<PAGE>   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 MARCH 31, 1999

                                       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 0-19371

                                PHARMCHEM [LOGO]
             (Exact name of registrant as specified in its charter)

               CALIFORNIA                                       77-0187280
      (State or other jurisdiction                            (IRS Employer
    of incorporation or organization)                     Identification Number)

          1505-A O'BRIEN DRIVE
         MENLO PARK, CALIFORNIA                                  94025
(Address of principal executive offices)                       (Zip Code)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 328-6200


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

        As of April 30, 1999, the registrant had outstanding 5,784,206 shares of
Common Stock, no par value.


================================================================================



<PAGE>   2

                          PHARMCHEM LABORATORIES, INC.

                          QUARTERLY REPORT ON FORM 10-Q

                                      INDEX


<TABLE>
<CAPTION>
                                                                                          PAGE
                                                                                          ----
<S>        <C>                                                                            <C>
PART I.    FINANCIAL INFORMATION

Item 1.    Condensed Consolidated Financial Statements                                      3

           Condensed Consolidated Balance Sheets at
           March 31, 1999 and December 31, 1998 (unaudited)                                 4

           Condensed Consolidated Statements of Operations (unaudited)
           for the Three Months ended March 31, 1999 and 1998                               5

           Condensed Consolidated Statements of Comprehensive Income (Loss)
           (unaudited) for the Three Months ended March 31, 1999 and 1998                   6

           Condensed Consolidated Statements of Cash Flows (unaudited)
           for the Three Months ended March 31, 1999 and 1998                               7

           Notes to Condensed Consolidated Financial Statements (unaudited)                 8

Item 2.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations                                                        9


PART II.   OTHER INFORMATION

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

Item 5.    Other Information                                                               14

Item 6.    Exhibits and Reports on Form 8-K                                                14

SIGNATURE                                                                                  14
</TABLE>



                                       2
<PAGE>   3

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

        The condensed consolidated financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures made are adequate to make the information presented not
misleading. It is suggested that the condensed consolidated financial statements
be read in conjunction with the consolidated financial statements and the notes
thereto for the year ended December 31, 1998 included in the Company's Annual
Report on Form 10-K.

        These financial statements have been prepared in all material respects
in conformity with the standards of accounting measurements set forth in
Accounting Principles Board Opinion No. 28, "Interim Financial Reporting," and
the rules and regulations as specified in the Securities Exchange Act of 1934
and reflect all adjustments, consisting only of normal recurring adjustments
which, in the opinion of management, are necessary to summarize fairly the
Company's consolidated financial position, the results of operations and cash
flows for the periods presented. The results of operations for such interim
periods are not necessarily indicative of the results to be expected for the
full year.




                                       3
<PAGE>   4

                          PHARMCHEM LABORATORIES, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                        March 31,       December 31,
                                                                           1999            1998
                                                                        ---------       ------------
<S>                                                                      <C>              <C>     
                                     ASSETS
CURRENT ASSETS
        Cash and cash equivalents                                        $  1,034         $    802
        Accounts receivable, net                                            6,729            6,522
        Inventory                                                           1,532            1,525
        Prepaids and other current assets                                     806              719
                                                                         --------         --------
                TOTAL CURRENT ASSETS                                       10,101            9,568
                                                                         --------         --------

PROPERTY AND EQUIPMENT, net                                                 8,600            8,508
OTHER ASSETS                                                                  896              997
GOODWILL, net                                                               2,944            2,990
                                                                         --------         --------
TOTAL ASSETS                                                             $ 22,541         $ 22,063
                                                                         ========         ========


             LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
        Revolving line of credit                                         $  1,337         $  2,379
        Current portion of long-term debt                                     665              465
        Accounts payable                                                    2,742            3,123
        Accrued compensation                                                1,282            1,155
        Accrued collectors and other liabilities                            3,014            2,765
                                                                         --------         --------
                TOTAL CURRENT LIABILITIES                                   9,040            9,887

LONG-TERM DEBT, net of current portion                                      1,832              656
OTHER NONCURRENT LIABILITIES                                                  245              610
                                                                         --------         --------
                TOTAL LIABILITIES                                          11,117           11,153
                                                                         --------         --------

SHAREHOLDERS' EQUITY
        Common stock, no par value, 10,000 shares authorized,
            5,781 and 5,781 shares issued and outstanding
            at March 31, 1999 and December 31, 1998, respectively          19,090           19,090
        Accumulated other comprehensive income                                 14               83
        Accumulated deficit                                                (7,680)          (8,263)
                                                                         --------         --------
                TOTAL SHAREHOLDERS' EQUITY                                 11,424           10,910
                                                                         --------         --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                               $ 22,541         $ 22,063
                                                                         ========         ========
</TABLE>


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



                                       4
<PAGE>   5

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

<TABLE>
<CAPTION>
                                                         Three Months Ended
                                                              March 31,
                                                       -------------------------
                                                         1999            1998
                                                       --------         --------
<S>                                                    <C>              <C>     
NET SALES                                              $ 10,174         $  9,528

COST OF SALES                                             7,224            7,308
                                                       --------         --------

GROSS PROFIT                                              2,950            2,220

OPERATING EXPENSES:
        Selling, general and administrative               2,439            2,208
        Marketing rights and research costs                  19               27
        Amortization of goodwill                             46               46
                                                       --------         --------
                    Total operating expenses              2,504            2,281
                                                       --------         --------

INCOME (LOSS) FROM OPERATIONS                               446              (61)

Interest expense                                            (56)             (99)
Other income                                                 17                3
                                                       --------         --------
                                                            (39)             (96)
                                                       --------         --------

INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES             407             (157)

BENEFIT FROM (PROVISION FOR) INCOME TAXES                   176              (35)
                                                       --------         --------

NET INCOME (LOSS)                                      $    583         $   (192)
                                                       ========         ========

EARNINGS (LOSS) PER SHARE:
Basic                                                  $   0.10         $  (0.03)
                                                       ========         ========
Diluted                                                $   0.10         $  (0.03)
                                                       ========         ========

WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic                                                     5,782            5,751
                                                       ========         ========
Diluted                                                   6,096            5,751
                                                       ========         ========
</TABLE>


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



                                       5
<PAGE>   6

                          PHARMCHEM LABORATORIES, INC.
        CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
                                   (Unaudited)
                                 (In thousands)

<TABLE>
<CAPTION>
                                            Three Months Ended
                                                 March 31,
                                            -------------------
                                            1999          1998
                                            -----         -----
<S>                                         <C>           <C>   
NET INCOME (LOSS)                           $ 583         $(192)

OTHER COMPREHENSIVE INCOME (LOSS):
        Foreign currency translation          (69)           16
                                            -----         -----

COMPREHENSIVE INCOME (LOSS)                 $ 514         $(176)
                                            =====         =====
</TABLE>



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



                                       6
<PAGE>   7

                          PHARMCHEM LABORATORIES, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                     Three Months Ended
                                                                                          March 31,
                                                                                   -----------------------
                                                                                    1999            1998
                                                                                   -------         -------
<S>                                                                                <C>             <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
        Net income (loss)                                                          $   583         $  (192)
        Adjustments to reconcile net income (loss)
            to net cash provided by
       Operating activities:
                Depreciation and amortization                                          472             495
                Provision for doubtful accounts                                         47              39
                Gain on sale of equipment                                                7              --
        Changes in operating assets and liabilities:
                Accounts receivable                                                   (254)            161
                Inventory                                                               (7)            103
                Prepaids and other current assets                                      (87)           (134)
                Other assets                                                           101               6
                Accounts payable and other accrued liabilities                          (5)            442
                Other noncurrent liabilities                                          (372)            350
                                                                                   -------         -------
                        Net cash provided by operating activities                      485           1,270
                                                                                   -------         -------

CASH FLOWS FROM INVESTING ACTIVITIES:
              Purchases of property and equipment                                     (518)           (680)
                                                                                   -------         -------
                        Net cash used in investing activities                         (518)           (680)
                                                                                   -------         -------

CASH FLOWS FROM FINANCING ACTIVITIES:
              Borrowings (repayments) on revolving lines of credit, net                458            (633)

              Principal payments on long-term debt                                    (124)           (122)
              Proceeds from exercise of stock options                                   --               3
                                                                                   -------         -------
                        Net cash provided by (used in) financing activities            334            (752)

                                                                                   -------         -------
FOREIGN CURRENCY TRANSLATION                                                           (69)             --
                                                                                   -------         -------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                   232            (162)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                       802             372
                                                                                   -------         -------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                         $ 1,034         $   210
                                                                                   =======         =======
</TABLE>



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



                                       7
<PAGE>   8

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


1.      Earnings (Loss) per Share

        The Company computes and discloses its earnings (loss) per share in
accordance with SFAS No. 128, "Earnings Per Share," which requires the
presentation of basic and diluted earnings (loss) per share. Basic earnings
(loss) per share is calculated using the weighted average number of common
shares outstanding during the period. Diluted earnings (loss) per share is
calculated using the weighted average number of common shares and dilutive
potential common shares outstanding during the period. Dilutive potential common
shares represent shares issuable upon the exercise of outstanding options and
are calculated using the treasury stock method.

        Options to purchase 1,021,000 shares of the Company's common stock for
the three month period ended March 31, 1998 were not included in the computation
of diluted earnings per share because their effect would have been antidilutive.
Options to purchase 20,000 shares of the Company's common stock at March 31,
1999 were not included in the computation of diluted earnings per share because
their exercise prices were greater than the average market price of the
Company's common stock of $3.53 per share. Weighted average dilutive options of
314,000 were used in the computation of earnings per share for the three month
period ending March 31, 1999.

2.      Inventory

        Inventory represents laboratory materials, collection materials and
products and is stated at the lower of cost or market. Cost is determined using
standard costs, including freight, that approximate actual costs on a first-in,
first-out basis. Inventory consisted of the following at March 31, 1999 and
December 31, 1998, respectively:

<TABLE>
<CAPTION>
                                       1999          1998
                                      ------        ------
                                          (In thousands)
<S>                                   <C>           <C>   
        Laboratory materials ...      $  495        $  529
        Collection  materials...         843           801
        Products ...............         194           195
                                      ------        ------
                                      $1,532        $1,525
                                      ======        ======
</TABLE>

3.      Debt

        PharmChem maintains a revolving line of credit agreement ("Credit
Agreement") with a bank. At March 31, 1999, the maximum that could be borrowed
and the amount outstanding under the Credit Agreement were $4,785,000 and
$1,337,000, respectively. As of March 31, 1999, the Company was in compliance
with all debt covenants.



                                       8
<PAGE>   9

4.      Reportable Segments

        The Company adopted SFAS No. 131, "Dislosures about Segments of an
Enterprise and Related Information," effective December 31, 1998. Prior period
amounts have been restated to conform to the presentation required by SFAS No.
131. The Company has two reportable segments, Domestic and International,
providing integrated drug testing services. The Domestic segment serves the
United States and the International segment serves primarily the United Kingdom
and also includes the European, Asian, Middle Eastern and South American
markets. The Domestic segment is serviced by the Company's California and Texas
operations and the International segment is serviced by Medscreen, the Company's
London-based subsidiary. The Company evaluates segment profit based on income or
loss from operations before intercompany interest, other income or expense and
income taxes and excluding goodwill amortization. Intersegment sales and
transfers are not material. Information about the Company's segments as of and
for the three month periods ended March 31 is as follows:

<TABLE>
<CAPTION>
                                                            Domestic      International        Total
        ----                                                --------      -------------      --------
                                                                        (In thousands)
<S>                <C>                                      <C>              <C>             <C>     
        1999:      Net sales from external customers.....   $  8,476         $  1,698        $ 10,174
                   Segment profit .......................        236              256             492


        1998:      Net sales from external customers.....   $  7,974         $  1,554        $  9,528
                   Segment profit (loss) ................       (217)             202             (15)
</TABLE>


5.      Subsequent Events

        On April 20, 1999, the Company entered into a $1,500,000 variable rate
installment note ("Installment Note") with its bank. The proceeds from the
Installment Note were immediately used to reduce the amount outstanding under
the Company's revolving line of credit. The Installment Note is subject to the
terms and conditions of the Credit Agreement, bears interest at the bank's base
rate (currently prime) plus 1.0% and is payable over 60 months. The Company has
reclassified $1,289,000 of the revolving line of credit as long-term debt as of
March 31, 1999, as such debt was refinanced in April, 1999.

        On April 30, 1999, the Company entered into a $1,082,000 lease agreement
with a lessor to refinance certain modules of the Company's Unified Database
software project. The lease agreement bears interest at 8.5% and is payable over
36 months. Proceeds from the lease agreement are expected to be used to finance
the Company's ongoing capital expenditure program.

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

FORWARD LOOKING STATEMENTS

        "Management's Discussion and Analysis of Financial Condition and Results
of Operations" 




                                       9
<PAGE>   10

contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act
of 1933, which are subject to the "safe harbor" created by these Sections. The
Company's actual future results could differ materially from those projected in
the forward-looking statements. Some factors which could cause future actual
results to differ materially from the Company's recent results and those
projected in the forward-looking statements are described in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998. The Company
assumes no obligation to update the forward-looking statements or such factors.

RESULTS OF OPERATIONS

        The following table sets forth for the periods indicated certain
financial data (dollars in thousands):

<TABLE>
<CAPTION>
                                                           Three Months Ended March 31,
                                                   --------------------------------------------
                                                    1999         1998         1999        1998
                                                   -------      -------       -----       -----
NET SALES:                                                                 (As a percentage of sales)
<S>                                                <C>          <C>              <C>         <C>  
        Public and private employers analyses      $ 3,257      $ 3,617          32.0%       38.0%
        Criminal justice agencies analyses           4,223        3,559          41.5        37.3
        Drug rehabilitation programs analyses          380          334           3.7         3.5
        Domestic product sales                         616          464           6.1         4.8
        Medscreen                                    1,698        1,554          16.7        16.4
                                                   -------      -------       -------     -------
                Total net sales                     10,174        9,528         100.0       100.0

COST OF SALES                                        7,224        7,308          71.0        76.7
                                                   -------      -------       -------     -------

GROSS PROFIT                                         2,950        2,220          29.0        23.3
                                                   -------      -------       -------     -------

OPERATING EXPENSES:
        Selling, general and administrative          2,439        2,208          24.0        23.2
        Marketing rights and research                   19           27           0.2         0.3
        Amortization of goodwill                        46           46           0.4         0.5
                                                   -------      -------       -------     -------
                Total operating expenses             2,504        2,281          24.6        24.0
                                                   -------      -------       -------     -------

INCOME (LOSS) FROM OPERATIONS                          446          (61)          4.4        (0.7)

OTHER EXPENSE, net                                      39           96           0.4         1.0
BENEFIT FROM (PROVISION FOR) INCOME TAXES              176          (35)          1.7        (0.3)
                                                   -------      -------       -------     -------

NET INCOME (LOSS)                                  $   583      $  (192)          5.7%       (2.0)%
                                                   =======      =======       =======     =======  
</TABLE>

        Net sales for the three months ended March 31, 1999 increased $646,000
(6.8%) to $10,174,000 in 1999 from $9,528,000 in 1998. The Company's domestic
criminal justice revenues increased $664,000 (18.7%) reflecting higher specimen
volume from federal customers. Increased specimen volume also contributed to
higher sales for domestic drug rehabilitation customers and for Medscreen, the
Company's London-based subsidiary. However, average selling prices for domestic
laboratory analyses decreased slightly due primarily to lower workplace specimen
volume. The Company's domestic specimen volume increased 6.6% and international
specimen volume increased 43.8% from comparable 1998 levels. Sales 




                                       10
<PAGE>   11

of PharmScreen(R) On-site Screening Devices increased $56,000 (11.7%) and sales
of PharmChek(R) Drugs of Abuse Patch increased $89,000, attributed to the timing
of shipments, compared to the prior year.

        Cost of sales for the three months ended March 31, 1999 decreased
$84,000 (1.1%) to $7,224,000 in 1999 from $7,308,000 in 1998, despite the higher
specimen volume and product sales. The improvement in cost of sales reflects the
favorable impact of the Company's ongoing cost reduction program and laboratory
process improvement program. The success of the programs have resulted in lower
direct labor and material costs per specimen unit compared to the prior year.
Cost of sales as a percentage of net sales decreased to 71.0% in 1999 from 76.7%
in 1998. Gross profit as a percentage of net sales increased to 29.0% in 1999
from 23.3% in 1998.

        Selling, general and administrative (SG&A) expenses for the three months
ended March 31, 1999 increased $231,000 (10.5%) to $2,439,000 in 1999 from
$2,208,000 in 1998, representing continued rebuilding of the sales, marketing,
information systems and administrative infrastructure and higher depreciation
expenses related to information systems placed into service. SG&A expenses as a
percentage of net sales increased slightly to 24.0% in 1999 from 23.2% in 1998.

        Income from operations for the three months ended March 31, 1999 was
$446,000 compared to a loss of $61,000 for the comparable period in 1998.

        Benefit from (provision for) income taxes. The Company recorded a
benefit from income taxes of $176,000 in 1999 compared to an income tax
provision of $35,000 during 1998. The 1999 benefit from income taxes reflects an
income tax provision of $160,000 was more than offset by an income tax credit of
$336,000. This income tax credit reflects the reversal of a liability
established in a prior year when the Internal Revenue Service (IRS) disputed the
deductibility of research expenses incurred in the years 1992 through 1994
related to the development of PharmChek(R). Recently, the IRS issued a final
determination in favor of the Company's position.

        Net income for the three months ended March 31, 1999 was $583,000 or
$0.10 per diluted common share compared to a net loss of $192,000 or $0.03 per
diluted common share in 1998. Excluding the impact of the $336,000 income tax
credit, net income would have been $247,000 or $0.04 per diluted share in 1999.

LIQUIDITY AND CAPITAL RESOURCES

        The Company's operations during the three month period ended March 31
provided cash of approximately $485,000 in 1999 and $1,270,000 in 1998. The
decrease in cash flow from operations between 1999 and 1998 principally reflects
the reversal of the $336,000 income tax credit and improvements in working
capital recorded in 1998, which more than offset the increase in net income in
1999. As of March 31, 1999, the Company had $1,034,000 in cash and cash
equivalents. During the three months ended March 31, 1999, the Company used
approximately $518,000 in cash to acquire property and equipment, principally
for information systems and laboratory equipment. These property and equipment
acquisitions were financed mostly by borrowings under the revolving line of
credit.

        The Company maintains a Credit Agreement with a bank. All borrowings are
secured by a lien on 




                                       11
<PAGE>   12

all assets of the Company. The Credit Agreement provides for borrowings under
the revolver limited to 85% of qualified accounts receivables up to a maximum of
$6,000,000. At March 31, 1999, the maximum that could be borrowed was $4,785,000
and approximately $1,337,000 was outstanding under the Credit Agreement.
Year-to-date net borrowings on the revolver were approximately $458,000 as of
March 31, 1999. The Credit Agreement contains certain financial covenants which,
among others, require the Company to maintain certain levels of net worth, cash
flow and profitability, and restricts the payment of dividends. As of March 31,
1999, the Company was in compliance with its financial covenants.

        On April 20, 1999, the Company entered into a $1,500,000 variable rate
installment note ("Installment Note") with its bank. The proceeds from the
Installment Note were immediately used to reduce the amount outstanding under
the Company's revolving line of credit. The Installment Note is subject to the
terms and conditions of the Credit Agreement, bears interest at the bank's base
rate (currently prime) plus 1.0% and is payable over 60 months. The Company has
reclassified $1,289,000 of the revolving line of credit as long-term debt as of
March 31, 1999, as such debt was refinanced in April, 1999.

        On April 30, 1999, the Company entered into a $1,082,000 lease agreement
with a lessor to refinance certain modules of the Company's Unified Database
software project. The lease agreement bears interest at 8.5% and is payable over
36 months. Proceeds from the lease agreement are expected to be used to finance
the Company's ongoing capital expenditure program.

        The Company anticipates that existing cash balances, amounts available
under existing and future credit agreements and funds to be generated from
future operations will be sufficient to fund operations and forecasted capital
expenditures through 1999.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        PharmChem is subject to market risk with respect to its debt outstanding
and foreign currency transactions. The Company's revolving credit agreement and
installment note carry interest at the prime rate plus 1.0%. As the prime rate
increases, the Company will incur higher relative interest expense and
similarly, a decrease in the prime rate will reduce relative interest expense.
In recent years, there have not been significant fluctuations in the prime rate.
A 1.0% change in the prime rate would not materially change interest expense
assuming levels of debt consistent with historical amounts. Due to the Company's
international operations, certain transactions are conducted in foreign
currencies. Medscreen's transactions are denominated approximately 85% in pound
sterling and 15% in US currency. During the three month periods ending March 31,
1999 and 1998, Medscreen's net sales represented 16.7% and 16.4%, respectively,
of the Company's total net sales and, as a result, the impact of market risk on
foreign currency transactions is not considered material. These market risks are
not considered significant and, therefore, the Company does not intend to engage
in hedging transactions.

YEAR 2000

        The Year 2000 ("Y2K") issue is the result of date-sensitive devices,
systems and computer applications that were deployed using two digits rather
than four digits to define the applicable year. Therefore, these technologies
may improperly recognize a year containing "00" as 1900 rather than the 




                                       12
<PAGE>   13

year 2000. This may result in a system failure or miscalculations causing
disruptions of operations. The Company is subject to various risks associated
with the Y2K impact on information systems software and hardware.

        The Company has completed its assessment of the Y2K impact on internal
information systems. The assessment identified operational inefficiencies and
Y2K non-compliance of the existing laboratory information system ("LIS"). The
Company has commenced replacing its existing LIS with a new system that is Y2K
ready. The new LIS is expected to be implemented in mid-third quarter of 1999.
The Company estimates the cost to purchase and install the new LIS and related
hardware will be approximately $1 million. Excluding the LIS expenditures, the
Company estimates additional Y2K related expenditures of approximately $100,000
representing consulting costs and payroll for employees dedicated to Y2K
projects.

        Due to the large volume of electronic transmissions, the Company has
conducted inquiries of customers, vendors and key business partners to identify
Y2K issues and continues to evaluate responses. During the second quarter of
1999, the Company will commence limited transmissions of test results to
selected customers using a four digit year to determine which customers can and
cannot receive such electronic results with a year field of four digits. The
Company's various internal drug test results reporting systems have been
reprogrammed and tested in a parallel systems environment and the Company
continues to test external results reporting services. The Company has reviewed
its facilities systems and found that many are not date sensitive. With respect
to other facilities systems and financial accounting systems, the Company is in
the process of obtaining documentation of Y2K compliance or replacing systems
that are not Y2K compliant.

        For the period January 1, 1996 through March 31, 1999, the Company has
invested approximately $5.7 million in new information systems which have been
designed to enhance its operational capabilities as well as meet Y2K
requirements. The Company expects to complete all Y2K projects at various dates
through the end of the third quarter of 1999. All investments in information
systems and other Y2K projects have been funded or are expected to be funded by
internally generated cash, leases or bank financing.

        The Company is in the process of refining its contingency plans to
consider additional scenarios whereby Y2K readiness is not significantly
achieved by the Company and/or its key customers, business partners and vendors.
The Company believes that the "most reasonably likely worst case Year 2000
scenario" would result from a failure of third party transportation systems
which would prevent the Company from receiving specimens to test. These
contingency plans, including issues involving providers of transportation
services, are expected to be completed in mid-1999. If the Company determines
that any critical supplier is not Y2K compliant, it will seek alternate
suppliers and, if it finds that alternate suppliers are not available, the
Company will purchase inventory in advance in excess of normal purchase levels.
In the event of information systems failures, the Company may utilize
appropriate manual procedures or alternate information systems for an interim
period. Due to the general uncertainty inherent in the Y2K issues, resulting in
part from the uncertainty of Y2K readiness of third party providers, suppliers
and customers, the Company is unable to determine at this time whether the
consequences of Y2K non-compliance will have a material impact on the Company's
results of operations, liquidity or financial position.




                                       13
<PAGE>   14

PART II. OTHER INFORMATION


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

        None.


Item 6. Exhibits and Reports on Form 8-K

(a)     Exhibits:

        Exhibit 27 - Financial Data Schedule.


(b)     Reports on Form 8-K:

        None.

SIGNATURE

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


                                        PharmChem Laboratories, Inc.
                                        (Registrant)


Date:  May 12, 1999                     By: /S/ David A. Lattanzio
                                           ------------------------------------
                                           David A. Lattanzio
                                           Chief Financial Officer and 
                                           Vice President, Finance and 
                                           Administration (Principal Financial 
                                           and Accounting Officer)



                                       14



<PAGE>   15


                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit
Number         Description
------         -----------
<S>      <C>
  27     Financial Data Schedule
</TABLE>