly installments
through 2005, secured by laboratory equipment, office
equipment and computer software, interest rates
ranging from 8% to 9% |  |      | 2,506  |      |  |   | 3,397  |  
|                                                                                                                                                                                              |  |      |        |      |  |   |        |  
|                                                                                                                                                                                              |  |      | 7,671  |      |  |   | 10,242 |  
|Less: current portion and revolving line of credit                                                                                                                                            |  |      | (5,064 | )    |  |   | (7,212 | )
|                                                                                                                                                                                              |  |      |        |      |  |   |        |  
|Long-term portion                                                                                                                                                                             |  | $    | 2,607  |      |  | $ | 3,030  |  
|                                                                                                                                                                                              |  |      |        |      |  |   |        |  

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 continues at $4,250,000, the maturity date is June 30, 2003,
interest is at the prime rate plus one-half percent (5.25% as of June 30,
2002), and the annual fee is 0.10% of the credit line, payable quarterly. The
financial covenants have been modified to include a current ratio of no less
than 0.85 to 1.00, total liabilities to effective tangible net worth of not
more than 2.0 to 1.00, and minimum effective tangible net worth of not less
than $10 million (including subordinated debt)all measured quarterly. In
addition, the Company is required to be profitable for the 2002 fiscal year and
quarterly in 2003. Also, the Agreement provides for a limitation on capital
expenditures and requires a restricted cash balance of $500,000.

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.

This Agreement replaces the May 15, 2000 Loan and Security Agreement which
was modified on May 20, 2002 (whereby the advance rate was reduced from 85% to
80% of eligible receivables, restricted

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cash of $1,000,000 was required and the maturity date was extended to June 30,
2002), and again on June 30, 2002 (which further extended the maturity date
until July 31, 2002).

As of June 30, 2002, the calculated maximum that could be borrowed and the
amount outstanding were $3,925,000 and $3,881,000, respectively. We were in
compliance with our covenants as of June 30, 2002.

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             |     | 2002     |   | As of        
|                               |       |   | December 31, 2001 |     | Payments |   | June 30, 2002
|                               |       |   |                   |     |          |   |              
|Severance and related benefits |       | $ | 74                |     |          | $ | (45           | )   |         | $ | 29  |    
|Clean-up and remediation       |       |   | 213               |     |          |   |              |     |         |   | 213 |    
|Repairs                        |       |   | 9                 |     |          |   |              |     |         |   | 9   |    
|Legal and other                |       |   | 67                |     |          |   | (3            | )   |         |   | 64  |    
|                               |       |   |                   |     |          |   |               |     |         |   |     |    
|                               | Total |   | $                 | 363 |          |   | $             | (48 | )       |   | $   | 315 | 
|                               |       |   |                   |     |          |   |               |     |         |   |     |    

The restructuring plan was designed to provide for costs associated with
leaving our facilities in Menlo Park, California. The lease on our main Menlo
Park facility terminated on June 1, 2001 and the restructuring expenses
represent estimated and actual costs related to workforce reductions, clean-up,
repairs and legal services. As part of the workforce reduction, we recorded
severance and related fringe benefits costs for approximately 160 employees
from operations and administration, of which 151 employees were terminated as
of June 30, 2002. The clean-up and remediation includes removal of a
previously unknown storage vault and potential restoration of the facility per
the lease agreement. Repairs includes sewer line repair or replacement as
contractually provided for in the lease agreement. In addition, we expect to
continue to incur legal and other fees related to interpretation of the leases
contractual obligations. The accrual balance of $315,000 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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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, 2001. We assume no obligation to
update the forward-looking statements or such factors.

Recent Events

During 2001, we relocated our corporate headquarters, distribution center
and laboratory operations from the Silicon Valley area of Northern California
to a new facility in Haltom City, Texas. We vacated our primary California
facility in May 2001 and temporarily moved to our existing facility in Fort
Worth, Texas until construction was completed at the new Haltom City facility.
During the process of relocating to Texas, we incurred significant costs that
were financed through a combination of internal operations, increased borrowing
under our existing and new credit facilities and a sale-leaseback transaction.
We believe these costs were of a nonrecurring nature and principally relate to
the period prior to occupying our new Haltom City facility. Our laboratory
operations and distribution center relocated to the Haltom City facility in
September and October, 2001, respectively. To mitigate further operating
losses, we implemented a cost containment program in September of 2001 which is
continuing in 2002. This cost containment program included two rounds of
layoffs whereby our employee population has decreased approximately 30% from
mid-2001 levels, significant reductions in discretionary spending, including
travel and marketing, renegotiations with certain suppliers to secure more
favorable pricing of materials and services, and the closure of our satellite
laboratory in California that performed methadone drug testing.

In connection with the consolidation of our laboratory operations into our
new Haltom City, Texas laboratory, in November 2001 we voluntarily withdrew our
Fort Worth, Texas laboratorys license to conduct laboratory testing of
federally regulated specimens. Thereafter, we temporarily outsourced our
customers federally regulated specimens to another certified laboratory.
Federally regulated specimens represented approximately 3% of our total
specimen volume in 2001. In May 2002, the Company was granted its license and
certified to process federally regulated specimens at its new facility.

As further discussed in Note 2 of the accompanying Notes to Condensed
Consolidated Financial Statements, in March 2002 we completed the sale of
Medscreen for approximately $10,000,000 in cash. A portion of the sale
proceeds were used to repay debt and the remainder is expected to be sufficient
to fund the general corporate needs of the US operations for at least the next
year.

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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.

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

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Results of Operations

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

|                                          |                                                             |                                |       |                             |       |                           |        |       |       |      |      |                       |       |      |       |      |       |      |        |       |        |                       |        |       |        |  |      |      |       |   |       |      |       | 
|----------------------------------------- | ----------------------------------------------------------- | ------------------------------ | ----- | --------------------------- | ----- | ------------------------- | ------ | ----- | ----- | ---- | ---- | --------------------- | ----- | ---- | ----- | ---- | ----- | ---- | ------ | ----- | ------ | --------------------- | ------ | ----- | ------ |  | ---- | ---- | ----- | - | ----- | ---- | ----- | 
|                                          |                                                             |                                |       | Three Months Ended June 30, |       | Six Months Ended June 30,
|                                          |                                                             |                                |       |                             |       |                          
|                                          |                                                             |                                |       | 2002                        |       | 2001                      |        | 2002  |       | 2001 |      | 2002                  |       | 2001 |       | 2002 |       | 2001
|                                          |                                                             |                                |       |                             |       |                           |        |       |       |      |      |                       |       |      |       |      |       |     
|                                          |                                                             |                                |       |                             |       |                           |        |       |       |      |      | (As a % of net sales) |       |      |       |      |       |      |        |       |        | (As a % of net sales)
|                                          |                                                             |                                |       |                             |       |                           |        |       |       |      |      |                       |       |      |       |      |       |      |        |       |        |                      
|NET SALES:                                |                                                             |                                |       |                             |       |                           |        |       |       |      |      |                       |       |      |       |      |       |      |        |       |        |                       |        |       |        |  |      |      |       |   |       |     
|                                          | Workplace employers analysis                                |                                | $     | 2,473                       |       |                           | $      | 3,405 |       |      |      | 30.7                  | %     |      |       | 37.7 | %     |      | $      | 4,713 |        |                       | $      | 6,885 |        |  |      | 30.3 | %     |   |       | 36.9 | %    
|                                          | Criminal justice agencies analysis                          |                                |       | 3,844                       |       |                           |        | 3,537 |       |      |      | 47.6                  |       |      |       | 39.2 |       |      |        | 7,732 |        |                       |        | 7,982 |        |  |      | 49.7 |       |   |       | 42.8 |      
|                                          | Other analysis                                              |                                |       | 45                          |       |                           |        | 220   |       |      |      | 0.6                   |       |      |       | 2.4  |       |      |        | 90    |        |                       |        | 510   |        |  |      | 0.6  |       |   |       | 2.7  |      
|                                          | Products and other                                          |                                |       | 1,704                       |       |                           |        | 1,868 |       |      |      | 21.1                  |       |      |       | 20.7 |       |      |        | 3,007 |        |                       |        | 3,287 |        |  |      | 19.4 |       |   |       | 17.6 |      
|                                          |                                                             |                                |       |                             |       |                           |        |       |       |      |      |                       |       |      |       |      |       |      |        |       |        |                       |        |       |        |  |      |      |       |   |       |     
|                                          |                                                             | Total net sales                |       |                             | 8,066 |                           |        |       | 9,030 |      |      |                       | 100.0 | %    |       |      | 100.0 | %    |        |       | 15,542 |                       |        |       | 18,664 |  |      |      | 100.0 | % |       |      | 100.0 | 
|COST OF SALES                             |                                                             |                                | 6,249 |                             |       |                           | 9,214  |       |       |      | 77.5 |                       |       |      | 102.0 |      |       |      | 11,917 |       |        |                       | 16,928 |       |        |  | 76.7 |      |       |   | 90.7  |     
|                                          |                                                             |                                |       |                             |       |                           |        |       |       |      |      |                       |       |      |       |      |       |      |        |       |        |                       |        |       |        |  |      |      |       |   |       |     
|GROSS PROFIT (LOSS)                       |                                                             |                                | 1,817 |                             |       |                           | (184   | )     |       |      | 22.5 |                       |       |      | (2.0  | )    |       |      | 3,625  |       |        |                       | 1,736  |       |        |  | 23.3 |      |       |   | 9.3   |     
|                                          |                                                             |                                |       |                             |       |                           |        |       |       |      |      |                       |       |      |       |      |       |      |        |       |        |                       |        |       |        |  |      |      |       |   |       |     
|OPERATING EXPENSES:                       |                                                             |                                |       |                             |       |                           |        |       |       |      |      |                       |       |      |       |      |       |      |        |       |        |                       |        |       |        |  |      |      |       |   |       |     
|                                          | Selling, general and administrative                         |                                |       | 1,933                       |       |                           |        | 4,415 |       |      |      | 24.0                  |       |      |       | 48.9 |       |      |        | 3,946 |        |                       |        | 7,239 |        |  |      | 25.4 |       |   |       | 38.8 |      
|                                          | Amortization of goodwill                                    |                                |       |                            |       |                           |        | 32    |       |      |      |                      |       |      |       | 0.3  |       |      |        |      |        |                       |        | 64    |        |  |      |     |       |   |       | 0.3  |      
|                                          | Restructuring charge                                        |                                |       |                            |       |                           |        | 1,029 |       |      |      |                      |       |      |       | 11.4 |       |      |        |      |        |                       |        | 1,029 |        |  |      |     |       |   |       | 5.5  |      
|                                          |                                                             |                                |       |                             |       |                           |        |       |       |      |      |                       |       |      |       |      |       |      |        |       |        |                       |        |       |        |  |      |      |       |   |       |     
|                                          |                                                             | Total operating expenses       |       |                             | 1,933 |                           |        |       | 5,476 |      |      |                       | 24.0  |      |       |      | 60.6  |      |        |       | 3,946  |                       |        |       | 8,332  |  |      |      | 25.4  |   |       |      | 44.6  | 
|                                          |                                                             |                                |       |                             |       |                           |        |       |       |      |      |                       |       |      |       |      |       |      |        |       |        |                       |        |       |        |  |      |      |       |   |       |     
|LOSS FROM OPERATIONS                      |                                                             |                                | (116  | )                           |       |                           | (5,660 | )     |       |      | (1.5 | )                     |       |      | (62.6 | )    |       |      | (321   | )     |        |                       | (6,596 | )     |        |  | (2.1 | )    |       |   | (35.3 | )   
|OTHER EXPENSE, net                        |                                                             |                                | 79    |                             |       |                           | 82     |       |       |      | 1.0  |                       |       |      | 0.9   |      |       |      | 266    |       |        |                       | 138    |       |        |  | 1.7  |      |       |   | 0.7   |     
|PROVISION FOR (BENEFIT FROM)
INCOME TAXES |                                                             |                                | 13    |                             |       |                           |       |       |       |      | 0.2  |                       |       |      |      |      |       |      | (69    | )     |        |                       |       |       |        |  | (0.4 | )    |       |   |      |     
|                                          |                                                             |                                |       |                             |       |                           |        |       |       |      |      |                       |       |      |       |      |       |      |        |       |        |                       |        |       |        |  |      |      |       |   |       |     
|LOSS FROM CONTINUING OPERATIONS           |                                                             |                                | (208  | )                           |       |                           | (5,742 | )     |       |      | (2.7 | )                     |       |      | (63.5 | )    |       |      | (518   | )     |        |                       | (6,734 | )     |        |  | (3.4 | )    |       |   | (36.0 | )   
|DISCONTINUED OPERATIONS:                  |                                                             |                                |       |                             |       |                           |        |       |       |      |      |                       |       |      |       |      |       |      |        |       |        |                       |        |       |        |  |      |      |       |   |       |     
|                                          | Income from discontinued operations,                        |                                |       |                             |       |                           |        |       |       |      |      |                       |       |      |       |      |       |      |        | 3     |        |                       |        |       |        |  |      |      |       |   |       |      |      
|                                          |                                                             | net of applicable income taxes |       |                             |      |                           |        |       | 185   |      |      |                       |      |      |       |      | 2.0   |      |        |       | 359    |                       |        |       | 477    |  |      |      | 2.3   |   |       |      | 2.5   | 
|                                          | Gain on sale of disposition, net of
applicable income taxes |                                |       |                            |       |                           |        |      |       |      |      |                      |       |      |       |     |       |      |        | 4,277 |        |                       |        |      |        |  |      | 27.5 |       |   |       |     |      
|                                          |                                                             |                                |       |                             |       |                           |        |       |       |      |      |                       |       |      |       |      |       |      |        |       |        |                       |        |       |        |  |      |      |       |   |       |     
|NET INCOME (LOSS)                         |                                                             | $                              | (208  | )                           |       | $                         | (5,557 | )     |       |      | (2.7 | )%                    |       |      | (61.5 | )%   |       | $    | 4,118  |       |        | $                     | (6,257 | )     |        |  | 26.4 | %    |       |   | (33.5 | )%  
|                                          |                                                             |                                |       |                             |       |                           |        |       |       |      |      |                       |       |      |       |      |       |      |        |       |        |                       |        |       |        |  |      |      |       |   |       |     

Second Quarter 2002 vs. 2001

Net salesfor the three months ended June 30, 2002 were $8,066,000, a
decrease of 10.7% from last years second quarter sales of $9,030,000. While
the overall volume of laboratory specimen analysis was down by 13.9%, revenue
from our criminal justice customers rose 8.7% with revenue from all other
customer classes down by 33.0%. Specimen volume from workplace customers
continues to be weak as the economic downturn, which first impacted us in the
fourth quarter of 2001, continues. Average selling prices of laboratory
analysis rose slightly in the current quarter but this is a function of
customer and service mix as there have been no significant price increases in
2002. Sales of products and other services were lower by 8.8%, which is also a
reflection of the weak economy.

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Cost of salesfor the three months ended June 30, 2002 was $6,249,000
(77.5% of net sales), a decrease of 32.2% from last years second quarter cost
of sales of $9,214,000 (102.0% of net sales). Last years amount includes
$2,028,000 of nonrecurring costs related to our relocation from California to
Texas. Excluding this item, last years pro forma cost of sales would have
been $7,186,000 (79.6% of net sales).

On a pro forma basis, this years cost of sales is $937,000 (13.0%) lower
than last years amount and compares favorably with the 10.7% sales decrease.
Nearly every cost element was lower in 2002 versus 2001 with the exception of
health and related benefit costs. Also, the cost of specimen collections
(conducted for the Company by third parties) was down 10.3% in absolute dollars
versus the prior years quarter (which compares favorably with a 10.0% drop in
the number of collections). However, the per collection cost was 2.2% and 6.1%
higher, respectively, than the first quarter of 2002 and the fourth quarter of
2001. The Company has embarked on a program to lower its collection costs but
any benefits will not be seen until late in 2002 or early in 2003.

The lower cost of sales this year is a direct function of lower specimen
volume coupled with operating efficiencies and a cost reduction program
implemented in late 2001 which is continuing into 2002. Fixed overhead was
lower by 24.7% in spite of higher depreciation related to systems and equipment
at the new facility being placed in service. Gross profit (loss) as a
percentage of net sales increased to 22.5% in 2002 from negative 2.0% in 2001.
Excluding the nonrecurring costs of $2,028,000, 2001s gross profit on a pro
forma basis would have been $1,844,000 and the gross profit margin would have
been 20.4%.

Selling, General & Administrative (SG&A)expenses for the three months
ended June 30, 2002 decreased $2,482,000 (56.2%) to $1,933,000 in 2002 from
$4,415,000 in 2001. The decrease partially reflects lower labor and fringe
benefit costs, travel, marketing and consulting resulting from the cost
containment program implemented in the latter part of 2001. In addition, the
prior year included $1,417,000 of nonrecurring costs associated with the
relocation of our Company to Texas. SG&A expenses as a percentage of net sales
decreased to 24.0% in 2002 from 48.9% in 2001. Excluding the nonrecurring
costs, SG&A on a pro forma basis in 2001 would have been $2,998,000, or 33.2%
of net sales. The current quarters SG&A would have been lower than last
years pro forma SG&A by 35.5%.

Restructuring Chargeof $1,029,000 was recorded in 2001s second quarter
in accordance with a plan approved by our Board of Directors to provide for
costs associated with closing our former headquarters and main laboratory in
Menlo Park, California. The charge consisted of $330,000 for severance and
related benefits costs of a workforce reduction and $699,000 for repairs,
clean-up and professional services.

Discontinued Operationsfor the three months ended June 30, 2001 generated
income of $185,000, or $0.03 per share. There were no discontinued operations
in the second quarter of 2002.

Net lossfrom continuing operations for the three months ended June 30,
2002 was $208,000 or $0.04 per share compared to a net loss of $5,742,000 or
$0.98 per share in 2001. The net loss in 2001, after the inclusion of income
from discontinued operations, was $5,557,000, or $0.95 per share. Excluding
the $3,445,000 of nonrecurring expenses associated with the Companys
relocation, the restructuring charge of $1,029,000 and $32,000 of goodwill
amortization, the pro forma loss from continuing operations in 2001 would have
been $1,236,000, or $0.21 per share.

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Six Months 2002 vs. 2001

Net salesfor the six months ended June 30, 2002 decreased $3,122,000
(16.7%) to $15,542,000 in 2002 from $18,664,000 in 2001. Specimen volume was
down in all customer classes with workplace volume down significantly more than
criminal justice. Sales of products and other services were lower by only
8.5%.

Cost of salesfor the six months ended June 30, 2002 decreased $5,011,000
(29.6%) to $11,917,000 in 2002 (76.7% of net sales) from $16,928,000 in 2001
(90.7% of net sales). Last years cost of sales includes $2,504,000 of
nonrecurring costs directly related to our relocation to Texas. Excluding
these nonrecurring costs, last years cost of sales on a pro forma basis would
have been $14,424,000 (77.3% of net sales). This years cost of sales is lower
than last years pro forma cost of sales by $2,507,000, or 17.4%. This
reduction is attributable to lower specimen volume, operating efficiencies, and
the cost containment program implemented late last year, and exceeds the sales
decrease of 16.7%. Nearly all cost components were lower with the exception of
health and related benefit costs. Collection costs were lower in absolute
dollars by 14.3% versus a 13.6% decrease in the number of collections.
However, in the past six months, the per collection cost has risen 5.1% since
last years fourth quarter. Gross profit as a percentage of net sales
increased to 23.3% in 2002 from 9.3% in 2001. Excluding the nonrecurring
costs, 2001s gross profit would have been, on a pro forma basis, $4,240,000
and the gross profit margin would have been 22.7%.

Selling, General & Administrative (SG&A)expenses for the six months ended
June 30, 2002 decreased $3,293,000 (45.5%) to $3,946,000 in 2002 (25.4% of net
sales) from $7,239,000 in 2001 (38.8% of net sales). Last years SG&A expenses
include $1,502,000 of nonrecurring costs associated with the relocation of our
Company from California to Texas. These nonrecurring costs include significant
relocation, travel and subsistence expenses. This years SG&A expenses reflect
a reduction in costs related to sales, marketing, customer service and
information systems. On a pro forma basis, last years SG&A for the first six
months would have been $5,737,000 (30.7% of net sales), or 31.2% higher than
this years SG&A amount.

Discontinued Operationsfor the six months ended June 30, 2002 resulted in
net income of $4,636,000 (or $0.79 per share) which is comprised of net income
from Medscreens operations for three months of $359,000 (or $0.06 per share)
and the gain on the sale of Medscreen of $4,277,000 (or $0.73 per share).
These operations in 2001 generated net income of $477,000 (or $0.08 per share)
and reflect six months of operations.

Net Lossfrom continuing operations for the six months ended June 30, 2002
was $518,000, or $0.09 per share compared to a net loss in 2001 of $6,734,000,
or $1.15 per share. Excluding the impact of the $4,006,000 in nonrecurring
costs, the $1,029,000 restructuring charge and $64,000 of goodwill
amortization, the net loss from continuing operations for the six months ended
June 30, 2001 would have been $1,635,000, or $0.28 per share. The net income
for the six months ended June 30, 2002 including discontinued operations was
$4,118,000, or $0.70 per share versus a net loss in 2001 of $6,257,000, or
$1.07 per share.

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Liquidity and Capital Resources

Our continuing operations during the six-month periods ended June 30
provided cash of $247,000 and used cash of $3,243,000 in 2002 and 2001,
respectively. The increase in cash flow from operations between 2002 and 2001
principally reflects a lower loss from continuing operations in 2002 and
improved working capital management. The cash used in 2001 reflects expenses
related to the relocation of the Companys operations to Texas. As of June 30,
2002, we had $5,085,000 in cash and cash equivalents. During the six months
ended June 30, 2002, we used approximately $836,000 in cash to purchase
property and equipment, principally for information systems development and
facility-related expenditures for our new Haltom City, Texas location.

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 continues at $4,250,000, the maturity date is June 30, 2003,
interest is at the prime rate plus one-half percent (5.25% as of June 30,
2002), and the annual fee is 0.10% of the credit line, payable quarterly. The
financial covenants have been modified to include a current ratio of no less
than 0.85 to 1.00, total liabilities to effective tangible net worth of not
more than 2.0 to 1.00, and minimum effective tangible net worth of not less
than $10 million (including subordinated debt)all measured quarterly. In
addition, the Company is required to be profitable for the 2002 fiscal year and
quarterly in 2003. Also, the Agreement provides for a limitation on capital
expenditures and requires a restricted cash balance of $500,000.

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.

This Agreement replaces the May 15, 2000 Loan and Security Agreement which
was modified on May 20, 2002 (whereby the advance rate was reduced from 85% to
80% of eligible receivables, restricted cash of $1,000,000 was required and the
maturity date was extended to June 30, 2002), and again on June 30, 2002 (which
further extended the maturity date until July 31, 2002).

As of June 30, 2002, the calculated maximum that could be borrowed and the
amount outstanding were $3,925,000 and $3,881,000, respectively.

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

Impact of Recent Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 144 (SFAS 144), Accounting for the Impairment or Disposal of
Long-Lived Assets.SFAS 144 supercedes SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
in that it removes goodwill from its impairment scope and allows for different
approaches in cash flow estimation. However, SFAS 144 retains the fundamental
provisions of SFAS 121 for (a) recognition and measurement of the impairment of
long-lived assets to be held and

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used and (b) measurement of long-lived assets to be disposed of. SFAS 144 also
supercedes the business segment concept in APB Opinion No. 30, Reporting the
Results of OperationsReporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions,in that it permits presentation of a component of an entity,
whether classified as held for sale or disposed of, as a discontinued
operation. SFAS 144 retains the requirement of APB Opinion No. 30 to report
discontinued operations separately from continuing operations. We adopted the
provisions of SFAS 144 in the first quarter of 2002 and the implementation of
this standard did not have a material effect on our results of operations or
financial position.

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

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

Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risk with respect to our debt outstanding. Our
revolving credit agreement 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.

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PART II. Other Information




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



| |  | At the Annual Meeting of the Company held on May 14, 2002, the
Companys stockholders took the following actions:
| |  | -----------------------------------------------------------------------------------------------------------------



| | (a) |  | The following directors were elected to serve until the next Annual
Meeting:                                                                                                                                                                                                                               
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Joseph W. Halligan  5,628,784
shares in favor and 21,687 shares withheld;
Richard D. Irwin  5,627,979 shares in favor and 22,492 shares withheld;
Stephen I. Schorr  5,629,984 shares in favor and 20,487 shares withheld; and
Donald R. Stroben  5,629,884 shares in favor and 20,587 shares withheld.
|
| | (b) |  | Ratification of the appointment of KPMG LLP as
Independent Certified Public Accountants for the Company for
the 2002 fiscal year, by a vote of 5,639,284 shares in favor,
7,500 shares against, 202,122 shares broker non-vote and 3,687
shares abstained.                                                 




Item 6. Exhibits and Reports on
Form 8-K



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

|      |  |   |  |                                                                                                                                                   
|----- |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|10.51 |  | - |  | Amendment to Loan and Security Agreement between
Comerica Bank-California and PharmChem, Inc. dated May 20, 2002.                                 
|10.52 |  | - |  | Amendment to Loan and Security Agreement
between Comerica Bank-California and PharmChem, Inc. dated June
28, 2002.                                
|10.53 |  | - |  | Second Amended and Restated Loan and Security Agreement between
Comerica Bank-California and PharmChem, Inc. dated July 31, 2002.                 
|10.54 |  | - |  | Intellectual Property Security Agreement between Comerica
Bank-California and PharmChem, Inc. dated July 31, 2002.                                
|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:
| | --- |  | --------------------
|
| |     |  | None.               

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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: August 14, 2002 | By:                                                                                                                                    | /S/ David A. Lattanzio
|                      | David A. Lattanzio
Chief Financial Officer and Vice President,
Finance and Administration
(Principal Financial and Accounting Officer)

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Index to Exhibits



|              |  |   |  |                                                                                                                                                   
|------------- |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  |   |  | Description                                                                                                                                       
|             
|10.51         |  | - |  | Amendment to Loan and Security Agreement between
Comerica Bank-California and PharmChem, Inc. dated May 20, 2002.                                 
|10.52         |  | - |  | Amendment to Loan and Security Agreement
between Comerica Bank-California and PharmChem, Inc. dated June
28, 2002.                                
|10.53         |  | - |  | Second Amended and Restated Loan and Security Agreement between
Comerica Bank-California and PharmChem, Inc. dated July 31, 2002.                 
|10.54         |  | - |  | Intellectual Property Security Agreement between Comerica
Bank-California and PharmChem, Inc. dated July 31, 2002.                                
|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.