<PAGE>   1
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                       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 SEPTEMBER 30, 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 LABORATORIES, INC. 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 October 31, 1999, the registrant had outstanding 5,789,829 shares
of Common Stock, no par value.


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<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 (unaudited) at
              September 30, 1999 and December 31, 1998...................................................4

              Condensed Consolidated Income Statements (unaudited) for the
              Three and Nine Months ended September 30, 1999 and 1998....................................5

              Condensed Consolidated Statements of Comprehensive Income
              (unaudited) for the Three and Nine Months ended
              September 30, 1999 and 1998................................................................6

              Condensed Consolidated Statements of Cash Flows (unaudited)
              for the Nine Months ended September 30, 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 ................................................................10


PART II.      OTHER INFORMATION

Item 4.       Submission of Matters to a Vote of Security Holders  .....................................15

Item 6.       Exhibits and Reports on Form 8-K  ........................................................15


SIGNATURE ..............................................................................................15

</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>
                                                                              September 30,      December 31,
                                                                                  1999               1998
                                                                              -------------      -------------
<S>                                                                           <C>                <C>
                                   ASSETS
CURRENT ASSETS
        Cash and cash equivalents                                                 $ 1,139           $   802
        Accounts receivable, net                                                    8,576             6,522
        Inventory                                                                   1,731             1,525
        Prepaids and other current assets                                             698               719
                                                                                  -------           -------
                TOTAL CURRENT ASSETS                                               12,144             9,568
                                                                                  -------           -------

PROPERTY AND EQUIPMENT, net                                                         9,032             8,508
OTHER ASSETS                                                                          733               997
GOODWILL, net                                                                       2,852             2,990
                                                                                  -------           -------
TOTAL ASSETS                                                                      $24,761           $22,063
                                                                                  =======           =======


                    LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
        Revolving line of credit                                                  $ 1,091           $ 2,379
        Current portion of long-term debt                                           1,100               465
        Accounts payable                                                            3,316             3,123
        Accrued compensation                                                          934             1,155
        Accrued collectors and other liabilities                                    3,396             2,765
                                                                                  -------           -------
                TOTAL CURRENT LIABILITIES                                           9,837             9,887

LONG-TERM DEBT, net of current portion                                              2,074               656
OTHER NONCURRENT LIABILITIES                                                          228               610
                                                                                  -------           -------
                TOTAL LIABILITIES                                                  12,139            11,153
                                                                                  -------           -------

SHAREHOLDERS' EQUITY
        Common stock, no par value, 10,000 shares authorized, 5,784 and 5,782
            shares issued and outstanding at September 30, 1999
        and December 31, 1998, respectively                                        19,096            19,090
        Accumulated other comprehensive income                                         71                83
        Accumulated deficit                                                        (6,545)           (8,263)
                                                                                  -------           -------
                TOTAL SHAREHOLDERS' EQUITY                                         12,622            10,910
                                                                                  -------           -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                        $24,761           $22,063
                                                                                  =======           =======
</TABLE>



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




                                       4
<PAGE>   5

                          PHARMCHEM LABORATORIES, INC.
                    CONDENSED CONSOLIDATED INCOME STATEMENTS
                                   (Unaudited)
                    (In thousands, except per share amounts)
<TABLE>
<CAPTION>
                                                       Three Months Ended           Nine Months Ended
                                                           September 30,              September 30,
                                                     ----------------------      -----------------------
                                                       1999          1998          1999           1998
                                                     --------      --------      --------       --------
<S>                                                  <C>            <C>          <C>            <C>
NET SALES                                             $11,870       $11,311       $33,193       $32,290

COST OF SALES                                           8,169         8,175        23,258        23,698
                                                      -------       -------       -------       -------

GROSS PROFIT                                            3,701         3,136         9,935         8,592

OPERATING EXPENSES
         Selling, general and administrative            2,462         2,558         7,511         7,570
         Marketing rights and research                     24            11            61            51
         Amortization of goodwill                          47            47           139           139
                                                      -------       -------       -------       -------
                  Total operating expenses              2,533         2,616         7,711         7,760
                                                      -------       -------       -------       -------

INCOME FROM OPERATIONS                                  1,168           520         2,224           832

Interest expense                                           96            83           200           272
Other expense (income), net                                (7)           (4)          (27)          (16)
                                                      -------       -------       -------       -------
                  Total other expenses                     89            79           173           256
                                                      -------       -------       -------       -------

INCOME BEFORE PROVISION FOR INCOME TAXES                1,079           441         2,051           576

PROVISION FOR INCOME TAXES                                305            97           333           178
                                                      -------       -------       -------       -------
NET INCOME                                            $   774       $   344       $ 1,718       $   398
                                                      =======       =======       =======       =======


EARNINGS PER SHARE:
         Basic                                        $  0.13       $  0.06       $  0.30       $  0.07
                                                      =======       =======       =======       =======
         Diluted                                      $  0.13       $  0.06       $  0.29       $  0.07
                                                      -------       -------       -------       -------

WEIGHTED AVERAGE SHARES OUTSTANDING:
         Basic                                          5,784         5,771         5,783         5,758
                                                      =======       =======       =======       =======
         Diluted                                        5,857         5,903         5,960         5,846
                                                      =======       =======       =======       =======


</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
                                   (Unaudited)
                                 (In thousands)
<TABLE>
<CAPTION>
                                           Three Months Ended         Nine Months Ended
                                              September 30,             September 30,
                                          ---------------------     ----------------------
                                            1999         1998         1999          1998
                                          -------      --------     -------       --------
<S>                                       <C>          <C>          <C>           <C>
NET INCOME                                  $774         $344        $1,718         $398

OTHER  COMPREHENSIVE INCOME (LOSS):
        Foreign currency translation         116           47           (12)          62
                                            ----         ----        ------         ----
COMPREHENSIVE INCOME                        $890         $391        $1,706         $460
                                            ====         ====        ======         ====
</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>
                                                                                     Nine Months Ended
                                                                                        September 30,
                                                                                   ---------------------
                                                                                    1999          1998
                                                                                   -------       -------
<S>                                                                                <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
        Net income                                                                 $ 1,718       $   398
        Adjustments to reconcile net income to net cash provided by operating
        activities:
                Depreciation and amortization                                        1,490         1,487
                Provision for doubtful accounts                                        105           222
                Loss on disposition of property and equipment                           23             6
        Changes in operating assets and liabilities                                 (1,874)        1,226
                                                                                   -------       -------
                        Net cash provided by operating activities                    1,462         3,339
                                                                                   -------       -------

CASH FLOWS FROM INVESTING ACTIVITIES
              Purchases of property and equipment                                   (1,916)       (1,714)
              Proceeds from sales of equipment                                          32            --
                                                                                   -------       -------
                        Net cash used in investing activities                       (1,884)       (1,714)
                                                                                   -------       -------

CASH FLOWS FROM FINANCING ACTIVITIES
              Borrowings (repayments) on revolving line of credit, net              (1,288)         (823)
              Principal payments on long-term debt                                    (529)         (399)
              Proceeds from issuance of term note and capital lease                  2,582            --
              Proceeds from exercise of stock options                                    6            58
                                                                                   -------       -------
                        Net cash provided by (used in) financing activities            771        (1,164)
                                                                                   -------       -------
FOREIGN CURRENCY TRANSLATION                                                           (12)           62
                                                                                   -------       -------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                              337           523

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

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                         $ 1,139       $   895
                                                                                   =======       =======

</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 per Share

         The Company computes and discloses its earnings per share in accordance
with SFAS No. 128, "Earnings Per Share," which requires the presentation of
basic and diluted earnings per share. Basic earnings per share is calculated
using the weighted average number of common shares outstanding during the
period. Diluted earnings 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 121,000 shares and 116,000 shares of the Company's
common stock for the three months and nine months ended September 30, 1999,
respectively, 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 $2.54 and $2.92 per share, respectively. Options to
purchase 45,000 shares and 50,000 shares of the Company's common stock for the
three months and nine months ended September 30, 1998, respectively, 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 $2.79 and $2.58 per share, respectively. Weighted average dilutive options of
73,000 and 177,000 were used in the computation of earnings per share for the
three month and nine month periods ended September 30, 1999, respectively.
Weighted average dilutive options of 132,000 and 88,000 were used in the
computation of earnings per share for the three month and nine month periods
ended September 30, 1998, respectively.

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 September 30, 1999 and
December 31, 1998, respectively:

<TABLE>
<CAPTION>
                                                                                  1999               1998
                                                                                -------             ------
                                                                                      (In thousands)
                <S>                                                              <C>                <C>
                Laboratory materials........................................     $  544             $  529
                Collection materials........................................        685                801
                Products....................................................        502                195
                                                                                 ------             ------
                                                                                 $1,731             $1,525
                                                                                 ======             ======
</TABLE>

                                       8
<PAGE>   9



3.       Reportable Segments

         The Company adopted SFAS No. 131, "Disclosures 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 accounting policies of the segments are the same as
those described in the Summary of Significant Accounting Policies in the
accompanying notes to the consolidated financial statements for the year ended
December 31, 1998 included in the Company's Annual Report on Form 10-K. 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 and nine month
periods ended September 30 is as follows:

<TABLE>
<CAPTION>

                                                                          Domestic        International          Total
                                                                          --------        -------------         -------
                                                                                          (In thousands)
        <S>         <C>                                                   <C>             <C>                   <C>
                    Three Months Ending September 30,
        1999:       Net sales from external customers..........            $10,105            $1,765            $11,870
                    Segment profit.............................                892               323              1,215

        1998:       Net sales from external customers..........            $ 9,681            $1,630            $11,311
                    Segment profit.............................                351               216                567

                    Nine Months Ending September 30,
        1999:       Net sales from external customers..........            $27,951            $5,242            $33,193
                    Segment profit.............................              1,419               944              2,363

        1998:       Net sales from external customers..........            $27,418            $4,872            $32,290
                    Segment profit............................                 297               674                971
</TABLE>

 4.      Debt

         PharmChem maintains a revolving line of credit agreement ("Credit
Agreement") with a bank. At September 30, 1999, the maximum that could be
borrowed and the amount outstanding under the Credit Agreement were $6,000,000
and $1,091,000, respectively. As of September 30, 1999, the Company was in
compliance with all debt 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 prime rate
plus 1.0% and is payable over 60 months.

                                       9
<PAGE>   10

         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 bears interest at an 8.5% annual rate, is
payable over 36 months and the transaction has been recorded as a capital lease.
Proceeds from the lease agreement are being 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" 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 September 30,          Nine Months Ended September 30,
                                         --------------------------------------    ---------------------------------------
                                           1999      1998      1999       1998       1999       1998       1999      1998
                                         -------   -------    ------     ------    -------    -------    -------    ------
<S>                                      <C>       <C>        <C>        <C>       <C>        <C>        <C>        <C>
                                                            (As a % of net sales)                      (As a % of net sales)
NET SALES:
   Workplace employers analyses          $ 4,295   $ 4,625     36.2%      40.9%    $11,691    $13,113     35.2%      40.6%
   Criminal justice agencies analyses      4,522     3,950     38.1       34.9      13,080     11,204     39.4       34.7
   Drug rehabilitation programs analyses     413       394      3.5        3.5       1,161      1,174      3.5        3.6
   Domestic products & other                 876       712      7.4        6.3       2,019      1,927      6.1        6.0
   Medscreen analyses & products           1,764     1,630     14.8       14.4       5,242      4,872     15.8       15.1
                                         -------   -------    ------     ------    -------    -------    ------     ------
         Total net sales                  11,870    11,311    100.0      100.0      33,193     32,290    100.0      100.0

COST OF SALES                              8,169     8,175     68.8       72.3      23,258     23,698     70.1       73.4
                                         -------   -------    ------     ------    -------    -------    ------     ------

GROSS PROFIT                               3,701     3,136     31.2       27.7       9,935      8,592     29.9       26.6
                                         -------   -------    ------     ------    -------    -------    ------     ------

OPERATING EXPENSES:
   Selling, general and administrative     2,462     2,558     20.8       22.6       7,511      7,570     22.6       23.4
   Marketing rights and research              24        11      0.2        0.1          61         51      0.2        0.2
   Amortization of goodwill                   47        47      0.4        0.4         139        139      0.4        0.4
                                         -------   -------    ------     ------    -------    -------    ------     ------
         Total operating expenses          2,533     2,616     21.4       23.1       7,711      7,760     23.2       24.0
                                         -------   -------    ------     ------    -------    -------    ------     ------

INCOME FROM OPERATIONS                     1,168       520      9.8        4.6       2,224        832      6.7        2.6
                                         -------   -------    ------     ------    -------    -------    ------     ------

OTHER EXPENSES, net                           89        79      0.7        0.7         173        256      0.5        0.8
PROVISION FOR INCOME TAXES                   305        97      2.6        0.9         333        178      1.0        0.6
                                         -------   -------    ------     ------    -------    -------    ------     ------

NET INCOME                               $    74   $   344      6.5%       3.0%    $ 1,718    $   398      5.2%       1.2%
                                         =======   =======    ======     ======    =======    =======    ======     ======
</TABLE>


                                       10
<PAGE>   11

      Net sales for the three months ended September 30, 1999 increased $559,000
(4.9%) to $11,870,000 in 1999 from $11,311,000 in 1998. The Company recorded
higher domestic criminal justice analyses sales of $572,000 (14.5%) which more
than offset a decrease in domestic workplace analyses sales of $330,000 (7.1%).
Domestic specimen (including product related analyses) volume increased 2.7%
with an increase in criminal justice specimens more than offsetting a decrease
in workplace specimens. Medscreen, the Company's London-based subsidiary,
reported higher sales of $134,000 (8.2%) and an 8.9% increase in specimen
volume. Average selling prices for domestic laboratory analyses (including
product related analyses) increased slightly despite the higher mix of lower
priced criminal justice volume. Sales of PharmScreen(R) On-site Screening
Devices increased $59,000 (9.9%) and sales of PharmChek(R) Drugs of Abuse Patch
(excluding analysis) increased slightly compared to the prior year.

      Net sales for the nine months ended September 30, 1999 increased $903,000
(2.8%) to $33,193,000 in 1999 from $32,290,000 in 1998. Domestic criminal
justice analyses sales increased $1,876,000 (16.7%) on 14.3% higher specimen
volume which more than offset a $1,422,000 (10.8%) decrease in domestic
workplace analyses sales attributed primarily to a 15.1% decrease in specimen
volume during 1999. Total domestic specimen volume increased 2.9% compared to
the prior year and domestic product sales increased $91,000 (4.7%). Medscreen
sales increased $370,000 (7.6%) reflecting a 16.4% increase in specimen volume
and higher product sales.

      Cost of sales for the three months ended September 30, 1999 decreased
$6,000 (0.1%) to $8,169,000 in 1999 from $8,175,000 in 1998. The slight decrease
in cost of sales, despite higher sales, reflects lower labor costs and
operational efficiencies attributed to the Company's ongoing cost reduction
program and laboratory process improvement program. Cost of sales as a
percentage of net sales decreased to 68.8% in 1999 from 72.3% in 1998. Gross
profit as a percentage of net sales increased to 31.2% in 1999 from 27.7% in
1998.

      Cost of sales for the nine months ended September 30, 1999 decreased
$440,000 (1.9%) to $23,258,000 in 1999 from $23,698,000. The success of the
Company's cost reduction program has resulted in a 4.8% decrease in variable
cost per specimen processed. Savings and efficiencies have been realized in
direct labor, collector service fees and collection inventories. Cost of sales
as a percentage of net sales decreased to 70.1% in 1999 from 73.4% in 1998.
Gross profit as a percentage of net sales increased to 29.9% in 1999 from 26.6%
in 1998.

      Selling, General & Administrative (SG&A) expenses for the three months
ended September 30, 1999 decreased $96,000 (3.8%) to $2,462,000 in 1999 from
$2,558,000 in 1998. The decrease partially reflects lower bad debt and
telecommunications expenses which more than offset higher depreciation expenses
attributed to the Company recently implementing its Unified DataBase customer
service information systems project. SG&A expenses as a percentage of net sales
decreased to 20.8% in 1999 from 22.6% in 1998.

      SG&A expenses for the nine months ending September 30, 1999 decreased
$59,000 (0.8%) to $7,511,000 in 1999 from $7,570,000 in 1998 reflecting lower
professional fees, bad debt and telecommunications expenses which more than
offset higher depreciation expenses. SG&A expenses as a percentage of net sales
decreased slightly to 22.6% in 1999 from 23.4% in 1998.

                                       11
<PAGE>   12

      Income from operations for the three months ended September 30, 1999 was
$1,168,000 compared to $520,000 in 1998. Income from operations for the nine
months ended September 30, 1999 was $2,224,000 compared to $832,000 in 1998.

      Provision for Income Taxes for the three months ended September 30, 1999
was $305,000 compared to an income tax provision of $97,000 during 1998. The
increase in 1999 reflects the increased profitability of the Company's
operations in 1999 combined with Medscreen's utilization of net operating loss
carryforwards in 1998. The Company recorded a provision for income taxes of
$333,000 and $178,000, respectively, for the nine months ending September 30,
1999 and 1998. During the first quarter of 1999, the Company realized 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). The IRS issued a final
determination in favor of the Company's position in the first quarter of 1999.

         Net income for the three months ended September 30, 1999 was $774,000
or $0.13 per diluted common share compared to net income of $344,000 or $0.06
per diluted common share in 1998. Net income for the nine months ended September
30, 1999 was $1,718,000 or $0.29 per diluted common share compared to $398,000
or $0.07 per diluted common share in 1998. Excluding the impact of the $336,000
income tax credit, net income for the nine months ended September 30, 1999 would
have been $1,382,000 or $0.23 per diluted share.


LIQUIDITY AND CAPITAL RESOURCES

         The Company's operations during the nine month period ended September
30 provided cash of approximately $1,462,000 in 1999 and $3,339,000 in 1998. The
decrease in cash flow from operations between 1999 and 1998 principally reflects
the prior year's improvements in working capital, which more than offset the
increase in net income in 1999. As of September 30, 1999, the Company had
$1,139,000 in cash and cash equivalents. During the nine months ended September
30, 1999, the Company used approximately $1,916,000 in cash to acquire property
and equipment, principally for information systems and laboratory equipment,
entered into a capital lease transaction valued at $1,082,000 and entered into a
$1,500,000 installment note with its bank, whereby the proceeds were used to
reduce amounts outstanding under the revolving line of credit.

         The Company maintains a Credit Agreement with a bank. All borrowings
are secured by a lien on 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 September 30, 1999, the maximum
that could be borrowed was $6,000,000 and approximately $1,091,000 was
outstanding under the Credit Agreement. Year-to-date net repayments on the
revolver were approximately $1,288,000 for the nine months ended September 30,
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 September 30,
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


                                       12
<PAGE>   13

("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 prime rate plus 1.0% and is payable
over 60 months.

         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 bears interest at an 8.5% annual rate, is
payable over 36 months and the transaction has been recorded as a capital lease.
Proceeds from the lease agreement are being 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 the foreseeable future.


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The Company 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 nine month periods ending
September 30, 1999 and 1998, Medscreen's net sales represented 15.8% and 15.1%,
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 significant 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 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 is in the final testing phases to determine the Y2K readiness of
recently implemented software modifications and hardware upgrades with respect
to the existing LIS. These changes to the existing LIS are expected to be
completed by November 30, 1999.


                                       13
<PAGE>   14

In addition, 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 the first
quarter of 2000 and the Company estimates the cost to purchase and install the
new LIS and related hardware will be approximately $1 million.

         For the period January 1, 1996 through September 30, 1999, the Company
has invested over $6.0 million in new information systems which have been
designed to enhance its operational capabilities as well as meet Y2K
requirements. The Company estimates Y2K-related expenditures of approximately
$175,000 representing consulting costs and payroll for employees dedicated to
Y2K projects and expects to complete all Y2K projects as of November 30, 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.

         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. In August 1999, the Company
commenced transmission of electronic drug test results using a four digit year
to a majority of customers capable of receiving a four digit year field. The
Company's various internal drug test results reporting systems have been
reprogrammed and tested in a parallel systems environment and the Company has
tested external results reporting services. No significant issues have been
identified with respect to the Company's ability to report a four digit year
field.

         The Company has reviewed its significant facilities systems and found
that they are not date sensitive. With respect to other facilities systems and
financial accounting systems, the Company is in the final process of obtaining
documentation of Y2K compliance or replacing systems that are not Y2K compliant.

         The Company's contingency plans continue to be refined 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 December 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.



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<PAGE>   15

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:  November 4, 1999         By:      /S/ David A. Lattanzio             .
                                   ------------------------------------------
                                David A. Lattanzio
                                Chief Financial Officer and Vice President,
                                Finance and Administration
                                (Principal Financial and Accounting Officer)


                                       15
<PAGE>   16


                                 EXHIBIT INDEX


<TABLE>
<CAPTION>

  No.                   Description
  --                    -----------
<S>              <C>
  27             Financial Data Schedule


</TABLE>


                                       16