UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

                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: 000-27690

                        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 12, 1999, THERE WERE OUTSTANDING 13,996,021 SHARES OF COMMON STOCK,
PAR VALUE $.01, OF THE REGISTRANT.

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

<PAGE>

                        INTELLIGENT MEDICAL IMAGING, INC.

                           QUARTER ENDED JUNE 30, 1999

                                      INDEX

                                                                           PAGE

PART I - FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS (Unaudited)

            BALANCE SHEETS AS OF
            JUNE 30, 1999 AND DECEMBER 31, 1998                              3

            STATEMENTS OF OPERATIONS FOR THE SIX
            MONTHS ENDED JUNE 30, 1999 AND 1998                              4

            STATEMENTS OF CASH FLOWS FOR
            THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998                      5

            NOTES TO FINANCIAL STATEMENTS                                    6

ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
            CONDITION AND RESULTS OF OPERATIONS                             11

PART II - OTHER INFORMATION                                                 18

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K                                18

SIGNATURES                                                                  18

<PAGE>

                         PART I - FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

                        INTELLIGENT MEDICAL IMAGING, INC.
                                 BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                                                 JUNE 30,              DECEMBER 31,
ASSETS                                                                                             1999                   1998
                                                                                               (unaudited)
                                                                                               ------------            ------------
<S>                                                                                            <C>                     <C>
Current assets:
 Cash                                                                                          $    113,053            $     31,923
 Accounts receivable, net of allowance for uncollectable
     accounts of $40,000                                                                            232,772               1,002,781
 Notes receivable                                                                                        --                  86,684
 Inventory                                                                                        1,971,423               3,157,537
 Prepaid expenses                                                                                    48,175                  67,408
 Current portion of investment in sales-type leases                                                 497,000                 497,000
                                                                                               ------------            ------------

Total current assets                                                                              2,862,423               4,843,333

Long-term portion of investment in sales-type leases                                                451,808                 451,808
Revenue equipment, net                                                                              415,093                 544,215
Property and equipment, net                                                                       1,161,478               2,556,347
Other assets                                                                                         41,779                  52,650
Deferred financing costs, net                                                                       277,603                 297,000
                                                                                               ------------            ------------
                                                                                               $  5,210,184            $  8,745,353
                                                                                               ------------            ------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                                                           $  1,530,181            $  1,159,737
    Accrued salaries and benefits                                                                   831,851                 372,149
    Notes payable                                                                                   890,942                 335,493
    Other accrued liabilities                                                                       992,107                 258,671
    Due to factor                                                                                        --                 320,000
    Current portion of amount due to financing companies                                            497,000                 497,000
    Current portion of capital lease obligation                                                      14,371                  30,562
    Current portion of deferred revenue                                                             106,907                 318,381
                                                                                               ------------            ------------
Total current liabilities                                                                         4,863,359               3,291,993

Deferred revenue                                                                                    521,957                 412,423
Amount due to financing companies                                                                   451,808                 451,808
Capital lease obligation                                                                             45,711                 54,719
Convertible debentures, net of unamortized discount                                               2,505,397               2,788,000
                                                                                               ------------            ------------
Total long-term liabilities                                                                       3,524,873               3,706,950


Stockholders' equity:
 Preferred stock, $.01 par value-authorized 2,000,000 shares;
   no shares issues or outstanding                                                                        -                       -
 Common Stock, $.01 par value-authorized 30,000,000 shares;
   issued and outstanding, 12,656,871 shares at June 30, 1999
   and 11,631,486 shares at December 31, 1998                                                       126,569                 116,315
 Additional paid-in capital                                                                      47,683,518              44,416,708
 Deferred compensation                                                                           (1,728,524)               (486,000)
 Accumulated deficit                                                                            (49,259,611)            (42,300,613)
                                                                                               ------------            ------------
Total stockholders' equity                                                                       (3,178,048)              1,746,410
                                                                                               ------------            ------------
Total liabilities and stockholders' equity                                                     $  5,210,184            $  8,745,353
                                                                                               ============            ============

</TABLE>


<PAGE>


                        INTELLIGENT MEDICAL IMAGING, INC.
                            STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>


                                              Three Months       Three Months        Six Months          Six Months
                                                     Ended              Ended             Ended               Ended
                                             June 30, 1999      June 30, 1998     June 30, 1999       June 30, 1998
                                             -------------      -------------     -------------       -------------
<S>                                          <C>                <C>               <C>                 <C>
Sales:

Product sales                                $    464,429       $     437,297     $   1,063,789       $   1,479,595
Licensing fees                                         --                  --           500,000                  --
                                             ------------       -------------     -------------       -------------
Total Sales                                       464,429             437,297         1,563,789           1,479,595

Cost of sales                                     546,446             342,940         1,147,713           1,104,232
Inventory provisions                            1,000,000                  --         1,000,000                  --
                                             ------------       -------------     -------------       -------------
Gross profit (loss)                            (1,082,017)             94,357          (583,924)            375,363
                                             ------------       -------------     -------------       -------------
Operating expenses:
     Selling, general and administrative        2,260,170           2,601,060         3,669,295           4,950,785
     Research and development                     581,741           1,354,972         1,463,126           2,771,997
     Restructuring charges                        913,982                  --           913,982                  --
                                             ------------       -------------     -------------       -------------
Total operating expenses                        3,755,893           3,956,032         6,046,403           7,722,782
                                             ------------       -------------     -------------       -------------
Loss from operations                           (4,837,910)         (3,861,675)       (6,630,327)         (7,347,419)
                                             ------------       -------------     -------------       -------------
Other income (expense):
     Investment and interest income                   308              26,409             3,322              94,567
     Interest expense                            (243,356)                 --          (275,197)                 --
     Discount on debenture                        (28,398)                 --           (56,796)                 --
                                             ------------       -------------     -------------       -------------
Other income (expense)                           (271,446)             26,409          (328,671)             94,567
                                             ------------       -------------     -------------       -------------

Net loss                                     $ (5,109,356)      $ (3,835,266)     $  (6,958,998)      $  (7,252,852)
                                             ============       ============      =============       =============
Loss per common share
  --basic and diluted:                              (0.41)             (0.33)             (0.58)              (0.64)
                                             ============       ============      =============       =============
Weighted average common
shares outstanding                             12,382,034         11,463,386         12,048,097          11,245,726
                                             ============       ============      =============       =============

</TABLE>

<PAGE>


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

<TABLE>

                                                                                                  SIX MONTHS            SIX MONTHS
                                                                                                      ENDED                ENDED
                                                                                                 JUNE 30, 1999         JUNE 30, 1998
                                                                                                 -------------         -------------
<S>                                                                                              <C>                  <C>
OPERATING ACTIVITIES
Net loss                                                                                           $(6,958,998)         $(7,252,852)
Adjustments to reconcile net loss to net cash used in operating activities:
    Depreciation and amortization                                                                    1,533,266              593,270
    Amortization on deferred compensation                                                              114,118                   --
    Inventory provisions                                                                             1,000,000                   --
    Services received in exchange for common stock
    and stock options                                                                                1,637,819               46,626
    Changes in operating assets and liabilities:
          Accounts receivable                                                                          450,009              443,891
          Inventory                                                                                    186,114              132,251
          Prepaid expenses                                                                              19,233              (66,217)
          Investment in sales-type leases                                                                   --              234,359
          Other assets                                                                                  10,871              (32,326)
          Revenue equipment                                                                             10,122             (134,746)
          Accounts payable                                                                             370,444              (13,905)
          Accrued salaries and benefits                                                                459,702               28,558
          Other accrued liabilities                                                                    733,436              (22,251)
          Deferred revenue                                                                            (101,940)             146,519
                                                                                                 -------------         -------------
Net cash used in operating activities                                                                 (535,804)          (5,896,823)
                                                                                                 -------------         -------------
INVESTING ACTIVITIES
Purchases of property and equipment                                                                         --             (326,322)
Sale of investments held for sale                                                                           --            6,167,342
Advances to related parties                                                                             86,684             (622,267)
                                                                                                 -------------         -------------
Net cash provided by investing activities                                                               86,684            5,218,753
                                                                                                 -------------         -------------
FINANCING ACTIVITIES
Proceeds from sale of common stock                                                                          --               92,352
Proceeds from issuance of notes payable                                                                555,449                   --
Repayment capital leases                                                                               (25,199)                  --
Convertible debentures                                                                                      --
                                                                                                                          2,800,000
                                                                                                 -------------         -------------
Net cash provided by financing activities                                                              530,250            2,892,352
                                                                                                 -------------         -------------
Net (decrease) increase in cash                                                                         81,130            2,214,282
Cash at beginning of period                                                                             31,923              853,164
                                                                                                 -------------         -------------
Cash at end of period                                                                              $   113,053          $ 3,067,446
                                                                                                 =============         =============
Supplemental Information

Stock purchase warrants issued for financing costs                                                 $        --          $   116,400
                                                                                                 =============         =============
Conversion of convertible debentures to common stock                                               $   282,603          $        --
                                                                                                 =============         =============
Inventory transferred to property and equipment                                                    $        --          $   612,262
                                                                                                 =============         =============

</TABLE>


<PAGE>

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

1.   BASIS OF PRESENTATION

The accompanying unaudited 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,

<PAGE>

1998.  Operating  results for the six month  period  ended June 30, 1999 are not
necessarily  indicative  of the results that may be expected for the year ending
December 31, 1999.

The  Company  incurred a  significant  loss  during  fiscal 1998 and for the six
months  ended  June 30,  1999.  The  Company  has  taken and  continues  to take
significant  steps to reduce spending and capital  expenditures.  The Company is
currently working to raise capital to assist in funding the Company's  currently
proposed operating activities for the next twelve months. However, a significant
shortfall from the Company's  current  operating plan, or the inability to raise
additional  capital would unfavorably  impact the Company's cash flow. There can
be no assurances that the Company could obtain the necessary financing.

The  Company  initiated  actions to  restructure  its  operations  and  recorded
restructuring and other charges totaling  $1,913,982 during the six months ended
June 30, 1999. This charge included $1,000,000 for excess inventory and $913,982
for restructuring  charges including  $151,082 of severance and $762,900 related
to the  impairment  of  fixed  assets.  Cash  expenditures  associated  with the
restructuring and one-time charges, are payable over the next six months and are
estimated  to be  $151,082.  In addition,  the Company  issued stock  options to
employees at below market prices in an effort to retain employees.  Compensation
expense related to stock options issued totaled  $2,713,284 of which  $1,356,642
is included in operating expenses for the six month period ending June 30, 1999.

The Company has implemented  strategic steps in an effort to remain viable until
sufficient market penetration for the Company's products is achieved. This plan,
which includes  personnel  reductions,  has reduced  monthly  expenditures  from
approximately  $1,100,000 in July 1998 to approximately  $280,000 as of July 15,
1999, with the reduction in extraordinary  development  expenditures  coinciding
with the completion of the HSM instrument and across the board reductions in the
Company's operating costs.

The Company has also  reduced  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.

On October 30, 1998,  Nasdaq  notified the Company of its concern  regarding the
continued  listing of the  Company's  shares of common  stock for trading on the
Nasdaq National Market as a result of the failure of the Company's  common stock
to  maintain a closing  bid price of  greater  than or equal to $1.00 for thirty
(30) consecutive  trade dates.  Pursuant to Nasdaq rules, the Company had ninety
(90) calendar days in which to regain  compliance with Nasdaq continued  listing
requirements.  If within this 90-day  period the common stock  complied with the
minimum  closing  bid  price  requirement  of $1.00  for a  minimum  of ten (10)
consecutive  days,  and was in compliance  with all other listing  requirements,
continued listing would have occurred.  However,  due to the Company's inability
to  demonstrate  compliance  with the $1.00 minimum bid price  requirement on or
before January 28, 1999, the Company's securities were delisted on May 18, 1999.
Since  May 18,  1999,  the  Company's  securities  have  been  traded on the OTC
Bulletin Board under the symbol  "IMII." Such delisting  constituted an event of
default under the Debentures, which was waived by the holder.

As of June  30,  1999 the  Company  is  delinquent  in its  payroll  obligations
(including  wages,  severance  pay and  accrued  vacation  pay) in the amount of
approximately  $642,000. The Company is also currently delinquent in the payment
of its  accounts  payable.  The  Company's  failure  to pay its  employees  will
adversely affect the Company's efforts to maintain a competent and capable sales
and marketing  staff.  The Company will continue to lose employees unless it can
raise capital promptly.  In addition,  the Company's inability to timely pay its
accounts  payable has had an adverse effect on the Company's

<PAGE>

relationship  with its  vendors,  resulting  in some  vendors  refusing  to ship
products or to provide services to the Company.  On April 27, 1999, James Davis,
William Whittaker, George Masters and Gene Cochran resigned their positions with
the Board of  Directors.  Gene  Cochran  also  resigned  his  position  as Chief
Financial Officer effective April 30, 1999. The Company is seeking to hire a new
Chief Financial  Officer and continues to explore a variety of alternatives  for
increasing its sales and distribution capacity and raising sufficient capital to
fund its operations.  Implementation of the Company's business strategy requires
significant expenditures of capital. The Company is currently seeking additional
funds through debt or equity.  There can be no assurance  that such funds can be
obtained  on  favorable  terms,  if at all.  If the  Company's  efforts to raise
capital are unsuccessful, the Company will have to cease operations.

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 1998.

3.   NOTE RECEIVABLE RELATED PARTIES

In January  1998,  $196,000 was advanced to the  Company's  President  and Chief
Executive  Officer 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.  During the
year the advance of $424,000,  plus all accrued interest thereon,  was repaid in
full by payments in the amount of  $290,000,  plus a $163,563  credit  offset in
consulting fees due the former member of the Board of Directors.

4.   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

<PAGE>

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.  At June 30, 1999
interest  payable  relating to the Debentures of $169,650 is included in accrued
expenses.  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  was declared  effective by the SEC on October 20, 1998.
Additional capital  commitments of up to $7,000,000 are available to IMI subject
to the parties mutually agreeing on the terms. As of June 30, 1999 the holder of
the  Debentures  had  converted  $345,000 of the original  $3,000,000  principal
amount of the Debentures into shares of the Company's common stock.

In connection with the issuance of the  Debentures,  the Company issued warrants
to the holders of the  Debentures  to purchase  120,000  shares of the Company's
common  stock at $3.93 per  share.  The  warrants  are  exercisable  immediately
through June 30, 2003. The fair value of the warrants 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 warrants.

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:

<PAGE>

                        Risk-free interest rate                           5.48%
                        Volatility factors of the
                        expected market price of the
                        Company's common stock                            .598
                        Expected life                                  5 Years
                        Dividend yield                                       0%

As of June 30, 1999 the Company was in default of certain covenants  relating to
the Debentures, which subsequently were waived by the holder.

5.   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. On October 7, 1998 the arbitration hearings were
completed  and on November  6, 1998  written  arguments  were  presented  to the
arbitration  panel.  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, 1999, the Company has accrued
$170,000 of potential loss  contingencies or related expenses in connection with
this Arbitration.  The Company believes that it 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.

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.  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.

<PAGE>

On November 16, 1998 the Company  entered  into three  related  agreements  with
Bayer Corporation  ("Bayer") involving the Company's blood slide maker, the HSM.
The three agreements, a Licensing Agreement,  Instrument Supply Agreement and an
After Market Supply Agreement,  provide Bayer with certain  non-exclusive rights
to  manufacture  and sell products  based on the HSM.  Pursuant to the Licensing
Agreement  Bayer paid the Company a one-time  licensing fee of  $1,100,000.  The
Licensing  Agreement  further  provides  for Bayer to pay the  Company a royalty
payment of $2,000 on each of the first 400 HSM-based units it  manufactures  and
sells in exchange for the non-exclusive  right to manufacture and sell HSM-based
products and the right to negotiate for the manufacture and  distribution of the
Company's  MICRO21  System,  Urine Slide Maker ("USM") and any other new Company
products.  The Instrument Supply Agreement  provides that Bayer will manufacture
the HSM for the Company for at least two years in the event the Company  chooses
not to  manufacture  the HSM or  chooses to have  Bayer  manufacture  the HSM to
supplement the Company's manufacture of this product.  Finally,  pursuant to the
After Market  Supply  Agreement,  with limited  exceptions  Bayer is required to
recommend  the Company as a sole  source of  consumables  used on all  HSM-based
products  manufactured and sold by Bayer until the earlier to occur of (a) three
years following Bayer's sale of 200 HSMs or (b) five years after Bayer's initial
sale of an HSM.

On November 23,  1998,  the Company  entered  into an Invoice  Purchase and Sale
Agreement with Finova Capital  Corporation  ("Finova")  pursuant to which Finova
purchased  certain invoices from the Company at an invoice purchase price of 95%
of the net amount of the invoice.  Eighty percent (80%) of the purchase price is
payable to the  Company at the time of the  acceptance  of the invoice by Finova
and the  remainder of the  purchase  price is due to the Company upon payment of
the invoice by the  account  debtor.  As of April 9, 1999,  the Company had sold
invoices with an aggregate net amount of $1,057,000 to Finova.

On December 17, 1998,  the Company  entered into a  distribution  agreement with
Beckman-Coulter  involving  the  Company's  blood  slide  maker,  the  HSM.  The
non-exclusive  distribution  agreement  has a  term  of  ten  years  and  allows
Beckman-Coulter  to obtain the HSM on a volume discount basis for re-sale to its
customers. Domestically IMI will have prime responsibility for customer support,
with  Beckman-Coulter  field support personnel providing  installation and field
maintenance  services on a fixed fee basis. In foreign markets,  Beckman-Coulter
will have  total  responsibility  for  customer  support.  Beckman-Coulter  will
recommend  IMI as  the  sole  source  for  consumables  on all  HSMs  it  sells,
domestically  and overseas.  As of April 9, 1999,  Beck an-Coulter had purchased
two HSMs under the distribution agreement.

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

The  following  discussion  should  be read in  conjunction  with the  condensed
financial statements and notes thereto appearing elsewhere in this report.

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.

<PAGE>

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 5 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.  As of June 30, 1999,  the Company also
received full  repayment of all amounts due with respect to an advance which the
Company made to a former director, R. Wayne Fritzsche,  by virtue of payments in
the amount of $290,000,  plus a $163,563 credit offset in consulting fees due to
Mr. Fritzsche.

On October 30, 1998,  Nasdaq  notified the Company of its concern  regarding the
continued  listing of the  Company's  shares of common  stock for trading on the
Nasdaq National Market as a result of the failure of the Company's  common stock
to  maintain a closing  bid price of  greater  than or equal to $1.00 for thirty
(30) consecutive  trade dates.  Pursuant to Nasdaq rules, the Company had ninety
(90) calendar days in which to regain  compliance with Nasdaq continued  listing
requirements.  If within this 90-day  period the common stock  complied with the
minimum  closing  bid  price  requirement  of $1.00  for a  minimum  of ten (10)
consecutive  days,  and was in compliance  with all other listing  requirements,
continued listing would have occurred.  However,  due to the Company's inability
to  demonstrate  compliance  with the $1.00 minimum bid price  requirement on or
before January 28, 1999, the Company's securities were delisted on May 18, 1999.
Since  May 18,  1999,  the  Company's  securities  have  been  traded on the OTC
Bulletin Board under the symbol  "IMII." Such delisting  constituted an event of
default under the Debentures, which was waived by the holder.

On November 16, 1998,  the Company  entered into three related  agreements  with
Bayer  Corporation  ("Bayer")  involving  the Company's  blood slide maker,  the
Hematology  Slide  Master(TM)  (HSM(TM)).  The  three  agreements,  a  Licensing
Agreement,  Instrument  Supply  Agreement and an After Market Supply  Agreement,
provide Bayer with certain non-exclusive rights to manufacture and sell products
based on the HSM. Pursuant to the Licensing  Agreement,  Bayer will pay to IMI a
one-time  licensing fee of $1,100,000 in  installments  with the last payment of
$500,000  subject to Bayer's  acceptance  of the  Company's  first  commercially
manufactured  HSM,  as well as a royalty  payment of $2,000 on each of the first
400 HSM-based units it manufactures and sells in exchange for the  non-exclusive
right to manufacture and sell HSM-based  products and the right to negotiate for
the manufacture and  distribution of the Company's  MICRO21 System,  Urine Slide
Maker  ("USM")  and any  other  new  Company  products.  The  Instrument  Supply
Agreement  provides that Bayer will  manufacture  the HSM for the Company for at
least two years in the event the Company  chooses not to manufacture  the HSM or
chooses  to  have  Bayer   manufacture  the  HSM  to  supplement  the  Company's
manufacture  of this  product.  Finally,  pursuant  to the After  Market  Supply
Agreement, with limited exceptions Bayer is required to recommend the Company as
a sole source of consumables  used on all HSM-based  products  manufactured  and
sold by Bayer until the earlier to occur of (a) three  years  following  Bayer's
sale of 200 HSM's or (b) five years after Bayer's initial sale of an HSM.

<PAGE>

In December  1998 the  Company's  new blood slide maker,  HSM, was  commercially
released.  The HSM fully  automates the process of blood slide  making/staining.
The HSM was designed so that results from the hematology analyzers  manufactured
by Bayer and Beckman-Coulter  can trigger the automatic  preparation of a slide,
providing the lab significant labor savings and improved operational efficiency.
Once  prepared,  the  slides  can be  automatically  reviewed  by  the  MICRO21,
providing even greater labor savings and improved operational efficiency.

During April 1999,  all of the  Company's  directors  other than Mr.  Fitzmorris
resigned  from the Board of Directors  primarily  due to concerns  regarding the
Company's financial condition and personal liability issues.

In April  1999,  the Board of  Directors  of the Company  implemented  a plan of
salary  deferrals  pursuant to which all  employees  were  offered the option of
deferring a percentage of their salary in exchange for options to purchase three
shares of the  Company's  common  stock at $0.01  per  share for each  dollar of
salary  deferred.  Pursuant  to  such  salary  deferral  plan,  Messrs.  Tyce M.
Fitzmorris,  Jaime Pereira, and Ronald Hagner, the Company's executive officers,
elected to defer 60%, 100% and 40%, respectively, of their salary payments, and,
for the deferral of salary in April,  May and June 1999,  were issued options to
purchase  approximately  662,000,  296,000 and 296,000  restricted shares of the
Company's common stock, respectively.

On April 21,  1999,  the  Company  entered  into a Loan and  Security  Agreement
("Agreement") with Advisco Capital Corp.  ("Advisco")  pursuant to which Advisco
agreed to lend to the Company from time to time, subject to certain  conditions,
up to $2,000,000.  All amounts,  if any,  advanced under the Agreement  would be
secured  by a lien  on all of the  Company's  assets  and  property,  including,
without   limitation,   all  equipment,   receivables,   inventory  and  general
intangibles.  As of June 30, 1999, no amounts were advanced under the Agreement.
In the  second  quarter  of 1999,  due to the  failure  of  Advisco  to make any
advances  under the  Agreement,  the  Company  failed to make  certain  required
minimum  monthly  payments  which  constitutes  an event of  default  under  the
Agreement.

In the second quarter of 1999, Mr.  Fitzmorris,  loaned the Company an aggregate
of $175,000 for working capital purposes. Such loans bear interest at a rate per
annum equal to the prime rate. In connection with such loans, Mr. Fitzmorris was
granted options for the purchase of 175,000  restricted  shares of the Company's
common stock for nominal consideration.

On April 26, 1999, the Company borrowed  $200,000 for working capital  purposes.
Such loan was evidenced by a promissory note that matured on June 25, 1999, with
interest at 12% per annum, and was secured by certain receivables, inventory and
equipment.  In  connection  with such  loan,  the  Company  issued to the lender
213,350   restricted   shares  of  the   Company's   common  stock  for  nominal
consideration. This loan was paid in full on June 25, 1999.

On June 15, 1999,  the Company  engaged  Geneva  Capital Corp. to render certain
financial  advisory services to the Company.  In consideration of such services,
the  Company has agreed to pay Geneva a  combination  of cash and stock upon the
occurrence of certain events.

On June 25, 1999, the Company borrowed an aggregate of $310,000 to repay certain
maturing indebtedness and to pay certain outstanding lease and payroll expenses.
Such loans are evidenced by promissory notes that mature on the earlier to occur
of certain events, and bear interest at the rate of 12% per annum. In connection
with such loans, the Company issued an aggregate of 310,000 restricted shares of
the Company's common stock for nominal consideration (the "Shares"). The Company
has agreed to file with the  Securities  and Exchange  Commission not later than
November 15, 1999, and to use its best

<PAGE>

efforts  to cause to  become  effective,  a  registration  statement  under  the
Securities Act of 1933, as amended, for the resale of the Shares.

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  $1,100,000  to  $280,000  with  the  reduction  in  extraordinary
development  expenditures  coinciding  with  the  completion  of the HSM and 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 and
improving  its sales  and  distribution  capacity  (including  actively  seeking
alliances with  well-established  manufacturers  and  distributors)  and raising
sufficient  capital  to fund its  operations.  Implementation  of the  Company's
business strategy requires  significant  expenditures of capital. The Company is
currently  seeking  additional  funds  through  debt or equity.  There can be no
assurance that such funds can be obtained on favorable terms, if at all.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999
COMPARED TO THREE MONTHS ENDED JUNE 30, 1998

Product  sales were  $464,429 for the three months ended June 30, 1999  compared
with  $437,297 for the three  months  ended June 30, 1998, a slight  increase of
$27,132. The increase resulted from a minimal amount of additional sales for the
quarter.

Cost of sales were  $546,446 for the three  months ended June 30, 1999  compared
with $342,940 for the three months ended June 30, 1998, an increase of $203,506.
The primary reason for the increase is a result of accelerated  depreciation  on
revenue equipment and certain one-time charges.

During  the three  month  period  ended  June 30,  1999 the  Company  recorded a
$1,000,000  provision  for  obsolete  and excess  inventory as a result of sales
being well below the Company's 1999 initial operations plan.

Selling,  general and  administrative  expenses were  $2,260,170  for the second
quarter of 1999  compared  with  $2,601,060  for the second  quarter of 1998,  a
decrease of $340,890.  Selling,  general and

<PAGE>

administrative  expenses  decreased because of the staff and expense  reductions
implemented early in the third quarter of 1998 and have continued into 1999.

Research and development  expenses were $581,741 for the three months ended June
30, 1999  compared with  $1,354,972  for the three months ended June 30, 1998, a
decrease of $773,231.  Research and  development  expenses have decreased due to
resources being cut and development of new procedures, technologies and products
put on hold.

Interest  income was $308 for the three months ended June 30, 1999 compared with
$26,409 for the six months  ended June 30,  1998,  a decrease  of  $26,101.  The
decrease  was  primarily  due to the  sale  of  investment  securities  to  fund
operations.  Interest  expense was  $243,356 for the three months ended June 30,
1999,  compared  with $0 for the three  months  ended  June 30,  1998.  Interest
expense  represents  interest  on  notes  payable  and  the  Debentures  and the
amortization  of the  discounts  and  deferred  financing  costs  related to the
issuance of the convertible debentures that were issued on June 30, 1998.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
COMPARED TO SIX MONTHS ENDED JUNE 30, 1998

Product  sales were  $1,063,789  for the six months ended June 30, 1999 compared
with  $1,479,595 for the six months ended June 30, 1998, a decrease of $415,806.
The decrease in sales for the six months ended June 30, 1999 was  primarily  due
to  decreased  demand for the  Company's  products and the $500,000 of licensing
fees related to the Licensing Agreement with Bayer Corporation.

Cost of sales was  $1,147,713  for the six months  ended June 30, 1999  compared
with  $1,104,232  for the six months ended June 30,  1998, a slight  increase of
$43,481.  The  primary  reason  for the  increase  is a  result  of  accelerated
depreciation on revenue equipment and certain one-time charges.

Selling,  general and administrative expenses were $3,669,295 for the six months
ended June 30,  1999  compared  with  $4,950,785  for the  comparable  six month
period, a decrease of $1,281,490.  Selling,  general and administrative expenses
decreased because of the staff and expense  reductions  implemented early in the
third quarter of 1998 and have continued into 1999.

Research and development  expenses were $1,463,126 for the six months ended June
30, 1999  compared  with  $2,771,997  for the six months  ended June 30, 1998, a
decrease of $1,308,871.  Research and development expenses have decreased due to
resources being cut and development of new procedures, technologies and products
put on hold.

Interest  income was $3,322 for the six months ended June 30, 1999 compared with
$94,567 for the six months  ended June 30,  1998,  a decrease  of  $91,245.  The
decrease  was  primarily  due to the  sale  of  investment  securities  to  fund
operations.  Interest  expense was  $275,197  for the six months  ended June 30,
1999,  compared with $0 for the six months ended June 30, 1998. Interest expense
represents  interest on notes payable and the Debentures and the amortization of
the  discounts  and  deferred  financing  costs  related to the  issuance of the
convertible debentures that were issued on June 30, 1998.

LIQUIDITY AND CAPITAL RESOURCES

For the six months ended June 30, 1999, net cash used in operating activities of
$535,804 was primarily due to the Company's  operating loss, net of increases in
assets and liabilities.

<PAGE>

For the six  months  ended  June  30,  1999,  net  cash  provided  by  investing
activities of $86,684 was primarily the result of advances by related parties.

For the six  months  ended  June  30,  1999,  net  cash  provided  by  financing
activities  of $530,250  was the result of proceeds  from the  issuance of notes
payable.

During 1998 the Company  experienced a reduction in revenue and increased  costs
that continue to adversely  affected the Company's current results of operations
and its  liquidity.  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.  These revenues have not yet been
realized.  The  Company's  plans also  contemplate  continuing  the cost control
measures  implemented  in 1998 and cost and  personnel  reductions,  which  have
reduced monthly  expenditures  from  approximately  $1,100,000 to $280,000.  The
Company's plans also contemplate  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 addition,  the Company is
currently  negotiating with a company for distribution and licensing  agreements
associated with sales of the Company's products. At June 30, 1999, the Company's
remaining cash balance totaled $113,053.  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 the distribution and licensing agreements.

As described  above,  in June 1998, the Company issued $3 million of convertible
debentures.  An additional  $7,000,000  million of financing may be available to
the Company,  but the availability of such financing is at the discretion of the
lender after  consideration of the trading  characteristics of the common stock,
the lender's  exposure to the Company at that time,  the absence of any material
adverse  change in the  Company's  financial  condition  or  operations  and the
Company's continued  compliance with the terms of the financing.  The debentures
include a requirement  that the Company's  common stock be listed for trading by
Nasdaq.  However, due to the Company's inability to demonstrate  compliance with
the $1.00  minimum bid price  requirement  on or before  January 28,  1999,  the
Company's  securities were delisted on May 18, 1999. Such delisting  constituted
an event of default under the Debentures, which was waived by the holder.

As  described  above,  in the second  quarter of 1999,  the Company  borrowed an
aggregate of $675,000 to repay  certain  maturing  indebtedness  and for working
capital purposes.

As  described  above,  on April 21,  1999,  the Company  entered into a Loan and
Security  Agreement with Advisco pursuant to which Advisco agreed to lend to the
Company from time to time, subject to certain conditions,  up to $2,000,000.  As
of June 30,  1999,  Advisco  has not funded  any loans  under the  Advisco  Loan
Agreement  on the basis that certain  conditions  precedent to such funding have
not been satisfied.

Implementation  of  the  Company's   business   strategy  requires   significant
additional  expenditures of capital. The Company is currently seeking additional
funds through  equity or debt.  There can be no assurance that such funds 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

<PAGE>

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
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
1999 and beyond to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company.

<PAGE>

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  immediate  need for the Company to raise  significant
additional  capital to satisfy  delinquent  payroll,  accounts payable and notes
payable  obligations  and to  finance  operations  in  the  near-term,  and  the
inability  to provide  assurances  that such  capital will be available on terms
favorable to the Company,  if at all; the delay in the Company's  achievement of
substantial market penetration and widespread  acceptance of the MICRO21 system;
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;  the potential failure of the
Company's  sales  team,   Bayer   Corporation  and   Beckman-Coulter   or  other
distributors  to sell  HSMs in  amounts  sufficient  to  generate  a  meaningful
recurring  revenue  base  associated  with HSM  consumables  and to sell MICRO21
systems in amounts  sufficient  to help the  Company  achieve  its sales  goals;
uncertainty  as to whether  strategic  partners will become  involved in MICRO21
sales;  uncertainty  as to the  ability  of the  Company  to  achieve  sales and
marketing  goals  following   implementation  of  the  Company's  revised  sales
approach,  including  increased  reliance on strategic  partners  for  worldwide
sales/service and reductions in the Company's sales and marketing personnel, due
to the  decrease in  personnel,  and the  possible  adverse  impact on potential
customer  perception of the Company;  uncertainty due to industry  consolidation
and customer budget processes and restrictions;  the possibility that agreements
with strategic partners will not result in significant  improvements in results;
the  uncertainty  as to the actual  amount of damages  which the Company will be
obligated  to pay  DiaSys  pursuant  to a  pending  decision  on  damages  by an
arbitration  panel;  the risk that expansion of sales in foreign  markets may be
possible only through distributors,  such as Coulter, at transfer prices too low
for favorable profitability;  the expense of product development and the related
delay and  uncertainty  as to receipt of any  requisite  FDA  clearance or other
government  clearance or approval for new products and new procedures for use on
the MICRO21 system;  and the uncertainty of profitability and  sustainability of
revenues and profitability.

PART II - OTHER INFORMATION

Item 6.   Exhibits and Reports on Form 8-K

     (a) No exhibits are filed as of part of this report.

     (b) No Reports on Form 8-K were filed during this period

SIGNATURES

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

INTELLIGENT MEDICAL IMAGING, INC.

By: /s/ TYCE M. FITZMORRIS                         Date:  August 15, 1999
    ----------------------------------------
    Tyce M. Fitzmorris
    President and Chief Executive Officer