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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

     (Mark One)

For the transition period from      to
Commission File Number 0-19371

PHARMCHEM, INC.

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

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

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

     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 reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the Registrant is an accelerated filer. Yes o No þ

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

     The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing price of $0.86 as reported on the Nasdaq SmallCap on June 28, 2002, was approximately $1,755,000 (and approximately $352,000 based on the closing price of $0.13 as reported on the Nasdaq SmallCap on February 28, 2003). Shares of voting stock held by each executive officer and director and by each holder of 5% or more of the outstanding voting stock have been treated as shares held by affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of outstanding shares of the Registrant’s Common Stock as of February 28, 2003 was 5,852,593.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the PharmChem, Inc. Proxy Statement for the 2003 Annual Meeting of Stockholders to be filed with the Commission on or before April 19, 2003 are incorporated by reference into Part III of this Annual Report on Form 10-K. With the exception of those portions which are specifically incorporated by reference in this Annual Report on Form 10-K, such Proxy Statement shall not be deemed filed as part of this Report.

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PHARMCHEM, INC.
ANNUAL REPORT ON FORM 10-K
INDEX

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PART I

ITEM 1. BUSINESS

GENERAL OVERVIEW

          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 and Puerto Rico who seek to detect and deter the use of illegal drugs and alcohol. We are certified by a number of state agencies, as well as by the following organizations to conduct drug testing using forensic procedures:

	•		Substance Abuse and Mental Health Service Administration (SAMHSA) of the US Department of Health and Human Services
	•		College of American Pathologists (CAP)

          Our laboratory is certified under the Clinical Laboratory Improvement Amendments of 1988 (CLIA) or has “deemed status” under CLIA as a result of state certification. Our forensic procedures provide accurate and reliable test results and a chain of custody for each specimen from its collection to the reporting of its test result.

          We test for a number of drugs of abuse, including cocaine, methamphetamine, heroin, phencyclidine (PCP), marijuana (THC) and alcohol. We test primarily by urinalysis but also with the PharmScreen^® and PharmView™ on-site screening devices and the PharmChek^®Drugs of Abuse Patch (for testing with sweat). Under our Premium Comprehensive Management program, we offer a comprehensive set of services customized to assist customers in implementing cost-effective drug testing programs.

CORPORATE BACKGROUND

          In March 2000, PharmChem, Inc. was formed as a Delaware corporation and in May 2000, PharmChem Laboratories, Inc., a California corporation was merged into PharmChem, Inc. PharmChem Laboratories, Inc. was incorporated in 1987 to acquire PharmChem Laboratories Operations, Inc., a California corporation founded in 1971. In 1991, we completed our initial public offering. In 1992, we expanded our operations through the acquisition of London-based Medscreen, Limited (Medscreen), a certified laboratory providing international drug testing services. In 1992 we also acquired a certified laboratory in Fort Worth, Texas. In March 2002, we sold Medscreen. When we refer to “we”, “our” or “PharmChem” in this Form 10-K, we mean the current Delaware corporation (PharmChem, Inc.).

          Our principal executive offices are located at 4600 N. Beach Street, Haltom City, Texas, 76137. Our main telephone number is (817) 605-5300, our fax number is (817) 581-2049 and our home web site is www.pharmchem.com. Reports filed on Form 10-K, Form 10-Q and Form 8-K are available on our home web site.

RECENT EVENTS

          During 2001, we relocated our corporate headquarters, distribution center and laboratory operations from the Silicon Valley area of Northern California to a new facility in Haltom City, Texas. We vacated our primary Menlo Park, California facility in May 2001 and temporarily moved to our existing facility in Fort Worth, Texas until construction was completed at the new Haltom City facility. In October 2001, all operations were centralized to Haltom City. During the process of relocating to Texas, we incurred significant costs that were financed through a combination of internal operations, increased borrowing under our credit facilities and a sale-leaseback transaction. As further discussed in Note 13, “Sale of Medscreen”, in the accompanying Notes to Consolidated Financial Statements, in March 2002 we completed the sale of entire share capital of Medscreen for approximately $10,000,000 in cash.

          On February 20, 2003, the Company received notification from Nasdaq that, for the past 30 consecutive trading days, the Company’s common stock has not maintained a minimum market value of publicly held shares of $1 million as required for inclusion by Marketplace Rule 4310(c)(7). Publicly held shares exclude shares held directly or

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indirectly by any officer or director of the Company or by any person who is beneficial owner of more than 10% of total shares outstanding. The Company will be provided with 90 calendar days, or until May 21, 2003, to regain compliance. If, at anytime before May 21, 2003, such market value is $1,000,000 or more for a minimum of 10 consecutive trading days, Nasdaq will provide written notification that the Company is in compliance. If compliance cannot be demonstrated by May 21, 2003, Nasdaq will provide written notification that the Company’s securities will be delisted. At that time, the Company may appeal to a Listing Qualifications Panel.

          In addition, as previously reported, the Company is not in compliance with the $1.00 minimum bid price as required for listing on the Nasdaq SmallCap Market. The Company has been granted a grace period until April 7, 2003, to comply with this rule.

INDUSTRY BACKGROUND

          National clinical laboratory chains, independent national drug testing laboratories, like ourselves, and numerous regional and local laboratories have historically served the drug testing market. Thousands of general clinical laboratories nationwide can conduct forensic and non-forensic drug testing, and are increasingly bidding on local contracts. Over the past several years, through consolidations and restructurings, there has been a decline in the number of independent laboratories whose sole business is conducting forensic drug testing. Many corporate and governmental organizations require drug testing laboratories to be certified to conduct forensic drug tests and to offer integrated cost-effective testing services. Many large organizations, particularly those in the public sector, use a competitive bidding procedure to select their drug testing laboratories. These organizations often limit the bidding to certified drug testing laboratories that can demonstrate the ability to meet their specified service and volume levels.

FORENSIC DRUG TESTING

          The essential elements of forensic drug testing are (1) a secure chain of custody for each specimen from its collection to the reporting of its test result and (2) accurate and reliable testing in which a second independent test is performed to confirm each positive test result. We carefully control each step of the testing process with detailed written procedures and by using the specific forensic testing methods required for legal defensibility of results. We perform the majority of our testing at our laboratory in Haltom City, Texas, which operates six days per week, 24 hours a day. In recent years, we introduced two product lines, the PharmScreen^® On-Site Screening Device and the PharmChek^® Drugs Of Abuse Patch, to provide alternatives to traditional urinalysis laboratory testing. The PharmScreen^® product line was extended in 2002 to include the PharmView™ on-site screening devices.

Urinalysis

          The steps in PharmChem’s forensic drug testing process by urinalysis, our primary drug testing method, are as follows:

	Specimen Collection and Transportation
	•		Forensic drug testing begins with specimen collection conducted under carefully controlled conditions. Once a donor has provided a specimen, we assign a unique specimen identification number.
	•		We then record information pertinent to the specimen on a chain of custody form numbered to match the specimen bottle.
	•		Specimens, together with chain of custody forms, are delivered to PharmChem by courier or mail.
	Receiving and Accessioning
	•		We receive specimens in our restricted accessioning rooms, where we inspect them for tampering and check for proper chain of custody documentation.
	•		We identify and track the specimens using unique bar-coded laboratory specimen identification numbers (accessioning).

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	Screening Analyses
	•		We screen each specimen submitted for the presence of the drugs specified by the customer.
	•		In 2002, we performed approximately 970,000 laboratory screening tests on approximately 140,000 specimens per month to determine the presence of drugs.
	•		The screening methods we use include enzyme immunoassay and enzyme assay.
	Results/Confirmation Testing
	•		We report negative screening results to the customer.
	•		If the specimen tests positive, we confirm the results by testing a separate aliquot using a different and independent technology from that used for the initial screening.
	•		Confirmation technologies we use include gas chromatography/mass spectrometry (GC/MS) and gas chromatography. GC/MS confirmation is required for federally-regulated drug testing and most other workplace drug testing. Its use has been cited with approval in numerous legal proceedings.
	•		In 2002, we performed approximately 27,000 laboratory confirmation tests per month to detect the presence of drugs.
	Quality Control
	We carefully monitor the accuracy and reliability of our test results by internal and external quality assurance and quality control programs. Our staff evaluates laboratory performance with open and blind quality control samples. We are subject to frequent proficiency testing by various certifying bodies, which send their own open and blind samples to the laboratory. We are also subject to frequent inspections by certifying agencies. We put each test result through several independent levels of review before a certified scientist reports the results to our customer.
	Reporting of Test Results
	We transmit substantially all of our test results electronically. We use various secure communication networks and automated voice reporting systems. Our information systems make each test result available to the customer’s computer or secure facsimile machine, via the internet, by email, by telephonic inquiry or by mail delivery. We routinely report results for specimens that screen negative within 24 hours of receipt in the laboratory and within 72 hours for specimens that require confirmation.

PharmScreen^® and PharmView™ On-Site Screening Devices

          In recent years there has been a growing trend toward the use of on-site screening for drugs of abuse by a number of agencies and workplace employers, including some of our customers. On-site screening relies upon portable diagnostic devices that the customer may use at the point of specimen collection to readily identify drugs of abuse in urine specimens. This technology is advantageous because it provides virtually immediate test results. There are several states whose legislation still requires the use of traditional laboratory testing and does not recognize the on-site screening devices as an alternative means of screening for drugs of abuse.

          We offer two lines of on-site screening devices to supplement our laboratory-based testing services. PharmScreen^® and newly introduced PharmView™ are portable, hand-held devices used for on-site screening of drugs of abuse and are available in single, dual, four and five drug test configurations. PharmScreen^® is currently being used by certain government agencies, including the Administrative Office of the United States Courts (Federal Probation), and by certain private employers, including Sears Roebuck & Co. PharmScreen^® and PharmView™ provide only a preliminary analytical result, and a more specific alternative chemical method, such as GC/MS, is necessary to obtain a confirmed analytical result. There can be no assurance that the historical profit margins of PharmScreen^® will continue due to increasingly competitive market pressures or that PharmView™ will be commercially accepted.

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PharmChek^® Drugs Of Abuse Patch

          PharmChek^® is a system that uses sweat to detect the presence of illegal drugs and has been under development by us since 1992. It consists of a transparent polyurethane outer covering, a small absorbent pad and a release liner. A unique number is printed on the underside of the polyurethane layer for identification and anti-counterfeiting purposes. Unlike urinalysis, flushing or employing a diuretic to rid the body of drugs of abuse does not affect PharmChek^® test results, since the drugs in the sweat simply collect on the absorption pad until the pad is removed for analysis. The Food and Drug Administration (FDA) has cleared PharmChek^® for detecting the use of cocaine, opiates (including heroin), amphetamines (including methamphetamine), phencyclidine (PCP) and marijuana (THC).

          PharmChek^® may offer other advantages over other drug detection systems currently available. First, it does not require the handling of urine or blood, which may be objectionable to some people. Second, the use of sweat as a testing medium may lengthen the drug use detection period and decrease testing costs by reducing the need for specialized specimen collection facilities and staff. PharmChek^® has been used for detecting illegal drug use in highly sensitive cases, including child custody matters. Court cases in California, Missouri and Nevada have recognized the validity of PharmChek^® for detecting the use of illegal drugs.

          Our sales of PharmChek^® have been targeted toward criminal justice agencies and drug rehabilitation customers. There can be no assurance that PharmChek^® will generate significant revenues in the future or be accepted by various jurisdictions as an alternative method of detecting drugs of abuse or customers will continue to secure funding for alternative methods of drug testing, including PharmChek^®.

SUPPLIERS

          We are dependent upon single suppliers for the PharmScreen^®, PharmView™ and PharmChek^® products and we continue to seek alternative suppliers. Recently, there has been a consolidation of suppliers to the drugs of abuse testing laboratories. We are not dependent upon any other single supplier for our raw materials.

CUSTOMER SERVICE AND TECHNICAL SUPPORT

          We provide a variety of drug testing services which are customized to each customer’s specific needs. We employ a customer service and technical support staff specializing in one or more of the following areas of service:

Specimen Collection

          We manage specimen collection services for a number of our customers. We maintain a list of more than 4,000 clinics and other organizations throughout the United States (US) and Puerto Rico that offer specimen collection services that comply with forensic drug-testing procedures. Our customer service staff identifies collectors conveniently located to customer sites, prepares customized specimen collection procedures, conducts training of collection personnel and monitors their performance. We also offer our customers integrated web-based specimen collection management services. In 2002, PharmChem managed approximately 450,000 collections.

Transportation

          Specimens are transported to PharmChem by overnight delivery couriers or by mail. We offer special specimen transportation services for selected areas that provide for pickup of specimens before the close of each business day.

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Technical Consultation

          The technical specialists on our staff are experienced in drug metabolism and other technical aspects of drug testing. These specialists respond to requests from customers to interpret test results. In addition, we are often called upon to assemble the complete chain of custody and testing data package for specimen results that have been challenged and to provide expert witness testimony in legal proceedings. The technical consultation group also provides comprehensive in-service training for customers on topics such as substance abuse trends, toxicology and drug pharmacology, breath alcohol testing and technical information on PharmChem’s testing procedures.

Program Analysis

          We collect and analyze data on test results in order to provide comprehensive monthly statistical reports to meet customers’ regulatory requirements and to assist with drug program management.

SALES AND MARKETING

          We sell our integrated drug testing services to corporate and governmental customers. Our sales force uses a consultative selling approach – Premium Comprehensive Management (PCM^®). PCM^® emphasizes the full scope of integrated services we offer and customizes these services to meet customers’ particular needs. PCM^® provides customized services including:

	•		a database of collection sites and on-call collections for rapid response
	•		alternatives to laboratory urine testing including on-site screening devices such as PharmScreen® and PharmView™, sweat testing with PharmChek® and hair testing
	•		PharmTrack®, our secure internet-based tracking and reporting system
	•		FAST® (Federal Agency Specimen Tracking), our secure internet-based collection scheduling and management system
	•		statistical management reporting, centralized billing and other services

CUSTOMERS

          PharmChem provides integrated drug testing services to three primary customer groups in the United States:

Public and Private Workplace Employers

          Public and private workplace employers use drug testing as part of their hiring decisions in order to increase safety and reduce costs associated with drug abuse in the workplace. In addition, a number of public and private workplace employers test employees in certain positions on a periodic or random basis and test other employees upon reasonable suspicion of drug use.

          Sales of laboratory services and products to public and private workplace employers accounted for 36%, 41% and 43% of our total net sales in 2002, 2001 and 2000, respectively. Sales to Sears, Roebuck & Co. accounted for approximately 15%, 12% and 14% of our total net sales in 2002, 2001 and 2000, respectively, while sales to Lowes Companies, Inc. were 10% in 2002 and less than 10% in 2001 and 2000.

Criminal Justice Agencies

          Criminal justice agencies use drug testing results in criminal proceedings and to assist with making parole, drug treatment and probation decisions. These agencies also use drug testing to monitor drug treatment of individuals under supervision and to track drug use trends within the United States.

          Sales of laboratory services and products to criminal justice agencies accounted for 63%, 56% and 54% of our total net sales in 2002, 2001 and 2000 , respectively. Sales to Federal Probation accounted for approximately 31%, 24% and 21% of our total net sales in 2002, 2001 and 2000, respectively.

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Drug Treatment Programs

          Drug treatment programs use drug testing to monitor the treatment and rehabilitation of drug users in their care. Sales of laboratory services and products to drug treatment programs accounted for approximately 2% of our total net sales in 2002, 2001 and 2000. In November 2001, we ceased offering our customers specialized methadone testing using thin layer chromatography.

CONTRACTING

	Customers engage us to provide services through the following:
	•		the formal competitive bid process
	•		standard service contracts
	•		without a formal contract, but by accepting test specimens for an agreed upon price renegotiated every twelve months

          A majority of our sales are derived from competitive bids, and we believe that competitive pressure with respect to these bids, particularly for large multi-year contracts, has intensified. Many of our large potential customers, including the majority of public employers and criminal justice agencies, use a formal competitive bid process in which the potential customer provides a detailed specification of the drug testing services it requires. There is no assurance that we will be the successful bidder when these contracts are up for renewal. While price is an important factor, in most cases these organizations are not required to accept the lowest bid, but rather may choose the winning bidders based on technical superiority and customer service.

          The failure to renew a significant contract, if not replaced by comparable contracts, could result in lower sales, lower profit margins, decreased cash flows and losses. Our contracts generally allow termination at the customer’s discretion on short notice with little or no penalty. Many contracts provide for termination for convenience. Although in the past our customers generally have not exercised these early termination rights, there can be no assurance that this will continue in the future.

          Backlog is not a significant statistic for PharmChem due to the short turnaround time for processing specimens.

COMPETITION

          The market for drug testing services became increasingly competitive in the early 1990’s, and continues to be very competitive. Drug testing laboratories compete primarily on the basis of customer service, technical capability and price. We believe that PharmChem competes favorably in each of these categories. In recent years, we have expanded our scope of services and invested heavily in information technology to provide flexible, responsive and customized drug testing programs while maintaining a competitive average total selling price per specimen. Our competitors include:

	•		national clinical laboratory companies, such as Laboratory Corporation of America Holdings and Quest Diagnostics, Inc.
	•		independent national drug testing laboratories, such as Psychemedics Corporation, Medtox Scientific, Inc. and Northwest Toxicology, Inc.
	•		regional and local laboratories
	•		third party administrators
	•		medical review officers
	•		manufacturers and distributors of on-site screening devices and equipment

          The national clinical laboratories have significantly greater financial, marketing, laboratory and related resources than PharmChem. In addition, some of our customers and our potential customers operate their own drug testing facilities or may develop such facilities in the future.

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CERTIFICATION AND GOVERNMENT REGULATION

          Laboratories which compete in the U.S. forensic drug testing market generally must be certified by SAMHSA. In addition, some state and local jurisdictions require their own certification for testing of specimens of their residents. Such state and local certifications are essential to our business in each such respective jurisdiction. Our laboratory is certified by CLIA and SAMHSA and as a clinical laboratory and forensic drug testing laboratory by CAP.

          We are subject to frequent inspection by certifying bodies, including annual CAP and semi-annual SAMHSA inspections. Inspections sometimes result in reports describing areas for improvement or suggesting changes in procedures. We may be required to take actions on the items noted in the inspection report in order to remain certified. Failure to meet certification requirements could result in suspension or loss of certification. During the past year, we have achieved favorable results on ten laboratory inspections conducted by various federal and local regulatory agencies.

          We have never been decertified as the result of an inspection. Certification is essential to our business because some of our customers are required to use a certified laboratory, and many of our customers look to certification as an indication of reliability and accuracy of results.

          Court precedent currently exists in a number of states regarding the circumstances under which employers may test employees and the procedures under which such tests must be conducted. The circumstances under which drug testing can legally be required by employers is subject to judicial review, and is challenged from time to time by employees, unions and other groups on constitutional, privacy and other grounds.

          In 2001, a revision of the Federal Register, CFR Part 40, was implemented. This revision imposed more stringent requirements for the training and retraining of specimen collector service providers. This may negatively impact the pool of available service providers and may result in higher costs for the services they perform.

ENVIRONMENTAL MATTERS

          A small portion of our business involves testing procedures requiring the use of small amounts of chloroform, which is considered to be a hazardous material. Failure to comply with current or future federal, state or local environmental laws or regulations regarding this hazardous material could have an adverse effect on us. We believe that we have adequately notified employees of potential risks associated with working at PharmChem and have provided a workplace safe from hazard, as required by the Occupational Safety and Health Administration and certain state laws. We believe we are in compliance with all applicable environmental laws and regulations.

EMPLOYEES

          As of December 31, 2002, we had approximately 170 full-time employees. Since August 2001, the Company has laid off approximately 30% of its workforce to more closely align its cost structure to the reduction in specimen volume resulting from the slowing U.S. economy. Our employees are not represented by labor organizations and we consider relations with our employees to be good.

CODE OF ETHICS

          The Company has adopted a code of ethics that applies to its chief executive officer, chief financial officer, principal accounting officer or controller, and persons performing similar functions. Such code of ethics may be found on the Company’s website at www.pharmchem.com.

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SEASONAL OPERATING FACTORS

          PharmChem’s operations are affected by both seasonal trends to which drug testing laboratories are generally subject and general economic conditions. Historically, our laboratory testing volume tends to be higher in the second and third calendar quarters and lower in the fourth and first calendar quarters, primarily due to the hiring patterns of our public and private employer customer group which affect pre-employment drug testing.

RESEARCH AND DEVELOPMENT

          Our most experienced scientists and technicians perform research and development activities. Our research and development efforts continually focus upon improving laboratory procedures and processes. We believe we have engineered a number of efficiencies to improve the accuracy and reliability of our drug tests.

OPERATIONS

          Refer to Note 11, “Reportable Segments”, in the accompanying Notes to Consolidated Financial Statements for reportable segment information and financial information about geographic areas.

ITEM 2. PROPERTIES

ITEM 3. LEGAL PROCEEDINGS

          In the ordinary course of our business, we are sued by individuals, primarily those in the criminal justice system, who have tested positive for drugs of abuse. In addition, we frequently testify in administrative and court proceedings involving the results of our tests. To date, we have not experienced any material liability related to these claims, although there can be no assurance that we will not at some time in the future experience significant liability in connection with such claims. There are no pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or to which any of our property is subject and our management does not believe the outcome of any of the proceedings will have a material impact on our financial position or results of operations.

          Although no lawsuit has been filed, our attorneys received a letter on September 19, 2002, from the landlord of our former Menlo Park, California facility claiming damages in the amount of $4,700,000. This amount is based primarily on the landlord’s claim for lost and reduced rents arising from our alleged failure to vacate the Menlo Park facility under the terms of the lease. We will defend ourselves vigorously against this claim. Refer to Note 12, “Restructuring Charge”, in the accompanying Notes to Consolidated Financial Statements.

          We believe that our liability insurance coverage is adequate for our business.

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

          No matters were submitted to a vote of PharmChem’s stockholders in the quarter ended December 31, 2002

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EXECUTIVE OFFICERS OF PHARMCHEM

          The executive officers of the Company are as follows:

          Mr. Halligan has been PharmChem’s President, Chief Executive Officer and Director since November 1995. From 1988 to 1995, he was President and CEO of E.S.I. Consulting Group, a private consulting practice, specializing in advising and operating high growth, consumer and service-oriented companies. Before forming his consulting practice, Mr. Halligan served from 1983 to 1987 as President and CEO of a privately-held company, Laura Scudder’s, Inc. From 1969 to 1983, he served as Senior Vice President of Fotomat Corporation and President of its subsidiary, Video Services of America. He holds a B.S. in Management and Business Administration from Columbia Pacific University.

          Mr. Lattanzio has been PharmChem’s Vice President, Finance and Administration, and Chief Financial Officer since April 1996 and Secretary since January 1997. He is responsible for all financial and administrative aspects of our operations, including accounting, corporate finance, treasury, logistics, purchasing, human resources and risk management. From 1995 to March 1996, Mr. Lattanzio performed private consulting for several companies, including PharmChem. He served as Vice President, Finance and Chief Financial Officer of Mission Foods from 1991 to 1995. Mr. Lattanzio holds a B.B.A. in Accounting from the University of Notre Dame and is a Certified Public Accountant.

          Mr. Fortner has served as Vice President, Laboratory Operations of PharmChem since February 1992. He joined PharmChem as Director, Laboratory Operations in July 1991. He is the Scientific Director and is responsible for all production aspects of laboratory operations. From 1985 to 1991, he served as Director of Toxicology at Southgate Medical Services. Mr. Fortner has more than 20 years experience in forensic toxicology and he is a qualified SAMHSA and CAP laboratory inspector. He is a member of the American Association of Clinical Chemistry and a full member of the Society of Forensic Toxicologists, the American Academy of Forensic Sciences (Fellow) and the American Board of Forensic Examiners. Mr. Fortner holds a B.A. in Biology from Hiram College and an M.S. in Biochemistry from Western Kentucky University. He is certified as a Forensic Toxicology Specialist by the American Board of Forensic Toxicologists and as a Toxicological Chemist by the National Registry of Certified Chemists.

          Mr. Merryman has served as Vice President, Customer Service since joining PharmChem in November 2000. He is responsible for all customer service functions. Prior to joining PharmChem, Mr. Merryman served in various customer service capacities at Quest Diagnostics from 1982 to 1990 and from 1996 until he joined PharmChem. From 1990 to 1996, Mr. Merryman held management positions at Laboratory Corporation of America. Mr. Merryman holds a B.B.A. degree in Computer Sciences from Ursinus College in Pennsylvania and an M.B.A. degree from the University of Phoenix.

          Mr. Parakkal has served as Vice President, Information Systems since November 2000. He is responsible for all information service functions. He has also served as Director, Systems Development at PharmChem since 1997. Prior to joining PharmChem, Mr. Parakkal served in project management at Transworld Information Systems, Inc. from 1996 to 1997. He was responsible for directing the development of cross-functional systems, software and databases. From 1987 to 1995, Mr. Parakkal worked in Information Technology in various aspects of design, development and implementation of business applications in India. Mr. Parakkal holds a B.S. degree in Physics from University of Madras, India and a B.S. degree in Business Management from the University of Phoenix. Mr. Parakkal is in the process of completing his M.B.A. degree from the University of Dallas.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

          Our common stock trades on The Nasdaq SmallCap Market (Nasdaq) under the symbol “PCHM”. In February 2002, Nasdaq informed us we were not in compliance with the $5,000,000 minimum market value requirement for our publicly held shares, as stated in Marketplace Rule 4450(a)(2). Publicly held shares exclude shares held directly or indirectly by any officer or director of PharmChem and by any person who is the beneficial owner of more than 10% of the total shares outstanding. Nasdaq approved PharmChem’s application to transfer its securities to The Nasdaq SmallCap Market.

          On February 20, 2003, the Company received notification from Nasdaq that, for the past 30 consecutive trading days, the Company’s common stock has not maintained a minimum market value of publicly held shares of $1 million as required for inclusion by Marketplace Rule 4310(c)(7). Publicly held shares exclude shares held directly or indirectly by any officer or director of the Company or by any person who is beneficial owner of more than 10% of total shares outstanding. The Company will be provided with 90 calendar days, or until May 21, 2003, to regain compliance. If, at anytime before May 21, 2003, such market value is $1,000,000 or more for a minimum of 10 consecutive trading days, Nasdaq will provide written notification that the Company is in compliance. If compliance cannot be demonstrated by May 21, 2003, Nasdaq will provide written notification that the Company’s securities will be delisted. At that time, the Company may appeal to a Listing Qualifications Panel.

          In addition, the Company is not in compliance with the $1.00 minimum bid price as required for listing on the Nasdaq SmallCap Market. The Company has been granted a grace period until April 7, 2003, to comply with this rule.

STOCK PRICES

          The following table sets forth for the periods indicated the high and low closing bid prices for our common stock by quarter for years 2002 and 2001, as reported by the Automated Quotation System of the National Association of Securities Dealers (Nasdaq). The prices shown represent quotations among securities dealers, do not include retail markups, markdowns or commissions and may not represent actual transactions.

          As of March 1, 2003, there were approximately 110 holders of record of our common stock. A large number of shares were held in nominee name. Based upon information furnished by our proxy solicitor, Skinner & Co., we believe we have approximately 760 stockholders as of March 1, 2003.

DIVIDENDS

          We have never paid cash dividends on our common stock. We currently anticipate that we will retain all future earnings for use in the operation and expansion of our business and do not anticipate paying any dividends in the foreseeable future. In addition, our current revolving credit agreement prohibits the declaration or payment of dividends except in connection with our stockholder rights plan.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA