PSYCHEMEDICS CORP (Form: 10-Q, Received: 11/12/2002 08:35:49)

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For quarterly period ended September 30, 2002

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 1-13738

PSYCHEMEDICS CORPORATION
(exact name of Issuer as specified in its charter)


Delaware (State or other jurisdiction of incorporation of organization)		58-1701987 (I.R.S. Employer Identification No.)

1280 Massachusetts Ave., Suite 200, Cambridge, MA (Address of principal executive offices)		02138 (Zip Code)

Issuer’s telephone number, including area code (617) 868-7455

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Number of shares outstanding of only class of Issuer’s Common Stock as of November 12, 2002: Common Stock $.005 par value (5,261,125 shares).

TABLE OF CONTENTS


	CONDENSED BALANCE SHEETS
	CONDENSED STATEMENTS OF INCOME
	CONDENSED STATEMENTS OF INCOME
	CONDENSED STATEMENTS OF CASH FLOWS
	NOTES TO FINANCIAL STATEMENTS
	Item 2
	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
	Item 4. Controls and Procedures
PART II OTHER INFORMATION
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
Ex-3 Amended & Restated Certificate of Inc.
Ex-10 2000 Stock Option Plan
Ex-99.1 Certification - Chief Executive Officer
Ex-99.2 Certification -Chief Financial Officer

PSYCHEMEDICS CORPORATION


		Page No.

Part I FINANCIAL INFORMATION

Item 1	Financial Statements

	Condensed Balance Sheets as of September 30, 2002 and December 31, 2001		3

	Condensed Statements of Income for the three month periods ended September 30, 2002 and 2001		4

	Condensed Statements of Income for the nine month periods ended September 30, 2002 and 2001		5

	Condensed Statements of Cash Flows for the nine month periods ended September 30, 2002 and 2001		6

	Notes to Condensed Financial Statements		7-9

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		9-13

Item 3	Quantitative and Qualitative Disclosures about Market Risk		13

Item 4	Controls and Procedures		13

Part II OTHER INFORMATION

Item 4	Submission of Matters to a Vote of Security Holders		14

Item 6	Exhibits and Reports on Form 8-K		14

SIGNATURES			15

CERTIFICATIONS			16-18

EXHIBIT INDEX			19

PSYCHEMEDICS CORPORATION
CONDENSED BALANCE SHEETS


				SEPTEMBER 30,			DECEMBER 31,
				2002			2001

				(Unaudited)			(Audited)
			ASSETS
CURRENT ASSETS:
	Cash and cash equivalents			$	3,350,910		$	3,110,700
	Accounts receivable, net				2,843,794			2,025,423
	Prepaid expenses and other current assets				722,590			804,185
	Deferred tax asset				471,028			471,028

		Total current assets			7,388,322			6,411,336

PROPERTY AND EQUIPMENT:
	Equipment and leasehold improvements, at cost				9,308,472			9,116,142
	Less-Accumulated depreciation and amortization				(7,590,182	)		(6,753,733	)

					1,718,290			2,362,409

DEFERRED TAX ASSET					61,120			61,120

OTHER ASSETS, NET					231,251			273,518

				$	9,398,983		$	9,108,383

			LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
	Accounts payable			$	337,505		$	376,089
	Accrued expenses				846,724			708,724
	Accrued income taxes				466,911			498,308
	Deferred revenue				672,374			753,283

		Total current liabilities			2,323,514			2,336,404

SHAREHOLDERS’ EQUITY:
	Preferred stock, $0.005 par value; 872,521 shares authorized; none issued or outstanding				—			—
	Common stock; $0.005 par value; 50,000,000 shares authorized; issued 5,658,430 shares in 2002 and 5,656,328 shares in 2001				28,292			28,282
	Paid-in capital				24,591,477			24,571,592
	Accumulated deficit				(10,041,026	)		(10,324,621	)
	Less — Treasury stock, at cost; 397,105 common shares				(7,503,274	)		(7,503,274	)

		Total shareholders’ equity			7,075,469			6,771,979

				$	9,398,983		$	9,108,383

See accompanying notes to financial statements and management’s discussion and analysis of financial condition and results of operations.

PSYCHEMEDICS CORPORATION
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)


		THREE MONTHS
		ENDED SEPTEMBER 30,

		2002		2001

REVENUE		$	4,344,685	$	3,955,117
COSTS OF REVENUE			1,781,852		1,974,092

	Gross profit		2,562,833		1,981,025

EXPENSES:
	General and administrative		787,965		750,747
	Marketing and selling		959,566		930,651
	Research and development		84,460		115,216

			1,831,991		1,796,614

OPERATING INCOME			730,842		184,411
INTEREST INCOME			10,069		22,010

NET INCOME BEFORE INCOME TAXES			740,911		206,421
PROVISION FOR INCOME TAXES			306,400		90,150

NET INCOME		$	434,511	$	116,271

BASIC NET INCOME PER SHARE		$	0.08	$	0.02

DILUTED NET INCOME PER SHARE		$	0.08	$	0.02

BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING			5,261,379		5,290,991

DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING			5,277,456		5,338,376

See accompanying notes to financial statements and management’s discussion and analysis of financial condition and results of operations.

PSYCHEMEDICS CORPORATION
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)


		NINE MONTHS
		ENDED SEPTEMBER 30,

		2002		2001

REVENUE		$	12,706,049	$	12,537,870
COSTS OF REVENUE			5,405,817		6,031,236

	Gross profit		7,300,232		6,506,634

EXPENSES:
	General and administrative		2,354,549		2,385,766
	Marketing and selling		2,784,679		2,920,285
	Research and development		269,889		501,779

			5,409,117		5,807,830

OPERATING INCOME			1,891,115		698,804
INTEREST INCOME			30,524		106,243

NET INCOME BEFORE INCOME TAXES			1,921,639		805,047
PROVISION FOR INCOME TAXES			796,400		351,300

NET INCOME		$	1,125,239	$	453,747

BASIC NET INCOME PER SHARE		$	0.21	$	0.09

DILUTED NET INCOME PER SHARE		$	0.21	$	0.08

BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING			5,260,116		5,289,425

DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING			5,288,225		5,344,813

See accompanying notes to financial statements and management’s discussion and analysis of financial condition and results of operations.

PSYCHEMEDICS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)


				NINE MONTHS
				ENDED SEPTEMBER 30,

				2002			2001

CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income			$	1,125,239		$	453,747
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization			886,830			960,093
		Compensation expense related to issuance of stock options			—			2,510
		Changes in current assets and liabilities:
			Accounts receivable		(818,371	)		142,307
			Prepaid expenses and other current assets		81,595			(103,107	)
			Accounts payable		(38,584	)		53,778
			Accrued expenses		138,000			(160,087	)
			Accrued income taxes		(31,397	)		131,234
			Deferred revenue		(80,909	)		112,133

		Net cash provided by operating activities			1,262,403			1,592,608

CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchases of property and equipment				(192,330	)		(571,021	)
	Increase in other assets — net				(8,114	)		(11,196	)

		Net cash used in investing activities			(200,444	)		(582,217	)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Net proceeds from the issuance of common stock				19,895			28,815
	Cash dividends paid				(841,644	)		(1,692,529	)
	Acquisition of treasury stock				—			(80,363	)
	Proceeds from the receivable from officer				—			2,516

		Net cash used in financing activities			(821,749	)		(1,741,561	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS					240,210			(731,170	)

CASH AND CASH EQUIVALENTS, beginning of period					3,110,700			3,434,593

CASH AND CASH EQUIVALENTS, end of period				$	3,350,910		$	2,703,423

See accompanying notes to financial statements and management’s discussion and analysis of financial condition and results of operations.

PSYCHEMEDICS CORPORATION
NOTES TO FINANCIAL STATEMENTS

September 30, 2002

1. Interim Financial Statements

The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Accordingly, certain information and footnote disclosure required for complete financial statements are not included herein. It is recommended that these financial statements be read in conjunction with the financial statements and related notes of Psychemedics Corporation (the “Company”) as reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of financial position, results of operations, and cash flows at the dates and for the periods presented have been included. The results of operations for the three months and the nine months ended September 30, 2002 may not be indicative of the results that may be expected for the year ending December 31, 2002, or any other period.

2. Reverse Stock Split

On August 1, 2002, the Company effected a one-for-four reverse stock split. All common shares, common stock equivalents and per share amounts in the accompanying financial statements and footnotes have been retroactively adjusted to reflect the reverse stock split.

3. Basic and Diluted Net Income Per Share

Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share was computed by dividing net income by the weighted average number of common and dilutive common equivalent shares outstanding during the period. The number of dilutive common equivalent shares outstanding during the period has been determined in accordance with the treasury-stock method. Common equivalent shares consist of common stock issuable upon the exercise of outstanding options.

Basic and diluted weighted average common shares outstanding are as follows:


	Three Months Ended				Nine Months Ended

	September 30,		September 30,		September 30,		September 30,
	2002		2001		2002		2001

Weighted average common shares		5,261,379		5,290,991		5,260,116		5,289,425
Dilutive common stock options		16,077		47,385		28,109		55,388
Weighted average common shares outstanding, assuming dilution		5,277,456		5,338,376		5,288,225		5,344,813

For the three months ended September 30, 2002 and 2001, options to purchase 428,605 and 356,784 common shares, respectively, were outstanding but not included in the diluted weighted average common share calculation as the effect would have been antidilutive. For the nine months ended September 30, 2002 and 2001, options to purchase 407,992 and 252,649 common shares, respectively, were outstanding but not included in the diluted weighted average common share calculation as the effect would have been antidilutive.

4. Revenue Recognition

Except as provided below, revenues from the Company’s services are recognized upon reporting of drug test results to the customer provided there is persuasive evidence of an arrangement, the sales price is fixed and determinable and collection of the related receivables is probable. In the event sample collection kits are not returned for processing by customers, revenues are recognized when the likelihood of the Company performing any service obligation is deemed remote. During the first three quarters of 2002 and 2001, the Company did not record any revenue related to sample collection kits that were sold for which the Company’s obligation to provide service was deemed remote. At September 30, 2002 and December 31, 2001, the Company had deferred revenue balances of approximately $672,000 and $753,000, respectively, reflecting payments for its personal drug testing service received prior to the performance of the related test.

5. Comprehensive Income

The Company’s comprehensive income for the three month periods and the nine month periods ended September 30, 2002 and 2001 was the same as reported net income.

6. Recent Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Asset s, which supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of , and the accounting and reporting provisions of APB 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 Transaction s. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The implementation of this statement did not have any effect on the Company’s financial statements.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities . SFAS 146 addresses the recognition, measurement and reporting of costs associated with exit and disposal activities, including restructuring activities that are currently accounted for in accordance with Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) . The scope of SFAS 146 includes costs related to terminating a contract that is not a capital lease, costs to consolidate facilities or relocate employees, and certain termination benefits provided to employees who are involuntarily terminated. SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. The Company does not expect the implementation of this statement will have a material impact on its financial position or results of operations.

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FACTORS THAT MAY AFFECT FUTURE RESULTS

From time to time, information provided by the Company or statements made by its employees may contain “forward-looking” information which involves risks and uncertainties. In particular, statements contained in this report which are not historical facts (including but not limited to the Company’s expectations regarding revenues, business strategy, anticipated operating results, cash dividends and anticipated cash requirements) may be “forward looking” statements. The Company’s actual results may differ from those stated in any “forward looking” statements. Factors that may cause such differences include, but are not limited to, risks associated with the expansion of the Company’s sales and marketing network, market acceptance of the Company’s products, development of markets for new products and services offered by the Company, the economic health of principal customers of the Company, financial and operational risks associated with possible expansion of testing facilities used by the Company, government regulation (including, but not limited to, Food and Drug Administration regulations), competition and general economic conditions.

CRITICAL ACCOUNTING POLICIES

Management believes the most critical accounting policies include revenue recognition and income taxes.

Revenue Recognition

Revenues from the Company’s services are recognized upon reporting of drug test results to the customer provided there is persuasive evidence of an arrangement, the sales price is fixed and determinable and collection of the related receivable is probable. In the event sample collection kits are not returned for processing by customers, revenues are recognized when the likelihood of the Company performing any service obligation is deemed remote.

Income Taxes

As part of the process of preparing the Company’s financial statements, the Company is required to estimate income taxes in each of the jurisdictions in which it operates. This process involves the preparation of an estimate of the Company’s actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the balance sheet. The Company must then assess the likelihood that the deferred tax assets will be recovered from future taxable income and to the extent it believes that recovery is not likely, it must establish a valuation allowance. To the extent the Company establishes a valuation allowance or increases this allowance in a period, it must include an expense within the tax provision in the statement of operations.

Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. In the event that actual results differ from these estimates or the Company adjusts these estimates in future periods, it may need to establish a valuation allowance, which could materially impact the Company’s financial position and results of operations.

The above listing is not intended to be a comprehensive list of all of the Company’s accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.

OVERVIEW

Psychemedics Corporation was incorporated in 1986. The Company utilizes a patented hair analysis method involving radioimmunoassay technology to analyze human hair to detect abused substances.

RESULTS OF OPERATIONS

Revenue was $4,344,685 for the three month period ended September 30, 2002 as compared to $3,955,117 for the comparable period of 2001, representing an increase of 10%. Revenue was $12,706,049 for the nine month period ended September 30, 2002 as compared to $12,537,870 for the comparable period of 2001, representing an increase of 1%. The revenue increase for the third quarter of 2002 was due primarily to an increase in volume from both new and existing clients, along with an increase in average revenue per sample of 2% for the three month period ended September 30, 2002 as compared to the comparable period of 2001. An increase of 1% in average revenue per sample for the nine month period ended September 30, 2002 as compared to the same period in 2001 was responsible for the revenue increase for the nine months ended September 30, 2002.

Gross margin was 59% of revenue for the three month period ended September 30, 2002, as compared to 50% for the comparable period of 2001. Gross margin was 57% for the nine months ended September 30, 2002 as compared to 52% for the comparable period of 2001. The increase was due to higher volumes, an increase in average revenue per sample of 2% and cost reductions at the Company’s laboratory for the three month period ended September 30, 2002, as compared to the year earlier period. The increase for the nine month period was due to average revenue per sample increasing by 1% and cost reductions at the Company’s laboratory for the nine month period ended September 30, 2002, as compared to the year earlier period.

General and administrative (“G&A”) expenses were $787,965 for the three month period ended September 30, 2002 as compared to $750,747 for the comparable period of 2001, representing an increase of 5%. Increases in personnel costs, legal fees and insurance costs were offset in part by a decrease in professional fees related to corporate strategic development for the three months ended September 30, 2002 as compared to the comparable period of 2001. G&A expenses were $2,354,549 for the nine months ended September 30, 2002 as compared to $2,385,766 for the comparable period of 2001, representing a decrease of 1%. Professional fees related to corporate strategic development decreased substantially during the first three quarters of 2002 as compared to the comparable period of 2001. These reduced fees were offset in part by increases in personnel costs, legal fees and insurance costs in the second and third quarter of 2002. As a percentage of revenue, G&A expenses decreased to 18% in the third quarter of 2002 from 19% in the third quarter of 2001 and remained at 19% for the nine month periods ended September 30, 2002 and 2001.

Marketing and selling expenses were $959,566 for the three month period ended September 30, 2002 as compared to $930,651 for the comparable period of 2001, an increase of 3%. This increase was due primarily to greater customer service costs, which were offset in part by a reduction in expenses pertaining to the Company’s sales and support staff for the three months ended September 30, 2002 as compared to the comparable period of 2001. Marketing and selling expenses were $2,784,679 for the nine months ended September 30, 2002 as compared to $2,920,285 for the year earlier period, representing a decrease of 5%. This decrease was due primarily to a reduction in expenses related to the Company’s sales and support staff in the first three quarters of 2002, as compared to the first three quarters of 2001. These reduced expenses were offset in part by an increase in customer service costs in the second and third quarter of 2002. As a percentage of revenue, marketing and selling expenses decreased to 22% for the three months ended September 30, 2002 from 24% in the third quarter of 2001 and decreased to 22% for the nine months ended September 30, 2002 from 23% for the comparable period of 2001. The Company expects to continue to aggressively promote its drug testing services during the remainder of 2002 and in future years in order to expand its client base.

Research and development (“R&D”) expenses were $84,460 for the three month period ended September 30, 2002 as compared to $115,216 for the comparable period of 2001, a decrease of 27%. R&D expenses were $269,889 for the nine months ended September 30, 2002 as compared to $501,779 for the comparable period of 2001, representing a decrease of 46%. This decrease was primarily due to non-recurring expenses incurred in 2001 related to applying for United States Food and Drug Administration (“FDA”) 510k clearance for its assays. As of May 14, 2002, the Company had received 510k clearance to market all of its five assays. As a percentage of revenue, R&D expenses decreased to 2% in the third quarter of 2002 from 3% in the third quarter of 2001 and decreased to 2% for the nine months ended September 30, 2002 from 4% for the comparable period of 2001.

Other income represents interest earned on cash equivalents. Other income decreased by $11,941 for the three month period ended September 30, 2002 and decreased by $75,719 for the nine month period ended September 30, 2002 as compared to the year earlier periods. While the average investment balances decreased in the first quarter of 2002 and increased in the second and third quarter of 2002 as compared to the comparable periods of 2001, interest income decreased due to lower yields on investment balances.

During the three months ended September 30, 2002, the Company recorded a tax provision of $306,400 reflecting an effective tax rate of 41.4% as compared to a tax provision of $90,150 and an effective tax rate of 43.7% for the three months ended September 30, 2001. During the nine months ended September 30, 2002 and September 30, 2001, the Company recorded tax provisions of $796,400 and $351,300 representing effective tax rates of 41.4% and 43.6%, respectively. The variation in the effective tax rate was due primarily to a decrease in non-deductible expenses for tax purposes along with an increased level of net income before tax in the first three quarters of 2002 versus the first three quarters of 2001.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2002, the Company had $3,350,910 of cash and cash equivalents. The Company’s operating activities generated net cash of $1,262,403 in the nine months ended September 30, 2002. Investing activities used $200,444 in the nine month period while financing activities used a net amount of $821,749 during the period.

Operating cash flows decreased $330,205 in the first nine months of 2002, compared to the same period in 2001. This decrease is primarily due to an increase in accounts receivable during the first nine months of 2002 as compared to the first nine months of 2001 which was partially offset by an increase in net income for the first three quarters of 2002 as compared to the year earlier period. Despite this significant increase in accounts receivable, it should be noted that the net accounts receivable balance of $2,843,794 as of September 30, 2002 is slightly lower than the net accounts receivable balance of $2,845,878 as of September 30, 2001. The non-cash effect of depreciation and amortization in the 2002 and 2001 periods was $886,830 and $960,093, respectively.

Capital expenditures in the first three quarters of 2002 were $192,330. The expenditures primarily consisted of new equipment, including laboratory and computer equipment. The Company believes that within the next two years it may be required to expand its existing laboratory or develop a second laboratory, the cost of which is currently believed to range from $2 million to $4 million.

During the nine month period ended September 30, 2002, the Company distributed $841,644 in cash dividends to its shareholders.

At September 30, 2002, the Company’s principal source of liquidity is $3,350,910 of cash and cash equivalents. Management currently believes that such funds, together with cash generated from operations, should be adequate to fund anticipated working capital requirements and capital expenditures in the near term. Depending upon the Company’s results of operations, its future capital needs and available marketing opportunities, the Company may use various financing sources to raise additional funds. Such sources could potentially include joint ventures, issuance of additional equity or debt financing. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders, and we cannot be certain that additional financing will be available in amounts or on terms acceptable to us, if at all. At September 30, 2002, the Company had no long-term debt.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s exposure to market risk related to changes in interest rates is limited as the Company maintains a short-term investment portfolio consisting principally of money market securities that are not sensitive to sudden interest rate changes. The Company does not use derivative financial instruments for speculative or trading purposes.

Interest Rate Sensitivity. The Company maintains a short-term investment portfolio consisting principally of money market securities that are not sensitive to sudden interest rate changes.

Item 4. Controls and Procedures

Within the 90 days prior to the date of this report, our Chief Executive Officer and Chief Financial Officer performed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring the reporting of material information required to be included in the Company’s periodic filings with the Securities and Exchange Commission. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these internal controls subsequent to the date of the most recent evaluation.

PART II OTHER INFORMATION

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

A Special Meeting of Shareholders of Psychemedics Corporation was held on July 30, 2002 for the purpose of voting upon a proposal to amend and restate the Company’s Certificate of Incorporation to effect a reverse stock split of the shares of the Company’s issued and outstanding common stock whereby one (1) share of “new” common stock was to be issued in exchange for each four (4) shares of common stock issued and outstanding at the close of business on July 31, 2002. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was no solicitation in opposition to management’s solicitations.

Description and tabulation by the Company’s transfer agent of the proposal voted upon at the Special Meeting of Shareholders of Psychemedics Corporation held on July 30, 2002:


Number of Shares

For			14,394,556
Opposed			1,963,554
Abstained			33,509

The numbers of shares represented above are pre-split amounts. The reverse stock split became effective at 12:01 AM on August 1, 2002.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

See Exhibit Index included in this Report

(b) Reports on Form 8-K

On August 17, 2002 a report on Form 8-K was filed, reporting under “Item 4 – Changes in Registrant’s Certifying Accountant” that the Registrant named Ernst & Young LLP as the Company’s new independent public accountants.

SIGNATURES

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.

CERTIFICATIONS

I, Raymond C. Kubacki, Jr., President and Chief Executive Officer of Psychemedics Corporation

1. I have reviewed this quarterly report on Form 10-Q of [identify registrant];

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

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

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

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

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


Date: November 12, 2002		By: /s/ Raymond C. Kubacki, Jr. Raymond C. Kubacki, Jr. President and Chief Executive Officer

I, Peter C. Monson, Vice President, Treasurer and Chief Financial Officer of Psychemedics Corporation, certify that:

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


Date: November 12, 2002		By: /s/ Peter C. Monson Peter C. Monson Vice President, Treasurer & Chief Financial Officer

PSYCHEMEDICS CORPORATION
FORM 10-Q
September 30, 2002
EXHIBIT INDEX


Exhibit No.		Description

3		Amended and Restated Certificate of Incorporation
10		2000 Stock Option Plan (as adjusted to reflect the Company’s 1-for-4 reverse stock split effective August 1, 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

Exhibit 3

AMENDED AND RESTATED CERTIFICATE OF INCORPORATION

PSYCHEMEDICS CORPORATION

Psychemedics Corporation, a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows:

1. The name of the corporation (hereinafter called the "corporation") is

PSYCHEMEDICS CORPORATION

The original certificate of incorporation of the corporation was filed with the Secretary of State of the State of Delaware on September 24, 1986.

2. The amendment and restatement of the certificate of incorporation has been duly adopted by both the Board of Directors and the stockholders of the corporation in accordance with the provisions of Sections 141, 222, 242 and 245 of the General Corporation Law of the State of Delaware.

3. Pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware, this Amended and Restated Certificate of Incorporation restates and integrates and further amends the provisions of the corporation's certificate of incorporation as heretofore amended or supplemented.

4. The text of the Amended and Restated Certificate of Incorporation reads in its entirety as follows:

FIRST: The name of the corporation is Psychemedics Corporation.

SECOND: The address, including street, number, city, and county, of the registered office of the corporation in the State of Delaware is 2711 Centerville Road, Suite 400, Wilmington, Delaware 19808; and the name of the registered agent of the corporation in the State of Delaware at such address is CSC - Corporation Service Company.

THIRD: The nature of the business and of the purposes to be conducted and promoted by the corporation are as follows:

To establish, maintain, and operate chemical, physical, and other laboratories to carry on chemical, and physical, research and testing services of every kind and character, (especially for the detection of drugs of abuse), and to market and sell directly or indirectly such laboratory services to the public, including without limitation, private employers, the military, government agencies and institutions, and medical professionals and institutions; to produce and manufacture, and/or sell antibodies and reagents for laboratory research, application and commercial purposes; to establish, operate, conduct, assist and support rehabilitation clinics, services and facilities engaged in the field of substance abuse, to own and protect any inventions by letters

patent or by holding them as secret processes, and to grant licenses and make other lawful agreements or arrangements for the employment or use of any such inventions by other persons; to apply for, obtain, register, purchase, or otherwise acquire, hold, own, use, introduce, develop, and sell, assign, lease, pledge, or otherwise dispose of or turn to account letters patent of the United States or of any foreign country, inventions, formulas, processes, patents, patent rights, licenses and privileges, trademarks and trade names, or pending applications therefor; and without limiting any of the aforesaid, to engage in such other business activities in furtherance of the foregoing objectives.

To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware.

FOURTH: The total number of shares of stock which the corporation shall have authority to issue is 50,872,521 shares, consisting of 50,000,000 shares of Common Stock having a par value of $.005 per share and 872,521 shares of Preferred Stock having a par value of $.005 per share. The Board of Directors is hereby authorized, as it may determine, subject to limitations prescribed by law, to issue such number of the authorized shares of Preferred Stock at any time and from time to time, in one or more series, and to fix or alter the designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions, of such shares of Preferred Stock, including without limitation of the generality of the foregoing, dividend rights, dividend rates, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), the redemption price or prices and liquidation preferences of any wholly unissued series of preferred shares and the number of shares constituting any such series and the designation thereof, of any of them; and to increase or decrease the number of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series.

Effective as of 12:01 a.m. Eastern Daylight Time on August 1, 2002 (the "Effective Date"), each share of Common Stock, $.005 par value per share ("Old Common Stock"), then issued and outstanding or held in the treasury of the corporation at the close of business on the Effective Date shall automatically be reclassified, converted and changed into 0.25 share of Common Stock, $.005 par value per share ("New Common Stock"), of the corporation without any further action by the holders of such shares of Old Common Stock (and any fractional shares resulting from such exchange will not be issued but will be redeemed by the corporation at the fair market value of the fractional shares as determined in good faith by the Board of Directors). Each stock certificate representing shares of Old Common Stock shall thereafter represent that number of shares of New Common Stock into which the shares of Old Common Stock represented by such certificate shall have been reclassified; provided, however, that each person holding of record a stock certificate or certificates that represented shares of Old Common Stock shall receive, upon surrender of such certificate or certificates, a new certificate or certificates evidencing and representing the number of shares of New Common Stock to which such person is entitled. The New Common Stock issued in this exchange shall have the same rights and preferences as the Old Common Stock.

FIFTH: Intentionally Omitted.

SIXTH: The corporation is to have perpetual existence.

SEVENTH: Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this corporation under the provisions of section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under the provisions of section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this corporation, as the case may be, and also on this corporation.

EIGHTH: For the management of the business and for the conduct of the affairs of the corporation, and in further definition, limitation and regulation of the powers of the corporation and of its directors and of its stockholders or any class thereof, as the case may be, it is further provided:

1. The management of the business and the conduct of the affairs of the corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed by, or in the manner provided in, the By-Laws. The phrase "whole Board" and the phrase "total number of directors" shall be deemed to have the same meaning, to wit, the total number of directors which the corporation would have if there were no vacancies. No election of directors need be by written ballot.

2. After the original or other By-Laws of the corporation have been adopted, amended, or repealed, as the case may be, in accordance with the provisions of Section 109 of the General Corporation Law of the State of Delaware, and, after the corporation has received any payment for any of its stock, the power to adopt, amend, or repeal the By-Laws of the corporation may be exercised by the Board of Directors of the corporation; provided, however, that any provision for the classification of directors of the corporation for staggered terms pursuant to the provisions of subsection (d) of Section 141 of the General Corporation Law of the State of Delaware shall be set forth in an initial By-Law or in a By-Law adopted by the stockholders entitled to vote of the corporation unless provisions for such classification shall be set forth in this Amended and Restated Certificate of Incorporation.

3. Whenever the corporation shall be authorized to issue only one class of stock, each outstanding share shall entitle the holder thereof to notice of,

and the right to vote at, any meeting of stockholders. Whenever the corporation shall be authorized to issue more than one class of stock, no outstanding share of any class of stock which is denied voting power under the provisions of this Amended and Restated Certificate of Incorporation shall entitle the holder thereof to the right to vote at any meeting of stockholders except as the provisions of paragraph (2) of subsection (b) of Section 242 of the General Corporation Law of the State of Delaware shall otherwise require; provided, that no share of any such class which is otherwise denied voting power shall entitle the holder thereof to vote upon the increase or decrease in the number of authorized shares of said class.

NINTH: The personal liability of the directors of the corporation is hereby eliminated to the fullest extent permitted by paragraph (7) of subsection (b) of
Section 102 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented.

TENTH: The corporation shall, to the fullest extent permitted by Section 145 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented, indemnify any and all persons whom it shall have power to indemnify under said section from and against any and all of the expenses, liabilities or other matters referred to in or covered by said section, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any By-Law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.

ELEVENTH: From time to time any of the provisions of this Amended and Restated Certificate of Incorporation may be amended, altered or repealed, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted in the manner and at the time prescribed by said laws, and all rights at any time conferred upon the stockholders of the corporation by this Amended and Restated Certificate of Incorporation are granted subject to the provisions of this Article ELEVENTH.

5. This Amended and Restated Certificate of Incorporation shall be effective as of 12:01 a.m. Eastern Daylight Time on August 1, 2002.

[Remainder of Page Intentionally Left Blank]

IN WITNESS WHEREOF, Psychemedics Corporation has caused this Amended and Restated Certificate of Incorporation to be signed by its President and attested to by its Secretary this 30th day of July, 2002.

PSYCHEMEDICS CORPORATION

                              By: /s/ Raymond C. Kubacki, Jr.
                                 --------------------------------------------
                                   Raymond C. Kubacki, Jr.,
                                   President and Chief Executive Officer


Attest:


By: /s/ Edward S. Brewer, Jr.
   ---------------------------------------------
    Edward S. Brewer, Jr., Secretary

Exhibit 10

PSYCHEMEDICS CORPORATION

2000 STOCK OPTION PLAN

(as adjusted to reflect the Company's 1-for-4 reverse stock split effective August 1, 2002)

ESTABLISHMENT, OBJECTIVES AND DURATION

A. ESTABLISHMENT OF THE PLAN. Effective March 21, 2000 (the "Effective Date"), Psychemedics Corporation, a Delaware corporation (hereinafter referred to as the "Company"), established an incentive compensation plan known as the Psychemedics Corporation 2000 Stock Option Plan (hereinafter referred to as the "Plan"), as set forth in this document.

B. PURPOSE. The purpose of the Plan is to encourage key employees of the Company and of any present or future parent or subsidiary of the Company (collectively, "Related Corporations") and other individuals who render services to the Company or a Related Corporation, by providing opportunities to participate in the ownership of the Company and its future growth through (a) the grant of options which qualify as "incentive stock options" ("ISOs") under Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"); or (b) the grant of options which do not qualify as ISOs ("Non-Qualified Options"). Both ISOs and Non-Qualified Options are referred to hereafter individually as an "Option" and collectively as "Options." As used herein, the terms "parent" and "subsidiary" mean "parent corporation" and "subsidiary corporation," respectively, as those terms are defined in Section 424 of the Code.

C. PRIOR PLANS SUPERSEDED. This Plan is intended to replace and supercede the Company's 1989 Employee Stock Option Plan as amended, and the Company's 1989 Non-Qualified Stock Option Plan, as amended (the "Prior Plans"), provided, however that each outstanding option under the Prior Plans shall remain in full force and effect in accordance with the terms of the option agreement evidencing such option as in effect on the Effective Date.

D. DURATION OF THE PLAN. The Plan commenced on the Effective Date and shall remain in effect, subject to the right of the Board of Directors to amend or terminate the Plan at any time pursuant to paragraph 15 hereof, until all shares subject to it shall have been purchased or acquired according to the Plan's provisions.

ADMINISTRATION OF THE PLAN.

A. BOARD OR COMMITTEE ADMINISTRATION. The Plan shall be administered by the Board of Directors of the Company (the "Board") or, subject to paragraph 2(D) (relating to compliance with Section 162(m) of the Code), by a committee appointed by the Board (the "Committee"). Hereinafter, all references in this Plan to the "Committee" shall mean the Board if no Committee has been appointed. Subject to ratification of the grant of each Option by the Board (if so

required by applicable state law), and subject to the terms of the Plan, the Committee shall have the authority to (i) determine to whom (from among the class of employees eligible under paragraph 3 to receive ISOs) lSOs shall be granted, and to whom (from among the class of individuals and entities eligible under paragraph 3 to receive Non-Qualified Options) Non-Qualified Options may be granted; (ii) determine the time or times at which Options shall be granted; (iii) determine the purchase price of shares subject to each Option, which prices shall not be less than the minimum price specified in paragraph 6; (iv) determine whether each Option granted shall be an ISO or a Non-Qualified Option; (v) determine (subject to paragraph 8) the time or times when each Option shall become exercisable and the duration of the exercise period; (vi) extend the period during which outstanding Options may be exercised; (vii) determine whether restrictions such as repurchase options are to be imposed on shares subject to Options, and the nature of such restrictions, if any; and (viii) interpret the Plan and prescribe and rescind rules and regulations relating to it. If the Committee determines to issue a Non-Qualified Option, it shall take whatever actions it deems necessary under Section 422 of the Code and the regulations promulgated thereunder to ensure that such Option is not treated as an ISO. The interpretation and construction by the Committee of any provisions of the Plan or of any Option granted under it shall be final unless otherwise determined by the Board. The Committee may from time to time adopt such rules and regulations for carrying out the Plan as it may deem advisable. No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Option granted under it.

B. COMMITTEE ACTIONS. The Committee may select one of its members as its chairman, and shall hold meetings at such time and places as it may determine. A majority of the Committee shall constitute a quorum and acts of a majority of the members of the Committee at a meeting at which a quorum is present, or acts reduced to or approved in writing by all the members of the Committee (if consistent with applicable state law), shall be the valid acts of the Committee. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer the Plan.

C. GRANT OF OPTIONS TO BOARD MEMBERS. Options may be granted to members of the Board. All grants of Options to members of the Board shall in all respects be made in accordance with the provisions of this Plan applicable to other eligible persons. Members of the Board who either (i) are eligible to receive grants of Options pursuant to the Plan or (ii) have been granted Options may vote on any matters affecting the administration of the Plan or the grant of any Options pursuant to the Plan, except that no such member shall act upon the granting to himself or herself of Options, but any such member may be counted in determining the existence of a quorum at any meeting of the Board during which action is taken with respect to the granting to such member of Options.

D. PERFORMANCE-BASED COMPENSATION. The Board, in its discretion, may take such action as may be necessary to ensure that Options granted under the Plan qualify as "qualified performance-based compensation" within the

meaning of Section 162(m) of the Code and applicable regulations promulgated thereunder ("Performance-Based Compensation"). Such action may include, in the Board's discretion, some or all of the following (i) if the Board determines that Options granted under the Plan generally shall constitute Performance-Based Compensation, the Plan shall be administered, to the extent required for such Options to constitute Performance-Based Compensation, by a Committee consisting solely of two or more "outside directors" (as defined in applicable regulations promulgated under Section 162(m) of the Code), and (ii) Options granted under the Plan may be subject to such other terms and conditions as are necessary for compensation recognized in connection with the exercise or disposition of such Option or the disposition of Common Stock acquired pursuant to such Option, to constitute Performance-Based Compensation.

3. ELIGIBLE EMPLOYEES AND OTHERS. ISOs may be granted only to employees of the Company or any Related Corporation. Non-Qualified Options may be granted to any employee, officer or director (whether or not also an employee) or consultant of the Company or any Related Corporation. The Committee may take into consideration a recipient's individual circumstances in determining whether to grant an Option. The granting of any Option to any individual or entity shall neither entitle that individual or entity to, nor disqualify such individual or entity from, participation in any other grant of Options.

4. STOCK. The stock subject to Options shall be authorized but unissued shares of Common Stock, par value $.005 per share of the Company (the "Common Stock"), or shares of Common Stock reacquired by the Company in any manner. The aggregate number of shares which may be issued pursuant to the Plan is 500,000, subject to adjustment as provided in paragraph 13. If any Option granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part or shall be repurchased by the Company, the unpurchased shares of Common Stock subject to such Option shall again be available for grants of Options under the Plan.

No employee of the Company or any Related Corporation may be granted Options to acquire, in the aggregate, more than 62,500 shares of Common Stock under the Plan during any fiscal year of the Company. If any Option granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part or shall be repurchased by the Company, the shares subject to such Option shall be included in the determination of the aggregate number of shares of Common Stock deemed to have been granted to such employee under the Plan.

5. GRANTING OF OPTIONS. Options may be granted under the Plan at any time on or after the Effective Date. The date of grant of a Option under the Plan will be the date specified by the Committee at the time it grants the Option; provided, however, that such date shall not be prior to the date on which the Committee acts to approve the grant.

6. MINIMUM OPTION PRICE; ISO LIMITATIONS.

A. EXERCISE PRICE. The exercise price per share specified in the agreement relating to each Option granted under the Plan shall not be less than the fair market value per share of Common Stock on the date of such grant. In

the case of an ISO to be granted to an employee owning stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Related Corporation, the price per share specified in the agreement relating to such ISO shall not be less than one hundred ten percent (110%) of the fair market value per share of Common Stock on the date of grant. For purposes of determining stock ownership under this paragraph, the rules of Section 424(d) of the Code shall apply.

B. $100,000 ANNUAL LIMITATION ON LSO VESTING. Each eligible employee may be granted Options treated as ISOs only to the extent that, in the aggregate under this Plan and all incentive stock option plans of the Company and any Related Corporation, ISOs do not become exercisable for the first time by such employee during any calendar year with respect to stock having a fair market value (determined at the time the ISOs were granted) in excess of $100,000. The Company intends to designate any Options granted in excess of such limitation as Non-Qualified Options, and the Company shall issue separate certificates to the optionee with respect to Options that are Non-Qualified Options and Options that are ISOs.

C. DETERMINATION OF FAIR MARKET VALUE. The "fair market value" of the Company's Common Stock shall be determined as of the trading day next preceding the date of grant and shall mean (i) the average (on that date) of the high and low prices of the Common Stock on the principal national securities exchange on which the Common Stock is traded, if the Common Stock is then traded on a national securities exchange; or (ii) the last reported sale price (on that date) of the Common Stock on the Nasdaq Stock Market, if the Common Stock is not then traded on a national securities exchange; or (iii) the closing bid price (or average of bid prices) last quoted (on that date) by an established quotation service for over-the-counter securities, if the Common Stock is not reported on the Nasdaq Stock Market. If the Common Stock is not publicly traded at the time an Option is granted under the Plan, "fair market value" shall mean the fair value of the Common Stock as determined by the Committee after taking into consideration all factors which it deems appropriate, including, without limitation, recent sale and offer prices of the Common Stock in private transactions negotiated at arm's length.

7. OPTION DURATION. Subject to earlier termination as provided in paragraphs 9 and 10 or in the agreement relating to such Option, each Option shall expire on the date specified by the Committee, but not more than (i) ten years from the date of grant in the case of Options generally and (ii) five years from the date of grant in the case of ISOs granted to an employee owning stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Related Corporation, as determined under paragraph 6(A).

8. EXERCISE OF OPTION. Subject to the provisions of paragraphs 9 through 12, each Option granted under the Plan shall be exercisable as follows:

A. VESTING. The Option shall either be fully exercisable on the date of grant or shall become exercisable thereafter in such installments as the Committee may specify.

B. FULL VESTING OF INSTALLMENTS. Once an installment becomes exercisable, it shall remain exercisable until expiration or termination of the Option, unless otherwise specified by the Committee.

C. PARTIAL EXERCISE. Each Option or installment may be exercised at any time or from time to time, in whole or in part, for up to the total number of shares with respect to which it is then exercisable.

D. ACCELERATION OF VESTING. The Committee shall have the right to accelerate the date that any installment of any Option becomes exercisable; provided that the Committee shall not, without the consent of an optionee, accelerate the permitted exercise date of any installment of any Option granted to any employee as an ISO if such acceleration would violate the annual vesting limitation contained in Section 422(d) of the Code, as described in paragraph 6(A).

9. TERMINATION OF EMPLOYMENT. Unless otherwise specified in the agreement relating to such ISO, if an ISO optionee ceases to be employed by the Company and all Related Corporations other than by reason of death or disability as those terms are defined in paragraph 10, no further installments of his or her ISOs shall become exercisable, and his or her ISOs shall terminate on the date of termination of his or her employment. For purposes of this paragraph 9, employment shall be considered as continuing uninterrupted during any bona fide leave of absence (such as those attributable to illness, military obligations or governmental service) provided that the period of such leave does not exceed 90 days or, if longer, any period during which such optionee's right to reemployment is guaranteed by statute or by contract. A bona fide leave of absence with the written approval of the Committee shall not be considered an interruption of employment under this paragraph 9, provided that such written approval contractually obligates the Company or any Related Corporation to continue the employment of the optionee after the approved period of absence. ISOs granted under the Plan shall not be affected by any change of employment within or among the Company and Related Corporations, so long as the optionee continues to be an employee of the Company or any Related Corporation. Nothing in the Plan shall be deemed to give any grantee of any Option the right to be retained in employment or other service by the Company or any Related Corporation for any period of time.

10. DEATH; DISABILITY. Unless otherwise specified in the agreement relating to such ISO, if an ISO optionee ceases to be employed by the Company and all Related Corporations by reason of his or her death, permanent and total disability (as defined in Section 22(c)(3) of the Code or any successor statute), any ISO owned by such optionee may be exercised, to the extent otherwise exercisable on the date of such death, or permanent and total disability, by the optionee, or if he or she is not living, by his or her estate, personal representative or beneficiary who has acquired the ISO by will or by the laws of descent and distribution, until the earlier of (i) the specified expiration date of the ISO or (ii) one year from the date of termination of employment.

11. ASSIGNABILITY. No ISO shall be assignable or transferable by the optionee except by will or by the laws of descent and distribution, and during the lifetime of the optionee shall be exercisable only by such optionee. Non-Qualified Options shall be transferable to the extent set forth in the agreement relating to such Non-Qualified Option.

12. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by instruments (which need not be identical) in such forms as the Committee may from time to time approve. Such instruments shall conform to the terms and conditions set forth in paragraphs 6 through 11 hereof and may contain such other provisions as the Committee deems advisable which are not inconsistent with the Plan, including restrictions applicable to shares of Common Stock issuable upon exercise of Options. The Committee may specify that any Non-Qualified Option shall be subject to the restrictions set forth herein with respect to ISOs, or to such other termination and cancellation provisions as the Committee may determine. The Committee may from time to time confer authority and responsibility on one or more of its own members and/or one or more officers of the Company to execute and deliver such instruments. The proper officers of the Company are authorized and directed to take any and all action necessary or advisable from time to time to carry out the terms of such instruments.

13. ADJUSTMENTS. Upon the occurrence of any of the following events, an optionee's rights with respect to Options granted to such optionee hereunder shall be adjusted as hereinafter provided, unless otherwise specifically provided in the written agreement between the optionee and the Company relating to such Option:

A. STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, the number of shares of Common Stock deliverable upon the exercise of Options shall be appropriately increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend.

B. CONSOLIDATIONS OR MERGERS. If the Company is to be consolidated with or acquired by another entity in a merger or other reorganization in which the holders of the outstanding voting stock of the Company immediately preceding the consummation of such event, shall, immediately following such event, hold, as a group, less than a majority of the voting securities of the surviving or successor entity, or in the event of a sale of all or substantially all of the Company's assets or otherwise (each, an "Acquisition"), the Committee or the board of directors of any entity assuming the obligations of the Company hereunder (the "Successor Board"), shall, as to outstanding Options, either (i) make appropriate provision for the continuation of such Options by substituting on an equitable basis for the shares then subject to such Options either (a) the consideration payable with respect to the outstanding shares of Common Stock in connection with the Acquisition, (b) shares of stock of the surviving or successor corporation or (c) such other securities as the Successor Board deems appropriate, the fair market value of which shall not materially exceed the fair market value of the shares of Common Stock subject to such Options immediately preceding the Acquisition; or (ii) upon written notice to the optionees, provide that all Options must be exercised, to the extent then exercisable or to be exercisable as a result of the Acquisition, within a specified number of days of the date of such notice, at the end of which period the Options shall terminate; or (iii) terminate all Options in exchange for a cash payment equal to the excess of the fair market value of the shares subject to such Options (to the extent then exercisable or to be exercisable as a result of the Acquisition) over the exercise price thereof.

C. RECAPITALIZATION OR REORGANIZATION. In the event of a

recapitalization or reorganization of the Company (other than a transaction described in subparagraph B above) pursuant to which securities of the Company or of another corporation are issued with respect to the outstanding shares of Common Stock, an optionee upon exercising an Option shall be entitled to receive for the purchase price paid upon such exercise the securities he or she would have received if he or she had exercised such Option prior to such recapitalization or reorganization.

D. MODIFICATION OF ISOS. Notwithstanding the foregoing, any adjustments made pursuant to subparagraphs A, B or C with respect to ISOs shall be made only after the Committee, after consulting with counsel for the Company, determines whether such adjustments would constitute a "modification" of such ISOs (as that term is defined in Section 424 of the Code) or would cause any adverse tax consequences for the holders of such ISOs. If the Committee determines that such adjustments made with respect to ISOs would constitute a modification of such ISOs or would cause adverse tax consequences to the holders, it may refrain from making such adjustments.

E. DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, each Option will terminate immediately prior to the consummation of such proposed action or at such other time and subject to such other conditions as shall be determined by the Committee.

F. ISSUANCES OF SECURITIES. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares subject to Options. No adjustments shall be made for dividends paid in cash or in property other than securities of the Company.

G. FRACTIONAL SHARES. No fractional shares shall be issued under the Plan and the optionee shall receive from the Company cash in lieu of such fractional shares.

H. ADJUSTMENTS. Upon the happening of any of the events described in subparagraphs A, B or C above, the class and aggregate number of shares set forth in paragraph 4 hereof that are subject to Options which previously have been or subsequently may be granted under the Plan shall also be appropriately adjusted to reflect the events described in such subparagraphs. The Committee or the Successor Board shall determine the specific adjustments to be made under this paragraph 13 and, subject to paragraph 2, its determination shall be conclusive.

14. MEANS OF EXERCISING OPTIONS. An Option (or any part or installment thereof) shall be exercised by giving written notice to the Company at its principal office address, or to such transfer agent as the Company shall designate. Such notice shall identify the Option being exercised and specify the number of shares as to which such Option is being exercised, accompanied by full payment of the purchase price therefor either (a) in United States dollars in cash or by check, (b) at the discretion of the Committee, through delivery of shares of Common Stock having a fair market value

equal as of the date of the exercise to the cash exercise price of the Option,
(c) at the discretion of the Committee, by delivery of the grantee's personal recourse note bearing interest payable not less frequently than annually at a rate not less than 100% of the lowest applicable Federal rate, as defined in
Section 1274(d) of the Code and secured by such collateral as may be required by the Committee, (d) at the discretion of the Committee and consistent with applicable law, through the delivery of an assignment to the Company of a sufficient amount of the proceeds from the sale of the Common Stock acquired upon exercise of the Option and an authorization to the broker or selling agent to pay that amount to the Company, which sale shall be at the participant's direction at the time of exercise, or (e) at the discretion of the Committee, by any combination of (a), (b), (c) and (d) above. If the Committee exercises its discretion to permit payment of the exercise price of an ISO by means of the methods set forth in clauses (b), (c), (d) or (e) of the preceding sentence, such discretion shall be exercised in writing at the time of the grant of the ISO in question. The holder of an Option shall not have the rights of a shareholder with respect to the shares covered by such Option until the date of issuance of a stock certificate to such holder for such shares. Except as expressly provided above in paragraph 13 with respect to changes in capitalization and stock dividends, no adjustment shall be made for dividends or similar rights for which the record date is before the date such stock certificate is issued.

15. DURATION OF PLAN; AMENDMENT OF PLAN. This Plan was adopted by the Board on March 21, 2000 and ratified by the stockholders of the Company on May 11, 2000. The Board may terminate or amend the Plan in any respect at any time, except that, without the approval of the stockholders obtained within 12 months before or after the Board adopts a resolution authorizing any of the following actions: (a) the total number of shares that may be issued under the Plan may not be increased (except by adjustment pursuant to paragraph 13); (b) the provisions of paragraph 3 regarding eligibility for grants of lSOs may not be modified; and (c) the provisions of paragraph 6(A) regarding the exercise price at which shares may be offered pursuant to ISOs may not be modified (except by adjustment pursuant to paragraph 13). Except as otherwise provided in this paragraph 15, in no event may action of the Board or stockholders alter or impair the rights of a grantee, without such grantee's consent, under any Option previously granted to such grantee.

16. APPLICATION OF FUNDS. The proceeds received by the Company from the sale of shares pursuant to Options granted and Purchases authorized under the Plan shall be used for general corporate purposes.

17. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. By accepting an ISO granted under the Plan, each optionee agrees to notify the Company in writing immediately after such optionee makes a Disqualifying Disposition (as described in Sections 421, 422 and 424 of the Code and regulations thereunder) of any stock acquired pursuant to the exercise of ISOs granted under the Plan. A Disqualifying Disposition is generally any disposition occurring on or before the later of (a) the date two years following the date the ISO was granted or
(b) the date one year following the date the ISO was exercised.

18. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the exercise of a Non-Qualified Option or the making of a Disqualifying Disposition (as defined in paragraph 17), the Company may withhold taxes in respect of amounts that constitute compensation includible in gross income. The Committee in its discretion may condition the exercise of an Option, on the grantee's making satisfactory arrangement

for such withholding. Such arrangement may include payment by the grantee in cash or by check of the amount of the withholding taxes or, at the discretion of the Committee, by the grantee's delivery of previously held shares of Common Stock or the withholding from the shares of Common Stock otherwise deliverable upon exercise of an Option shares having an aggregate fair market value equal to the amount of such withholding taxes.

19. GOVERNMENTAL REGULATION. The Company's obligation to sell and deliver shares of the Common Stock under this Plan is subject to the approval of any governmental authority required in connection with the authorization, issuance or sale of such shares.

Government regulations may impose reporting or other obligations on the Company with respect to the Plan. For example, the Company may be required to send tax information statements to employees and former employees that exercise ISOs under the Plan, and the Company may be required to file tax information returns reporting the income received by grantees of Options in connection with the Plan.

20. GOVERNING LAW. The validity and construction of the Plan and the instruments evidencing Options shall be governed by the laws of the State of Delaware, or the laws of any jurisdiction in which the Company or its successors in interest may be organized.

Exhibit 99.1

CERTIFICATION PURSUANT TO
U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Raymond C. Kubacki, Jr., President and Chief Executive Officer of Psychemedics Corporation (the "Company"), certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, as filed with the Securities and Exchange Commission on November 12, 2002 (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

Date: November 12, 2002                By: /s/ Raymond C. Kubacki, Jr.
                                          --------------------------------------
                                           Raymond C. Kubacki, Jr.
                                           President and Chief Executive Officer

This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

Exhibit 99.2

CERTIFICATION PURSUANT TO
U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Peter C. Monson, Vice President, Treasurer and Chief Financial Officer of Psychemedics Corporation (the "Company"), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

Date: November 12, 2002                 By: /s/ Peter C. Monson
                                           -------------------------------
                                           Peter C. Monson
                                           Vice President, Treasurer &
                                           Chief Financial Officer

Psychemedics Corporation

Date: November 12, 2002

By: /s/ Raymond C. Kubacki, Jr.

Raymond C. Kubacki, Jr.
President and Chief Executive Officer

Date: November 12, 2002

By: /s/ Peter C. Monson

Peter C. Monson
Vice President, Treasurer &
Chief Financial Officer


(Mark One)

	x	QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For quarterly period ended September 30, 2002

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

	(a)		Exhibits

			See Exhibit Index included in this Report

	(b)		Reports on Form 8-K

			On August 17, 2002 a report on Form 8-K was filed, reporting under “Item 4 – Changes in Registrant’s Certifying Accountant” that the Registrant named Ernst & Young LLP as the Company’s new independent public accountants.

1.		I have reviewed this quarterly report on Form 10-Q of [identify registrant];

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

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

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

	a)		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c)		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

	a)		all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and