1

                                      
                                      
                      SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C.  20549

                                 FORM 10-QSB

(Mark One)

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

                  For quarterly period ended  JUNE 30, 1995

              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 Small Business Issuer as specified in its charter)

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

1280 Massachusetts Ave., Ste. 200, Cambridge, MA                 02138
   (Address of principal executive offices)                    (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 
                                 -----     -----

Number of shares outstanding of only class of Issuer's Common Stock as of
June 30, 1995: Common Stock $.005 par value (19,740,943 shares).          

Transitional Small Business Disclosure Format.

                                            Yes        No   X 
                                                -----     -----

                                    Page 1
   2

                           PSYCHEMEDICS CORPORATION
                                    INDEX

Part I   FINANCIAL INFORMATION                                            Page No.
                                                                          --------
                                                                     
         Item 1  Financial Statements

                 Condensed Balance Sheets as of June 30, 1995
                 and December 31, 1994                                        3
                 
                 Condensed Statements of Income for the three
                 and six month periods ended June 30, 1995
                 and 1994                                                   4-5
                 
                 Condensed Statements of Cash Flows for the
                 six month periods ended June 30, 1995
                 and 1994                                                     6
                 
                 Notes to Condensed Financial Statements                      7

         Item 2  Management's Discussion and Analysis of Financial 
                 Condition and Results of Operations                       8-10

Part II  OTHER INFORMATION

         Item 4  Submission of matters to a vote of security holders         11

         Item 6  Exhibits and Reports on Form 8-K                            11

                                    Page 2
   3

                           PSYCHEMEDICS CORPORATION
                           CONDENSED BALANCE SHEETS
                                 (UNAUDITED)

                                                                  JUNE 30,          DECEMBER 31,
                                                                    1995               1994
                                                                -----------         -----------
                                                                              
      ASSETS
CURRENT ASSETS:
   Cash and cash equivalents                                    $   669,990         $   544,776
   Short-term investments                                         6,124,501           6,120,453
   Receivables                                                    1,611,681           1,417,701
   Laboratory supplies                                              128,095             188,703
   Prepaid expenses and other current assets                        204,450              79,687
                                                                -----------         -----------
    Total current assets                                          8,738,717           8,351,320
                                                                -----------         -----------

EQUIPMENT AND LEASEHOLD IMPROVEMENTS                              3,358,200           2,837,862
Less-accumulated depreciation and amortization                    1,550,284           1,291,684
                                                                -----------         -----------
                                                                  1,807,916           1,546,178
                                                                -----------         -----------

OTHER ASSETS - NET                                                  412,002             392,224
                                                                -----------         -----------
                                                                $10,958,635         $10,289,722
                                                                ===========         ===========
   LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
   Current portion of obligations under capital leases          $    94,854         $   153,942
   Accounts payable                                                 326,282             303,562
   Accrued expenses                                                 362,908             235,978
                                                                -----------         -----------
      Total current liabilities                                     784,044             693,482
                                                                -----------         -----------

OBLIGATIONS UNDER CAPITAL LEASES,
   net of current portion                                                --              16,031
                                                                -----------         -----------

SHAREHOLDERS' EQUITY:
   Preferred stock, $.005 par value; authorized 1,000,000
     shares; none outstanding                                            --                  --
   Common stock; $.005 par value; authorized 50,000,000
     shares; issued 20,164,830 and 19,510,879
     shares in 1995 and 1994, respectively                          100,824              97,554
   Paid-in capital                                               15,444,489          14,709,632
   Treasury stock, at cost; 423,887 shares in 1995               (1,198,265)                 --
   Accumulated deficit                                           (4,172,457)         (5,226,977)
                                                                -----------         -----------
     Total shareholders' equity                                  10,174,591           9,580,209
                                                                -----------         -----------
                                                                $10,958,635         $10,289,722
                                                                ===========         ===========

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

                                    Page 3
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                           PSYCHEMEDICS CORPORATION
                        CONDENSED STATEMENTS OF INCOME
                                  (UNAUDITED)

                                                    THREE MONTHS
                                                    ENDED JUNE 30,
                                           ---------------------------------
                                               1995                  1994
                                           -----------           -----------
                                                           
REVENUE                                    $ 2,747,242           $ 2,325,143
DIRECT COSTS                                 1,172,357               923,449
                                           -----------           -----------
   Gross profit                              1,574,885             1,401,694
                                           -----------           -----------
                                           
EXPENSES:                                  
   General and administrative                  417,111               332,081
   Marketing and selling                       435,955               421,573
   Research and development                    107,650               101,494
                                           -----------           -----------
                                               960,716               855,148
                                           -----------           -----------
                                           
INCOME FROM OPERATIONS                         614,169               546,546
                                           
OTHER INCOME (EXPENSE) - NET                    84,671                27,376
                                           -----------           -----------
                                           
INCOME BEFORE PROVISION                    
FOR INCOME TAXES                               698,840               573,922
                                           
PROVISION FOR INCOME TAXES                      48,300                21,200
                                           
                                           -----------           -----------
NET INCOME                                 $   650,540           $   552,722
                                           ===========           ===========

NET INCOME PER COMMON SHARE                
AND COMMON EQUIVALENT SHARE                $      0.03           $      0.03
                                           ===========           ===========
                                           
WEIGHTED AVERAGE COMMON SHARES AND         
COMMON SHARE EQUIVALENTS OUTSTANDING        20,169,317            19,086,839
                                           ===========           ===========

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

                                    Page 4
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                           PSYCHEMEDICS CORPORATION
                        CONDENSED STATEMENTS OF INCOME
                                  (UNAUDITED)

                                                     SIX MONTHS
                                                    ENDED JUNE 30,
                                            ---------------------------------
                                                1995                  1994
                                            -----------           -----------
                                                            
REVENUE                                     $ 5,068,399           $ 3,873,258
DIRECT COSTS                                  2,245,001             1,693,551
                                            -----------           -----------
   Gross profit                               2,823,398             2,179,707
                                            -----------           -----------
                                            
EXPENSES:                                   
   General and administrative                   838,690               641,194
   Marketing and selling                        820,260               760,003
   Research and development                     211,660               200,102
                                            -----------           -----------
                                              1,870,610             1,601,299
                                            -----------           -----------
                                            
INCOME FROM OPERATIONS                          952,788               578,408
OTHER INCOME (EXPENSE) - NET                    176,032                30,743
                                            -----------           -----------
                                            
INCOME BEFORE PROVISION                     
FOR INCOME TAXES                              1,128,820               609,151
                                            
PROVISION FOR INCOME TAXES                       74,300                21,200
                                            -----------           -----------
NET INCOME                                  $ 1,054,520           $   587,951
                                            ===========           ===========

NET INCOME PER COMMON SHARE                 
AND COMMON EQUIVALENT SHARE                 $      0.05           $      0.03
                                            ===========           ===========
                                            
WEIGHTED AVERAGE COMMON SHARES AND          
COMMON SHARE EQUIVALENTS OUTSTANDING         20,247,488            17,813,794
                                            ===========           ===========

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

                                    Page 5
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                           PSYCHEMEDICS CORPORATION
                      CONDENSED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

                                                                               SIX MONTHS
                                                                              ENDED JUNE 30,
                                                                        ---------------------------
                                                                            1995             1994
                                                                        -----------      ----------
                                                                                   
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                           $ 1,054,520      $  587,951
   Adjustments to reconcile net income to net
    cash provided by operating activities:
    Depreciation and amortization                                           276,600         202,200
    Changes in assets and liabilities:
      Receivables                                                          (193,980)       (221,722)
      Laboratory supplies                                                    60,608         (39,464)
      Prepaid expenses and other current assets                            (124,762)        (72,467)
      Accounts payable                                                       22,720          62,351
      Accrued expenses                                                      126,930          17,941
                                                                        -----------      ----------
         Net cash provided by operating activities                        1,222,636         536,790
                                                                        -----------      ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of short-term investments - net                                 (4,048)             --
   Purchases of equipment and leasehold improvements                       (520,339)       (129,527)
   Increase in other assets- net                                            (37,778)        (25,508)
                                                                        -----------      ----------
          Net cash used in investing activities                            (562,165)       (155,035)
                                                                        -----------      ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net principal payments on obligations under
      capital leases                                                        (75,119)        (68,204)
   Net proceeds from the issuance of
      common stock                                                          738,127       3,921,414
   Net cash used to repurchase common stock                              (1,198,265)             --
                                                                        -----------      ----------
          Net cash (used in) provided by financing activities              (535,257)      3,853,210
                                                                        -----------      ----------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                   125,214       4,234,965
CASH AND CASH EQUIVALENTS, beginning of period                              544,776       1,001,939
                                                                        -----------      ----------

CASH AND CASH EQUIVALENTS, end of period                                $   669,990      $5,236,904
                                                                        ===========      ==========

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

                                     Page 6
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                           PSYCHEMEDICS CORPORATION
                    NOTES TO CONDENSED FINANCIAL STATEMENTS

                                 June 30, 1995

1.  The financial information furnished herein is unaudited; however, in the
opinion of management, it reflects all adjustments which are necessary to fairly
state the Company's financial position at June 30, 1995 and December 31, 1994
and the results of its operations and cash flows for the periods ended June 30,
1995 and 1994.  The financial statements have been prepared in conformity with
generally accepted accounting principles appropriate in the circumstances, and
included in the financial statements are certain amounts based on management's
estimates and judgments.

The financial information herein is not necessarily representative of a full
year's operations because levels of sales, capital additions and other
factors fluctuate throughout the year.  These same considerations apply to all
year to year comparisons.  See the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1994 for additional information not required by this
report (Form 10-QSB).

2.  Net income per common share and common equivalent share is based upon the
weighted average number of common shares and common share equivalents
outstanding as computed using the treasury stock method.  

3.  The following presents supplementary cash flow data:

                                          Six Months
                                         Ended June 30,
                                  ----------------------------
                                    1995              1994
                                    ----              ----
                                               
Cash paid 
for interest                       $ 6,831           $15,345

Cash paid for
income taxes                       $56,695           $15,550

                                    Page 7
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Item 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
        
                             RESULTS OF OPERATIONS
                             ---------------------

REVENUE

Revenue for the second quarter of 1995 was $2,747,242, an increase of 18% over
the $2,325,143 reported for the second quarter of 1994.  Revenue for the six
month period ended June 30, 1995 was $5,068,399 an increase of 31% over the
$3,873,258 reported for the comparable period of 1994.  The revenue
increases result primarily from the addition of new customers and expanding
volume from the Company's existing customer base. 

DIRECT COSTS AND EXPENSES

The following table sets forth the direct costs of revenue, general and
administrative expenses, marketing and selling expenses and research and
development expenses as a percentage of revenue.

                                     Three Months              Six Months
                                    Ended June 30,           Ended June 30,
                                    --------------           --------------
                                   1995        1994         1995        1994
                                   ----        ----         ----        ----
                                                             
Direct costs                        43%         40%          44%         44%
General and administrative          15%         14%          17%         17%
Marketing and selling               16%         18%          16%         20%
Research and development             4%          4%           4%          5%

Direct Costs

Direct costs were $1,172,357, $923,449, $2,245,001 and $1,693,551 for the three
and six month periods ended June 30, 1995 and 1994, respectively.  The increase
in direct costs in 1995 is attributable to increased production staffing in 1995
to handle the increase in volume during the period, as well as to position the
Company to handle anticipated volume increases in future periods.  Direct       
costs as a percentage of revenue were marginally higher for the three month
period ended June 30, 1995 as compared to the comparable period in 1994
primarily due to increased production staffing undertaken in response to
expanded business and anticipated growth for the balance of 1995.

                                    Page 8
   9

General and Administrative Expenses

General and Administrative expenses were $417,111, $332,081, $838,690, and
$641,194 for the three and six month periods ended June 30, 1995 and 1994,
respectively.  The increase in general and administrative expenses in the 1995
periods as compared to the same periods in 1994 is primarily due to higher
expenses incurred as a result of expansion of the Company's business during the
periods. 

Marketing and Selling Expenses

Marketing and selling expenses were $435,955, $421,573, $820,260, and $760,003
for the three and six month periods ended June 30, 1995 and 1994, respectively. 
Marketing and selling expenses increased in each period in 1995 as compared to
1994 due primarily to the Company's increased marketing activities.  

Other Income (Expense) - Net

Other income for the three and six month periods ended June 30, 1995 and 1994
results primarily from interest income from the Company's invested cash
balances.  The increase in both the three and six month periods ended June 30,
1995, as compared to comparable periods in 1994, is due primarily to the larger
invested balances in 1995.

                        LIQUIDITY AND CAPITAL RESOURCES
                        -------------------------------

The Company's cash and investment balances at June 30, 1995 amounted to
$6,794,491.  Cash generated from operations in the first six months of 1995 was
$1,222,636.  Prior to 1993, the Company's working capital and liquidity
requirements for its operations were met largely from cash generated from
private equity placements, the most recent of which took place in November 1991
and resulted in net proceeds to the Company of $2,000,000.  The Company also
received $4,213,194 of net proceeds from the exercise of warrants and stock
options in 1994.

Management believes that cash generated from operations, together with proceeds
from such private placements, should be adequate to fund anticipated working
capital requirements. 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 capital.  

Working capital at June 30, 1995 amounted to $7,954,673 as compared to
$7,657,838 at December 31, 1994.  

                                    Page 9
   10

The Company's capital expenditures were $520,339 for the first six months of
1995.  Capital expenditures for 1995 are expected to be approximately $1,000,000
and are expected to be funded through cash generated from operations and from
existing cash reserves.

In December 1994, the Company's Board of Directors authorized the repurchase of
up to one million shares of the Company's common stock.  This program is
a direct result of the Company's solid financial condition and cash-generating
capability, and it was authorized after evaluating various alternatives to
enhance long-term shareholder value.  As of June 30, 1995, the Company had
purchased 423,887 shares of common stock for $1,198,265.

                                       
                                    Page 10
   11
                           PART II OTHER INFORMATION

Item 4.  Submission of Matters to a Vote of Security Holders
         
         The Annual Meeting of Shareholders of Psychemedics Corporation was
         held on May 11, 1995, for the purpose of electing a board of directors 
         and approving the appointment of auditors. 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.

         All of management's nominees for directors, as listed in the proxy
         statement, were elected with the following vote:

                                                      Number of Shares
                                                      ----------------                        
                                                                                               Not
                                            For                  Withheld Authority           Voted   
                                            ---                  ------------------           -----
                                                                                     
         Werner A. Baumgartner, Ph.D.       14,703,366                 23,650                 1,000
         Raymond C. Kubacki, Jr.            14,702,266                 24,750                 1,000
         A. Clinton Allen                   14,702,366                 24,650                 1,000
         Donald F. Flynn                    14,702,366                 24,650                 1,000
         John J. Melk                       14,702,366                 24,650                 1,000
         Frederick J. Weinert               14,701,866                 25,150                 1,000

         Selection of Arthur Andersen LLP as auditors of the Company.

                                                      Number of Shares
                                                      ----------------                        
                                                     
         For                                            14,690,153
         Against                                            18,908
         Abstain                                            17,955
         Not voted                                           1,000

Item 6.  Exhibits and Reports on Form 8-K

         (a)      Exhibits.

                  The Exhibits filed as part of this Form 10-QSB are listed on 
                  the Exhibits Index immediately preceding such Exhibits, which 
                  Exhibit Index is incorporated herein by reference.

         (b)      Reports on Form 8-K - None.

                                    Page 11
   12

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.

                                           Psychemedics Corporation
                                         
Date:  August 11, 1995                     By: /s/ Raymond C. Kubacki, Jr.   
                                               ---------------------------
                                           Raymond C. Kubacki, Jr.
                                           President and Chief Executive Officer

                                            
                                            
Date:  August 11, 1995                     By: /s/ Leroy O. Moyer 
                                               ---------------------------
                                           Leroy O. Moyer
                                           Vice President Finance, Chief
                                           Financial Officer and Treasurer
                                           (Principal Financial Officer)

                                            

                                    Page 12
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                           PSYCHEMEDICS CORPORATION

                                    10-QSB

                                 EXHIBIT INDEX
                                 -------------

Exhibit
Number                                     Description
- -------                                    -----------

10.1                                       Employment Agreement with
                                           Werner A. Baumgartner, Ph.D.
                                           Dated May 14, 1994
                                           
10.2                                       Employment Agreement with
                                           Donald J. Kippenberger, Ph.D.
                                           Dated January 1, 1994
                                           
10.3                                       Employment Agreement with
                                           Thomas Cairns, Ph.D., D.Sc.
                                           Dated July 1, 1995
                                           
11                                         Calculation of shares use in determining
                                           net income per share
                                           
27                                         Financial Data Schedules

   1
                                                                   Exhibit 10.1

                             EMPLOYMENT AGREEMENT
                             --------------------

        AGREEMENT ("Agreement") made as of the 15th day of May 1994, by and
between Psychemedics Corporation, a Delaware corporation, with its principal
office at 1280 Massachusetts Ave., Cambridge, Massachusetts 02138 (hereinafter
called the "Company"), and Werner A. Baumgartner, Ph.D. (hereinafter called the
"Employee").

        WHEREAS, the Employee is employed by the Company on the date hereof; and

        WHEREAS, the Company desires to continue the employment of the Employee
to render services to and on behalf of the Company at a salary in excess of the
salary paid by the Company to the Employee prior to the effective date hereof,
but only on the condition that the Employee agree to be bound by all of the
terms and conditions set forth in this Agreement;

        WHEREAS, the Employee desires to be employed by the Company with a
salary at the rate set forth below and on the terms and conditions set forth in
this Agreements;

        NOW, THEREFORE, in consideration of the mutual promises herein
contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Employee agree
as follows:

        1.      EMPLOYMENT TERM  The Company hereby agrees to employ the
Employee for a three (3) year term commencing as of May 15, 1994 upon the terms
and conditions herein contained.  The Company further agrees to provide Employee
with written notice given at least six (6) months in advance of expiration of
this Agreement as to whether the Company wishes to negotiate with Employee for
renewal.  The giving of such notice, if specifying an intent to renew, shall not
be binding upon the Company to execute an extension or new agreement with
Employee, it being acknowledged that the Company's sole obligation under such
circumstance shall be to negotiate in good faith.  In the event no notice is
given and Employee's employment is not continued as an executive upon expiration
of this Agreement, Employee shall be entitled to the severance benefits set
forth in Section 12 hereof.

        2.      DUTIES   (a)  The Employee shall be employed by the Company as
Director of Scientific and Regulatory Affairs and shall perform all duties in
connection therewith, which duties shall include, without limitation, direction
and supervision of Company research and development, including without
limitation, development of inventions of new hair analysis tests, (e.g. for
antidepressants, antipsychotics, alcohol and other agents), antibody and labeled
antigen production for existing and future tests, planning and supervision of
clinical trials for new hair analysis tests, and GC/MS research.  Duties shall
further include supervision of the scientific quality of the Company's testing
operations, market development, collaboration with the National Institute on
Drug Abuse, National Institute of Justice, the  National Institute on Standards
and Technology, the Drug Enforcement Agency, the Federal Bureau of 

   2

Investigation, the General Accounting Office, the Food and Drug Administration
and other organizations in the U.S. and overseas for introducing hair analysis
to the public sector, development of field studies in the workplace, pre-natal,
criminal justice, rehabilitation and psychiatric areas, preparation and
presentation of scientific papers which further the acceptance of hair analysis;
and testimony  as an expert witness  at such times and at such places as the
Company may reasonably require.  Employee will also work closely with the
President in establishing and implementing government regulatory and scientific
community plans and strategies.    

        (b)  Employee represents and warrants to the Company that his employment
by the Company and the performance of his duties hereunder do not violate the
terms or conditions of any other agreement or understanding by which Employee is
bound or subject, including, without limitation, the terms of any agreement or
understanding which Employee may now have or hereinafter be subject to with
Wadsworth V.A. Hospital, Nuclear Medicine Department, Los Angeles, California
(the "V.A"), and Employee knows of no basis for any claim that he is so bound or
subject.

        3.      EXTENT OF SERVICE         The Company hereby acknowledges that
Employee is presently employed by the V.A. on a part- time basis and may
continue in such capacity for not more than twenty (20) hours per week provided
the objective of Employee's affiliation is limited to advancing the scientific
non-proprietary aspects of hair analysis.  Notwithstanding the foregoing, the
Employee shall devote the remainder of his working time to the business of the
Company.  Employee agrees at all times to devote his skills, knowledge and
energies to the promotion and in furtherance of the Company's best interests.

        4.      COMPENSATION              As full compensation for the services
to be performed by the Employee hereunder, the Company shall pay and the
Employee shall accept an initial annual base salary of One Hundred Fifteen
Thousand Six Hundred Seventy Two ($115,672) Dollars per year (the "Base
Salary").  Said Base Salary may be adjusted from time to time as hereinafter
provided.  All Base Salary shall be payable in accordance with the Company's
standard payroll policies for executive employees.  Nothing contained herein
shall be construed so as to prevent the Board of Directors of the Company from
declaring and paying a bonus to Employee upon review of the business operations
of the Company and review of Employee's performance of his duties hereunder.

        5.      ADJUSTMENTS TO BASE SALARY                 It is expressly
acknowledged by the Company that the Employee's Base Salary has been based, in
part, on the amount of compensation earned and anticipated to be earned by the
Employee from his employment with the V.A.  In view of the foregoing, the
Company hereby agrees that if the Employee shall, for any reason whatsoever,
including without limitation, any salary cut-back, reduction in days or hours
worked, or voluntary or involuntary termination 

                                       2
   3

or dismissal, gross less than $2,794.00 per month in salary or consulting fees
from the V.A. (the "V.A. Target Salary"), the Company shall adjust the
Employee's Base Salary for the month just completed by an amount equal to the
difference between the actual salary, if any, earned by Employee from the V.A.
and said V.A. Target Salary.  For purposes hereof, adjustments shall be
calculated beginning with the month ended June 30, 1994 and thereafter on the
last day of each successive month during the term of this Agreement.

        6.      COST OF LIVING ADJUSTMENT         The Base Salary due Employee
hereunder (and the V.A. Target Salary) shall be adjusted annually on the
anniversary date of this Agreement to reflect the change for the year just ended
in the consumer price index for all urban consumers in the Los Angeles area as
published by the Bureau of Labor Statistics; provided that no downward
adjustments shall be made.

        7.      FRINGE BENEFITS           During the term of this Agreement, the
Employee shall be entitled to the following fringe benefits:

                      (a)  VACATION  The Employee shall be entitled to four (4)
weeks during each twelve-month period hereof.
        
                      (b)  EMPLOYEE BENEFIT PLANS  In addition to the
compensation set forth hereinabove, the Employee shall also be entitled to
participate in such employee benefit plans and such other fringe benefits, if
any, as the Company shall establish for its executive personnel from time to
time.  Without limiting the generality of the foregoing, Employee may elect to
receive, in lieu of Company provided medical and dental insurance, a term life
insurance policy for the benefit of Employee's designated beneficiary in the
amount of $300,000 (the "Term Policy").

                      (c)  BUSINESS EXPENSES   The Company agrees to reimburse
Employee for reasonable out-of-pocket expenses incurred in connection with the
Company's business, including without limiting the generality of the foregoing,
travel and accommodations for all authorized business trips (including
conventions and trade shows), and any and all other expenses incurred by
Employee in connection with the promotion of the Company's business upon
presentation of proper vouchers therefor.

        8.      LIMITS ON TRAVEL AND RELOCATION   The Company hereby agrees that
Employee shall not be required to travel on Company business in connection with
the performance of his duties hereunder for more than fifteen (15) days per
year.  The Company further agrees that Employee shall not be required to perform
his on-site duties at any  Company business location which is not within thirty
(30) miles of Employee's present residential address.

        9.      TERMINATION               (a)  Notwithstanding the Term of
Employment set forth in Section 1 hereof, this Agreement shall terminate:

         (1)     Upon receipt by the Employee of written notice thereof from 
                 the Company, in the event that the termination is for cause.

                                       3
   4
         (2)     Upon the death of the Employee.

         (3)     Upon the permanent disability of the Employee.  For purposes 
                 of this Agreement, the Employee shall be considered to be
                 permanently disabled if he is unable to perform the full-time
                 and normal duties associated with his employment hereunder for
                 a period of six months during the Term of Employment by        
                 reason of physical or mental illness or incapacity, provided,
                 however, that a resumption of full-time and normal duties 
                 associated with his employment for a continuous period of
                 forty-five (45) days, shall be deemed to be a resumption of
                 full-time and normal duties hereunder, and any  subsequent
                 disability shall not include a period of previous disability.

         (4)     Sixty (60) days following the receipt by the Company of 
                 written notice thereof by the Employee.
        
As used herein, the Employee's employment hereunder shall be deemed to have
been terminated for cause if it has been terminated for any of the following
reasons:  (i) the willful and continued failure by the Employee to perform
substantially the services contemplated by this Agreement (other than any such
failure resulting from the Employee's incapacity due to physical or mental
illness) after a written demand for substantial performance is delivered to the
Employee by the President of the Company which specifically identifies the
manner in which it is alleged that the Employee has not substantially performed
such services, or (ii) the willful engaging by the Employee in gross misconduct
which is materially and demonstrably injurious to the Company; provided that,
no act, or failure to act, on the Employee's part shall be considered "willful"
unless done, or omitted to be done, in bad faith and without reasonable belief
that such action or omission was in, or not opposed to, the best interests of
the Company.  It is also expressly understood that the Employee's attention
to or engagement in matters not directly related to the business of the Company
during the Company's business hours shall not provide a basis for termination
for cause if such attention or engagement is authorized by the terms of this
Agreement or has otherwise been approved by the Board of Directors of the
Company.

        (b)     Upon the expiration or other termination of this Agreement, all
obligations of the Company to the Employee shall forthwith terminate, except for
any obligation to pay the Base Salary or any other benefit which may have
accrued and be due and payable hereunder at the time of such expiration or other
termination.

        10.     DEATH BENEFIT             In the event of death  of the Employee
during the term hereof, the Company shall pay  to the Employee's estate at the
beginning of each month for each of the next six (6) months following such
death, an amount equal to the Employee's monthly Base Salary, and all 
adjustments thereto, in effect at the date of death.  All of such payments shall
be integrated with and 

                                       4
   5

reduced by any payments which the Employee or the Employee's estate, may receive
under any insurance policy, plan or program which the Company may  maintain for
the benefit of the Employee (but excluding payments made on account of the
Term Policy under section 7 (b) hereof).  

        11.     CONFIDENTIAL INFORMATION  Employee agrees to be bound by all of
the terms and conditions set forth in the Employee Confidentiality Agreement
dated the date hereof (the "Confidentiality Agreement") in the form attached
hereto as Exhibit A.

        12.     SEVERANCE BENEFITS                In the event the Company fails
to comply with the advance notice requirements prior to expiration of this
Agreement in accordance with section 1 hereof, Employee shall be entitled to
receive his Base Salary, and all adjustments thereto in effect at the time of
expiration, for six (6) months thereafter, provided, however, that no such
severance benefits shall be payable to the Employee in the event of the
termination of this Agreement pursuant to Section 9 hereof.

        13.     NOTICES  All notices under this Agreement shall be in writing
and shall be deemed to have been given if addressed and mailed by registered or
certified mail, return receipt requested, if to the Company:

                          Leroy O. Moyer
                          Psychemedics Corporation
                          1280 Massachusetts Ave.
                          Cambridge, Massachusetts  02138

with a copy to:

                          Edward S. Brewer, Jr.
                          Lynch, Brewer, Hoffman & Sands
                          101 Federal Street
                          Boston, MA  02110

and if to the Employee:

                          Werner A. Baumgartner, Ph.D.
                          24622 Skyline View Drive
                          Malibu, CA  90265

with a copy to:

                          Samuel P. Sears, Jr., Esquire
                          Star Tobacco Corporation
                          16 South Market Street
                          Petersburg, VA  23803

or to such other address for notice as may be specified by any party hereto by 
notice given in the manner herein provided.
        
                                       5
   6

        14.     SUCCESSORS AND ASSIGNS    This Agreement shall inure to the
benefit of and shall be binding upon the Company and its successors and assigns,
and shall be binding upon the Employee and his heirs, executors, administrators
and legal representatives to the extent that the context so permits.

        15.     ENTIRE AGREEMENT          This instrument together with the
Confidentiality Agreement  contain the entire agreement of the parties with
respect to the subject matter hereof.  They may not be changed, modified,
extended terminated or discharged orally, but only by an agreement in writing
signed by the party against whom enforcement is sought.  This Agreement shall be
governed by the laws of the State of California.  If any part of this Agreement
shall be or become unenforceable, then the same shall be deemed severed and the
remainder of the Agreement shall be fully enforceable.

        IN WITNESS WHEREOF, the parties have executed this Agreement the day and
year first above written.

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

                                             
                                           /s/ Werner A. Baumgartner,   
                                           -------------------------------
                                           Werner A. Baumgartner, Ph.D.

                                       6
   7

                                                                  EXHIBIT A

                      EMPLOYEE CONFIDENTIALITY AGREEMENT
                      ----------------------------------

        This Agreement is entered into as of the 15th day of May 1994 by and
between PSYCHEMEDICS CORPORATION, a Delaware corporation (the "Company"), and
Werner A. Baumgartner, Ph.D. (the "Employee") as a condition of and as
additional consideration for the Company's agreement to continue employment of
the Employee as an employee of the Company.

         1.       NON DISCLOSURE:

        a)  The Employee recognizes that his relationship with the Company is
one of high trust and confidence by reason of access to and contact with
confidential information of the Company.

        b)  The Employee hereby acknowledges and agrees that, during the term of
his employment with the Company and at any time thereafter, he will not, without
the express written consent of a duly authorized executive officer of the
Company, communicate directly or indirectly or divulge or use for the benefit of
himself or of any other person, firm, association, corporation, or any other
entity, any of the Company's trade secrets, proprietary data, technical
information, ideas, pricing concepts, formulas, processes and methods,
including, without limitation to the generality of the foregoing, anything to do
with the Company's proprietary  methods for the analysis of hair and other
keratinized structures for the presence of foreign substances and the technical
data, know-how and inventions related thereto, and any information, reports,
results or test data derived therefrom, as well as any business and financial
plans, pricing information, customer and prospective customer lists, marketing
strategies and the like  (hereinafter collectively called the "Proprietary
Information") that were communicated to or otherwise learned or acquired by the
Employee in the course of his employment.  As long as such Proprietary
Information is treated as confidential by the Company and otherwise has not been
disclosed lawfully to the public, the Employee shall be bound to the provisions
hereof, which provisions the parties agree shall survive any termination of his
employment with the Company.

        c)  Upon termination of his employment with the Company, the Employee
promptly shall  deliver to the Company all records, reports, drawings, designs,
plans, software and other documents containing any Proprietary Information (and
all copies thereof) that the Employee may then possess or have under his control
by virtue of his role as an employee of the Company.

        d)  Prior to the Employee accepting or otherwise engaging in duties
pursuant to a position of employment or a contract or understanding with a
person or entity operating or doing business in the general field covered by the
Proprietary Information, the Employee agrees as follows:

   8

           (i)  the Employee shall inform the person or entity that he is bound
under the terms of this Agreement;

           (ii)  the Employee shall provide a copy of this Agreement to the 
person or entity; and

          (iii)  the Employee shall provide the Company with a representation in
writing from the person or entity that the person has reviewed the terms of this
Agreement and the Employee and the person or entity agrees to respect the terms
thereof and not to accept from the Employee or otherwise make use of the
Proprietary Information and not to engage in activity which would violate the
Employee's obligations under this Agreement.

        e)  Notwithstanding the provisions of paragraphs 1(a) and (b) of this
Agreement, the Employee may continue after termination of his employment with
the Company to perform private research using the Proprietary Information to
which he had access while an employee.  As to such Proprietary Information that
is maintained as confidential by the Company, such Proprietary Information may
not, without the express written agreement of a duly authorized executive
officer of the Company, be disclosed pursuant to the terms of paragraph 1(a)
hereof.  As to all patents that name the Employee as an inventor, the Employee
is granted a royalty free, perpetual license for research purposes only and may
not sell or license, except to the Company, any ideas or inventions derived from
his use of the licensed patents.

         2.      ASSIGNMENT OF INVENTIONS:

        a)  Any and all inventions, processes, procedures, systems discoveries,
designs, configurations, technology, trade secrets and improvements (whether or
not patentable and whether or not they are made conceived or reduced to practice
during working hours or using the Company's data or facilities ("Inventions")
that the Employee makes, conceives, reduces to practice, or acquires during
employment with the Company (either solely or jointly with others) and that are
related to the Company's present or planned business, including, without
limitation, any inventions or discoveries pertaining to the Proprietary
Information (as defined in Paragraph 1 hereof) shall be the sole property of the
Company and shall at all times and for all purposes be regarded as acquired and
held by the Employee in a fiduciary capacity for the sole benefit of the
Company.  The Employee agrees to assign to the Company, without further
compensation, such Inventions and any and all patents, copyrights, trademarks
trade names or applications therefor, in the United States and elsewhere,
relating thereto.

        b)  The Employee agrees to keep and maintain adequate and current
written records of all such Inventions (in the form of notes, sketches, drawings
and as may be specified by the Company), which records shall be available to and
remain the sole property of the Company at all times.

                                       2
   9
        c)  The Employee will disclose promptly to the Company all such
Inventions and will assist the Company in obtaining and enforcing for its own
benefit patents on such Inventions in any country.  Upon request, the Employee
will execute all applications, assignments, instruments and papers and perform
all acts necessary or desired by the Company, its successors, assigns and
nominees to secure and enjoy the full benefits and advantages thereof.

         3.      CONTINUATION OF OBLIGATIONS

        The Employee understands that his obligations under this Agreement will
continue after the termination of employment with the Company, and the Employee
will continue to perform his obligations hereunder without further
consideration, except for:  (i) the payment by  the Company to the Employee of 
reasonable consulting fees for services required under this Agreement which are
rendered after the termination of employment; and (ii) reimbursement of expenses
incurred at the request of the Company.  In addition, the Employee understands
that the absence of a request by the Company for information, for the making of
an oath, or for the execution of any document shall in no way be construed to
constitute a waiver of the Company's rights under this Agreement.

         4.      ABSENCE OF RESTRICTIONS:

        a)  The Employee hereby represents that, except as disclosed in writing
to the Company, the Employee is not bound by the terms of any agreement with any
previous employer or other party to refrain from using or disclosing any trade
secret or confidential or proprietary information in the course of  employment
with the Company or to refrain from competing, directly or indirectly, with the
business of such previous employer or any other party.  

        b)  The Employee further represents that the performance of all the
terms of this Agreement as an employee of the Company does not and will not
breach any agreement to keep in confidence proprietary information, knowledge or
data acquired in confidence or in trust prior to employment with the Company. 
The Employee will not disclose to the Company or induce the Company to use any
confidential or proprietary  information or material belonging to any previous
employer or others.

        5.      INJUNCTIVE RELIEF:  The Employee acknowledges specifically that
any breach or threatened breach of any provision of this Agreement or of the
Employment Agreement ("Employment Agreement") between the Employee and the
Company dated the date hereof will cause irreparable harm to the Company and
will entitle the Company to seek immediate injunctive relief (in addition to any
other rights or remedies the Company may have) to prevent a violation of either
of such Agreements.

                                       
                                       3
   10
        6.      SUCCESSORS AND ASSIGNS:   This agreement shall inure to the
benefit of and shall be binding upon the Company, its successors and assigns and
shall be binding upon the Employee and his heirs, executors, administrators and
legal representatives to the extent that the context so permits.

        7.      ENTIRE AGREEMENT:  This instrument together with the Employment
Agreement contain the entire understanding of the parties pertaining to the
subject manner contained therein, and supersede all prior and contemporaneous
agreements, representations and understandings of the parties and may not be
changed, modified, extended, terminated or discharged orally, but only by
agreement in writing signed by both parties.

        8.      GOVERNING LAW:  This Agreement shall be governed by and
construed in accordance with the laws of the State of California.

        9.      SEVERABILITY:  In the event a court of law shall find, for any
reason, that any one or more of the provisions of this Agreement is invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision hereof, and this Agreement
shall be construed as if  such invalid, illegal or unenforceable provision had
never been contained herein.  Said court shall have  the power to modify any
invalid, illegal or unenforceable provision to the extent necessary to give such
provision full force and effect under the laws of the State of California.

        IN WITNESS WHEREOF, the Employee has executed this Agreement under seal
the day and year first above written and the Company has caused this Agreement
to be executed under seal by its duly authorized representative the day and year
first above written.

                                                 PSYCHEMEDICS CORPORATION
                                                 
                                                 BY: /s/ Raymond C. Kubacki, Jr.
                                                    ----------------------------
                                                 Raymond C. Kubacki, Jr.
                                                 President & CEO
                                                 
                                                 EMPLOYEE
                                                 /s/ Werner A. Baumgartner
                                                 -------------------------------
                                                 Werner A. Baumgartner, Ph.D.

                                       4
   1
                                                                    Exhibit 10.2

                             EMPLOYMENT AGREEMENT
                             --------------------

        AGREEMENT made this 1st day of January, 1994 by and between PSYCHEMEDICS
CORPORATION, a Delaware corporation (the "Company"), and Dr. Donald J.
Kippenberger ("the Employee").

        WHEREAS, the Company and the Employee are desirous of setting forth in a
definitive employment agreement their respective rights and obligations with
regard to the Employee's employment by the Company:

        NOW THEREFORE, in consideration of the mutual covenants herein contained
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Company and the Employee agree as follows:

        1.      EMPLOYMENT TERM:  The Company hereby agrees to employ the
Employee as of  July 1, 1995 until terminated in accordance with Paragraph 11 
hereof.

        2.      DUTIES:  The Employee shall be employed by the Company as Vice
President, Technology  Research and Development and shall perform all duties in
connection therewith as prescribed by the officers of the Company.

        3.      EXTENT OF SERVICE:  During the period of employment hereunder,
the Employee shall devote his full working time, attention, skills, knowledge
and energies to the business and affairs of the Company, its affiliates and in
the promotion of its interests.

        4.      COMPENSATION:  As full compensation for the services to be
performed hereunder, the Employee shall accept a base salary ("Base Salary") at
the annual rate of $90,000, payable in equal bi-monthly installments.

        5.      FRINGE BENEFITS:  During the term of employment under this
Agreement, the Employee shall be entitled to the following fringe benefits:

                a)   STOCK OPTIONS:  The Employee shall be entitled to 
participate in  the Company's 1989 Employee Stock Option Plan subject to the
discretion of the Stock Option Committee of the Company's Board of Directors.

                b)   VACATION:  The Employee shall be entitled to a vacation 
that accrues at a rate of 15 days per year.

                c)   MEDICAL AND DENTAL PLANS:  The Employee shall be entitled 
to participate in the Company's group policy for medical and dental insurance
coverage. Said medical and dental plans shall be fully non-contributory by the
Employee for the Employee's personal coverage. The Company will assist in 
providing medical and dental insurance for dependents under the Company's group
policy. The Company will pay employee and dependent coverage for dental coverage
and $100 per month for the cost for dependent coverage for medical coverage.

   2
        6.      EMPLOYEE DRUG TESTING:  The Employee recognizes and agrees that
he shall be required to submit personally to drug testing, utilizing the
Company's proprietary technology, upon his employment and thereafter, as
scheduled by the Company, on no less than a semi-annual basis.

        7.      ASSIGNMENT OF INVENTIONS:

                a)  Any and all inventions, processes, procedures, systems 
discoveries, designs, configurations, technology, trade secrets and improvements
(whether or not patentable and whether or not they are made conceived or
reduced to practice during working hours or using the Company's data or
facilities ("Inventions") that the Employee makes, conceives, reduces to
practice, or acquires during employment by the Company (either solely or jointly
with others) and that are related to the Company's present or planned business,
including, without limitation, any inventions or discoveries pertaining to the
Proprietary Information (as defined in Paragraph 9 hereof) shall be the sole
property of the Company and shall at all times and for all purposes be regarded
as acquired and held by the Employee in a fiduciary capacity for the sole
benefit of the Company.  The Employee hereby assigns to the Company, without
further compensation, such Inventions and any and all patents, copyrights,
trademarks trade names or applications therefor, in the United States and
elsewhere, relating thereto. 

                b)  The Employee agrees to keep and maintain adequate and 
current written records of all such Inventions (in the form of notes, sketches,
drawings and as may be specified by the Company), which records shall be
available to and remain the sole property of the Company at all times. 

                c)  The Employee will disclose promptly to the Company all such
Inventions and will assist the Company in obtaining and enforcing its own
benefit patents on such Inventions in any country.  Upon request, the Employee
will execute all applications, assignments, instruments and papers and perform
all acts necessary or desired by the Company, its successors, assigns and
nominees to secure and enjoy the full benefits and advantages thereof. 

                d)  The Employee understands that obligations under this 
Paragraph will continue after the termination of employment with the Company,
and the Employee will perform such obligations without  further consideration,
except for reimbursement of expenses incurred at the request by the
Company.  In addition, the Employee understands that the absence of a request by
the Company for information, for the making of an oath, or for the execution of
any document shall in no way be construed to constitute a waiver of the
Company's rights under this Agreement. 

        8.      ABSENCE OF RESTRICTIONS:

                a)  The Employee hereby represents that, except as disclosed 
in writing to the Company, the Employee is not bound by the terms of any
agreement with any previous employer or other party to refrain from using
or disclosing any trade secret or confidential or proprietary information in the
course of  employment with the Company or to refrain from competing, directly or
indirectly, with the business of such previous employer or any other party.   

                                       2
   3

                b)  The Employee further represents that the performance of all
the terms of this Agreement as an employee of the Company does not and will not
breach any agreement to keep in confidence proprietary information, knowledge or
data acquired in confidence or in trust prior to employment with the Company. 
The Employee will not disclose to the Company or induce the Company to use any
confidential or proprietary  information or material belonging to any previous
employer or others.

         9.     NON DISCLOSURE:

                a)  The Employee recognizes that his relationship with the 
Company is one of high trust and confidence by reason of access to and contact
with confidential information of the Company.

                b)  The Employee hereby acknowledges that, during the term of 
rendering services to the Company hereunder and at any time thereafter, he will
not, without the express written consent of a duly authorized executive
officer of the Company, communicate directly or indirectly or divulge or use for
the benefit of himself or of any other person, firm, association, corporation,
or any other entity, any of the Company's trade secrets, proprietary data,
technical information, ideas, pricing concepts, formulas, processes and methods,
including, without limitation to the generality of the foregoing, anything to do
with the Company's "proprietary extraction method" for the analysis of hair and
other keratinized structures for the presence of foreign substances and the
technical data, know-how and inventions related thereto, and any information,
reports, results or test data derived therefrom, as well as any business and
financial plans, pricing information, customer and prospective customer lists,
marketing strategies and the like  (hereinafter collectively called the
"Proprietary Information") that were communicated to or otherwise learned or
acquired by the Employee in the course of employment hereunder.  As long as such
Proprietary Information is treated as confidential by the Company and otherwise
has not been disclosed lawfully to the public, the Employee shall be bound to
the provisions hereof, which provisions the parties agree shall survive any
termination of his employment by the Company.

                c)  Upon termination of his employment by the Company, the 
Employee promptly shall  deliver to the Company all records, reports, drawings,
designs, plans, software and other documents containing any Proprietary
Information (and all copies thereof) that the Employee may then possess or have
under his control by virtue of his role as employee of the Company.

                d)  Prior to the Employee accepting or otherwise engaging in 
duties pursuant to a position of employment or a contract or understanding with
a person or entity operating or doing business in the general field covered
by the Proprietary Information, the Employee agrees as follows:

                                       3
   4

                (i)  the Employee shall inform the person or entity of his 
employment by the Company and that he is bound under the terms of Paragraphs 9
and 10 of this  Agreement;

                (ii)  the Employee shall provide a copy of Paragraphs 9 and 10 
of this Agreement to the person or entity; and

                (iii)  the Employee shall provide the Company with a 
representation in writing from the person or entity that the person has reviewed
the terms of Paragraphs 9 and 10 of this Agreement and the Employee and the
person or entity agrees to respect the terms thereof and not to accept from the
Employee or otherwise make use of the Proprietary Information and not to engage
in activity which would violate the Employee's obligations under Paragraph 9 or
10 of this Agreement.

                e)  The Employee acknowledges specifically that any breach or 
threatened breach of any provision of Paragraph 7, 9, or 10 hereof will cause
irreparable harm to the Company and will entitle the Company to seek
immediate injunction relief (in addition to any other rights or remedies the
Company has to prevent a violation of any such Paragraph).

        10.     COVENANT NOT TO COMPETE:  Upon the termination by either party
of the Employee's employment by the Company hereunder, the Employee agrees that,
for a period of two (2) years thereafter, within the United States, the Employee
shall not either as an individual for his own account, as a partner or joint
venturer, as an employee, agent or salesperson of any person, or as an officer,
director or more than 5% shareholder of a corporation or otherwise, engage in
any activity, including manufacturing, sale or distribution, that involves,
directly or indirectly, the use of radioimmunoassay of hair or any hair
extraction immunodiagnostic method.  The Employee further agrees that, for the
same two (2) year period following termination by either party of the Employee's
employment by the Company hereunder, the Employee will not hire or solicit his
co-workers at the Company for employment or engagement elsewhere.

        11.     TERMINATION:  The Employee's employment hereunder shall
terminate:

                a)  Ninety (90) days after receipt by either party hereto of 
written notice thereof from the  other party.

                b)  Upon the death of the Employee.

                c)  Upon the mutual agreement of the parties.

                d)  Immediately upon receipt by the Employee of written notice 
thereof from the Company, in the event of termination for cause.

        Upon the termination of employment under this Agreement, all obligations
of the Company to the Employee shall forthwith terminate, except for any
obligation to pay the compensation or any other benefit which may have accrued
and be due and payable hereunder at the time of such termination; but the 

                                       4
   5
obligations of the Employee under Paragraphs 7, 9, or 10 shall not be so
terminated, and shall survive the termination of his employment hereunder by
the Company.

        As used herein, the Employee's employment hereunder shall be deemed to
have been terminated by the Company for cause if it has been terminated for any
of the following reasons: 

                e)  Employee materially breaches any provision hereunder; or

                f)  Employee acts in a knowingly and willfully dishonest manner
to the detriment of the Company in his relationship with the Company; or

                g)  Employee has been convicted or any crime or has engaged in 
any criminal activity that materially adversely affects the business or affairs
of the Company.

        12.     NOTICES:  All notices under this Agreement shall be in writing
and shall be deemed to have been given if delivered by hand or addressed and
mailed by registered or certified mail, return receipt requested, to the Company
at:

                           Psychemedics Corporation
                                Leroy O. Moyer
                       1280 Massachusetts Ave., Ste. 200
                             Cambridge, MA  02138

and to the Employee at:

                          Dr. Donald J. Kippenberger
                                625 Shore Drive
                             Joppatown, MD  21085

        13.     SUCCESSORS AND ASSIGNS:   This agreement shall inure to the
benefit of and shall be binding upon the Company, its successors and assigns and
shall be binding upon the Employee and his heirs, executors, administrators and
legal representatives to the extent that the context so permits.

        14.     ENTIRE AGREEMENT:  This instrument contains the entire
understanding of the parties pertaining to the subject manner contained herein,
and it supersedes all prior and contemporaneous agreements, representations and
understandings of the parties.  It may not be changed, modified, extended,
terminated or discharged orally, but only by agreement in writing signed by both
parties.

        15.     GOVERNING LAW:  This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Massachusetts.

        16.     SEVERABILITY:  In the event a court of law shall find, for any
reason, that any one or more of the provisions of this Agreement is invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision hereof, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.  Said court shall have 

                                       5
   6

the power to modify any invalid, illegal or unenforceable provision, including
specifically but without limitation any provision under paragraphs 7, 8,
9, and 10 to the extent necessary to give such provision full force effect under
the law of the Commonwealth of Massachusetts.

        IN WITNESS WHEREOF, the Employee has executed this Agreement under seal
the day and year first above written and the Company has caused this Agreement
to be executed under seal by its duly authorized representative the day and year
first above written.

                                                 PSYCHEMEDICS CORPORATION

                                                 BY: /s/ Raymond C. Kubacki, Jr.
                                                    ----------------------------
                                                 Raymond C. Kubacki, Jr.
                                                 President

                                                 EMPLOYEE
                                                 /s/ Donald J. Kippenberger
                                                 -------------------------------
                                                 Dr. Donald J. Kippenberger

                                       6

   1

                                                                    Exhibit 10.3

                             EMPLOYMENT AGREEMENT
                             --------------------

        AGREEMENT made this 1st day of July, 1995 by and between PSYCHEMEDICS
CORPORATION, a Delaware corporation (the "Company"), and Dr. Thomas Cairns ("the
Employee").

        WHEREAS, the Company and the Employee are desirous of setting forth in a
definitive employment agreement their respective rights and obligations with
regard to the Employee's employment by the Company:

        NOW THEREFORE, in consideration of the mutual covenants herein contained
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Company and the Employee agree as follows:

        1.      EMPLOYMENT TERM:  The Company hereby agrees to employ the
Employee as of  July 1, 1995 until terminated in accordance with Paragraph 11 
hereof.

        2.      DUTIES:  The Employee shall be employed by the Company as Vice
President, Technology  Research and Development and shall perform all duties in
connection therewith as prescribed by the officers of the Company.

        3.      EXTENT OF SERVICE:  During the period of employment hereunder,
the Employee shall devote his full working time, attention, skills, knowledge
and energies to the business and affairs of the Company, its affiliates and in
the promotion of its interests.

        4.      COMPENSATION:  As full compensation for the services to be
performed hereunder, the Employee shall accept a base salary ("Base Salary") at
the annual rate of $100,000, payable in equal bi-monthly installments.

        5.      FRINGE BENEFITS:  During the term of employment under this
Agreement, the Employee shall be entitled to the following fringe benefits:

                a)   STOCK OPTIONS:  The Employee shall be entitled to 
participate in  the Company's 1989 Employee Stock Option Plan subject to the
discretion of the Stock Option Committee of the Company's Board of Directors.

                b)   VACATION:  The Employee shall be entitled to a vacation 
that accrues at a rate of 15 days per year.

                c)   MEDICAL AND DENTAL PLANS:  The Employee shall be entitled 
to participate in such group medical and dental plans as may be offered by the
Company from time to time for the benefit of its employees.  The Company shall
pay the entire amount of the premium for coverage of the Employee  under the
medical and dental plan, and the entire amount of the premium for coverage of
the Employee's dependents under the dental plan. The Company shall contribute up
to $100 per month towards the cost of premiums for the Employee's dependents
under the medical plan, with the balance of any such premium costs to be the
responsibility of the Employee.

   2
        6.      EMPLOYEE DRUG TESTING:  The Employee recognizes and agrees that
he shall be required to submit personally to drug testing, utilizing the
Company's proprietary technology, upon his employment and thereafter, as
scheduled by the Company, on no less than a semi-annual basis.

        7.      ASSIGNMENT OF INVENTIONS:

                a)  Any and all inventions, processes, procedures, systems 
discoveries, designs, configurations, technology, trade secrets and improvements
(whether or not patentable and whether or not they are made conceived or
reduced to practice during working hours or using the Company's data or
facilities ("Inventions") that the Employee makes, conceives, reduces to
practice, or acquires during employment by the Company (either solely or jointly
with others) and that are related to the Company's present or planned business,
including, without limitation, any inventions or discoveries pertaining to the
Proprietary Information (as defined in Paragraph 9 hereof) shall be the sole
property of the Company and shall at all times and for all purposes be regarded
as acquired and held by the Employee in a fiduciary capacity for the sole
benefit of the Company.  The Employee hereby assigns to the Company, without
further compensation, such Inventions and any and all patents, copyrights,
trademarks trade names or applications therefor, in the United States and
elsewhere, relating thereto. 

                b)  The Employee agrees to keep and maintain adequate and 
current written records of all such Inventions (in the form of notes, sketches,
drawings and as may be specified by the Company), which records shall be
available to and remain the sole property of the Company at all times. 

                c)  The Employee will disclose promptly to the Company all such
Inventions and will assist the Company in obtaining and enforcing its own
benefit patents on such Inventions in any country.  Upon request, the Employee
will execute all applications, assignments, instruments and papers and perform
all acts necessary or desired by the Company, its successors, assigns and
nominees to secure and enjoy the full benefits and advantages thereof. 

                d)  The Employee understands that obligations under this 
Paragraph will continue after the termination of employment with the Company,
and the Employee will perform such obligations without  further consideration,
except for reimbursement of expenses incurred at the request by the
Company.  In addition, the Employee understands that the absence of a request by
the Company for information, for the making of an oath, or for the execution of
any document shall in no way be construed to constitute a waiver of the
Company's rights under this Agreement. 

        8.      ABSENCE OF RESTRICTIONS:

                a)  The Employee hereby represents that, except as disclosed 
in writing to the Company, the Employee is not bound by the terms of any
agreement with any previous employer or other party to refrain from using
or disclosing any trade secret or confidential or proprietary information in the
course of  employment with the Company or to refrain from competing, directly or
indirectly, with the business of such previous employer or any other party.   

                                       2
   3

                b)  The Employee further represents that the performance of all
the terms of this Agreement as an employee of the Company does not and will not
breach any agreement to keep in confidence proprietary information, knowledge or
data acquired in confidence or in trust prior to employment with the Company. 
The Employee will not disclose to the Company or induce the Company to use any
confidential or proprietary  information or material belonging to any previous
employer or others.

         9.     NON DISCLOSURE:

                a)  The Employee recognizes that his relationship with the 
Company is one of high trust and confidence by reason of access to and contact
with confidential information of the Company.

                b)  The Employee hereby acknowledges that, during the term of 
rendering services to the Company hereunder and at any time thereafter, he will
not, without the express written consent of a duly authorized executive
officer of the Company, communicate directly or indirectly or divulge or use for
the benefit of himself or of any other person, firm, association, corporation,
or any other entity, any of the Company's trade secrets, proprietary data,
technical information, ideas, pricing concepts, formulas, processes and methods,
including, without limitation to the generality of the foregoing, anything to do
with the Company's "proprietary extraction method" for the analysis of hair and
other keratinized structures for the presence of foreign substances and the
technical data, know-how and inventions related thereto, and any information,
reports, results or test data derived therefrom, as well as any business and
financial plans, pricing information, customer and prospective customer lists,
marketing strategies and the like  (hereinafter collectively called the
"Proprietary Information") that were communicated to or otherwise learned or
acquired by the Employee in the course of employment hereunder.  As long as such
Proprietary Information is treated as confidential by the Company and otherwise
has not been disclosed lawfully to the public, the Employee shall be bound to
the provisions hereof, which provisions the parties agree shall survive any
termination of his employment by the Company.

                c)  Upon termination of his employment by the Company, the 
Employee promptly shall  deliver to the Company all records, reports, drawings,
designs, plans, software and other documents containing any Proprietary
Information (and all copies thereof) that the Employee may then possess or have
under his control by virtue of his role as employee of the Company.

                d)  Prior to the Employee accepting or otherwise engaging in 
duties pursuant to a position of employment or a contract or understanding with
a person or entity operating or doing business in the general field covered
by the Proprietary Information, the Employee agrees as follows:

                                       3
   4

                (i)  the Employee shall inform the person or entity of his 
employment by the Company and that he is bound under the terms of Paragraphs 9
and 10 of this  Agreement;

                (ii)  the Employee shall provide a copy of Paragraphs 9 and 10 
of this Agreement to the person or entity; and

                (iii)  the Employee shall provide the Company with a 
representation in writing from the person or entity that the person has reviewed
the terms of Paragraphs 9 and 10 of this Agreement and the Employee and the
person or entity agrees to respect the terms thereof and not to accept from the
Employee or otherwise make use of the Proprietary Information and not to engage
in activity which would violate the Employee's obligations under Paragraph 9 or
10 of this Agreement.

                e)  The Employee acknowledges specifically that any breach or 
threatened breach of any provision of Paragraph 7, 9, or 10 hereof will cause
irreparable harm to the Company and will entitle the Company to seek
immediate injunction relief (in addition to any other rights or remedies the
Company has to prevent a violation of any such Paragraph).

        10.     COVENANT NOT TO COMPETE:  Upon the termination by either party
of the Employee's employment by the Company hereunder, the Employee agrees that,
for a period of two (2) years thereafter, within the United States, the Employee
shall not either as an individual for his own account, as a partner or joint
venturer, as an employee, agent or salesperson of any person, or as an officer,
director or more than 5% shareholder of a corporation or otherwise, engage in
any activity, including manufacturing, sale or distribution, that involves,
directly or indirectly, the use of radioimmunoassay of hair or any hair
extraction immunodiagnostic method.  The Employee further agrees that, for the
same two (2) year period following termination by either party of the Employee's
employment by the Company hereunder, the Employee will not hire or solicit his
co-workers at the Company for employment or engagement elsewhere.

        11.     TERMINATION:  The Employee's employment hereunder shall
terminate:

                a)  Ninety (90) days after receipt by either party hereto of 
written notice thereof from the  other party.

                b)  Upon the death of the Employee.

                c)  Upon the mutual agreement of the parties.

                d)  Immediately upon receipt by the Employee of written notice 
thereof from the Company, in the event of termination for cause.

        Upon the termination of employment under this Agreement, all obligations
of the Company to the Employee shall forthwith terminate, except for any
obligation to pay the compensation or any other benefit which may have accrued
and be due and payable hereunder at the time of such termination; but the 

                                       4
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obligations of the Employee under Paragraphs 7, 9, or 10 shall not be so
terminated, and shall survive the termination of his employment hereunder by
the Company.

        As used herein, the Employee's employment hereunder shall be deemed to
have been terminated by the Company for cause if it has been terminated for any
of the following reasons: 

                e)  Employee materially breaches any provision hereunder; or

                f)  Employee acts in a knowingly and willfully dishonest manner
to the detriment of the Company in his relationship with the Company; or

                g)  Employee has been convicted or any crime or has engaged in 
any criminal activity that materially adversely affects the business or affairs
of the Company.

        12.     NOTICES:  All notices under this Agreement shall be in writing
and shall be deemed to have been given if delivered by hand or addressed and
mailed by registered or certified mail, return receipt requested, to the Company
at:

                           Psychemedics Corporation
                                Leroy O. Moyer
                       1280 Massachusetts Ave., Ste. 200
                             Cambridge, MA  02138

and to the Employee at:

                               Dr. Thomas Cairns
                           3053 Laurel Canyon Blvd.
                            Studio City, CA  91604

        13.     SUCCESSORS AND ASSIGNS:   This agreement shall inure to the
benefit of and shall be binding upon the Company, its successors and assigns and
shall be binding upon the Employee and his heirs, executors, administrators and
legal representatives to the extent that the context so permits.

        14.     ENTIRE AGREEMENT:  This instrument contains the entire
understanding of the parties pertaining to the subject manner contained herein,
and it supersedes all prior and contemporaneous agreements, representations and
understandings of the parties.  It may not be changed, modified, extended,
terminated or discharged orally, but only by agreement in writing signed by both
parties.

        15.     GOVERNING LAW:  This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Massachusetts.

        16.     SEVERABILITY:  In the event a court of law shall find, for any
reason, that any one or more of the provisions of this Agreement is invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision hereof, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.  Said court shall have 

                                       5
   6

the power to modify any invalid, illegal or unenforceable provision, including
specifically but without limitation any provision under paragraphs 7, 8,
9, and 10 to the extent necessary to give such provision full force effect under
the law of the Commonwealth of Massachusetts.

        IN WITNESS WHEREOF, the Employee has executed this Agreement under seal
the day and year first above written and the Company has caused this Agreement
to be executed under seal by its duly authorized representative the day and year
first above written.

                                                 PSYCHEMEDICS CORPORATION

                                                 BY: /s/ Raymond C. Kubacki, Jr.
                                                    ----------------------------
                                                 Raymond C. Kubacki, Jr.
                                                 President

                                                 EMPLOYEE
                                                 /s/ Thomas Cairns
                                                 -------------------------------
                                                 Dr. Thomas Cairns

                                       6
   1

                                                                     EXHIBIT 11

CALCULATION OF SHARES USED IN DETERMINING INCOME PER SHARE

                                           THREE MONTHS ENDED               SIX MONTHS ENDED
                                                 JUNE 30,                        JUNE 30,
                                        --------------------------      --------------------------
                                            1995            1994           1995             1994
                                        --------------------------      --------------------------
                                                                            
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING DURING PERIOD               19,382,055      17,486,694      19,449,448      16,326,179

EFFECT OF COMMON STOCK EQUIVALENTS
COMPUTED IN ACCORDANCE WITH THE
TREASURY STOCK METHOD                      787,262       1,600,145         798,040       1,487,615
                                        ----------      ----------      ----------      ----------

                                        20,169,317      19,086,839      20,247,488      17,813,794
                                        ----------      ----------      ----------      ----------

  

 5
 0000806517
 PSYCHEMEDICS CORPORATION
 1

                   6-MOS
                          DEC-31-1995
                             JAN-01-1995
                               JUN-30-1995
                                         669,990
                                 6,124,501
                                1,611,681
                                         0
                                          0
                             8,738,717
                                       3,358,200
                               1,550,284
                              10,958,635
                          784,044
                                              0
                                       100,824
                                0
                                          0
                                  10,073,767
                10,958,635
                                      5,068,399
                             5,068,399
                                        2,245,001
                                2,245,001
                             1,870,610
                                     0
                               6,256
                              1,128,820
                                    74,300
                                  0
                                       0
                                      0
                                            0
                                 1,054,520
                                     0.05
                                     0.00