<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 JUNE 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 July 31, 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 (unaudited) at
           June 30, 1999 and December 31, 1998........................................4

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

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

           Condensed Consolidated Statements of Cash Flows (unaudited)
           for the Six Months ended June 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  .....................16

Item 6.    Exhibits and Reports on Form 8-K  ........................................16

SIGNATURE  ..........................................................................17
</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>
                                                                  June 30,       December 31,
                                                                    1999             1998
                                                                  --------       ------------
<S>                                                               <C>            <C>
                                           ASSETS

CURRENT ASSETS

    Cash and cash equivalents                                     $  1,124         $    802
    Accounts receivable, net                                         7,614            6,522
    Inventory                                                        1,522            1,525
    Prepaids and other current assets                                  753              719
                                                                  --------         --------
        TOTAL CURRENT ASSETS                                        11,013            9,568
                                                                  --------         --------

PROPERTY AND EQUIPMENT, net                                          8,873            8,508
OTHER ASSETS                                                           828              997
GOODWILL, net                                                        2,898            2,990
                                                                  --------         --------
TOTAL ASSETS                                                      $ 23,612         $ 22,063
                                                                  ========         ========

                            LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES

    Revolving line of credit                                      $    827         $  2,379
    Current portion of long-term debt                                1,057              465
    Accounts payable                                                 3,099            3,123
    Accrued compensation                                               994            1,155
    Accrued collectors and other liabilities                         3,315            2,765
                                                                  --------         --------
        TOTAL CURRENT LIABILITIES                                    9,292            9,887

LONG-TERM DEBT, net of current portion                               2,356              656
OTHER NONCURRENT LIABILITIES                                           232              610
                                                                  --------         --------
        TOTAL LIABILITIES                                           11,880           11,153
                                                                  --------         --------

SHAREHOLDERS' EQUITY

    Common stock, no par value, 10,000 shares authorized,
        5,784 and 5,782 shares issued and outstanding
        at June 30, 1999 and December 31, 1998,
        respectively                                                19,096           19,090
    Accumulated other comprehensive income (loss)                      (45)              83
    Accumulated deficit                                             (7,319)          (8,263)
                                                                  --------         --------
        TOTAL SHAREHOLDERS' EQUITY                                  11,732           10,910
                                                                  --------         --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                        $ 23,612         $ 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                 Six Months Ended
                                                        June 30,                          June 30,
                                                -------------------------         -------------------------
                                                  1999             1998             1999             1998
                                                --------         --------         --------         --------
<S>                                             <C>              <C>              <C>              <C>
NET SALES                                       $ 11,149         $ 11,451         $ 21,323         $ 20,979

COST OF SALES                                      7,865            8,215           15,089           15,523
                                                --------         --------         --------         --------

GROSS PROFIT                                       3,284            3,236            6,234            5,456

OPERATING EXPENSES

    Selling, general and administrative            2,610            2,804            5,049            5,012
    Marketing rights and research                     18               13               37               40
    Amortization of goodwill                          46               46               92               92
                                                --------         --------         --------         --------
        Total operating expenses                   2,674            2,863            5,178            5,144
                                                --------         --------         --------         --------

INCOME FROM OPERATIONS                               610              373            1,056              312

Interest expense                                      48               90              104              189
Other expense (income), net                           (3)              (9)             (20)             (12)
                                                --------         --------         --------         --------
        Total other expenses                          45               81               84              177
                                                --------         --------         --------         --------

INCOME BEFORE PROVISION FOR INCOME TAXES             565              292              972              135

PROVISION FOR INCOME TAXES                           204               46               28               81
                                                --------         --------         --------         --------

NET INCOME                                      $    361         $    246         $    944         $     54
                                                ========         ========         ========         ========

EARNINGS PER SHARE:

    Basic                                       $   0.06         $   0.04         $   0.16         $   0.01
                                                ========         ========         ========         ========
    Diluted                                     $   0.06         $   0.04         $   0.16         $   0.01
                                                ========         ========         ========         ========

WEIGHTED AVERAGE SHARES OUTSTANDING:

    Basic                                          5,784            5,758            5,783            5,754
                                                ========         ========         ========         ========
    Diluted                                        5,903            5,826            6,006            5,821
                                                ========         ========         ========         ========
</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           Six Months Ended
                                                 June 30,                    June 30,
                                            -------------------         -------------------
                                            1999          1998          1999          1998
                                            -----         -----         -----         -----
<S>                                         <C>           <C>           <C>           <C>
NET INCOME                                  $ 361         $ 246         $ 944         $  54

OTHER  COMPREHENSIVE INCOME (LOSS):

        Foreign currency translation          (59)           (1)         (128)           15
                                            -----         -----         -----         -----

COMPREHENSIVE INCOME                        $ 302         $ 245         $ 816         $  69
                                            =====         =====         =====         =====
</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>
                                                                            Six Months Ended
                                                                                June 30,
                                                                         -----------------------
                                                                            1999            1998
                                                                         -------         -------
<S>                                                                      <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                           $   944         $    54
    Adjustments to reconcile net income to net cash provided by
        operating activities:
            Depreciation and amortization                                    930             995
            Provision for doubtful accounts                                   92              93
    Changes in operating assets and liabilities                           (1,009)             85
                                                                         -------         -------
                Net cash provided by operating activities                    957           1,227
                                                                         -------         -------

CASH FLOWS FROM INVESTING ACTIVITIES
        Purchases of property and equipment                               (1,258)         (1,150)
        Proceeds from sales of equipment                                       5              --
                                                                         -------         -------
                Net cash used in investing activities                     (1,253)         (1,150)
                                                                         -------         -------

CASH FLOWS FROM FINANCING ACTIVITIES
        Borrowings (repayments) on revolving lines of credit, net         (1,552)            389
        Principal payments on long-term debt                                (290)           (277)
        Proceeds from issuance of term note
            and capital lease transaction                                  2,582              --
        Proceeds from exercise of stock options                                6              28
                                                                         -------         -------
                Net cash provided by financing activities                    746             140
                                                                         -------         -------
FOREIGN CURRENCY TRANSLATION                                                (128)             15
                                                                         -------         -------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                    322             232

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

CASH AND CASH EQUIVALENTS AT END OF PERIOD                               $ 1,124         $   604
                                                                         =======         =======
</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 116,000 shares and 66,000 shares of the Company's
common stock for the three months and six months ended June 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 $2.70 and $3.12 per share, respectively. Options to
purchase 80,000 shares of the Company's common stock for the three months and
six months ended June 30, 1998, 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 $2.51 per share. Weighted average
dilutive options of 119,000 and 223,000 were used in the computation of earnings
per share for the three month and six month periods ended June 30, 1999,
respectively. Weighted average dilutive options of 68,000 and 67,000 were used
in the computation of earnings per share for the three month and six month
periods ended June 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 June 30, 1999 and
December 31, 1998, respectively:

<TABLE>
<CAPTION>
                                     JUNE        December
                                     1999          1998
                                    ------        ------
                                       (In thousands)
<S>                                 <C>           <C>
        Laboratory materials .....  $  480        $  529
        Collection materials .....     819           801
        Products .................     223           195
                                    ------        ------
                                    $1,522        $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 six month
periods ended June 30 is as follows:



<TABLE>
<CAPTION>
                                                             Domestic       International       Total
                                                             --------       -------------     --------
                                                                           (In thousands)
<S>                 <C>                                      <C>              <C>             <C>
                    Three Months Ending June 30,
        1999:       Net sales from external customers .....  $  9,370         $  1,779        $ 11,149
                    Segment profit ........................       291              365             656

        1998:       Net sales from external customers .....  $  9,763         $  1,688        $ 11,451
                    Segment profit ........................       163              256             419

                    Six Months Ending June 30,
        1999:       Net sales from external customers .....  $ 17,845         $  3,478        $ 21,323
                    Segment profit ........................       527              621           1,148

        1998:       Net sales from external customers .....  $ 17,737         $  3,242        $ 20,979
                    Segment profit (loss) .................       (54)             458             404
</TABLE>



                                       9
<PAGE>   10

4.      Debt

        PharmChem maintains a revolving line of credit agreement ("Credit
Agreement") with a bank. At June 30, 1999, the maximum that could be borrowed
and the amount outstanding under the Credit Agreement were $5,547,000 and
$827,000, respectively. As of June 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.

        On April 30, 1999, the Company entered into a $1,082,000 capital 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.

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.



                                       10
<PAGE>   11

RESULTS OF OPERATIONS

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





<TABLE>
<CAPTION>
                                                    Three Months Ended June 30,                 Six Months Ended June 30,
                                              ---------------------------------------   ---------------------------------------
                                               1999       1998       1999       1998     1999       1998       1999       1998
                                              -------    -------    ------     ------   -------    -------    ------     ------
                                                                  (As a % of net sales)                     (As a % of net sales)
<S>                                           <C>        <C>        <C>        <C>      <C>        <C>        <C>        <C>
NET SALES:

    Public and private employers analyses     $ 4,142    $ 4,871      37.2%      42.5%  $ 7,399    $ 8,488      34.7%      40.5%
    Criminal justice agencies analyses          4,336      3,704      38.9       32.3     8,559      7,269      40.2       34.6
    Drug rehabilitation programs analyses         368        452       3.2        4.0       748        780       3.5        3.7
    Domestic products                             524        736       4.7        6.4     1,139      1,200       5.3        5.7
    Medscreen analyses & products               1,779      1,688      16.0       14.8     3,478      3,242      16.3       15.5
                                              -------    -------    ------     ------   -------    -------    ------     ------
        Total net sales                        11,149     11,451     100.0      100.0    21,323     20,979     100.0      100.0

COST OF SALES                                   7,865      8,215      70.5       71.7    15,089     15,523      70.8       74.0
                                              -------    -------    ------     ------   -------    -------    ------     ------

GROSS PROFIT                                    3,284      3,236      29.5       28.3     6,234      5,456      29.2       26.0
                                              -------    -------    ------     ------   -------    -------    ------     ------

OPERATING EXPENSES:
    Selling, general and administrative         2,610      2,804      23.4       24.5     5,049      5,012      23.6       23.9
    Marketing rights and research                  18         13       0.2        0.1        37         40       0.2        0.2
    Amortization of goodwill                       46         46       0.4        0.4        92         92       0.4        0.4
                                              -------    -------    ------     ------   -------    -------    ------     ------
        Total operating expenses                2,674      2,863      24.0       25.0     5,178      5,144      24.2       24.5
                                              -------    -------    ------     ------   -------    -------    ------     ------

INCOME FROM OPERATIONS                            610        373       5.5        3.3     1,056        312       5.0        1.5
                                              -------    -------    ------     ------   -------    -------    ------     ------

OTHER EXPENSES, net                                45         81       0.5        0.8        84        177       0.5        0.8
PROVISION FOR INCOME TAXES                        204         46       1.8        0.4        28         81       0.1        0.4
                                              -------    -------    ------     ------   -------    -------    ------     ------

NET INCOME                                    $   361    $   246       3.2%       2.1%  $   944    $    54       4.4%       0.3%
                                              =======    =======    ======     ======   =======    =======    ======     ======
</TABLE>

        Net sales for the three months ended June 30, 1999 decreased $302,000
(2.6%) to $11,149,000 in 1999 from $11,451,000 in 1998. The Company's domestic
workplace analyses sales decreased $729,000 (15.0%) which more than offset an
increase in domestic criminal justice analyses sales of $632,000 (17.1%) and
higher Medscreen sales of $91,000 (5.4%). Domestic specimen (including product
related analyses) volume was relatively unchanged, with an increase in criminal
justice specimens more than offsetting a decrease in workplace specimens.
Specimen volume at Medscreen, the Company's London-based subsidiary, increased
4.7%. Average selling prices for domestic laboratory analyses (including product
related analyses) decreased 1.9% due to the higher mix of lower priced criminal
justice volume. Sales of PharmScreen(R) On-site Screening Devices decreased
$152,000 (28.6%) and sales of PharmChek(R) Drugs of Abuse Patch decreased
$62,000 (31.3%), attributed in part to the timing of shipments compared to the
prior year.

        Net sales for the six months ended June 30, 1999 increased $344,000
(1.6%) to $21,323,000 in 1999 from $20,979,000 in 1998. Domestic criminal
justice analyses sales increased $1,290,000 (17.7%) on higher specimen volume of
114,000 (15.6%) in 1999, which more than offset a $1,089,000 (12.8%) decrease in
domestic workplace analyses attributed to decreased specimen volume of 76,000
(17.1%). Total domestic specimen volume increased 3.1% compared to the prior
year and domestic product sales decreased $61,000 (5.1%). Medscreen sales
increased $236,000 (7.3%) reflecting a 20.6% increase in specimen volume and
higher product sales.



                                       11
<PAGE>   12

        Cost of sales for the three months ended June 30, 1999 decreased
$350,000 (4.3%) to $7,865,000 in 1999 from $8,215,000 in 1998. The decrease in
cost of sales reflects lower collector fees, reduced product costs and the
favorable impact of the Company's ongoing cost reduction program and laboratory
process improvement program. Cost of sales as a percentage of net sales
decreased to 70.5% in 1999 from 71.7% in 1998. Gross profit as a percentage of
net sales increased to 29.5% in 1999 from 28.3% in 1998.

        Cost of sales for the six months ended June 30, 1999 decreased $434,000
(2.8%) to $15,089,000 in 1999 from $15,523,000. 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 fees, collection inventories and results reporting. Cost of sales as a
percentage of net sales decreased to 70.8% in 1999 from 74.0% in 1998. Gross
profit as a percentage of net sales increased to 29.2% in 1999 from 26.0% in
1998.

        Selling, general and administrative (SG&A) expenses for the three months
ended June 30, 1999 decreased $194,000 (6.9%) to $2,610,000 in 1999 from
$2,804,000 in 1998. The decrease partially reflects lower personnel costs and
legal expenses. SG&A expenses as a percentage of net sales decreased to 23.4% in
1999 from 24.5% in 1998.

        SG&A expenses for the six months ending June 30, 1999 increased $37,000
(0.7%) to $5,049,000 in 1999 from $5,012,000 in 1998. SG&A expenses as a
percentage of net sales decreased slightly to 23.6% in 1999 from 23.9% in 1998.

        Income from operations for the three months ended June 30, 1999 was
$610,000 compared to $373,000 in 1998. Income from operations for the six months
ended June 30, 1999 was $1,056,000 compared to $312,000. Interest expense
decreased by approximately 45.0% in 1999 for both the second quarter and
year-to-date and is attributed to lower average debt levels in 1999.

        Provision for Income Taxes for the three months ended June 30, 1999 was
$204,000 compared to an income tax provision of $46,000 during 1998. The
increase in 1999 reflects the increased profitability of the domestic operations
in 1999 combined with Medscreen's utilization of net operating loss
carryforwards in 1998. The Company recorded a provision for income taxes of
$28,000 and $81,000, respectively, for the six months ending June 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 June 30, 1999 was $361,000 or
$0.06 per diluted common share compared to net income of $246,000 or $0.04 per
diluted common share in 1998. Net income for the six months ended June 30, 1999
was $944,000 or $0.16 per diluted common share compared to $54,000 or $0.01 per
diluted common share in 1998. Excluding the impact of the $336,000 income tax
credit, net income for the six months ended June 30, 1999 would have been
$608,000 or $0.10 per diluted share.



                                       12
<PAGE>   13

LIQUIDITY AND CAPITAL RESOURCES

        The Company's operations during the six month period ended June 30
provided cash of approximately $932,000 in 1999 and $1,227,000 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 June 30, 1999, the Company had $1,124,000
in cash and cash equivalents. During the six months ended June 30, 1999, the
Company used approximately $1,258,000 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 June 30, 1999, the maximum that
could be borrowed was $5,547,000 and approximately $827,000 was outstanding
under the Credit Agreement. Year-to-date net repayments on the revolver were
approximately $1,552,000 as of June 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 June 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 ("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 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 the foreseeable future.

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

        In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for disclosing information about operating segments and enterprise-wide
information about customers and geographic activities. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997. The Company adopted SFAS No.
131 effective December 31, 1998 and prior period amounts have been restated to
conform to the presentation required by SFAS No. 131.



                                       13
<PAGE>   14

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 six month periods ending
June 30, 1999 and 1998, Medscreen's net sales represented 16.3% and 15.5%,
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 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 early in the fourth 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 $150,000 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 commenced 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 has tested external results
reporting services. Beginning in August, the Company has commenced transmitting
results using a four digit year to a majority of customers capable of receiving
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 process of obtaining
documentation of Y2K compliance or replacing systems that are not Y2K compliant.



                                       14
<PAGE>   15

        For the period January 1, 1996 through June 30, 1999, the Company has
invested approximately $6.1 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
in the third and fourth 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 the third quarter of 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.



                                       15
<PAGE>   16

PART II. OTHER INFORMATION

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

        At the Annual Meeting of the Company held on May 18, 1999, the Company's
shareholders took the following actions:

        (a)     The following directors were elected to serve until the next
                Annual Meeting:

                Joseph W. Halligan - 4,439,557 shares in favor and 29,487 shares
                withheld;.

                Richard D. Irwin - 4,440,257 shares in favor and 28,787 shares
                withheld; and

                Donald R. Stroben - 4,440,157 shares in favor and 28,887 shares
                withheld.

        (b)     Ratification of the appointment of KPMG LLP as Independent
                Certified Public Accountants for the Company for the 1999 fiscal
                year, by a vote of 4,445,557 shares in favor, 9,587 shares
                against and 13,900 shares abstained.

Item 6. Exhibits and Reports on Form 8-K

        (a)     Exhibits:

                Exhibit 10.33 - Variable Rate Installment Note between Comerica
                                Bank-California and PharmChem Laboratories, Inc.
                                dated April 14, 1999.

                Exhibit 10.34 - Lease Agreement for computer software between
                                American Technologies Credit, Inc. and PharmChem
                                Laboratories, Inc. dated March 29, 1999
                                (effective April 30, 1999).

                Exhibit 10.35 - Lease Amendment for the Company's offices in
                                Menlo Park, California dated May 7, 1999.

                Exhibit 27 - Financial Data Schedule.

        (b)     Reports on Form 8-K:

                None.



                                       16
<PAGE>   17

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



                                       17

<PAGE>   18

                                 EXHIBIT INDEX


<TABLE>
<CAPTION>
     EXHIBIT NO.                        DESCRIPTION
     -----------                        -----------
<S>             <C>
      10.33  -  Variable Rate Installment Note between Comerica Bank-California
                and PharmChem Laboratories, Inc. dated April 14, 1999.

      10.34  -  Lease Agreement for computer software between American
                Technologies Credit, Inc. and PharmChem Laboratories, Inc. dated
                March 29, 1999 (effective April 30, 1999).

      10.35  -  Lease Amendment for the Company's offices in Menlo Park,
                California dated May 7, 1999.

      27     -  Financial Data Schedule.
</TABLE>