<PAGE>   1

                                   Page 1 of 1
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                                    FORM 10-Q


(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 1998
   
                                       OR

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

For the transition period from                 to

Commission File Number 0-4748

                              Data Dimensions, Inc.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

              Delaware                             06-0852458
     (NAME OR OTHER JURISDICTION                  (IRS EMPLOYER
  OF INCORPORATION OR ORGANIZATION)             IDENTIFICATION NO.)

   One Bellevue Center, 411 - 108th Avenue NE, Suite 2100, Bellevue, WA 98004
          (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                   (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (425) 688-1000

Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ].

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date Common Stock: 12,988,455 shares
as of July 31, 1998



<PAGE>   2



                              DATA DIMENSIONS, INC.
                                      Index

<TABLE>
<CAPTION>
                                                                                                                 Page
                                                                                                                 Number
                                                                                                                 ------
<S>                                                                                                              <C>
PART I - FINANCIAL INFORMATION

          Item 1. Financial Statements

                Condensed Consolidated Balance Sheets at June 30,1998 and
                  December 31, 1997                                                                                3

                Supplemental Condensed  Consolidated Balance Sheets at June 30, 1998
                  and December 31,1997                                                                             4

                Condensed Consolidated Statements of Operations for the three
                  and six month periods ended June  30, 1998 and 1997                                              5

                Supplemental Condensed Consolidated Statements of Operations for the three
                  and six month periods ended June 30, 1998 and 1997                                               6

                Condensed Consolidated Statements of Cash Flows for the six month periods
                  ended June 30, 1998 and 1997                                                                     7

                Notes to Condensed Consolidated Financial Statements                                               8


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



     PART II - OTHER INFORMATION

          Item 4. Submission of Matters to a Vote of Security Holders                                             13
          Item 6. Exhibits and reports on Form 8-K                                                                13
</TABLE>

SIGNATURE



                                     Page 2
<PAGE>   3

                              DATA DIMENSIONS, INC.
                           CONSOLIDATED BALANCE SHEETS
                                 (In thousands)
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                 June 30,         December 31,
                                                                   1998               1997
                                                                 --------           --------

<S>                                                              <C>                <C>     
Current assets:
        Cash and cash equivalents                                $  5,571           $  4,694
        Investment securities available for sale                       --                986
        Accounts receivable, net:
             Trade                                                 22,256             16,806
             Other                                                    176                336
        Prepaid and other current assets                            1,614                937
        Deferred income taxes                                          --                247
                                                                 --------           --------

             Total current assets                                  29,617             24,006

     Equipment and furniture, net                                   4,349              3,107
     Investment in product development, net                         1,350              1,635
     Other assets                                                     841              1,613
                                                                 --------           --------

             Total assets                                        $ 36,157           $ 30,361
                                                                 ========           ========

     Current liabilities:
        Accounts payable                                         $  4,683           $  3,148
        Advance billings                                              252              1,431
        Accrued compensation and commissions                        4,377              3,128
        Other accrued liabilities                                   1,768              1,790
        Dividends payable                                             689              1,000
        Current portion of capital lease obligations                  259                287
        Deferred income taxes                                       1,591                 --
                                                                 --------           --------

             Total current liabilities                             13,619             10,784
                                                                 --------           --------

     Capital lease obligations, net of current portion                380                483
                                                                 --------           --------

     Commitments and contingencies (Note 3 )

     Stockholders' equity:
        Common stock, $.001 par value; 20,000 shares
            authorized; 12,876 and 12,542 outstanding                  22                 22
        Additional paid in capital                                 22,348             22,026
        Treasury stock, at cost, 112 and 108 shares                (3,034)            (2,971)
        Retained earnings (deficit)                                 2,946                (73)
        Cumulative translation adjustment                            (124)                90
                                                                 --------           --------

             Total stockholders' equity                            22,158             19,094
                                                                 --------           --------

             Total liabilities and stockholders' equity          $ 36,157           $ 30,361
                                                                 ========           ========
</TABLE>



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


                                     Page 3
<PAGE>   4

                              DATA DIMENSIONS, INC.
               SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS
                (Giving Effect to Pooling-of-Interests Business 
                  Combination with ST Labs, Inc. - See Note 2)
                                 (In thousands)
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                             June 30,         December 31,
                                                              1998               1997
                                                            --------           --------
<S>                                                         <C>                <C>     
Current assets:
   Cash and cash equivalents                                $  5,571           $  4,734
   Investment securities available for sale                       --                986
   Accounts receivable, net                                   24,406             18,730
   Prepaid and other current assets                            1,694              1,024
   Deferred income taxes                                          --                247
                                                            --------           --------

        Total current assets                                  31,671             25,721

Equipment and furniture, net                                   5,803              4,668
Investment in product development, net                         1,350              1,635
Other assets                                                     924              1,696
                                                            --------           --------

        Total assets                                        $ 39,748           $ 33,720
                                                            ========           ========

Current liabilities:
   Line of credit borrowings                                $  1,330           $  1,200
   Accounts payable                                            6,031              3,916
   Advanced billings                                             252              1,431
   Accrued compensation and commissions                        4,377              3,478
   Other accrued liabilities                                   3,013              2,528
   Dividends payable                                             689              1,000
   Current portion of capital lease obligations                  259                287
   Deferred income taxes                                       1,591                 --
   Current portion of notes payable                            1,397              1,397
                                                            --------           --------

        Total current liabilities                             18,939             15,237

Notes payable, net of current portion                            402                491
Capital lease obligations, net of current portion                380                483
Other noncurrent liabilities                                     135                166
                                                            --------           --------

             Total Liabilities                                19,856             16,377
                                                            --------           --------

Commitments and contingencies (Note 3)

Stockholders' equity:
   Common stock and additional paid in stock                  23,745             23,323
   Treasury stock, at cost                                    (3,034)            (2,971)
   Retained earnings (deficit)                                  (695)            (3,099)
   Cumulative translation adjustment                            (124)                90
                                                            --------           --------

        Total stockholders' equity                            19,892             17,343
                                                            --------           --------

        Total liabilities and stockholders' equity          $ 39,748           $ 33,720
                                                            ========           ========
</TABLE>



    The accompanying notes are an integral part of these financial statements



                                     Page 4
<PAGE>   5

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)
                                   (Unaudited)



<TABLE>
<CAPTION>
                                                          Three Month Period               Six Month Period
                                                            Ended June 30,                   Ended June 30,
                                                      ---------------------------       --------------------------
                                                         1998            1997             1998           1997
                                                      ------------    -----------       ----------    ------------
<S>                                                   <C>             <C>               <C>           <C>    
Revenue
  Knowledge Consulting                                $20,255          $ 7,637          $35,325          $13,447
  Information Services                                  2,456            1,914            4,386            3,733
  Knowledge Transfer                                      738              722            1,355              989
  International                                           197              677              495            1,353
                                                      -------          -------          -------          -------
              Total revenue                            23,646           10,950           41,561           19,522

Direct costs                                           13,727            5,553           23,726           10,451
                                                      -------          -------          -------          -------

Gross margin                                            9,919            5,397           17,835            9,071
General, administrative and selling expenses            6,731            4,005           13,068            7,171
                                                      -------          -------          -------          -------

Income from operations                                  3,188            1,392            4,767            1,900
Other income                                               58              120              101              267
                                                      -------          -------          -------          -------

Earnings before income tax                              3,246            1,512            4,868            2,167
Income tax provision                                    1,225              510            1,850              740
                                                      -------          -------          -------          -------

Net income                                            $ 2,021          $ 1,002          $ 3,018          $ 1,427
                                                      =======          =======          =======          =======


Net income per share-basic                            $  0.16          $  0.08          $  0.24          $  0.12
                                                      =======          =======          =======          =======
Net income per share-diluted                          $  0.16          $  0.08          $  0.23          $  0.11
                                                      =======          =======          =======          =======

Weighted average shares outstanding-basic              12,864           12,231           12,763           12,115
                                                      =======          =======          =======          =======
Weighted average shares outstanding-diluted            13,030           12,584           13,033           12,462
                                                      =======          =======          =======          =======
</TABLE>



                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                 (In thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                             Three Month Period                   Six Month Period
                                                               Ended June 30,                      Ended June 30,
                                                           -------------------------          -------------------------
                                                             1998              1997             1998              1997
                                                           -------           -------          -------           -------
<S>                                                        <C>               <C>              <C>               <C>    
Net Income
Other comprehensive income - foreign currency              $ 2,021           $ 1,002          $ 3,018           $ 1,427
  translation adjustments, net of deferred income
  taxes of  $143 and $81                                      (235)               --             (133)               --
                                                           -------           -------          -------           -------

Comprehensive income                                       $ 1,786           $ 1,002          $ 2,885           $ 1,427
                                                           =======           =======          =======           =======
</TABLE>



    The accompanying notes are an integral part of these financial statements



                                     Page 5
<PAGE>   6



                              DATA DIMENSIONS, INC.
          SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                 (Giving Effect to Pooling-of-Interests Business
                  Combination with ST Labs, Inc. - See Note 2)
                      (In thousands, except per share data)
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                            Three Month Period                 Six Month Period
                                                              Ended June 30,                    Ended June 30,
                                                      ---------------------------          ---------------------------
                                                        1998               1997              1998              1997
                                                      --------           --------          --------           --------
<S>                                                   <C>                <C>               <C>                <C>     
Revenue
  Knowledge Consulting                                $ 23,740           $ 11,128          $ 42,125           $ 19,773
  Information Services                                   2,456              1,914             4,386              3,733
  Knowledge Transfer                                       738                722             1,355                989
  International                                            197                677               495              1,353
                                                      --------           --------          --------           --------
              Total revenue                             27,131             14,441            48,361             25,848

Direct costs                                            15,651              7,582            27,498             14,281
                                                      --------           --------          --------           --------

Gross margin                                            11,480              6,859            20,863             11,567
General, administrative and selling expenses             8,538              5,976            16,394             10,544
                                                      --------           --------          --------           --------

Income from operations                                   2,942                883             4,469              1,023
Other income (expense)                                    (187)                12              (215)               109
                                                      --------           --------          --------           --------

Earnings before income tax                               2,755                895             4,254              1,132
Income tax provision                                     1,225                510             1,850                740
                                                      --------           --------          --------           --------

Net income                                            $  1,530           $    385          $  2,404           $    392
                                                      ========           ========          ========           ========


Net income per share-basic                            $   0.11           $   0.03          $   0.18           $   0.03
                                                      ========           ========          ========           ========
Net income per share-diluted                          $   0.11           $   0.03          $   0.18           $   0.03
                                                      ========           ========          ========           ========

Weighted average shares outstanding-basic               13,372             12,566            13,372             12,566
                                                      ========           ========          ========           ========
Weighted average shares outstanding-diluted             13,587             12,985            13,587             12,985
                                                      ========           ========          ========           ========
</TABLE>



   The accompanying notes are an integral part of these financial statements



                                     Page 6
<PAGE>   7

                              DATA DIMENSIONS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                  Six  Month Period Ended June 30,
                                                                  --------------------------------
                                                                     1998              1997
                                                                    -------           -------
<S>                                                                 <C>               <C>    
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                          $ 3,018           $ 1,427
Adjustments to reconcile net income to net cash provided
  (used) by operating activities:
       Depreciation and amortization                                  1,141               326
       Deferred income tax provision                                  1,850               655
       Changes in certain operating assets and liabilities
         Decrease (increase) in accounts receivable                  (5,450)           (3,466)
         Increase in prepaid and other current assets                  (169)             (779)
         Increase in accounts payable                                 1,535               125
         Decrease in advanced billings                               (1,179)             (821)
         Increase in accrued compensation and commissions             1,249               578
       Other                                                            114              (215)
                                                                    -------           -------

Net cash provided (used)  by operating activities                     2,109            (2,170)
                                                                    -------           -------

CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and sales of investments                                     986             5,492
Purchases of equipment and furniture                                 (1,949)             (788)
Investment in product development                                       (48)           (1,012)
                                                                    -------           -------

Net cash provided (used) by investing activities                     (1,011)            3,692
                                                                    -------           -------

CASH FLOWS FROM FINANCING ACTIVITIES
Payment of capital lease obligations                                   (131)               --
Distribution to shareholder                                            (300)             (114)
Proceeds from issuance of common stock                                  210               411
                                                                    -------           -------

Net cash provided by financing activities                              (221)              297
                                                                    -------           -------

Net increase in cash and cash equivalents                               877             1,819

Cash and cash equivalents, beginning of period                        4,694             2,617
                                                                    -------           -------

Cash and cash equivalents, end of period                            $ 5,571           $ 4,436
                                                                    =======           =======
</TABLE>



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



                                     Page 7
<PAGE>   8

                              DATA DIMENSIONS, INC.
              Notes to Condensed Consolidated Financial Statements

NOTE 1: Basis of Presentation

The financial statements present the consolidated financial position and results
of operations of Data Dimensions, Inc. and its subsidiaries, ("Data Dimensions"
or the "Company"). In November 1997, the Company acquired Pyramid Information
Services, Inc. in a business combination accounted for as a
pooling-of-interests. The historical financial statements for periods prior to
consummation of the business combination have been restated as though the
companies had been combined for all periods presented.

The financial information included herein for the six month periods ended June
30, 1998 and 1997 is unaudited; however, such information reflects all
adjustments consisting only of normal recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of the consolidated
financial position, results of operations and cash flows for the interim
periods. The financial information as of December 31, 1997 is derived from the
Company's audited consolidated financial statements. These interim condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and related notes thereto, which are included
in the Company's 1997 Annual Report on Form 10-KSB.

Earnings per share for the 1998 first and second quarters do not add to the six
months earnings per share amount due to rounding. The results of operations for
the 1998 interim periods presented are not necessarily indicative of the results
to be expected for the full year.

NOTE 2: Acquisition of ST Labs, Inc.

In July 1998, the Company entered into a definitive agreement with ST Labs, Inc.
("ST Labs") and certain of its shareholders, pursuant to which, in August 1998,
the Company acquired all of the outstanding common stock of ST Labs in exchange
for shares of Data Dimensions common stock having a value of approximately $9.7
million, such value as determined by the average closing market price of Company
common stock for a period preceding the close of the business combination. As a
result of the transaction, ST Labs, a Bellevue, Washington based company which
provides information technology testing related services, became a wholly-owned
subsidiary of the Company.

The business combination will be accounted for as a "pooling-of-interests" for
accounting and financial reporting purposes. The pooling-of-interests method of
accounting is intended to present as a single interest two or more common
shareholder interests which were previously independent. Consequently, the
historical financial statements for periods prior to the consummation of the
combination will be restated as though the companies had been combined for all
periods presented. The accompanying supplemental financial statements give
effect to the business combination of the Company and ST Labs. These
supplemental results of operations are not necessarily indicative of results to
be expected in the future.

The calculation of supplemental net income per common and common equivalent
share for each period presented reflects the issuance of shares of Company
common stock in exchange for all of the outstanding shares of ST Labs common
stock. The number of shares included in the basic earnings per share computation
has been determined utilizing a price of $14.38 per share and the exchange ratio
of Company shares for ST Labs shares as set forth in the business combination
merger agreement (the "Exchange Ratio") based upon the actual weighted average
number of ST Labs common shares outstanding during the period presented. The
computation of diluted earnings per share is similar to the computation of basic
earnings per share, except that the number of shares utilized as the denominator
is increased to include the number of ST labs additional shares that would have
been outstanding if dilutive common shares had been issued. Outstanding options
and warrants have been considered utilizing the Treasury stock method in
calculating dilutive earnings per share.

All fees and expenses related to the business combination and to the
consolidation of the combining companies will be expensed as required under the
pooling-of-interests accounting method. These expenses have not been reflected
in the supplemental financial statements, but will be reflected in the statement
of operations of the Company for the three month period ending September 30,
1998. Such fees and expenses are presently estimated to approximate $750,000,
comprised of direct transaction costs and the estimated expense of consolidating
and restructuring certain functions. The actual costs of the business
combination could vary significantly from those estimated.



                                     Page 8
<PAGE>   9

                              DATA DIMENSIONS, INC.
        Notes to Condensed Consolidated Financial Statements (Continued)

NOTE 2: (Continued)

The following pro forma supplemental consolidated condensed balance sheet
information reflects adjustments for the aforementioned estimated fees and
expenses, as if the business combination had been consummated on June 30, 1998
(in thousands):

<TABLE>
<CAPTION>
                                                  Pro forma           Pro forma
                               Supplemental      Adjustments         Supplemental

<S>                            <C>               <C>                 <C>        
Current assets                   $ 31,671                             $ 31,671
Non-current assets                  8,077                                8,077
                                 --------          --------           --------
     Total                       $ 39,748          $                  $ 39,748
                                 ========          ========           ========
Current liabilities              $ 18,939          $    750           $ 19,689
Non-current liabilities               917                                  917
                                 --------          --------           --------
      Total liabilities            19,856               750             20,606
Stockholders' equity               19,892              (750)            19,142
                                 --------          --------           --------
       Total                     $ 39,748           $   --           $  39,748
                                 ========          ========           ========
</TABLE>

NOTE 3: Stockholders' Equity

During the six months ended June 30, 1998, the Company issued approximately
336,000 shares of its common stock pursuant to exercise of outstanding options
and in connection therewith received cash proceeds of approximately $210,000.

NOTE 4: Contingencies

The Company is from time to time involved in various claims and legal
proceedings of a nature considered by Company management to be routine and
incidental to its business. In the opinion of Company management, after
consultation with outside legal counsel, the ultimate disposition of such
matters is not expected to have a material adverse effect on the Company's
financial position, results of operations or liquidity.



                                     Page 9
<PAGE>   10



Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

This management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the discussion and analysis
presented in the Company's Annual Report on Form 10-KSB.

Results of Operations

Comparison of the Three Month Periods Ended June 30, 1998 and 1997

Revenue for the three months ended June 30, 1998 was $23.6 million, more than
double the revenue for the comparative prior year period. Revenue from Knowledge
Consulting increased approximately $12.6 million, or 165% over the comparative
prior year period and a 34% increase over the first quarter of 1998, primarily
due to a heightened awareness of the millennium problem and demand for
millennium services. Knowledge Consulting continues to represent a dominant
portion of revenues, contributing 86% of total second quarter revenues. Revenues
from Information Services increased approximately $542,000 or 28% over the
comparative prior year period, reflecting new Year 2000 testing contracts.
Revenues from Knowledge Transfer, which include sales of Ardes 2k and
Interactive Vendor Review were $734,000 during the three months ended June 30,
1998, a 2% increase over the comparable 1997 period. International revenue was
$200,000 for the three months ended June 30, 1998, a decrease from $677,000 for
the comparable prior year period due primarily to approximately $500,000 of
license and other one-time or non-recurring fees received from licensees in the
1997 period.

Gross margin for the three months ended June 30, 1998 was $9.9 million, compared
to $5.4 million for the three months ended June 30, 1997, an increase of $4.5
million, or 84%. Gross margin as a percentage of revenue for the three month
period ended June 30, 1998 was 42% compared to 49% for the comparative 1997
period. This percentage decrease was primarily due to an increase in code
remediation work performed rather than portfolio analysis and higher gross
margins realized by International during 1997 as a result of one-time fees.

General, administrative and selling expenses for the three months ended June 30,
1998 were approximately $6.7 million compared to approximately $4 million for
the comparative prior year, an increase of $2.7 million. General, administrative
and selling expenses increased in dollar terms as a result of the increased
investment in infrastructure to support the Company's rapid growth, but
decreased as a percentage of revenues to 28% for the 1998 second quarter as
compared to 35% during the immediately preceding quarter and 37% during the
comparable prior year quarter. At June 30, 1998, the Company had 605 employees,
a net increase of 273 since June 30, 1997. This growth resulted in increased
costs of facilities and related services, salaries, continued recruiting,
training, travel and other staffing costs. The Company believes that with
increased demand for it services and products, further increases in support
staff and other related costs will continue. It is expected that these costs as
a percent of revenue will continue to gradually decrease as compared to prior
year periods.

Comparison of the Six Month Periods Ended June 30, 1998 and 1997

Revenue for the six months ended June 30, 1998 was $41.6 million, more than
double revenue for the comparative prior year period. Revenue from Knowledge
Consulting increased approximately $21.9 million, or 163% over the comparative
prior year period, primarily due to a heightened awareness of the millennium
problem and demand for millennium services. Knowledge Consulting continues to
represent a dominant portion of revenues, contributing 85% of total first and
second quarter revenues. Revenues from Information Services increased $653,000
or 17%, and were primarily outsourcing-related. Revenues from Knowledge
Transfer, which include sales of Ardes 2k and Interactive Vendor Review, were
$1.4 million during the six months ended June 30, 1998, a 37% increase over the
comparable 1997 period. International revenue was $499,000 for the six months
ended June 30, 1998, a decrease from $1.4 million for the comparable prior year
period due primarily to approximately $1 million of license and other one-time
or non-recurring fees received from licensees in the 1997 period.

Gross margin for the six months ended June 30, 1998 was $17.8 million, compared
to approximately $9 million for the six months ended June 30, 1997, an increase
of $8.8 million, or 97%. Gross margin as a percentage of revenue for the six
month period ended June 30, 1998 was 43% compared to 46% for the comparative
1997 period. This percentage decrease was primarily due to higher gross margins
realized by International during 1997. The first and second quarter's 1998 gross
margin is also a significant improvement from the 37% gross margin reported in
the fourth quarter of 1997.



                                    Page 10
<PAGE>   11

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation (Continued)

Comparison of the Six Month Periods Ended June 30, 1998 and 1997  (Continued)

General, administrative and selling expenses for the six months ended June 30,
1998 were approximately $13.1 million compared to $7.2 million for the
comparative prior year, an increase of $5.9 million. General, administrative and
selling expenses increased in dollar terms as a result of the increased
investment in infrastructure to support the Company's rapid growth, but
decreased as a percentage of revenues to 31% for the 1998 first half as compared
to 37% during the immediately preceding six months and the comparable prior year
period.

Liquidity and Capital Resources

Net cash provided by operating activities was approximately $2.1 million in the
six months ended June 30, 1998 as compared to $2.2 million used in 1997.
Earnings before deferred taxes, depreciation and amortization approximated $6.0
million in 1998, an increase of $3.6 million, or 150%, over 1997. Cash provided
by net income before non-cash charges for depreciation, amortization and
deferred taxes, and increases in accounts payable were offset partially by
increases in accounts receivable and advanced billings. Improvements in billing
and collection processes contributed to the decrease in days sales outstanding
from 107 days for the fourth quarter of 1997 to 85 days for the six months ended
June 30, 1998.

Net cash used by investing activities was approximately $1.0 million during the
six months ended June 30,1998 as compared to net cash provided of $3.7 million
during the comparative 1997 period. Cash provided by investing activities
resulted from proceeds from the maturity and sale of investments. Cash used by
investing activities resulted from the purchase of equipment and furniture and
investment in product development.

As of June 30, 1998, the Company had working capital of approximately $16
million and cash and cash equivalents of $5.6 million. As described in note 2 to
the financial statements, in August 1998 the Company acquired ST Labs. At June
30, 1998 ST Labs had total liabilities of approximately $5.8 million, including
bank debt of approximately $2.9 million. The Company intends to refinance ST
Labs bank debt and advance sufficient cash to ST Labs to satisfy its current
cash requirements. In connection therewith and to fund closing costs of the
transaction, the Company has increased its existing bank line of credit from $5
million to $10 million on terms substantially similar to its current facility.
Prior to the ST Labs acquisition, the Company had not borrowed any amounts
pursuant to this line of credit . The Company has no significant commitments for
capital expenditures and believes that based upon its current operating plan,
cash generated from operations and its existing cash and investments, as
supplemented by line of credit borrowings, will be adequate to finance its
current working capital requirements.

Year 2000 Compliance

The Company has evaluated the cost necessary to make its computer systems Year
2000 compliant. Most of these costs are expected to be incurred during 1998 and
are not expected to have a material impact on the Company's cash flows, results
of operations or financial condition.

Forward-Looking Statements and Associated Risks

The foregoing and the discussion and analysis presented in the Company's 1997
Annual Report on Form 10-KSB contains certain forward-looking statements,
including, among others (i) the potential extent of the millennium problem and
the anticipated growth in the millennium consulting market; (ii) anticipated
trends in the Company's financial condition and results of operations (including
expected changes in the Company's gross margin and general, administrative and
selling expenses); (iii) the Company's business strategies for expanding its
presence in the computer services industry (including opening new sales offices,
updating its millennium consulting process, expanding its licensing arrangements
and positioning itself for non-millennium and post-2000 markets); and (iv) the
Company's ability to distinguish itself from its current and future competitors.

These forward-looking statements are based largely on the Company's current
expectations and are subject to a number of risks and uncertainties, some of
which are described in the Issues and Uncertainties section of the discussion
and analysis included in the Company's 1997 Annual Report on Form 10-KSB. The
Company does not provide forecasts of future financial performances. While
Company management is optimistic about the Company's



                                    Page 11
<PAGE>   12


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation (Continued)

Forward-Looking Statements and Associated Risks (Continued)

long-term prospects, these issues and uncertainties, among others, should be
considered. Actual results could differ materially from these forward-looking
statements. Important factors to consider in evaluating such forward-looking
statements include (i) the shortage of reliable market data regarding the
millennium consulting market; (ii) changes in external competitive market
conditions that might impact trends in the Company's results of operations;
(iii) unanticipated working capital or other cash requirements; (iv) uncertainty
regarding the Company's ability to profitably market and sell its Knowledge
Transfer products; (v) changes in the Company's business strategies or an
inability to execute its strategies due to unanticipated changes in the
millennium consulting market; (vi) various competitive factors that may prevent
the Company from competing successfully in the marketplace, and (vii)
unanticipated financial requirements that could arise as a result of the
Company's acquisition of ST Labs, Inc. In view of these risks and uncertainties,
there can be no assurance that the forward-looking statements contained in this
Quarterly Report on Form 10-Q and the Company's Annual Report on Form 10-KSB
will, in fact, transpire.



                                    Page 12
<PAGE>   13

                           Part II - Other Information

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

The Annual meeting of the shareholders of the Company was held on May 18, 1998,
at which the shareholders elected the two nominees for director to the Board of
Directors of the Company, as follows:

<TABLE>
<CAPTION>
                                           Number of Shares                       Number of Shares
      Name                                    Voting For                           Withheld Voting
      ----                                 ----------------                       ----------------
<S>                                        <C>                                    <C>    
Robert T. Knight                              11,939,184                               259,991
Larry W. Martin                               11,938,512                               260,663
</TABLE>

The terms of Lucie J. Fjeldstad and Thomas W. Fife as directors continued after
the annual meeting of shareholders.





Item 6 - Exhibits and reports on Form 8-K.

   (a) The following exhibits are filed herewith or incorporated by
       reference, and this list is intended to constitute the exhibit index:

         Exhibit No.

                 2.1      Agreement and Plan of Reorganization by and among
                          Data Dimensions, Inc., DS Acquisition Corporation, 
                          Robert Arnold, Jr., Tye V. Minckler, and ST Labs, Inc.
                          dated July 28, 1998. (Incorporated by reference to
                          the Company's August 7, 1998 Current Report on Form 
                          8-K)

                 4.1      Stock Restriction and Registration Rights Agreement.
                          (Incorporated by reference to the Company's August 7,
                          1998 Current Report on Form 8-K)

                  11.     Statement of calculations of net income per share

                  27.     Financial Data Schedule

   (b)    There were no reports on Form 8-K filed during the quarter ended June
          30, 1998. The Company filed a Current Report on Form 8-K dated August
          7, 1998 regarding the acquisition of ST Labs, Inc.



                                    Page 13
<PAGE>   14

                                    SIGNATURE



Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.






                                            Data Dimensions, Inc.
                                            (Registrant)




                       /s/ LARRY W. MARTIN
                      ----------------------------------------------------------
August 11, 1998       Larry W. Martin, President and Chief Executive Officer
Date



                       /s/ GORDON A. GARDINER
                       ---------------------------------------------------------
August  11, 1998       Gordon A. Gardiner, Executive Vice President, Chief 
Date                   Financial Officer and Secretary (Principal Financial 
                       and Accounting Officer).



                                    Page 14