<PAGE>
 
                                 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, 1998
                                        
                         Commission File Number 0-18044

                              PROCYTE CORPORATION
           (Exact name of the registrant as specified in its charter)



<TABLE>
<CAPTION>
 
 
<S>                                                      <C>
WASHINGTON                                                            91-1307460
(State of incorporation)                    (I.R.S. Employer Identification No.)
 
BUILDING A, 8511 154TH AVENUE N.E., REDMOND, WA                            98052
(Address of principal executive offices)                              (Zip code)
 
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:               (425) 869-1239
</TABLE>


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 July 31, 1998, there were issued and outstanding 14,468,678 shares of
common stock, par value $.01 per share.

                                       1
<PAGE>
 
                              PROCYTE CORPORATION

                                     INDEX
<TABLE>
<CAPTION>
 
<S>                                                                                                     <C>  
PART I  -  FINANCIAL INFORMATION                                                                        3
                                                                                                         
 Item 1. FINANCIAL STATEMENTS.....................................................................      3
   Balance Sheet - as of June 30, 1998 (unaudited) and December 31, 1997..........................      3
   Statements of Operations - three and six months ended June 30, 1998 and 1997 (unaudited).......      4
   Statements of Cash Flows - six months ended June 30, 1998 and 1997 (unaudited).................      5
   Statement of Stockholders' Equity - six months ended June 30, 1998 and 1997 (unaudited)........      6 
   Notes to Financial Statements (unaudited)......................................................      7 
 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations...     10 
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk...............................     18 

PART II - OTHER INFORMATION.......................................................................     19
 Item 1. Legal Proceedings........................................................................     19
 Item 2. Change in Securities.....................................................................     19
 Item 4. Submission of Matters to a Vote of Security Holders......................................     19
 Item 5. Other Information........................................................................     19
 Item 6. Exhibits and Reports on Form 8-K.........................................................     20

SIGNATURES........................................................................................     20

EXHIBIT INDEX.....................................................................................     21
</TABLE>

                                       2
<PAGE>
 
                        PART I  -  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

     BALANCE SHEET - AS OF JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997

<TABLE>
<CAPTION>
 
                                                                         June 30,1998             Dec. 31, 1997
                                                                      -------------------------------------------- 
<S>                                                                   <C>                         <C>
ASSETS
CURRENT ASSETS
  Cash and cash equivalents......................................            $   3,430,753           $   3,003,524
  Securities available for sale..................................                5,493,963               9,863,093
  Accounts receivable............................................                  430,574                 208,247
  Inventories....................................................                2,208,970               1,927,325
  Other..........................................................                  155,902                 154,887
                                                                      --------------------------------------------
TOTAL CURRENT ASSETS.............................................               11,720,162              15,157,076
PROPERTY AND EQUIPMENT, AT COST
  Equipment......................................................                2,538,874               2,484,535
  Leasehold improvements.........................................                5,528,758               5,513,850
  Less accumulated depreciation and amortization.................               (2,732,007)             (2,394,562)
                                                                      --------------------------------------------
  PROPERTY AND EQUIPMENT, NET....................................               5,335,625               5,603,823
INTANGIBLE ASSETS, AT COST
       Patents...................................................                  290,931                 290,930
  Less accumulated amortization..................................                 (133,269)               (125,269)
       Goodwill..................................................                3,150,000
  Less accumulated amortization..................................                  (35,556)
                                                                      --------------------------------------------
  INTANGIBLE ASSETS, NET.........................................                3,272,106                 165,661
 
OTHER                                                                              384,399                 384,399
                                                                      --------------------------------------------
TOTAL ASSETS....................................................             $  20,712,292           $  21,310,959
                                                                      ============================================
 
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
  Accounts payable...............................................            $     265,770           $     203,764
  Accrued liabilities............................................                  307,287                 470,643
                                                                      --------------------------------------------
TOTAL CURRENT LIABILITIES.......................................                   573,057                 674,407
 
DEFERRED LEASE PAYMENTS                                                            112,197                  20,055
 
STOCKHOLDERS' EQUITY
  Preferred stock $.01 par value: 2,000,000 shares authorized;
   no shares issued or outstanding...............................
  Common stock $.01 par value: 30,000,000 shares authorized;
   14,453,393 and 13,364,958 shares issued and outstanding at
   June 30, 1998 and December 31, 1997, respectively.............                  144,534                 133,650
  
  Additional paid-in capital.....................................               84,290,946              82,801,830
  Accumulated deficit............................................              (64,408,442)            (62,318,983)
                                                                      --------------------------------------------
  TOTAL STOCKHOLDERS' EQUITY....................................                20,027,038              20,616,497
                                                                      --------------------------------------------
 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................             $  20,712,292           $  21,310,959
                                                                      ============================================
</TABLE> 
                       See notes to financial statements

                                       3
<PAGE>
 
  STATEMENTS OF OPERATIONS - THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
                                  (UNAUDITED)
<TABLE>
<CAPTION>
 
                                                    Three months ended June 30,                     Six months ended June 30,
                                                    1998                   1997                   1998                    1997
                                         ----------------------------------------------------------------------------------------
<S>                                           <C>                    <C>                    <C>                      <C>
REVENUES
 Product sales.......................         $    609,126           $     53,016            $    845,586            $     82,570
 Contract manufacturing..............              105,624                190,442                 131,987                 569,983
                                         ----------------------------------------------------------------------------------------
 TOTAL REVENUE.......................              714,750                243,458                 977,573                 652,553
 
OPERATING EXPENSES
 Cost of product sales...............              216,246                 19,455                 343,789                  31,220
 Research and development............              570,907              1,328,492               1,113,188               2,652,290
 General and administrative..........            1,123,229              1,240,787               1,941,088               2,505,894
 Litigation settlement                                                   (400,000)                                       (400,000)
                                         ----------------------------------------------------------------------------------------
 TOTAL COSTS AND EXPENSES............            1,910,382              2,188,734               3,398,065               4,789,404
                                         ----------------------------------------------------------------------------------------
OPERATING LOSS.......................           (1,195,632)            (1,945,276)             (2,420,492)             (4,136,851)
 
OTHER INCOME
 Interest income.....................              142,446                243,948                 318,699                 507,528
 Other income........................               12,334                                         12,334
                                         ----------------------------------------------------------------------------------------
  TOTAL OTHER INCOME.................              154,780                243,948                 331,033                 507,528
 
                                         ---------------------------------------------------------------------------------------- 
NET LOSS.............................          ($1,040,852)           ($1,701,328)            ($2,089,459)            ($3,629,323)
                                         ========================================================================================
 
NET LOSS PER COMMON SHARE............               ($0.07)                ($0.13)                 ($0.15)                 ($0.27)
 
Weighted average number of common
shares used in computing net loss
per common share....................            14,090,581             13,315,104              13,727,770              13,302,650
 
</TABLE>

                       See notes to financial statements

                                       4
<PAGE>
 
 STATEMENTS OF CASH FLOWS - SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)

<TABLE>
<CAPTION>
 
 
 
                                                                                    Six months ended June 30,
OPERATING ACTIVITIES                                                             1998                       1997
                                                                          -----------------------------------------
<S>                                                                          <C>                        <C>
NET LOSS                                                                     ($2,089,459)               ($3,629,323)
 Adjustments to reconcile net loss
 to net cash used in operating activities:
 Depreciation.................................................                   337,443                    342,993
 Amortization of intangibles..................................                    43,557                      7,999
 Gain on sale of securities available for sale................                                                 (458)
 Restricted stock granted to Hymedix..........................                                              129,500
 Changes in assets and liabilities:
 Increase in inventories (net of assets acquired from
  HumaTech)...................................................                  (151,645)                  (611,892)
 
 Increase in accounts receivable (net of assets acquired from                   
  HumaTech)...................................................                  (107,327)                  (252,061)
 Decrease (increase) in other current assets (net of assets                       
  acquired from Huma Tech)....................................                    28,985                   (229,469)
 Increase in accounts payable.................................                    62,006                    137,589
 Increase (decrease) in accrued liabilities...................                  (163,356)                   214,974
 Increase (decrease) in deferred lease payments...............                    92,142                    (10,148)
                                                                          -----------------------------------------
 NET CASH USED IN OPERATING ACTIVITIES.......................                 (1,947,654)                (3,900,296)
                                                                          -----------------------------------------
 
 
INVESTING ACTIVITIES
 Purchase of property and equipment...........................                   (69,247)                  (411,475)
 Purchase of securities.......................................                  (499,922)               (31,113,125)
 Proceeds from sale or maturity of securities.................                 4,869,052                 39,488,940
 Purchase of HumaTech assets..................................                (1,925,000)
 Increase in other assets.....................................                                             (225,000)
                                                                          -----------------------------------------    
NET CASH PROVIDED BY INVESTING ACTIVITIES.....................                 2,374,883                  7,739,340
                                                                          -----------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS.....................                   427,229                  3,839,044
 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..............                 3,003,524                  1,804,875
                                                                          -----------------------------------------
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD...................               $  3,430,753               $  5,643,919
                                                                          =========================================
</TABLE> 
                       See notes to financial statements

                                       5
<PAGE>
 
  STATEMENT OF STOCKHOLDERS' EQUITY - SIX MONTHS ENDED JUNE 30, 1998 AND 1997
                                  (UNAUDITED)

<TABLE>
<CAPTION>
 
                                                                              Additional
                                                  Common Stock                 Paid-in          Accumulated
                                            Shares           Par Value         Capital           Deficit              Total
                                    -------------------------------------------------------------------------------------------
<S>                                 <C>               <C>               <C>               <C>                 <C>
BALANCE,  JAN 1, 1997............        13,277,558          $132,776       $82,576,340       ($55,870,339)         $26,838,777
                                    -------------------------------------------------------------------------------------------
Restricted stock granted to
 Hymedix at $2.59 per share on
 March 31, 1997..................            25,000               250            64,500                                  64,750
 
 
Restricted stock granted to
 Hymedix at $2.59 per share on
 June 30, 1997...................            25,000               250            64,500                                  64,750
 
Net loss, six month period.......                                                               (3,629,323)          (3,629,323)
                                    -------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1997...........        13,327,558          $133,276       $82,705,340       ($59,499,662)         $23,338,954
                                    ===========================================================================================  
 
 
BALANCE, JAN 1, 1998                     13,364,958          $133,650       $82,801,830       ($62,318,983)         $20,616,497
                                    -------------------------------------------------------------------------------------------
Shares issued in connection with
 the acquisition of the assets
 of HumaTech Laboratories at
 $1.38 per share on April 27,
 1998............................         1,088,435          $ 10,884       $ 1,489,116                               1,500,000
Net loss, six month period.......                                                               (2,089,459)          (2,089,459)
                                    -------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1998...........        14,453,393          $144,534       $84,290,946       ($64,408,442)         $20,027,038
                                    ===========================================================================================
</TABLE> 
 
                       See notes to financial statements

                                       6
<PAGE>
 
                              PROCYTE CORPORATION
                   Notes to Financial Statements (unaudited)


1.  BASIS OF PRESENTATION

     The accompanying unaudited Financial Statements of ProCyte Corporation
("ProCyte" or the "Company") for the three and six-month periods ended June 30,
1998 and 1997 have been prepared by the Company in accordance with generally
accepted accounting principles for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X.  Pursuant to such
rules and regulations, the Financial Statements do not include all of the
information and footnotes required by generally accepted accounting principles
for audited financial statements.  Accordingly, this financial information
should be read in conjunction with the complete audited Financial Statements,
including the notes thereto, which are included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997. In the opinion of management,
all material adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Interim results are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.

2.  INVESTMENTS

     At June 30, 1998, the Company's investments consisted entirely of US
Treasury bills & notes, US Agency securities, and investment-grade commercial
paper.  All investments are classified as "available for sale."  At June 30,
1998, the amortized cost and estimated market value for investments maturing in
one year or less was $4,481,463, and for those maturing in one through five
years was $1,012,500.  There were no gross realized or unrealized gains or
losses on investments at June 30, 1998 or during the six month period then
ended.

3.  INVENTORIES

     Inventories consist of raw materials, work in process and finished goods,
and are accounted for at the lower of cost or market.  As of June 30, 1998,
finished goods inventory was stated at $812,862, raw materials and work-in-
process inventory was stated at $1,776,108 and a reserve for surplus and
obsolete inventory was maintained at $380,000.

4.   STOCKHOLDERS' EQUITY

     Information relating to stock options granted, exercised, canceled and
currently exercisable is as follows:

<TABLE>
<CAPTION>
                                                                                                
                                                      Shares subject to     Weighted average    
                                                            option           exercise price     
                                                            ------           --------------
<S>                                                        <C>                    <C>
Balance, January 1, 1997.........................          1,442,193              $3.50

 Granted.........................................            164,000              $3.15

 Exercised.......................................                  0                  -

 Canceled........................................           (237,498)             $2.70
                                                        -----------------------------------
Balance, June 30, 1997...........................          1,368,695              $3.60
                                                        ===================================
</TABLE>

                                       7
<PAGE>
 
<TABLE>
<CAPTION>
 
                                                                                               
                                                      Shares subject to     Weighted average   
                                                            option           exercise price    
                                                            ------           --------------    
<S>                                                   <C>                  <C>
Balance, January 1, 1998......................            1,304,374               $2.94
                                                                                            
 Granted......................................              636,500               $1.31

 Exercised....................................                    0                   -
 
 Canceled.....................................              (33,334)              $2.94
                                                        ------------------------------- 
Balance, June 30, 1998........................            1,907,540               $2.40
                                                        ===============================
Currently exercisable.........................              774,048               $3.57
                                                        ================================
</TABLE>



     During the three-month period ended June 30, 1998, the Compensation
Committee of the Board of Directors awarded incentive stock options and non-
qualified stock options to employees and consultants to the Company under the
Company's 1989 Restated Stock Option Plan to purchase 398,500 shares of common
stock.  Pursuant to the 1991 Restated Stock Option Plan for Non-employee
Directors, during the three month period ended June 30, 1998 the non-employee
directors were awarded stock options with respect to a total of 36,000 shares of
common stock.  All options are subject to vesting schedules.

5.   HUMATECH ACQUISITION

     On April 27, 1998 the Company purchased substantially all of the assets of
HumaTech Corporation ("HumaTech"), a private company engaged in the distribution
of specialty dermatological products to the professional market.  The
acquisition was effected through cash payments of $1.5 million and the
distribution of 1,088,435 shares of  ProCyte common stock (valued at $1.5
million at the time of the acquisition) to the selling HumaTech shareholders.
Related acquisition costs amounted to approximately $425,000.  The acquisition
has been accounted for using the purchase method of accounting whereby the value
of consideration paid has been allocated to the assets acquired, principally
inventory and accounts receivable. Goodwill of $3.15 million resulted from the
transaction and is being amortized over 15 years.  In connection with the
acquisition ProCyte entered into employment agreements with two of the HumaTech
principals which, among other terms, provided for payments contingent on future
sales of HumaTech products.

                                       8
<PAGE>
 
     The following table reflects pro forma consolidated operating results of
the Company and HumaTech assuming the acquisition had been made as of January 1,
1997:

<TABLE>
<CAPTION>
                                                            SIX MONTHS ENDED JUNE 30,
                                                        1998                        1997
                                                        ----                        ----
<S>                                                 <C>                         <C> 
     Pro forma revenue....................             $1,605,000                 $1,546,000
     Pro forma net loss...................            ($2,130,000)               ($3,725,000)
     Pro forma loss per common share......                 ($0.15)                    ($0.26)
</TABLE>

     These pro forma results have been prepared for comparative purposes only
and reflect certain  adjustments including amortization of the goodwill.  The
pro forma information is not necessarily indicative of either the results of
operations that would have occurred had the acquisition been made on January 1,
1997 or that may occur in the future.

6.  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was recently issued and is effective for the Company's year ending
December 31, 1998. Management believes that the impact of its adoption will not
be material to the financial statements, taken as a whole.

                                       9
<PAGE>
 
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This discussion contains forward-looking statements that are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those projected.  The words "believe", "expect", "intend", "anticipate",
variations of such words and similar expressions identify forward-looking
statements, but their absence does not mean that the statement is not forward-
looking.  These statements are not guaranties of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict.  Factors that could affect the Company's actual results include, among
other things, the availability of adequate funding, the availability of contract
manufacturing opportunities, relationships with corporate collaborators, the
progress and costs of pre-clinical studies and clinical trials, the recruitment
of suitable patients, the timing of regulatory approvals, the rate of market
acceptance of the Company's products, the availability of third-party
reimbursement for the Company's products, the ability to obtain and defend
patent and related future products and intellectual property rights and to
market the Company's products and the status of competing products.  See
"Important Factors Regarding Forward-Looking Statements."  Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date of this report.  ProCyte undertakes no obligation to update
publicly any forward-looking statement to reflect new information, events or
circumstances after the date of this report or to reflect the occurrence of
unanticipated events.

Corporate Overview

     For the first six months of 1998 ProCyte continued its marketing and
development efforts for an array of wound care products, expanded its product
line and channels of distribution with the acquisition of HumaTech, and
continued the development of complementary skin health and hair care products.
As the Company's product line has expanded, it has continued to focus its
efforts on the specialty tissue repair sectors - marketing to dermatologists,
plastic surgeons and cosmetic surgeons.

     During the first quarter, the Company introduced Complex Cu3(TM) Intensive
Repair Creme, a product used to treat patients following chemical peels,
dermabrasion and laser treatments.  The Company also began selling its Pillo(TM)
Pro dressings which provide moisture absorption following liposuction
procedures.  Each year in the United States alone an estimated 400,000 such
surgeries are performed.  In December 1997, ProCyte entered into an exclusive
distribution agreement with the Bard Medical Division ("Bard") of C.R. Bard,
Inc. Subject to certain minimum quarterly purchase requirements, ProCyte granted
Bard the exclusive rights to distribute ProCyte's products for the wound care
markets in the hospital, nursing home and extended care markets in the United
States and Canada. ProCyte's Iamin(R) Hydrating Gel, Iamin(R) Wound Cleanser,
and OsmoCyte(R) Pillow Wound Dressings became the first Company products to be
added to the Bard sales effort.  The Company shipped its first orders to Bard in
January 1998.

     Sales of the Company's GraftCyte(TM)  line of copper-peptide containing
wound care products for use following hair restoration surgery continued to
increase in the first half of 1998.  Approximately 400,000 hair restoration
procedures are performed annually in the United States.  ProCyte is the first
company to provide a line of products that address the importance of wound
repair in the hair transplant process.  The Company's GraftCyte(TM) products are
promoted through specialty distributors.

                                       10
<PAGE>
 
     During the second quarter the Company purchased the assets of HumaTech, a
private company  located in Boca Raton, FL, which distributes prescription and
OTC topical drugs and skin care products to dermatologists, plastic surgeons and
cosmetic surgeons.  HumaTech sales representatives sell therapeutic skin care,
dermatologic agents and anti-aging products as well as an advanced sun
protection line, TiSilc(TM).  Most HumaTech products are private-labeled or
custom-packaged with the doctors name.  The Company expects that access to the
HumaTech customer base and integration of its marketing approach will improve
the rate of increase of the Company's product sales.  The Company also expects
that there will be opportunities to enhance the sales of HumaTech products by
integrating the two product lines, reformulating certain HumaTech products, and
redesigning the HumaTech packaging and marketing materials.

Operating Losses

     The Company is engaged in the development of healthcare products utilizing
copper-peptide containing and polymer-based compounds.  Such development has
historically been funded from the Company's equity-derived working capital and
through corporate partnerships.  The Company has incurred operating losses since
its inception due to financial and regulatory requirements required to support
research, development and clinical studies of its proprietary technology.  At
June 30, 1998, the Company's accumulated deficit was approximately $64.4
million.  The Company expects to incur additional operating losses for a number
of years until its product lines have been expanded and have achieved market
acceptance.

Revenue

     For the three and six-month periods ended June 30, 1998, ProCyte generated
total operating revenue of approximately $714,750 and $977,573, respectively,
from product sales and from performing contract manufacturing services.
Comparable revenues were $243,458 and $652,553 for the three and six-month
periods ended June 30, 1997.  Sales of HumaTech products amounting to $353,190
were included in ProCyte's operating revenue during the six month period ended
June 30, 1998; no such sales were included in the comparable 1997 amounts.
Operating revenue excluding HumaTech sales decreased due to a decline in
contract manufacturing revenue from $569,983 during the six months ended June
30, 1997 to $131,987 during the comparable period in 1998. This decline resulted
from the completion of a contract manufacturing project in 1997 that did not
carry over into 1998, and from product regulatory delays faced by one of the
Company's largest contract manufacturing customers that have indefinitely
delayed this customer's need for the Company's services.

     Revenue from product sales were approximately $609,126 and $845,586 during
the three and six month periods ended June 30, 1998, respectively, up from
$53,016 and $82,570 during the three and  six months ended June 30, 1997. The
increase was primarily a result of revenue from HumaTech products, from new
products launched in the 3rd and 4th quarters in 1997 (especially products from
the GraftCyte(TM) line), and from the initial shipments of various wound care
products to Bard.

     Interest income was approximately $142,446 and $318,699 for the three and
six-month periods ended June 30, 1998, compared to $243,948 and $507,528 for the
comparable periods in 1997.  The decrease in interest income was primarily a
result of reduced funds available for investment.

                                       11
<PAGE>
 
Expenses

     Research and development expenses were approximately $570,907 and
$1,113,188 for the three and six-month periods ended June 30, 1998, primarily
reflecting the continuation of the Company's expenditures for development of
wound care, skin and hair health product candidates.  This compares to research
and development expenses of $1,328,492 and $2,652,290 for the comparable three
and six-month periods in 1997. This decrease resulted from reduced staffing
levels and from the completion of various research projects and studies.  The
Company anticipates that expenditures for product development will remain at or
near current levels.

     General and administrative expenses were approximately $1,123,229 and
$1,941,088 for the three and six-month periods ended June 30, 1998, compared to
$1,240,787 and $2,505,894 for the same periods in 1997.  This decrease in
general and administrative expenses was obtained despite the additional expenses
of the HumaTech operation and was primarily related to reduced staffing levels
and to the consolidation of the Company's facilities in the 3rd quarter of 1997.
The Company anticipates that expenditures will remain at or near current levels
although it is exploring areas where duplicative functions can be eliminated.
The Company expects to consolidate the HumaTech operations into its existing
facilities in Redmond, WA during the second half of 1998.  In May 1997 the
Company received a negotiated final payment of $400,000 related to the
settlement of a lawsuit against the Company.

Liquidity and Capital Resources

     The Company has relied primarily on equity financings, contract
manufacturing revenue, interest income, product sales and corporate partnerships
to fund its operations and capital expenditures.  At June 30, 1998, the Company
had approximately $8.9 million in cash, cash equivalents and securities
available for sale, as compared to $12.9 million at December 31, 1997.  The
principal components of the $4 million decrease are approximately $1.9 million
used for the HumaTech acquisition and $1.9 million used to fund ongoing
operations.  The Company expects that its operating cash needs will continue at
similar levels in future periods.

     The increase of $222,327 in trade accounts receivable during the six month
period ending June 30, 1998 reflects the HumaTech acquisition and the increase
in sales of ProCyte products.  For the six month period ending June 30, 1998,
inventory rose by $281,645, primarily as a result of the HumaTech acquisition.

         The Company believes that its existing cash, cash equivalents,
securities available for sale, and interest thereon, will be sufficient to meet
its capital requirements at least through 1999.  However, there can be no
assurance that the underlying assumed levels of revenue and expense will prove
accurate.  Although the Company believes that its existing and potential
products appear promising, it is unknown whether any of such products will prove
commercially viable.  In any event, substantial additional funds will be needed
to commercialize existing products and to continue development of potential
products.  The Company will depend upon equity financings, contract
manufacturing fees, interest income, product revenues and funding from corporate
partnerships to meet its future capital needs.  There can be no assurance that
such funds will be available as needed or on terms that are acceptable to the
Company.  If the Company is unable to obtain sufficient funds to satisfy its
cash requirements, the Company will be required to delay, reduce or eliminate
some or all of its research and development activities, clinical trials, and
manufacturing and administrative programs, or dispose of 

                                       12
<PAGE>
 
assets or technology. See "Important Factors Regarding Forward-Looking
Statements."

IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS

History of Operating Losses; Accumulated Deficit; Fluctuations in Future
Earnings

     The Company launched its first product in 1996, launched additional wound
care products in 1997 and the first half of 1998 and expects further product
launches in skin health and hair care products in 1998.  To date, however, the
Company has generated only minimal revenues from product sales and there can be
no assurance that the Company will be able to generate sufficient product sales
to achieve a profitable level of operations.  As of June 30, 1998, the Company's
accumulated deficit was approximately $64.4 million.  The Company expects to
incur additional operating losses at least through 1999.  The Company's revenues
have principally been from interest income, research fees, license fees and fees
for performance of contract manufacturing services.  The Company's ability to
achieve a consistent, profitable level of operations is dependent in large part
successfully manufacturing its products, entering into agreements with corporate
partners for distribution and commercialization of the Company's products and
out-licensing of the Company's products and technology, of which there can be no
assurance.  In addition, payments under corporate partnerships and licensing
arrangements, if any, will be subject to significant fluctuations in both timing
and amounts.  The time required to reach sustained profitability is highly
uncertain, and there can be no assurance that the Company will be able to
achieve profitability on a sustained basis, if at all.  Moreover, if
profitability is achieved, the level of profitability cannot be predicted and it
may vary significantly from quarter to quarter.

Need for Additional Capital

     The Company expects negative cash flow from operations to continue for the
foreseeable future.  The Company may require substantial additional funds to
expand or enhance sales and its marketing activities and to continue product
development.  The Company's future capital requirements will depend on numerous
factors, including its efforts, and the efforts of its collaborative partners,
to commercialize its products; continued progress in the Company's research and
development programs; the results of research and development activities;
relationships with existing and future corporate collaborators, if any;
competing technological and market developments; the costs involved in filing,
prosecuting and enforcing patent claims; the time and costs of commercialization
activities; and other factors. At June 30, 1998 the Company had cash, cash
equivalents and securities available for sale of $8.9 million.  The Company
estimates that at its planned rate of spending, its existing cash, cash
equivalents and securities available for sale and the interest income thereon
will be sufficient to meet its capital requirements at least through 1999.
There can be no assurance that the underlying assumed levels of revenue and
expense will prove accurate.  Whether or not these assumptions prove to be
accurate, the Company will need to raise substantial capital to fund operations.
The Company may be required to seek additional funding through public or private
financing, including equity financing, and through collaborative arrangements.
Adequate funds for these purposes, whether obtained through financial markets or
from collaborative or other arrangements with corporate partners or other
sources, may not be available when needed or may not be available on terms
favorable to the Company, if at all.  If additional funds are raised by issuing
equity securities, dilution to existing shareholders will result.  In addition,
in the event that additional funds are obtained through arrangements with
collaborative partners, such arrangements may require the Company to relinquish
rights to certain of its technologies or potential products that it would
otherwise seek to develop or commercialize itself.  If funding is insufficient
at any time in the future, the Company may be required to delay, scale back or
eliminate 

                                       13
<PAGE>
 
some or all of its marketing and research and development programs or to license
third parties to commercialize products or technologies that the Company would
otherwise seek to develop itself. Furthermore, the terms of any such license
agreements might be less favorable than if the Company were negotiating from a
stronger position. Moreover, if funding is insufficient at any time in the
future, and the Company's existing funds are depleted, the Company may be
required to cease operations.

Uncertainties Related to Contract Manufacturing Operations

     Since inception, a substantial portion of the Company's revenues have been
derived from its contract manufacturing operations as the Company has sought to
more fully utilize its existing facility's capacity while its own products were
under development.  For the foreseeable future, ProCyte expects to continue to
have excess manufacturing capacity as it works to complete development, and
begin commercialization, of its potential products.  Accordingly, the Company
will continue to seek contract manufacturing opportunities.  Contract
manufacturing revenues will be adversely affected to the extent the Company's
customers decide to manufacture their products themselves or choose to have them
manufactured elsewhere.  In addition, the Company's contract manufacturing
revenues may be adversely affected to the extent its customers experience
regulatory delays, product recalls, or competitive pressures in the marketplace.
The Company expects that revenues from contract manufacturing will significantly
decline in 1998 as a result of the loss of two of its most significant contract
manufacturing customers, one of whom faces an indefinite delay in receiving FDA
clearance.  There can be no assurance that contract revenues in the future will
be significant.

Uncertainties Related to Stage of Development

         From the Company's inception in 1986 until it launched its first
commercial product in June 1996, substantially all of its resources were
dedicated to the research and development of wound healing and tissue repair
applications of its topically administered copper-peptide compounds.  Although
the Company launched additional wound care product lines in 1997 and the first
half of 1998 and expects further product launches in skin health and hair care
in 1998, to date Company has generated only minimal revenues from product sales.
The Company's revenues have principally been from fees for performance of
contract manufacturing services, interest income, research fees and license
fees.  There can be no assurance that the Company's current products or its
potential products, if successfully developed, will be successfully
commercialized and accepted for use by physicians, healthcare providers and
consumers.  The failure of the Company to successfully develop its potential
products or its failure to successfully commercialize its existing or potential
products will have a material adverse effect on the Company's business,
financial condition and results of operations.

Uncertainties Related to Clinical Trials and Product Development

         The Company is dependent upon the successful development of its
potential products.  Development of the Company's potential products is highly
uncertain, and unanticipated developments, clinical and regulatory delays,
adverse or unexpected side effects or inadequate therapeutic efficacy could slow
or prevent the successful completion of the Company's product and technology
development. There can be no assurance that the Company will obtain regulatory
approval, that an approved product can be produced in commercial quantities at
reasonable costs or gain acceptance for use by physicians, healthcare providers
and consumers or that any potential products will be successfully marketed at
prices that would permit the Company to operate profitably, the failure of any
of which would have a material adverse effect on the Company's business,
financial condition and results of operations.

                                       14
<PAGE>
 
Dependence on and Management of Existing and Future Corporate Alliances

     The successful commercialization of the Company's existing and future
products will depend upon ProCyte's ability to enter into and effectively manage
numerous corporate partnerships.   ProCyte currently promotes certain of its
products through specialty distributors.  Other products and technology are
licensed for incorporation into products sold by others.  In November 1997, the
Company entered into an exclusive worldwide supply and marketing agreement with
Osmotics Corporation ("Osmotics"), pursuant to which the Company granted
Osmotics the right to introduce the Company's copper-peptide-containing products
to the prestige skin care market.  In December 1997, the Company entered into an
exclusive distribution agreement with the Bard Medical Division ("Bard") of C.R.
Bard, Inc.  Pursuant to this agreement, Bard will be the exclusive supplier of
the Company's wound care products to the hospital, nursing home and extended
care markets in the United States and Canada.  Subsequent to the Bard agreement,
ProCyte entered into exclusive distribution agreements for the registration and
distribution of certain of its wound care products in certain foreign countries.
ProCyte plans to seek similar distribution partnerships in additional countries.
There can be no assurance that any of the Company's collaborators will perform
their obligations under their agreements with the Company or that the Company's
products or the products of others that incorporate the Company's products or
technology, will be successfully commercialized, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.

     There can be no assurance that the Company will be successful in
establishing corporate alliances in the future, or that it will be successful in
maintaining existing or any future corporate alliances.  Moreover, there can be
no assurance that the interests and motivations of any corporate partner,
distributor or licensee would be or remain consistent with those of the Company,
or that such partners, distributors or licensees would successfully perform the
necessary technology transfer, clinical development, regulatory compliance,
manufacturing, marketing or other obligations.  Failure of any of the foregoing
could have a material adverse effect on the Company's business, financial
condition and results of operations.

Uncertainty of Patent Position and Proprietary Rights

     The patent positions of biotechnology, medical device and healthcare
products companies are often uncertain and involve complex legal and factual
questions, and the breadth of claims allowed in such patents cannot be
predicted.  In addition, there is a substantial backlog of patents at the US
Patent and Trademark Office that may delay the review and the potential issuance
of patents.  The Company's success will depend to a significant degree on its
ability to obtain patents and licenses to patent rights, to maintain trade
secrets and to operate without infringing on the proprietary rights of others,
both in the United States and in other countries.  The failure of the Company or
its licensors to obtain and maintain patent protection for the Company's
technology could have a material adverse effect on the Company.

     ProCyte's success depends in part upon its ability to protect its products
and technology under intellectual property laws in the United States and abroad.
As of June 30, 1998, the Company had 18 issued United States patents expiring
between 2005 and 2014, and 132 issued foreign patents and patent registrations.
The patents relate to use of the Company's copper-based technology for a variety
of healthcare applications, and to the composition of certain biologically
active, synthesized compounds. The Company's strategy has been to apply for
patent protection for certain compounds and their discovered uses that are
believed to have potential commercial value in countries which offer

                                       15
<PAGE>
 
significant market potential. There can be no assurance that patent applications
relating to the technology used by the Company will result in patents being
issued. There can be no assurance that any patent issued to the Company will not
be subjected to further proceedings limiting the scope of the rights under the
patent or that such patent will provide a competitive advantage or will afford
protection against competitors with similar technology, or will not be
successfully challenged, invalidated or circumvented by competitors.

     The Company's processes and potential products may conflict with patents
that have been or may be granted to competitors and others.  As the
biotechnology, medical device and healthcare industries expand and more patents
are issued, the risk increases that the Company's processes and potential
products may give rise to claims that they infringe the patents of others.  Such
other persons could bring legal actions against the Company claiming damages and
seeking to enjoin clinical testing, manufacturing and marketing of the affected
product or use of the affected process.  Litigation may be necessary to enforce
patents issued to the Company, to protect trade secrets or know-how owned by the
Company or to determine the enforceability, scope and validity of proprietary
rights of others.  If the Company becomes involved in such litigation, it could
result in substantial expense to the Company and significant diversion of effort
by the Company's technical and management personnel.  In addition to any
potential liability for significant damages, the Company could be required to
obtain a license to continue to manufacture or market the affected product or
use the affected process.  Costs associated with any licensing arrangement may
be substantial and could include ongoing royalties.  There can be no assurance
that any license required under any such patent would be made available to the
Company on acceptable terms, if at all.  If such licenses could not be obtained
on acceptable terms, the Company could be prevented from manufacturing and
marketing existing or potential products.  Accordingly, an adverse determination
in such litigation could have a material adverse effect on the Company's
business, financial condition and results of operations.

     The Company also relies upon unpatented proprietary technology.  There can
be no assurance that the Company can meaningfully protect its rights in such
unpatented technology, that any obligation to maintain the confidentiality of
such proprietary technology will not be breached by employees, consultants,
collaborators or others, or that others will not independently develop or
acquire substantially equivalent technology.  To the extent that corporate
partners or consultants apply Company technological information independently
developed by them or by others to Company projects or apply Company technology
or know-how to other projects, disputes may arise as to the ownership of
proprietary rights to such information.  Any failure to protect unpatented
proprietary technology or any breach of obligations designed to protect such
technology or development of equivalent technology may have a material adverse
effect on the Company's business, financial condition and results of operations.

Uncertainty of Government Regulatory Requirements

     The manufacture and marketing of ProCyte's products and its research and
development activities in general are subject to extensive regulation in the
United States by the federal government, principally by the FDA, and in other
countries by similar health and regulatory authorities.  The Federal Food, Drug
and Cosmetic Act and the regulations promulgated thereunder, and other federal
and state statutes govern, among other things, the testing, manufacture, safety,
labeling, storage, record-keeping, advertising and promotion of cosmetic
products and medical devices. Product development and approval or clearance
within the regulatory framework requires a number of years and involves the
expenditure of substantial resources.

                                       16
<PAGE>
 
     In order to obtain FDA clearance to market a new device in the United
States for use in humans, it is necessary to proceed through several stages of
product testing, including research and development, clinical trials, and the
filing of a product 510(k) medical device application with the FDA to obtain
authorization to market a product.  The Company's products and product
candidates may be regulated by any of a number of divisions of the FDA.  The
process of obtaining and maintaining regulatory approvals for the manufacturing
or marketing of the Company's existing and potential products is costly and
time-consuming and is subject to unanticipated delays. Accordingly, delays,
rejections or unexpected costs may be encountered based on changes in the policy
or regulations of the FDA or foreign governmental authorities during the period
of product development and regulatory review, which changes may result in
limitations or restrictions on the Company's ability to utilize its technology
or develop product candidates.  Regulatory requirements ultimately imposed could
also adversely affect the ability of the Company to clinically test, manufacture
or market products. Even if regulatory approval of a potential product is
obtained, such approval may entail limitations on the indicated uses for which
such product may be marketed, which may restrict the patient population for
which any product may be prescribed.  In addition, a marketed product is subject
to continual FDA review.  Later discovery of previously unknown problems or
failure to comply with the applicable regulatory requirements may result in
restrictions on marketing a product or withdrawal of the product from the
market, as well as possible criminal or civil sanctions.

     In the United States, products that do not seek to make effectiveness
claims based on human clinical evaluation may be subject to review and
regulation under the FDA's cosmetic or 510(k) medical device guidelines.
Similar guidelines exist for such products in other countries.  Such products,
which include wound care dressings, ointments and gels, must show safety and
substantial equivalency with predicate products already cleared to be marketed
by the FDA.  There can be no assurance that such product applications submitted
to the FDA or similar agencies in other countries will receive clearance to be
marketed, or that the labeling claims sought will be approved, or that, if
cleared, such products will be commercially successful.

     In addition to obtaining approval or clearance from the FDA or foreign
regulatory bodies to market a product, the prospective manufacturer's quality
control and manufacturing procedures must conform to current good manufacturing
practices ("cGMPs") guidelines, or ISO 9000 standards, when appropriate.  In
complying with these regulations, which are subject to change at any time
without notice to the Company, ProCyte must continue to expend time, effort and
financial resources in production and quality control.  In addition, ProCyte's
manufacturing plant is subject to the regulations of and inspections by other
foreign, federal, state or local agencies, such as local and regional water and
waste treatment agencies, and state and federal safety and health agencies.
There can be no assurance that the Company's manufacturing facility or its
manufacturing operations  will meet or continue to meet all appropriate
guidelines or to pass inspections by any government agency.

     The Company also is or may become subject to various other federal, state,
local and foreign laws, regulations and policies relating to, among other
things, safe working conditions, good laboratory practices, animal welfare, and
the use and disposal of hazardous or potentially hazardous substances used in
connection with research, development and/or manufacturing.

     Failure to obtain regulatory approvals for its product candidates or to
either attain or maintain compliance with cGMP or other manufacturing
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations.

                                       17
<PAGE>
 
Intense Competition

     Competition in the wound care, skin health and hair care markets is
intense.  The Company's competitors include well-established pharmaceutical,
cosmetic and healthcare companies such as Bristol Myers Squibb's ConvaTec
division, Kendall Healthcare Company, Johnson and Johnson, and Allergan.  These
competitors have substantially more financial and other resources, larger
research and development staffs, and more experience and capabilities in
researching, developing and testing products in clinical trials, in obtaining
FDA and other regulatory approvals, and in manufacturing, marketing and
distribution than the Company.  In addition, a number of smaller companies are
developing or marketing competitive products, some of which may have an entirely
different approach than products being marketed or developed by the Company.
The Company's competitors may succeed in developing and commercializing products
or obtaining patent protection or other regulatory approvals for products more
rapidly than the Company.  If the Company is successful in commercializing its
products, it will be required to be competitive with respect to manufacturing
efficiency and marketing capabilities, areas in which it has very limited
experience.  The Company's competitors may develop new technologies and products
that are available for sale prior to the Company's potential products or that
are more effective than the Company's existing or potential products.  In
addition, competitive products may be manufactured and marketed more
successfully than the Company's potential products.  Such developments could
render the Company's existing or potential products less competitive or
obsolete, and could have a material adverse effect on the Company's business,
financial condition and results of operations.

     The contract manufacturing service business is also highly competitive.
Competitors include major chemical and pharmaceutical companies, as well as
specialized biotechnology firms, smaller contract chemical manufacturers and
some universities.  Many of these companies or institutions have greater
financial, technical and marketing resources than the Company.

Potential Volatility of Stock Price

     The market prices for securities of healthcare, medical dressings,
pharmaceutical and biotechnology companies are subject to volatility, and the
market has from time to time experienced significant fluctuations that are
unrelated to the operations of the Company.  ProCyte's market price has
fluctuated over a wide range since the Company's initial public offering in
1989.  Announcements concerning the Company or its competitors, including
fluctuations in operating results, research and development program direction,
results of clinical trials, addition or termination of corporate alliances,
technology licenses, clearance or approval to market products, announcements of
technological innovations or new products by the Company or its competitors,
changes in government regulations, healthcare reform, developments in patent or
other proprietary rights of the Company or its competitors, litigation
concerning business operations or intellectual property, or public concern as to
safety of products, as well as changes in general market conditions and mergers
and acquisitions, may have a significant effect on the market price of ProCyte's
common stock.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         None

                                       18
<PAGE>
 
PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

        None.


ITEM  2 - CHANGES IN SECURITIES AND USE OF PROCEEDS

      The Company issued 1,088,435 shares of its Common Stock in connection with
the acquisition of HumaTech Laboratories, a Florida corporation, on April 27,
1998. The form of the transaction was a purchase of substantially all of
HumaTech's assets in exchange for a combination of cash and shares of the
Company's Common Stock. No underwriters were used and the recipients of the
Company's Common Stock were the former shareholders of HumaTech.

      The shares issued to the former HumaTech shareholders were not registered
under the Securities Act of 1933, as amended, pursuant to the exemption set
forth in Section 4(2) thereof. All recipients of shares of the Company's Common
Stock made certain representations to the Company as to investment intent,
possessed a sufficient level of financial sophistication and received or had
access to information about the Company. The shares issued in the transaction
are subject to restrictions on transfer absent registration under the Securities
Act, and no offers to sell the securities were made by any form of general
solicitation or general advertisement.

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

      The annual meeting of the shareholders of the Company was held on June 10,
1998. Two matters were submitted to the shareholders for a vote. As of April 2,
1998, the record date, there were 13,364,958 shares eligible to vote at the
meeting, of which 87.89% or 11,747,107 were present at the meeting, constituting
a quorum. The first matter was the election of directors. The seven nominees for
election as directors were elected to serve until the 1999 annual meeting of the
shareholders, and until the election and qualification of their respective
successors. The vote for each director follows:

<TABLE>
<CAPTION>
                     DIRECTOR                          FOR                      WITHHELD
<S>                                                <C>                          <C> 
                   Jules Blake                     11,473,327                   273,780
                   Susan Browner                   11,516,577                   230,530
                   John Clifford                   11,456,427                   290,680
                   Matt Leavitt                    11,468,777                   278,330
                   Robert Patterson                11,475,127                   271,980
                   William Sullivan                11,454,727                   292,380
                   Thomas Tierney                  11,453,427                   293,680
</TABLE> 
         The second matter was the adoption of the 1998 non-employee director
stock plan which was approved by a vote of 11,112,466 shares voting for, 460,424
shares voting against and 174,217 shares abstaining.

ITEM 5.  OTHER INFORMATION

         In accordance with the Company's Bylaws, a shareholder proposing to
transact business at the Company's annual meeting must provide written notice of
such proposal, in the manner provided by the 

                                       19
<PAGE>
 
Company's Bylaws, not fewer than 60 nor more than 90 days prior to the date of
such annual meeting (or, if the Company provides less than 60 days notice of
such meeting, no later than the tenth day after the date of the Company's
notice). In addition, if the Company receives notice of a shareholder proposal
after March 15, 1999, the persons named as proxies in the proxy statement will
have discretionary authority to vote on such shareholder proposal.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

     10.1  ProCyte Corporation 1998 Nonemployee Director Stock Plan
     10.2  Change of Control Agreement for Ms. Robin Carmichael
     10.3  Change of Control Agreement for Ms. Susan Browner
     10.4  Change of Control Agreement for Mr. Ken Tapman
     10.5  Form of Indemnity Agreement between Procyte Corporation and each of
           various of its Officers and Directors
     27    Financial Data Schedule

(b)  Reports on Form 8-K

         The Company filed one report of Form 8-K during the second quarter
ended June 30, 1998.  The report was filed on April 27, 1998 and reported on the
April 1998 acquisition of HumaTech Corporation.

SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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.

 
                                          PROCYTE CORPORATION
                                              (REGISTRANT)




Date: August 12, 1998              By:             /s/ John F. Clifford
                                       -----------------------------------------
                                         John F. Clifford, President and CEO



Date: August 12, 1998              By:             /s/ Jerry Scott
                                       -----------------------------------------
                                         Jerry P. Scott, Vice President and CFO

                                       20
<PAGE>
 
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>


  Exhibit Number                            Title
  --------------                            -----
<S>                   <C>     
      10.1            ProCyte Corporation 1998 Nonemployee Director Stock Plan
      10.2            Change of Control Agreement for Ms. Robin Carmichael
      10.3            Change of Control Agreement for Ms. Susan Browner
      10.4            Change of Control Agreement for Mr. Ken Tapman
      10.5            Form of Indemnity Agreement between ProCyte Corporation and each of various of
                      its Officers and Directors
      27              Financial Data Schedule
</TABLE>

                                       21