UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

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

                  FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 1998

                                       OR

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

          FOR THE TRANSITION PERIOD FROM ____________ TO ____________.

                         COMMISSION FILE NUMBER: 1-14190

                        INTELLIGENT MEDICAL IMAGING, INC.

             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                DELAWARE                                     65-0136178
     (STATE OR OTHER JURISDICTION            (IRS EMPLOYER IDENTIFICATION  NO.)
 OF INCORPORATION OR ORGANIZATION)

     4360 NORTHLAKE BOULEVARD, SUITE 214, PALM BEACH GARDENS, FLORIDA 33410
              (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (561) 627-0344

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  REPORTS),  AND  (2) HAS  BEEN  SUBJECT  TO SUCH  FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES __X__ NO __

AS OF AUGUST 11, 1998, THERE WERE OUTSTANDING 11,583,333 SHARES OF COMMON STOCK,
PAR VALUE $.01, OF THE REGISTRANT.




<PAGE>


                        INTELLIGENT MEDICAL IMAGING, INC.

                           QUARTER ENDED JUNE 30, 1998

                                      INDEX

                                                                          PAGE

PART I - FINANCIAL INFORMATION

     ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)                              3

              CONDENSED BALANCE SHEETS AS OF
              JUNE 30, 1998 AND DECEMBER 31, 1997                           3

              CONDENSED STATEMENTS OF OPERATIONS FOR THE
              THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997             4

              CONDENSED STATEMENTS OF CASH FLOWS FOR
              THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997                   5

              NOTES TO CONDENSED FINANCIAL STATEMENTS                       6

     ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL             8
              CONDITION AND RESULTS OF OPERATIONS

PART II - OTHER INFORMATION                                                12

     ITEM 2   CHANGES IN SECURITIES AND USE OF PROCEEDS                    12

     ITEM 4   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS          12

     ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                             13

SIGNATURES                                                                 14




<PAGE>


                         PART I - FINANCIAL INFORMATION

ITEM 1.  CONDENSED FINANCIAL STATEMENTS

                        INTELLIGENT MEDICAL IMAGING, INC.
                            CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                           June 30,               December 31,
                                                                             1998                     1997
                                                                        -----------------      -------------------
                                                                         (Unaudited)
<S>                                                                      <C>                    <C> 

Assets
Current assets:
     Cash and cash equivalents                                            $3,067,446                 $853,164
     Investments available for sale                                           31,662                6,230,009
     Accounts receivable, net                                                228,014                  671,905
     Notes receivable related parties                                        622,267                         
     Inventory                                                             5,189,302                5,933,815
     Prepaid expenses and other current assets                               141,167                   61,799
     Current portion of investment in sales-type leases                       47,704                  222,213
     Accrued interest receivable                                                                       13,151
Total current assets                                                       9,327,562               13,986,056

Revenue equipment, net                                                       398,378                  263,632
Property and equipment, net                                                3,135,007                2,789,693

Investment in sales-type leases, net                                         180,295                  240,145
Other assets                                                                 159,209                  126,883
Deferred financing costs                                                     316,400                         
                                                                                              ---------------
                                                                         $13,516,851              $17,406,409
                                                                   =================          ===============


Liabilities and stockholders' equity Current liabilities:
     Accounts payable                                                     $1,284,906               $1,298,811
     Accrued salaries and benefits                                           422,748                  394,190
     Other accrued liabilities                                                79,565                  101,816
     Current portion of deferred revenue                                     111,111                   74,673
Total current liabilities                                                  1,898,330                1,869,490

Deferred revenue                                                             329,655                  219,574
Convertible debentures, net of unamortized discount of 1,130,650           1,869,350                      ---
  
Stockholders' equity
Preferred stock, $.01 par value-authorized 2,000,000 shares;
     no shares issued or outstanding                                            ---                       ---
Common stock, $.01 par value-authorized 30,000,000 shares;
     issued and outstanding, shares at 11,583,333 June 30, 1998
     and 11,023,938 at December 31, 1997                                     115,834                  110,239
Additional paid-in capital                                                43,871,440               42,537,633
Deferred compensation                                                      (181,626)                (228,252)
Accumulated deficit                                                     (34,386,132)             (27,102,275)
 Total stockholders' equity                                                9,419,516               15,317,345
                                                                   ------------------      -------------------
                                                                         $13,516,851              $17,406,409
                                                                   ==================      ===================
</TABLE>

See accompanying notes


<PAGE>





                        INTELLIGENT MEDICAL IMAGING, INC.
                       CONDENSED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
<TABLE>
<CAPTION>

                                               Three months       Three months      Six months       Six months
                                                  ended              ended           ended             ended
                                              June 30, 1998       June 30, 1997   June 30, 1998      June 30, 1997
                                              -------------       -------------   -------------      -------------
<S>                                             <C>                  <C>            <C>                <C>


Sales                                              $437,297        $1,570,338       $1,479,595       $2,412,043

Cost of sales                                       342,940           888,978        1,104,232        1,295,221
                                             ---------------------------------------------------------------------
                                                     94,357           681,360          375,363        1,116,822

Operating expenses:
     Selling, general and administrative          2,601,060         2,077,318        4,950,785        3,571,957
     Research and development                     1,354,972         1,086,827        2,771,997        1,803,011
                                             ---------------------------------------------------------------------
Total operating expenses                          3,956,032         3,164,145        7,772,782        5,374,968
                                             ---------------------------------------------------------------------
Loss from operations                             (3,861,675)       (2,482,785)      (7,347,419)      (4,258,146)

Other income:
     Investment and interest income                  26,409           358,104           94,567          664,961
                                             ---------------------------------------------------------------------

Net loss                                        ($3,835,266)      ($2,124,681)     ($7,252,852)     ($3,593,185)
                                             =====================================================================


Loss per common share-basic and diluted              ($0.33)           ($0.19)          ($0.64)          ($0.33)
                                             =====================================================================

Weighted average common
     shares outstanding                           11,463,386        10,911,612       11,245,726       10,907,213
                                             =====================================================================
</TABLE>

See accompanying notes



<PAGE>



                        INTELLIGENT MEDICAL IMAGING, INC.
                       CONDENSED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                                            Six months       Six months
                                                                              ended            ended
                                                                          June 30, 1998    June 30, 1997

Operating activities
<S>                                                                           <C>            <C>         
Net loss                                                                      $(7,252,852)   ($3,593,185)
Adjustments to reconcile net loss
     to net cash used in operating activities:
          Depreciation                                                            593,270        301,988
          Amortization of deferred revenue                                        (52,730)          --
          Services exchanged for common stock                                      46,626         46,626
          Changes in operating assets and liabilities
               Accounts receivable                                                132,251     (1,427,903)
               Inventory                                                          443,891     (2,458,360)
               Prepaid expenses and accrued interest
                    receivable                                                    (66,217)      (316,343)
               Investment in sales-type leases                                    234,359           --
               Other assets                                                       (32,326)      (228,583)
               Revenue equipment                                                 (134,746)          --
               Accounts payable                                                   (13,905)       (20,645)
               Accrued salaries and benefits                                       28,558        254,396
               Other accrued liabilities                                          (22,251)      (376,786)
               Deferred revenue                                                   199,249           --
               Convertible debentures                                                --             --
               Coulter settlement liability                                             0     (1,048,929)
                                                                              -----------    -----------
Net cash used in operating activities                                          (5,896,823)    (8,867,724)

Investing activities
Purchases of property and equipment                                              (326,322)      (726,615)
Sales of investments available for sale                                         6,167,342      9,552,407
Advances to related parties                                                      (622,267)          --
                                                                              -----------    -----------
Net cash provided by investing activities                                       5,218,753      8,825,792

Financing activities
Proceeds from issuance of common stock                                             92,352         32,400
Proceeds from issuance of debentures, net of financing                          2,800,000
costs
Net cash provided by financing activities                                       2,892,352         32,400


Net increase (decrease) in cash and cash equivalents                            2,214,282         (9,532)
Cash and cash equivalents at beginning of period                                  853,164        288,001
                                                                              -----------    -----------

Cash and cash equivalents at end of period                                    $ 3,067,446    $   278,469
                                                                              ===========    ===========

Supplemental information

Stock purchase warrants issued as
     deferred financing costs                                                 $   116,400           --
                                                                              ===========    ===========

Inventory transferred to property and equipment                               $   612,262    $   842,858
                                                                              ===========    ===========

See accompanying notes
</TABLE>

<PAGE>



                        INTELLIGENT MEDICAL IMAGING, INC.
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                                   (UNAUDITED)


1.   BASIS OF PRESENTATION

The accompanying  unaudited condensed financial statements have been prepared in
accordance with generally accepted  accounting  principles for interim financial
information and with the  instructions to Form 10-Q and Article 10 of Regulation
S-X.  Accordingly,  they do not include  all of the  information  and  footnotes
required by generally  accepted  accounting  principles  for complete  financial
statements. In the opinion of management,  all adjustments (consisting of normal
recurring  accruals)  considered  necessary  for a fair  presentation  have been
included.  These financial statements,  footnotes and discussions should be read
in conjunction with audited financial  statements and related footnotes included
in Intelligent Medical Imaging, Inc.'s ("IMI" or "the Company") annual report on
Form 10-K for the year ended December 31, 1997. Operating results for the three-
and six-month periods ended June 30, 1998 are not necessarily  indicative of the
results that may be expected for the year ending December 31, 1998.

2.   REVENUE RECOGNITION

In October 1997, the American Institute of Certified Public Accountants  (AICPA)
issued Statement of Position (SOP) 97-2,  "Software Revenue  Recognition"  which
the Company has adopted for transactions  entered into during the year beginning
January 1, 1998. SOP 97-2 provides guidance for recognizing  revenue on software
transactions and supersedes SOP 91-1, "Software Revenue  Recognition".  In March
1998, the AICPA issued SOP 98-4,  "Deferral of the Effective Date of a Provision
of SOP 97-2, Software Revenue  Recognition".  SOP 98-4 defers, for one year, the
application  of  certain  passages  in SOP 97-2 which  limit what is  considered
vendor-specific  objective  evidence necessary to recognize revenue for software
licenses in  multiple-element  arrangements  when  undelivered  elements  exist.
Additional guidance is expected to be provided prior to adoption of the deferred
provision  of SOP 97-2.  The Company  will  determine  the impact,  if any,  the
additional guidance will have on the current revenue recognition  practices when
issued. Adoption of the remaining provisions of SOP 97-2 did not have a material
impact on revenue recognition during the second quarter of 1998.

3.   INVESTMENTS AVAILABLE-FOR-SALE

Investments  available-for-sale  at December  31, 1997  consist of asset  backed
securities,  corporate  bonds  and  U.S.  Government  agency  bonds.  Management
determines the proper  classifications  of investments in obligations with fixed
maturities  and  marketable  equity  securities  at the  time  of  purchase  and
re-evaluates  such  designations as of each balance sheet date. At June 30, 1998
and December 31, 1997, all  securities  were  designated as  available-for-sale.
Accordingly,  these securities are stated at fair market value,  with unrealized
gains and losses  reported  as a separate  component  of  stockholders'  equity.
Realized gains and losses on sales of  investments,  as determined on a specific
identification basis, are included in the statements of operations.

Investment securities available for sale at June 30, 1998 and December 31, 1997,
are summarized as follows:

<TABLE>
<CAPTION>
                                                       June 30, 1998                               December 31, 1997
                                                        Unrealized          Market                   Unrealized          Market
                                              Cost         Gains             Value       Cost       Gains (Losses)       Value
                                                         (Losses)
                                         ----------------------------------------------------------------------------------------

<S>                                            <C>         <C>             <C>          <C>           <C>               <C>     
Cash and cash equivalents                      $31,662      ---            $31,662      $164,708      $     0           $164,708

U.S. Government agency bonds and                   ---      ---                ---     3,677,946        5,466          3,683,412
mortgages

U.S. Corporate bonds and asset backed              ---      ---                ---     2,356,350       25,539          2,381,889
securities
                                         ========================================================================================
Total investments available-for-sale           $31,662      ---            $31,662    $6,199,004      $31,005         $6,230,009
                                         ========================================================================================

</TABLE>

<PAGE>


4.   PROPERTY AND EQUIPMENT

Property and equipment consist of the following:
<TABLE>
<CAPTION>

                                           June 30,               December 31,
                                             1998                     1997
                                          -----------             ------------
Furniture, fixtures and office
<S>                                        <C>                      <C>       
     equipment                             $2,500,311               $1,403,234
Computer and development
     equipment                              2,803,657                2,962,150
                                          -----------              -----------
                                            5,303,968                4,365,384
Accumulated depreciation                  (2,168,961)              (1,575,691)
                                          -----------              -----------
                                           $3,135,007               $2,789,693
                                          ===========               ==========

</TABLE>

5.   NOTE RECEIVABLE RELATED PARTIES

In January 1998,  $196,000 was advanced to the Company's  President and $424,000
was  advanced  to an  individual  who was at that  time a member of the Board of
Directors. The advance of $196,000 to the Company's President,  plus all accrued
interest  thereon,  was repaid in full on August 14, 1998. The original due date
for the  advance  in the amount of  $424,000,  which is secured by shares of the
Company's  common  stock and  bears  interest  at the rate of prime  plus 1% per
annum, was April 8, 1998 but has been extended to August 28, 1998.

6.   CONVERTIBLE DEBENTURES

On June 30,  1998  ("Original  Issue  Date") the  Company  issued,  in a private
placement transaction $3,000,000 of 6% convertible debentures, due June 30, 2001
(the "Debentures"). Subject to adjustment in certain events, twenty-five percent
(25%) of the aggregate  principal  amount of the Debentures is convertible  into
the common  stock of the Company  beginning  on  September  28,  1998  ("Initial
Conversion Date") and on the first,  second and third month anniversaries of the
Initial Conversion Date up to 50%, 75% and 100%, respectively,  of the aggregate
principal amount of the Debentures  originally issued on the Original Issue Date
is  convertible.   The  Debentures  are   convertible  at  a  conversion   price
("Conversion  Price")  equal to the  lesser  of (a) 120% of the  average  of the
closing  bid price for the common  stock of the Company for the five (5) trading
days immediately  preceding the Original Issue Date or (b) 86% multiplied by the
average of the five (5)  lowest  closing  bid prices of the Common  Stock of the
Company during the twenty-five (25) trading days immediately  preceding the date
of the applicable  conversion  notice.  The Company  recorded a debt discount of
$906,250  representing the intrinsic value of the beneficial  conversion feature
of the  Debentures.  Interest is payable  quarterly  and may,  at the  Company's
option and subject to certain  restrictions,  be paid in shares of the Company's
common  stock based on the  Conversion  Price.  Subject to certain  notification
requirements  and the  payment  of a  prepayment  premium  which  is tied to the
applicable Conversion Price and the closing bid price of the Common Stock on the
date of  prepayment,  the  Company has the right to prepay all or any portion of
the outstanding principal amount of the Debentures which has not previously been
repaid or converted. The principal amount of the Debentures for which conversion
notices have not previously  been received or for which  prepayment has not been
made will be automatically converted on June 30, 2001 at the Conversion Price on
such date.  The Debentures may be converted in whole or in part at the option of
the holder if the average of the closing  sales  prices of the common  stock for
any twenty (20) consecutive trading days is equal to or greater than 175% of the
average of the per share market values for the five (5) trading days immediately
preceding the original issue date. The principal  amount of Debentures for which
conversion notices have not previously been received or for which prepayment has
not  been  made or  required  shall  be  automatically  converted  on the  third
anniversary  of the Original  Issue Date at the  Conversion  Price on such date.
This automatic  conversion  shall not occur if (a) (1) an Underlying  Securities
Registration  Statement is not then effective that names the holder as a selling
stockholder  thereunder or (2) the holder is not permitted to resell  underlying
shares  pursuant to Rule 144(k)  promulgated  under the  Securities Act of 1993,
without volume restrictions; (b) there are not sufficient shares of common stock
authorized and reserved for issuance upon such  conversion;  and (c) the Company
shall not have defaulted on its covenants and obligations hereunder or under the
Purchase  Agreement  or  Registration  Rights  Agreement.  The Company  incurred
financing  costs of $200,000 in connection  with the issuance of the Debentures,
which will be amortized over the life of the  Debentures.  On July 30, 1998, the
Company  filed a  registration  statement  on Form S-3 with the  Securities  and
Exchange  Commission  ("SEC")  to  register  the  common  stock  underlying  the
convertible   debentures  issued  in  connection  with  the  transaction.   This
registration  statement has not been declared  effective by the SEC.  Additional
capital  commitments  of up to  $7,000,000  are  available to IMI subject to the
parties mutually agreeing on the terms.

In connection with the issuance of the Debentures,  the Company issued a warrant
to the holder of the  Debentures  to purchase  120,000  shares of the  Company's
common stock at $3.93 per share. The warrant is exercisable  immediately through
June  30,  2003.  The  fair  value of the  warrant  based  on the  Black-Scholes
valuation  method is $1.87.  The  Company  recorded a debt  discount of $224,400
representing the fair value of the warrant.

In addition,  the Company issued a warrant to a financial consultant to purchase
60,000 shares of the Company's  common stock at $3.63 per share.  The warrant is
exercisable  immediately  through June 30, 2003. The Company  recorded  deferred
financing costs of $116,400 in connection with the issuance of the warrant. Such
costs will be amortized over the term of the Debentures. The assumptions used to
compute the value of the warrants were as follows:

         Risk-free interest rate            5.48%
         Volatility factors of the
         expected market(1)                  .598
         Expected life                      5 Years
         Dividend yield                     0%

(1) Price of the Company's Stock


7.   COMMITMENTS AND CONTINGENCIES

In November 1996, IMI and DiaSys Corporation  ("DiaSys") (Nasdaq,  DIYS) entered
into a Product Integration  Agreement (the "DiaSys Agreement").  DiaSys designs,
develops,  manufactures and distributes workstation products which prepare fluid
samples.   Under  the  DiaSys   Agreement,   IMI  was  granted  a  nonexclusive,
nontransferable   license  to  integrate  the  patented  DiaSys  wet-preparation
specimen  handling  system  together  with  the  MICRO21  in  order  to  produce
integrated  systems for resale to MICRO21 end users.  The DiaSys  Agreement  was
terminated  in July 1997,  when IMI  rejected  products  delivered by DiaSys and
returned  them.  The  DiaSys  Agreement   provides  for  mandatory  and  binding
arbitration of disputes between the parties. On January 12, 1998, DiaSys filed a
demand for  arbitration of the dispute.  In its demand for  arbitration,  DiaSys
seeks  damages in excess of $1,000,000  for IMI's  alleged  breach of the DiaSys
Agreement and IMI's alleged defamation of DiaSys and its products. IMI filed its
response on February 9, 1998. In its  response,  IMI denies that it breached the
DiaSys  Agreement  or defamed  DiaSys,  and  states  that it  properly  rejected
products supplied by DiaSys due to  non-conformance.  IMI also seeks damages for
libelous  statements  made by DiaSys in a July 2, 1997 press  release  issued by
DiaSys, and for delays in IMI's product  development  efforts caused by DiaSys's
breach of the  DiaSys  Agreement.  Management  is  unable  to make a  meaningful
estimate of the  likelihood or amount or range of loss that could result from an
unfavorable outcome of the pending arbitration. As of June 30, 1998, the Company
has not accrued any loss  contingencies  or related  expenses in connection with
this  arbitration.  The Company believes that DiaSys's claims are without merit,
and that the Company will prevail in the arbitration.  However,  there can be no
assurance  that  the  Company  will  prevail  in  the   arbitration  or  in  its
counterclaim  asserted  against  DiaSys,  or that any resolution of the dispute,
which is expected  to occur  within one year,  will not have a material  adverse
effect  on  the  Company's   liquidity,   financial  condition  and  results  of
operations.  The Company and DiaSys have selected the panel of  arbitrators  and
the arbitration hearing date of October 5, 1998 has been scheduled.

On  March  7,  1997,  the  Company  entered  into a  settlement  agreement  with
International  Remote Imaging Systems,  Inc.  ("IRIS")  effective March 1, 1997.
Under  the  settlement  agreement,   IRIS  granted  the  Company  a  fully-paid,
royalty-free  license for  worldwide  direct sales of the MICRO21  system by the
Company.  The Company  agreed to pay a 4 percent  royalty on future sales of the
MICRO21 system through third-party  distributors in the United States. Since the
Company's  current  business plan is to sell its products  primarily on a direct
basis,  without  reliance on  third-party  distributors,  the  Company  does not
believe  the  4  percent  royalty  on  U.S.  sales  through   distributors  will
significantly  adversely impact the Company's  results of operations  during the
term of the  license.  This license and royalty  obligation  expire in September
2000,  when the IRIS  patents  that are the subject of the license  expire.  The
Company has the right,  but not the  obligation,  to request a license from IRIS
for  sales  through  third-party  distributors  outside  of the  United  States;
however,  the Company does not believe  that the MICRO21  system  infringes  any
foreign  patents  held by IRIS and the Company  has no current  plans to request
such a license.

8.   MANAGEMENT'S PLANS

The Company reported a net loss of  approximately  $7,253,000 for the six-months
ended June 30, 1998 incurred  cumulative losses from inception to June 30, 1998,
aggregating  approximately  $34,386,000,  and reported  negative cash flows from
operations for the six-months ended June 30, 1998, of approximately  $5,897,000.
At June 30, 1998, the company had working capital of  approximately  $11,526,000
and  shareholders'  equity  of  approximately   $9,327,000.   Costs  and  delays
associated  with he Company's  efforts to build its  internal  sales and service
force in the wake of the termination of its exclusive distribution and marketing
agreement with Coulter  Corporation  Agreement  adversely affected the Company's
business,  results of operations  and financial  condition in 1997 and 1998. The
Company's  1998 and 1999  operating  plans  contemplate  focusing  activities on
expanding sales revenue through the efforts of its internal sales, marketing and
service force. In addition,  during the fourth quarter of 1997 the Company began
to offer a short-term  rental  program  which it believes will augment its sales
and long-term lease programs by giving potential customers the ability to fund a
MICRO21  with  operating  funds,  thereby  overcoming  potential  cost  barriers
associated with the limited or non-existent capital expenditure funds. Expansion
of this  program  may  require  that the Company  secure  additional  financing,
however.  During 1998, the Company has introduced two new products, a hematology
slide  maker  and  urine  slide  maker,  and  two  additional  procedures  which
management  believes  will offer  significant  opportunities  for  expanding the
Company's  potential  customer base. The Company's plans also  contemplate  cost
control measures implemented in 1998 and cost and personnel reductions,  seeking
alternative sources of financing and exploring strategic  alternatives.  In June
1998, the Company issued $3 million of convertible debentures;  an additional $7
million of financing is available to the Company subject to the mutual agreement
of the parties.  Although  management believes that its plan will be successful,
there can be no assurance  that the Company will e successful  in its attempt to
expand  revenue,   secure   additional   financing  or  consummate  a  strategic
alternative.

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

OVERVIEW

The  Company  has  developed  and  is  marketing  the  MICRO21(TM)   system,  an
intelligent,  automated  microscope  system,  for  diagnostic  use in  hospital,
commercial  reference and physician  group  laboratories.  The MICRO21 system is
designed to automate a broad range of manual microscopic procedures, potentially
enabling the clinical  laboratory  to reduce costs and exposure to  liabilities,
enhance  analytical  accuracy  and  consistency,  increase the  productivity  of
medical technologists and improve patient care.

On April 20, 1998, the Company signed a customer financing  agreement with Prime
Capital Corp  ("Prime") to provide up to $36 million of financing  for customers
acquiring the MICRO21 System Workstation.  Under the terms of the agreement, the
Company and Prime will establish a wholesale customer finance relationship under
which Prime will provide a "Private Label Fee Per Slide"  financing  facility to
customers  of the  Company for an ongoing  vendor  leasing  program.  Prime will
provide up to $12  million of  customer  financing  per year over 3 years.  This
agreement  should help IMI to continue to meet its near-term cash flow needs and
provides a financing alternative for IMI's customers.

On June 30, 1998 the Company  completed the sale of $3,000,000 of 6% convertible
debentures,  due June 30, 2001.  See Footnote 6 of Notes to Condensed  Financial
Statements  in Part I, Item 1 of this  Form  10-Q.  The sale of the  convertible
debentures will help IMI to continue to meet its near-term cash flow needs.

On August 14, 1998 the Company  received full  repayment of all amounts due with
respect to an advance  which the  Company  made to the  Company's  President  in
January 1998 in the amount of $196,000.

The Company is currently in formal discussions with Bayer Corporation  regarding
a possible  non-exclusive  manufacturing  and  distribution  agreement for IMI's
hematology  slidemaker/stainer  technology. The Company has also signed a letter
of  intent  with  Beckman  Coulter,  Inc.  ("Beckman  Coulter"),  relating  to a
potential  non-exclusive  distribution  agreement for IMI's newly developed (not
yet sold commercially) hematology slide maker ("HSM").

The Company is implementing  strategic steps so as to allow IMI to remain viable
until sufficient market penetration for the Company's products is achieved. This
plan, which includes  personnel  reductions,  reduces monthly  expenditures from
approximately  $1.1  million to $850,000  with the  reduction  in  extraordinary
development  expenditures  coinciding  with the competition of the HSM and Urine
Slide  Maker  ("USM")  instruments  and  across  the board  reductions  in IMI's
operating costs. In connection with these cost  reductions,  the Company decided
to  discontinue  its  operations  in  Europe  and,  instead,  rely on  qualified
distributors. The IMI Europe office was officially closed on July 31, 1998.

The Company is moving  forward to identify  and  implement  reductions  in sales
expenditures,  while emphasizing a sales process that better targets prospective
customers who are closest to making a purchase decision.  The reduction of sales
expenditures is in furtherance of the strategy of focusing on specific  customer
groups and markets and the de-emphasis on providing total market coverage to all
types of  prospects.  The Company is  implementing  a plan that will segment the
market according to product fit and geographic location.

During  the fourth  quarter of 1997,  the  Company  began to offer a  short-term
rental  program  which  provides  for  monthly or annual  rentals of the MICRO21
system.  The  Company  believes  that this  program  will  augment its sales and
long-term  lease  programs by giving  potential  customers the ability to fund a
MICRO21  with  operating  funds,  thereby  overcoming  potential  cost  barriers
associated with limited or non-existent capital expenditure funds.  Expansion of
the short-term  rental  program may require that the Company  secure  additional
financing.

The Company  continues to explore a variety of  alternatives  for increasing its
sales and  distribution  capacity  and  raising  sufficient  capital to fund its
operations.

RESULTS OF OPERATIONS

Product  sales were  $437,297  for the  second  quarter  of 1998  compared  with
$1,570,338  for the second  quarter of 1997 a decrease  of  $1,133,041.  Product
sales were  $1,479,595  for the six months  ended June 30,  1998  compared  with
$2,412,043  for the six months ended June 30, 1997, a decrease of $932,448.  The
decease in sales for the six months  ended June 30,  1998  compared  to June 30,
1997 was primarily due to fewer than expected closings on systems.

Cost of sales was $342,940 for the second quarter of 1998 compared with $888,978
for the  second  quarter  of 1997,  a decrease  of  $546,038.  Cost of sales was
$1,104,232  for the six months ended June 30, 1998 compared with  $1,295,221 for
the six months ended June 30, 1997, a decrease of $190,989. The decrease in cost
of sales for the quarter was consistent with the sales for the period.

Selling,  general and  administrative  expenses were  $2,601,060  for the second
quarter of 1998  compared  with  $2,077,318  for the second  quarter of 1997, an
increase of $523,742.  Selling,  general and  administrative  expenses increased
because  of the  continued  growth of the  Company  and the need for  additional
personnel through December 1997.  Selling,  general and administrative  expenses
were  $4,950,785 for the six months ended June 30, 1998 compared with $3,571,957
for the six months ended June 30, 1997, an increase of $1,378,828.  The increase
was  primarily  due to increases in staffing  during the second half of 1997 and
business  development  expenses and higher than  expected  legal and  accounting
fees.

Research and development expenses were $1,354,972 for the second quarter of 1998
compared  with  $1,086,827  for the  second  quarter  of 1997,  an  increase  of
$268,145.  Research and  development  expenses  increased due to resources being
utilized  in the  development  of new  procedures,  technologies  and  products.
Research and development  expenses were $2,771,997 for the six months ended June
30, 1998  compared  with  $1,803,011  for the six months ended June 30, 1997, an
increase  of  $968,986.   The  increase  was  primarily  due  to  the  Company's
development of new procedures and new products for the Micro21 System.

Interest  income was  $26,409  for the  second  quarter  of 1998  compared  with
$358,104 for the second quarter of 1997, a decrease of $331,695. Interest income
was $94,567 for the six months ended June 30, 1998  compared  with  $664,961 for
the six months ended June 30,  1997,  a decrease of  $570,394.  The decrease was
primarily due to the sale of investment securities to fund operations.


LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents consist of cash and liquid investments with a maturity
of 90 days or less.  Investments  available-for-sale at June 30, 1998 consist of
cash and cash equivalents.

For the six months ended June 30, 1998, net cash used in operating activities of
$5,896,823 was primarily due to the Company's operating loss.

For the six  months  ended  June  30,  1998,  net  cash  provided  by  investing
activities  of  $5,218,753  was  primarily  the  result of sales of  investments
available-for-sale,  partially  offset by purchases of computer  equipment to be
used in research and  development  and advances to the Company's Chief Executive
Officer and a then member of the Board of Directors.

For the six  months  ended  June  30,  1998,  net  cash  provided  by  financing
activities  of  $2,892,352  was the result of the cash received from issuance of
the convertible debentures offset by the financing costs.

At June 30, 1998, the Company had a net operating loss ("NOL")  carryforward  of
approximately  $29,000,000  available  for income tax purposes  through the year
2012. Section 382 of the Internal Revenue Code, as amended, limits the amount of
federal taxable income that may be offset by pre-existing  NOLs of a corporation
following  a change in  ownership  ("Ownership  Change") of the  corporation.  A
portion  of the  Company's  NOL  carryforward  is  currently  subject  to  these
limitations  because the Company  experienced  an  Ownership  Change on June 30,
1995, due to the issuance of common stock.

The Company's 1998 and 1999 operating plans contemplate  focusing  activities on
expanding sales revenue through the efforts of its internal sales, marketing and
service force. In addition,  during the fourth quarter of 1997 the Company began
to offer a short-term  rental  program  which it believes will augment its sales
and long-term lease programs by giving potential customers the ability to fund a
MICRO21  with  operating  funds,  thereby  overcoming  potential  cost  barriers
associated with the limited or non-existent capital expenditure funds. Expansion
of this  program  may  require  that the Company  secure  additional  financing,
however.  The  Company's  plans also  contemplate  continuing  the cost  control
measures  implemented  in  1998  and  cost  and  personnel  reductions,  seeking
alternative  sources of financing and exploring strategic  alternatives.  During
1998, the Company has introduced two new products,  a Hematology Slide Maker and
Urine Slide Maker, and two additional  procedures which management believes will
offer significant  opportunities for expanding the Company's  potential customer
base. In June 1998, the Company issued $3 million of convertible debentures;  an
additional  $7 million of financing  is available to the Company  subject to the
mutual agreement of the parties. Although management believes that its plan will
be successful,  there can be no assurance that the Company will be successful in
its attempt to expand  revenue,  secure  additional  financing  or  consummate a
strategic alternative.

The Company  believes that cash, cash equivalents and investments held for sale,
together with  projected cash flow from  operations,  will be sufficient to meet
the  Company's   liquidity  and  capital   requirements   for  projected  annual
expenditures  through 1999.  Implementation  of the Company's  business strategy
will require significant  expenditures of capital,  and the Company will require
additional  financing in the future. Such additional funds may be sought through
equity or debt  financings.  There can be no assurance that  commitment for such
financings can be obtained on favorable terms, if at all.


YEAR 2000 ISSUE

The  Company  has  implemented  a  process  for  identifying,  prioritizing  and
modifying or replacing  certain computer and other systems and programs that may
be affected by the Year 2000 Issue.  The Company is also monitoring the adequacy
of the manner in which  certain third parties and third party vendors of systems
are  attempting  to address the Year 2000 issue.  The Company has  substantially
completed an assessment of its computer and embedded systems and determined that
it needed to modify or replace  portions of its  software  so that its  computer
systems  will  function  properly  with  respect  to dates in the year  2000 and
thereafter. While the Company believes its process is designed to be successful,
because of the  complexity of the Year 2000 issue,  and the  interdependence  of
organizations using computer systems, it is possible that the Company's efforts,
or  those  of  third  parties  with  whom  the  Company  interacts,  will not be
successful or satisfactorily completed in a timely fashion.

The Company  estimates that the total cost that it will incur in connection with
attempting to address the Year 2000 issue, including assessment,  development of
a modification  or replacement  plan,  purchase of new hardware and software and
implementation  of the  modification  or replacement  plan or software,  will be
approximately  $50,000. To date, the Company has incurred  approximately $35,000
(of which $0 has been capitalized and $35,000 expensed).  The Company funded the
costs  incurred to date  through cash flow from  operations  and expects to fund
future costs through cash flow from operations.

The project is estimated to be completed by September,  1999,  which is prior to
any anticipated impact on the Company's operating systems.  The Company believes
that with  modifications to existing  software,  conversions to new software and
replacement or modification  of certain  embedded  systems,  the Year 2000 issue
will not pose significant  operational problems.  However, if such modifications
and conversions  are not made, or are not completed on a timely basis,  the Year
2000 issue  would  have a material  adverse  impact on the  Company's  business,
financial condition and results of operations.

The  estimated  costs of the project and the date on which the Company  believes
necessary  modifications and replacements to address the Year 2000 issue will be
completed  are based on  management's  estimates,  which were derived  utilizing
numerous assumptions of future events,  including the continued  availability of
certain resources and other factors. As the Company progresses in addressing the
Year 2000 issue,  estimates of costs could change, and there can be no assurance
that the Company will not experience  cost overruns or delays in connection with
its plan for modifying or replacing  systems and programs.  In addition,  it may
not be possible to adequately  assess the impact of the failure of third parties
to adequately address the Year 2000 issue. As a result, actual operating results
could differ  materially  from those  anticipated.  Specific  factors that might
cause  such  material   differences   include,  but  are  not  limited  to,  the
availability  and cost of personnel  trained to address the Year 2000 issue, the
ability  to  locate  and  correct  all  relevant   computer  codes  and  similar
uncertainties.

Due to the fact that the Company believes it has secured sufficient resources to
address  the  Year  2000  issue  as it  relates  to its  computer  systems,  the
assessment of embedded systems is complete and the Company does not believe that
the  contingency  planning is warranted at this time.  The  assessment  of third
parties external to the Company is underway,  and the results of this assessment
when completed,  may reveal the need for  contingency  planning at a later date.
The Company will regularly  evaluate the need for contingency  planning based on
the progress and findings of the Year 2000 project.

FORWARD LOOKING STATEMENTS

Statements  contained  in this  Form  10-Q  that are not  historical  facts  are
forward-looking  statements that are made pursuant to the safe harbor provisions
of the Private  Securities  Litigation  Reform Act of 1995. The Company cautions
that a number of important  factors could cause the Company's actual results for
1998 and beyond to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company.

Forward-looking   statements   involve  a  number  of  risks  and  uncertainties
including,  but not  limited  to, the  Company's  history of  operating  losses;
uncertainty of profitability and uncertainty of widespread market acceptance for
the  MICRO21  system;  the need for the Company to raise  additional  capital to
finance  operations in the near-term,  through debt or equity, and the inability
to provide  assurances that such capital will be available or available on terms
favorable  to the Company;  the delays and  impediments  to customer  acceptance
associated with industry and market perception of the historical dispute between
the Company and Coulter Corporation;  the uncertainty of availability of debt or
equity capital for future  long-term  capital needs,  especially in the event of
further  delays  in  anticipated   widespread   market   acceptance  and  market
penetration of MCIRO21 systems;  the uncertainty of the commercial viability and
potential  market  acceptance of other IMI products such as the newly  developed
HSM and USM, which have not yet been manufactured or sold in commercial volumes;
uncertainty  as to the  ability of the  Company to achieve  sales and  marketing
goals  following   implementation  of  the  Company's  cost  reduction  program,
including  reduction in sales and  marketing  personnel,  due to the decrease in
personnel and the possible  adverse impact on potential  customer  perception of
the Company; the risk that expansion of sales in foreign markets may be possible
only through  distributors,  such as Beckman Coulter, at transfer prices too low
for  favorable  profitability;  the  inability  of the  Company to enter into an
alternative exclusive distribution  arrangement due to certain rights granted to
Coulter  Corporation under the Coulter Settlement  Agreement;  uncertainty as to
whether the Company and Beckman  Coulter will enter into a definitive  agreement
based on the  signed  nonbinding  letter  of  intent  relating  to the HSM;  the
potential  failure of the Company to negotiate  mutually  acceptable terms for a
definitive  Licensing  Agreement  with Bayer  Corporation;  the potential for an
adverse judgment against the Company in connection with the ongoing  arbitration
of the dispute between the Company and DiaSys Corporation;  potential delays and
technical problems in the development and commercial release of new products and
procedures such as the proposed MICRO21 Microscopic  Workstation System, the HSM
and the USM;  the  expense,  delays and  potential  setbacks in  development  of
competent  and  capable  sales  and  marketing   teams  and  service  teams  for
penetration and support of the market for the MICRO21 system,  including but not
limited to the pharmaceutical and veterinary lab market; delays in closing sales
of systems placed for evaluation due to length of the closing cycle, uncertainty
due to industry  consolidation  and customer budget processes and  restrictions;
the expense of product  development  and the related delay and uncertainty as to
receipt of any  requisite  FDA  clearance  or other  governmental  clearance  or
approval for new products and new procedures for use on the MICRO21 system;  the
uncertainty of profitability and  sustainability of revenues and  profitability;
the possibility that agreements with potential strategic partner candidates will
not be consummated or will not result in  significant  improvements  in results;
the  Company's  limited  manufacturing  experience;  fluctuations  in  operating
results;  the Company's  ability to its protect  trade  secrets and  proprietary
technology;  competition and  technological  change in the industry in which the
Company is engaged;  product  liability and the ability of the Company to obtain
adequate   insurance  for  product   liability;   uncertainty   of  third  party
reimbursement and health care reform policies;  and government  regulation.  The
Company  cannot assure that it will be able to  anticipate or respond  timely to
any of the factors, or changes in any of the factors,  listed above, which could
adversely affect the operating  results in one or more fiscal quarters.  Results
of  operations  in any past period  should not be  considered  indicative of the
results to be expected for future periods. Fluctuations in operating results may
also result in fluctuations in the price of the Company's common stock.


<PAGE>




                           PART II - OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

         (C)  Sales of Unregistered Securities

         In connection  with a private  placement  consummated  on June 30, 1998
(the  "Private  Placement"),  the Company  issued  convertible  debentures in an
aggregate  principal amount of $3,000,000 (the  "Debentures') to JNC Opportunity
Fund, Ltd. ("JNC"). In connection with this transaction, the Company also issued
warrants to purchase the Company's Common Stock (the "Warrants") to JNC (120,000
shares), the financial  consultant,  Wharton Capital Partners,  Ltd. ("Wharton")
(42,000 shares) and Elizabeth  D'Angelis (18,000 shares).  Subject to adjustment
in certain events,  twenty-five  percent (25%) of the aggregate principal amount
of the Debentures is convertible into the Common Stock of the Company  beginning
on September 28, 1998 ("Initial  Conversion Date") and on the first,  second and
third month  anniversaries  of the Initial  Conversion  Date up to 50%,  75% and
100%,  respectively,  of  the  aggregate  principal  amount  of  the  Debentures
originally issued is convertible. The Debentures are convertible at a conversion
price ("Conversion Price") equal to the lesser of (a) 120% of the average of the
closing  bid price for the Common  Stock of the Company for the five (5) trading
days immediately  preceding the Original Issue Date or (b) 86% multiplied by the
average of the five (5)  lowest  closing  bid prices of the Common  Stock of the
Company during the twenty-five (25) trading days immediately  preceding the date
of the applicable  conversion notice. The Warrants are exercisable  between June
30,  1998 and June 30,  2003 at an  exercise  price  equal to  $3.923  per share
(120,000 shares) or $3.63 per share (60,000 shares), as the case may be, subject
to adjustment in certain events.  The above  referenced  Debentures and Warrants
issued by the  Company  during the three  months  ending  June 30, 1998 were not
registered  under the Securities  Act of 1933 in reliance upon the  registration
exemption  set forth in  Regulation D under the  Securities  Act of 1933,  which
exemption  was made  available  to the  Company  due to the nature and number of
investors  involved in the Private  Placement and the Company's  compliance with
all other  requirements of such exemption.  The Company has filed a registration
statement on Form S-3 to register for resale by the holders the shares of Common
Stock  underlying the  Debentures and the Warrants,  and certain other shares of
Common Stock held by other stockholders of the Company.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         (a) The Annual Meeting of Stockholders was held on May 21, 1998.

         (b) Each of the persons  named in the Proxy  Statement as a nominee for
             Director was elected.

         (c) The following  are the voting  results on each of the matters which
             were submitted to the stockholders:

                                                       Withheld or       Broker
Election of Directors:    For             Against        Abstain       Non-Votes

Tyce M. Fitzmorris        6,017,837                      23,131
Gene M. Cochran           6,017,837                      23,131
James E. Davis            6,017,837                      23,131
George Masters            6,017,837                      23,131
William Whittaker         6,017,837                      23.131

Resolutions:
   To ratify the          6,027,168         9,100         4,700
appointment of Ernst &
Young LLP as
independent auditors
for 1998

         Additional  information  regarding  the matters  referred to under this
Item 4 is set forth in the Proxy Statement dated April 30, 1998 previously filed
with the Commission and incorporated herein by reference.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

       (a) Exhibits:

           LIST OF EXHIBITS               DESCRIPTION

                27                  Financial Data Schedule

       (b) Reports on Form 8-K:

           None.



<PAGE>



                                   SIGNATURES

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.

                        INTELLIGENT MEDICAL IMAGING, INC.

Date:      August 14, 1998       By: /S/ TYCE M. FITZMORRIS
           ---------------       -------------------------
                                     Tyce M. Fitzmorris, President and Chief
                                     Executive Officer


Date:      August 14, 1998       By: /S/ GENE M. COCHRAN
           ---------------       ----------------------
                                     Gene M. Cochran, Chief Financial Officer