Form 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                   QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the Quarterly Period Ended June 30, 1999

                          Commission File No. 000-19495



                                  Embrex, Inc.
              ----------------------------------------------------
               (Exact name of issuer as specified in its charter)


                     North Carolina                 56-1469825
              ----------------------------------------------------
             (State or other jurisdiction of      (IRS Employer
              incorporation or organization)   Identification No.)


                       1035 Swabia Court, Durham, NC      27703
              ----------------------------------------------------
               (Address of principal executive offices) (Zip Code)


        Registrant's telephone no. including area code: (919) 941-5185


Check 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 past 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
                                     ---                 ---
The number of shares of Common Stock, $0.01 par value, outstanding as of July
31, 1999, was 8,231,260.

<PAGE>



                                  EMBREX, INC.
                                    INDEX

Part I                                                             Page
                                                                   ----
     Financial Information:
        Item 1 - Financial Statements:

           Balance Sheets.........................................3 of 15

           Statements of Operations...............................4 of 15

           Statements of Cash Flows...............................5 of 15

           Notes to Consolidated Financial Statements.............6 of 15

        Item 2:

           Management's Discussion and Analysis of
           Financial Condition and Results of Operations..........7 of 15

        Item 3:

           Quantitative and Qualitative Disclosures
           About Market Risk.....................................12 of 15

Part II
     Other Information:

     Item 1: Legal Proceedings...................................12 of 15

     Item 2: Changes in Securities...............................13 of 15

     Item 3: Defaults Upon Senior Securities.....................13 of 15

     Item 4: Submission of Matters to a Vote of Security Holders.13 of 15

     Item 5: Other Information...................................13 of 15

     Item 6: Exhibits and Reports on Form 8-K....................13 of 15

     Signatures..................................................14 of 15

     Exhibit Index...............................................15 of 15


<PAGE>


PART I - FINANCIAL INFORMATION
     Item 1 - Financial Statements

                                  Embrex, Inc.
                                ----------------

Consolidated Balance Sheets
(Dollars in thousands)







                                                     June 30      December 31
                                                      1999           1998
                                                  -------------   -----------
                                                   (unaudited)
ASSETS
Current Assets
   Cash and cash equivalents..................   $     7,141    $    7,167
   Restricted Cash............................           275           275
   Accounts receivable - trade ...............         3,746         3,454
   Inventories:
     Materials and supplies...................           943           925
     Product..................................           800         1,281
   Other current assets.......................         1,091           738
                                                    ----------    ---------
     Total Current Assets.....................        13,996        13,840

INOVOJECT(R)Systems Under Construction........           725           568

INOVOJECT(R)Systems...........................        25,584        24,161
Less accumulated depreciation.................       (17,894)      (16,297)
                                                    ----------    ---------
                                                       7,690         7,864

Equipment, Furniture and Fixtures ............         6,183         5,060
   Less accumulated depreciation and amortization     (2,771)       (2,468)
                                                    ----------    ---------
                                                       3,412         2,592


Other Assets:
   Patents and exclusive licenses of patentable
   technology (net of  accumulated amortization
   of $196 in 1998)............................          103          126
                                                  ----------    ---------
                                               $      25,926  $    24,990
Total Assets...................................   ==========   ==========



LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
   Accounts payable..........................  $         754   $      393
   Accrued expenses..........................          2,397        2,033
   Deferred revenue.........................              56          175
   Product warranty accrual.................             366          322
   Current portion of capital lease obligations        1,350        2,618
                                                  ----------    ---------
     Total Current Liabilities...............          4,923        5,541

Capital Lease Obligations, less current portion          238          634
Long-Term Debt, less current portion......                 0           10
Shareholders' Equity
   Common Stock,$.01 par value:
     Authorized - 30,000,000 shares
     Issued and outstanding -
        8,222,190 and 8,264,490 shares at
        June 30, 1999 and December 31, 1998,
        respectively.......................               91           83
   Additional paid-in capital................         55,094       54,894
   Accumulated other comprehensive income....            (80)         113
   Accumulated deficit.......................        (33,605)     (36,072)
   Treasury stock............................           (735)        (213)
                                                    ----------  ---------
     Total Shareholders' Equity..............         20,765       18,805
                                                    ----------  ---------
Total Liabilities and Shareholders' Equity...  $      25,926   $   24,990
                                                    ==========   ==========


                                       3
<PAGE>


                                  Embrex, Inc.
                                ----------------


Consolidated Statements of Operations
(Unaudited)
(Amounts in thousands, except per share data)

<TABLE>
<CAPTION>
                                           Three Months Ended   Six Months Ended
                                                 June 30            June 30
                                           ------------------   ----------------
                                             1999      1998      1999     1998
                                             ----      ----      ----     ----
Revenues
<S>                                       <C>       <C>       <C>       <C>
   INOVOJECT(R)System revenue..........   $ 8,087   $ 6,574   $15,777   $ 13,152
   Product sales.....................         299       266       545        521
   Other revenue....................           25       121       105        145
                                          -------   -------   -------   --------
    Total Revenues..................        8,411     6,961    16,427     13,818
Cost of Product Sales and
INOVOJECT(R)System Revenues..........       3,213     3,474     6,439      6,683
                                          -------   -------   -------   --------
     Gross Profit....................       5,198     3,487     9.988      7,135

Operating Expenses
   General and administrative........       1,985     1,552     3,809      3,352
   Sales and marketing..............          156       126       322        323
   Research and development..........       1,410       940     2,734      1,800
                                          -------   -------   -------   --------
     Total Operating Expenses........       3,551     2,618     6,865      5,475

Operating Income.....................       1,647       869     3,123      1,660

Other Income (Expense)
   Interest income..................          101        73       181        152
   Interest expense................           (71)     (137)     (206)      (352)
                                          -------   -------   -------   --------
     Total Other Expense............           30       (64)      (25)      (200)
                                          -------   -------   -------   --------

Income Before Taxes...................      1,677       805     3,098      1,460
Income Taxes..........................       (347)     (200)     (631)      (328)
                                          -------   -------   -------   --------
     Net Income .......................   $ 1,330   $   605   $ 2,467  $   1,132
                                         ========   =======   =======  =========

Net Income Per Share of Common Stock:

   Basic.............................      $ 0.16    $ 0.07    $ 0.30     $ 0.14
   Diluted...........................      $ 0.16    $ 0.07    $ 0.29     $ 0.14

Weighted Average Number of Shares Used in Per-Share Calculation:
   Basic.............................       8,250     8,249     8,272      8,246
   Diluted...........................       8,456     8,340     8,412      8,337
</TABLE>




                                       4
<PAGE>



                                  Embrex, Inc.
                                ----------------


Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)



                                                        Six Months Ended June 30
                                                        ----------------------
                                                         1999             1998
                                                         ----             ----

OPERATING ACTIVITIES
   Net income .................................... $    2,467        $   1,132
   Adjustments to reconcile net income
   to net cash provided by (used in)
   operating activities:
     Depreciation and amortization..............        1,940            2,486
     Changes in operating assets and liabilities:
        Accounts receivable, inventories and
        other current assets.....................        (182)            (998)
        Accounts payable and accrued expenses....         650             (254)
                                                    ---------         --------
Net Cash Provided By Operating Activities ......        4,875            2,366
                                                    ---------         --------

INVESTING ACTIVITIES
   Purchases of INOVOJECT(R) systems, equipment,
   furniture and fixtures.......................       (2,703)          (2,600)
   Investments in patents and other noncurrent
   assets.......................................          (17)               0
                                                    ---------         --------
Net Cash Used in Investing Activities...........       (2,720)          (2,600)
                                                    ---------         --------

FINANCING ACTIVITIES
   Issuance of common stock.....................          208               42
   Additions to long-term debt..................            0                2
   Payments on long-term debt ..................          (10)             (55)
   Proceeds from capital lease obligations......            0               70
   Payments on capital lease obligations........       (1,664)          (1,297)
   Repurchase of Common Stock...................         (522)               0
                                                    ---------         --------
Net Cash Used in Financing Activities...........       (1,988)          (1,238)
                                                    ---------         --------

Increase (Decrease) in Cash and Cash Equivalents          167           (1,472)
Currency Translation Adjustments ................        (193)             258
Cash and cash equivalents at beginning of period.       7,167            8,580
                                                    ---------         --------
Cash and Cash Equivalents At End Of Period.......     $ 7,141          $ 7,366
                                                      =======          =======



                                       5
<PAGE>



                                 EMBREX, INC.
                                  FORM 10-Q
                                June 30, 1999


NOTES TO CONSOLIDATED INTERIM CONDENSED FINANCIAL STATEMENTS (Unaudited)


Note 1 -- Basis of Presentation

The accompanying unaudited financial statements include the accounts of Embrex,
Inc. and its wholly owned subsidiaries, Embrex Europe Limited and Embrex BioTech
Trade (Shanghai) Co., Ltd. (collectively referred to as the Company) and 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 notes required by generally accepted accounting principles. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of financial condition and results
of operations have been included. Operating results for the three-month and
six-month periods ended June 30, 1999 are not necessarily indicative of the
results that may be attained for the entire year. For further information, refer
to the financial statements and notes thereto included in the Company's Form
10-K for the year ended December 31, 1998.

Note 2 - Net Income Per Share

Basic net income per share was determined by dividing net income available for
common shareholders by the weighted average number of common shares outstanding
during each year. Diluted net income per share reflects the potential dilution
that could occur assuming conversion or exercise of all issued and unexercised
stock options and warrants.

Note 3 - Comprehensive Income

In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" (SFAS 130). This Statement establishes standards for reporting and
display of comprehensive income and its components in the financial statements.
In accordance with SFAS 130, the Company has determined total comprehensive
income, net of tax, to be $1,284,000 and $600,000 for the three months ended
June 30, 1999 and 1998, respectively, and $2,274,000 and $1,390,000 for the six
months ended June 30, 1999 and 1998, respectively. Embrex's total comprehensive
income represents net income plus the after-tax effect of foreign currency
translation adjustments for the periods presented.



                                      6
<PAGE>



Item 2. Management's  Discussion  and  Analysis of  Financial  Condition  and
        Results of Operations






The following discussion and analysis should be read in conjunction with the
Company's financial statements and related notes appearing elsewhere in this
report.

RESULTS OF OPERATIONS
---------------------

Three Months Ended June 30, 1999 and 1998
-----------------------------------------

Consolidated revenues for the second quarter of 1999 totaled $8.4 million,
representing an increase of 21% over 1998 second quarter revenues of $7.0
million.

INOVOJECT(R) system revenues amounted to $8.1 million for the 1999 second
quarter, an increase of 23% over 1998 second quarter revenues of $6.6 million.
Most of the 1999 and 1998 INOVOJECT(R) system revenues were generated from
INOVOJECT(R) system lease fees. The growth in INOVOJECT(R) system revenues was
primarily attributable to increased injection activity in North American
hatcheries as well as additional INOVOJECT(R) systems operating in Europe, Asia
and Latin America.

Sales of Bursaplex(R), the Company's proprietary vaccine for the treatment of
avian Infectious Bursal Disease, was the principal source of $299,000 of product
revenue in the 1999 second quarter and $266,000 in the 1998 second quarter. The
Company's ability to generate revenue from product sales has been constrained by
the previously announced delay associated with obtaining British regulatory
approval for the sale of Bursamune(TM) in the United Kingdom by Fort Dodge
Animal Health ("Ft. Dodge"), a division of American Home Products Corp., lower
levels of breeder and broiler flock vaccination rates, and fewer reported
incidences of bursal disease in the United States. Product sales nevertheless
increased 12% during the second quarter of 1999 compared to product sales during
the second quarter of 1998 due to demand for Bursaplex(R) in Asian and Latin
American markets where this product has received regulatory approval.

Consolidated revenues grew at a faster rate than the cost of product sales and
INOVOJECT(R) system revenues, resulting in an improvement in gross profit from
50% of total revenues during the second quarter 1998, to 62% during the
comparable 1999 quarter.

Operating expenses increased from $2.6 million during the second quarter of
1998, to $3.6 million during the second quarter of 1999. This increase is
primarily attributable to programs focused on INOVOJECT(R) system improvements
and enhancements, biological product development and expenses associated with
installation of a new information system, Year 2000 compliance efforts and the
protection of intellectual property rights.

Net interest income amounted to $30,000 for the second quarter of 1999 compared
to net interest expense of $64,000 for the second quarter of 1998. The $94,000
decrease is attributable to the reduction in lease and debt obligations.

INOVOJECT(R) system revenues and improved gross margins resulted in a $725,000
increase in net income, to $1.3 million in the second quarter of 1999 compared
to $605,000 during the comparable period in 1998. Diluted net income per common
share was $0.16 for 1999 second quarter based on 8.5 million average shares
outstanding, compared to diluted net income of $0.07 per share based on 8.3
million average shares outstanding in the second quarter 1998.



                                       7
<PAGE>



Six Months Ended June 30, 1999 and 1998
---------------------------------------

Consolidated revenues for the six months ended June 30, 1999 totaled $16.4
million, representing an increase of 19% over 1998 revenue of $13.8 million for
the comparable period.

INOVOJECT(R) system revenues amounted to $15.8 million for the first six months
of 1999, an increase of 20% over 1998 first half revenues of $13.2 million. Most
of the 1999 and 1998 INOVOJECT(R) system revenues were generated from
INOVOJECT(R) system lease fees. The growth in INOVOJECT(R) system revenues was
primarily attributable to increased injection activities in North American
hatcheries as well as additional INOVOJECT(R) systems operating in Europe and
Latin America.

Sales of Bursaplex(R) were the principal source of $545,000 of product revenue
during the first six months of 1999 and $521,000 during the first six months of
1998. Bursaplex(R) sales increased 5% as demand in the Asian and Latin American
markets offset a decline in the North American market for the reasons previously
discussed regarding second quarter results.

Consolidated revenues grew at a faster rate than the cost of product sales and
INOVOJECT(R) system revenues, resulting in an improvement in gross profit from
52% of total revenues during the first six months of 1998, to 61% during the
comparable 1998 period. As start-up operations in Asia and Latin America develop
a sustainable revenue base, certain recurring expenses currently reflected in
general and administrative expense may be reclassified to cost of revenue as was
done in prior years in North American and European operations. This could result
in a change to gross profit.

Operating expenses increased from $5.5 million during the first half of 1998, to
$6.9 million during the first half of 1999. This increase is primarily
attributable to programs focused on INOVOJECT(R) system improvements and
enhancements, biological product development, and expenses associated with
installation of a new information system, Year 2000 compliance efforts and the
protection of intellectual property rights.

Net interest expense amounted to $25,000 for the first six months of 1999
compared to $200,000 for the first six months of 1998. The $175,000 decrease is
attributable to the reduction in lease and debt obligations.

INOVOJECT(R) system revenues and improved gross margins resulted in a $1.3
million increase in net income, to $2.5 million in the first half of 1999
compared to $1.1 million during the comparable period in 1998. Diluted net
income per common share was $0.29 for the first six months of 1999 based on 8.4
million average shares outstanding, compared to diluted net income of $0.14 per
share based on 8.3 million average shares outstanding during the first six
months of 1998.

The Company estimates that as of June 30, 1999, it was vaccinating in excess of
80% of the broiler birds grown in the United States during the first six months
of 1999. Given its market penetration, the Company expects only moderate
INOVOJECT(R) system revenue growth in this market. Overall, management expects
moderate growth throughout the balance of 1999 relative to levels achieved in
1998. This growth is expected to come primarily from existing INOVOJECT(R)
system operations in the United States, and new INOVOJECT(R) system operations
in other countries, and secondarily from sales of the Company's Bursaplex(R)
product to poultry producers. The Company currently has INOVOJECT(R) systems
either installed or on trial in 28 countries, including the United States and
Canada.

                                       8
<PAGE>

Bursaplex(R), a product which uses the Company's Viral Neutralizing Factor
(VNF(R)) technology to form an antibody-vaccine when combined with an Infectious
Bursal Disease (IBD) virus, was granted approval from the United States
Department of Agriculture (the "USDA") in 1997 for in ovo (in-the-egg) use,
specifically for administration via the Company's INOVOJECT(R) system. To date,
regulatory approval for Bursaplex(R) has been received in Peru, Ecuador,
Pakistan, South Korea, Thailand and Vietnam, and regulatory approval is pending
in Canada, the Phillippines, People's Republic of China, Indonesia, Venezuela,
Argentina, Chile, Colombia, Malaysia and Taiwan and a number of other countries
in Asia and Latin America.

Bursamune(TM), which also utilizes the Company's VNF(R) technology, is an IBD
vaccine produced by Cyanamid Websters, a unit of Ft. Dodge and which will be
marketed by Ft. Dodge in Europe, the Middle East and Africa under Ft. Dodge's
trade name "Bursamune(TM)" upon receipt of regulatory approvals. In June 1997,
Ft. Dodge indicated that its U.K. application for in ovo regulatory approval of
Bursamune(TM) had been provisionally refused. Ft. Dodge also indicated that the
U.K. regulatory authority requested that further data be supplied. The Company
has worked with Ft. Dodge, which is responsible for obtaining the necessary
approvals for Bursamune(TM), in both the U.K. and other European Community
markets, to respond to the U.K. regulatory authority requests for data with
respect to Bursamune(TM). The Company anticipates that the regulatory review
process will be completed during 1999. To date, Bursamune(TM) has received
regulatory approval in South Africa and Spain.

For the rest of 1999, the goals of management are to maintain revenue growth and
profitability, to continue efforts to achieve worldwide placements of the
INOVOJECT(R) system, to obtain regulatory approvals and initiate marketing of
Bursaplex(R) in selected markets, to continue development of proprietary in ovo
vaccines and to develop enhancements to the INOVOJECT(R) system. Growth in
INOVOJECT(R) systems and product revenues during 1999 will be dependent on the
rate at which markets outside the United States accept INOVOJECT(R) system
technology, and the timing of regulatory approvals for Bursaplex(R) and
Bursamune(TM) as well as regulatory approval and market acceptance of other
vaccines for in ovo delivery. In addition, normal fluctuations in the market
price of grain, domestic and international consumption levels of chicken, the
supply of broiler chicken eggs, country-specific regulations and economic
conditions, and export opportunities for the Company's U.S. customers may impact
the timing and quantity of egg injections and the corresponding in ovo delivery
of vaccines. Moreover, further delay in obtaining U.K. regulatory approval for
the sale of Bursamune(TM) would negatively impact the Company's ability to
generate revenue from both the use of INOVOJECT(R) systems for the in ovo
delivery of Bursamune(TM) and the sale of its VNF(R) compound for the production
of Bursamune(TM) in the U.K. market.

CHANGES IN FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
----------------------------------------------------------------

At June 30, 1999, the Company's cash and cash equivalents amounted to $7.1
million, down $26,000 from $7.2 million on hand at year-end 1998.

Operating activities generated $4.9 million in cash during the first six months
of 1999. Cash was provided by net income of $2.5 million, adjusted by
depreciation of nearly $2.0 million, by increases in accounts payable and
accrued expenses of $0.7 million, and offset by increases in accounts receivable
and other current assets of $0.2 million.

During the first half of 1999, investing activities used $2.7 million of cash,
principally for additional INOVOJECT(R) systems well as hardware and software
for the Company's new information system.

                                       9
<PAGE>

Financing activities used $2.0 million, primarily for the repayment of capital
lease obligations and repurchases of the Company's common stock.

As of June 30, 1999, the Company had outstanding purchase commitments of
approximately $4.3 million related to the production of the Company's
Bursaplex(R) product, VNF(R) for the manufacture of Bursaplex(R) and
Bursamune(TM) and materials and supplies for the construction and maintenance of
its INOVOJECT(R) systems.

In April 1999, the Company obtained a $6.0 million secured revolving line of
credit from its bank. This line of credit may be used for working capital
purposes and has a term of eighteen months.

Based on its current operations, management believes that available cash and
cash equivalents, together with cash flow from operations and its bank line of
credit, will be sufficient to meet its foreseeable cash requirements in support
of its operations, including necessary capital investments, continued global
expansion, funding new product development and repurchases of its common stock.

YEAR 2000 ISSUE
---------------

The Company established a team to address the Year 2000 issue in June 1998. The
team has conducted an inventory and assessment of the Company's computer
hardware and software systems, as well as embedded systems in its INOVOJECT(R)
system, manufacturing and laboratory equipment and office facilities, such as
security and fire alarm systems. The team has developed remediation, testing,
and implementation plans for imbedded systems, including the INOVOJECT(R)
system. The Company expects to complete all remediation, testing and
implementation not later than October 1999.

The Company engaged an outside consulting firm to conduct an independent
verification and validation of the controls and software that operate the
INOVOJECT(R) system. The independent verification and validation determined that
the INOVOJECT(R) system does not access or use date information and the
independent verification and validation determined that INOVOJECT(R) system
operation is not affected by Year 2000 considerations. Both mechanical and
electronic systems that record egg volumes by counting the number of trays of
eggs injected by the INOVOJECT(R) system were also determined to be date
insensitive.

To date, the Company has determined that its general ledger and primary
financial accounting software, a DOS-based application, uses only two digits to
identify a year in the date field. The Company is currently on schedule to
replace this application with a Year 2000-compliant Windows-based system by
October 1999; however, the Company had planned to make this upgrade irrespective
of the Year 2000 issue in order to meet the demands of its business. The
Company is in the process of upgrading its computer software and hardware
systems as necessary to address both its increased internal needs and the impact
of the year 2000 on its systems. The inability of the Company or its software
and hardware vendors to upgrade the Company's systems in a manner that fully
addresses the Company's needs and the Year 2000 issue could adversely impact the
Company's ability to produce the information necessary to manage its business,
communicate with its customers and suppliers, and prepare financial statements.

The Company has surveyed nearly all of its customers and vendors through a Year
2000 questionnaire regarding the strategies, activities, and contingency plans
undertaken by those parties to achieve Year 2000 compliance. While not all
customers and vendors fully respond, the

                                       10
<PAGE>

information being received in response to the questionnaire assists the Company
in assessing its readiness for the Year 2000 issue and identifying any potential
negative impact to the Company from possible disruptions in other parties'
ability to do business with the Company after December 31, 1999. There is no
assurance that the systems of other parties on which the Company relies will be
compliant on a timely basis. The inability of the Company's vendors and
customers to fully address the Year 2000 issue could have an adverse impact on
the Company's ability to operate and manage the INOVOJECT(R) system at its
customers' hatcheries, to manage its business and to communicate with its
customers and suppliers, any of which could have a material adverse effect on
the Company's financial results.

The Company is developing contingency plans to address what would happen if its
execution of these plans were to fail to address the Year 2000 issue. These
contingency plans may include the purchasing and redeployment to various
locations of additional materials and supplies needed to operate the business
and provide services and products to its customers; and the preservation of
perishable biological products in the event of electrical power interruptions at
the Company's facilities.

The Company presently expects to incur no more than $200,000 in addressing Year
2000 issues, including an estimated $100,000 spent during the first six months
of 1999. The Company's estimates regarding the cost and timing of addressing the
Year 2000 issue are based upon presently available information and assumptions
about future events. Embrex cannot guarantee that its assumptions will be
correct or that its estimates will be achieved. Actual results could differ
materially from the Company's expectations as a result of numerous factors,
including the continued availability of certain resources, the cooperation of
third parties, the ability to locate and correct all relevant computer codes,
unforeseen circumstances that would cause the Company to allocate its resources
elsewhere, and similar uncertainties.

FORWARD-LOOKING STATEMENTS
--------------------------

This report contains forward-looking statements, including statements with
respect to future products, services, markets and financial results. These
statements involve risks and uncertainties that could cause actual results to
differ materially, including without limitation the ability of the Company to
penetrate new markets, place INOVOJECT(R) systems worldwide, establish a degree
of market acceptance for new products such as but not limited to Bursaplex(R)
and Bursamune(TM) , prevail in the outcome of its patent litigation appeal,
complete commercial development of potential future products or obtain
regulatory approval of its products, which approval is dependent upon a number
of factors, such as results of trials, the discretion of regulatory officials,
and potential changes in regulations, and the Company's dependence on certain
customers. These statements are also contingent upon continued growth of the
global poultry industry and the economic viability of certain markets.
Additional information on these risks and other factors which could affect the
Company's financial results is included in the Company's Form 10-K filed with
the Securities and Exchange Commission and other filings with the SEC, including
the Company's Forms 10-Q and 8-K.

                                   11
<PAGE>



Item 3. Quantitative and Qualitative Disclosures About Market Risk
------------------------------------------------------------------

A portion of the Company's operations are in jurisdictions outside North
America. The Company leases INOVOJECT(R) systems and sells products in Europe,
Asia and Latin America. As a result, the Company's financial results could be
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in the foreign markets in which the Company distributes its
products. At June 30, 1999, the Company's operations outside North America were
not material to the Company's consolidated results as a whole, and a significant
change in currency exchange rates or economic conditions in the jurisdictions
outside North America in which the Company operates should not have a material
effect on the Company's consolidated financial results.


PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings.
---------------------------

For a description of certain patent infringement proceedings initiated by the
registrant and related legal proceedings, see the registrant's Form 10-K for the
year ended December 31, 1998 filed with the Securities and Exchange Commission
on March 31, 1999.

On April 7, 1999, the registrant announced that the U.S. District Court for the
District of Maryland had granted the United States Department of Agriculture's
("USDA") motion for summary judgment in the litigation brought against the USDA
by Service Engineering Corporation and Edward G. Bounds ("SEC/Bounds"). The
court agreed that "the plaintiff (SEC/Bounds) lacked standing to challenge the
USDA's actions in this matter and that the [USDA's] motion for summary judgment
will be granted." In this lawsuit, SEC/Bounds filed suit against the USDA with
respect to its grant to Embrex of an exclusive license for U.S. Patent No.
4,458,630 ("patent '630", or the "Sharma patent"). Patent '630 relates to in ovo
(in-the-egg) injection.

This decision, combined with the verdict rendered in Embrex's favor in the U.S.
District Court for the Eastern District of North Carolina in July 1998,
reaffirms both the validity of the USDA's actions and the validity of the Sharma
patent.

The July 1998 verdict fully upheld the validity of all claims of the Sharma
patent, finding that SEC/Bounds had willingly infringed all asserted claims of
the patent. The jury also found that SEC/Bounds had breached a 1995 Consent
Judgment and Settlement Agreement and that such breach was not in good faith. In
October 1998, SEC/Bounds filed a notice of appeal in the U.S. Court of Appeals
for the Federal Circuit seeking reversal of the judgment. Embrex has opposed the
appeal.

On April 15, 1999, Machining  Technologies,  Inc. served on Embrex a Complaint
for  Declaratory  Judgment  against Embrex in the U. S. District Court for the
District of Maryland.  Machining  Technologies  seeks a declaration  that U.S.
Patent  No.  4,458,630  is not  infringed,  invalid  and/or  not  enforceable.
Machining  Technologies  was a manufacturer of egg injection  machine parts to
Bounds  and  Service  Engineering.  Embrex  believes  the action to be without
legal basis and moved for its dismissal.


                                       12
<PAGE>

Item 2.  Changes in Securities.   Not applicable.
-------  ----------------------

Item 3.  Defaults Upon Senior Securities.   Not applicable.
-------  --------------------------------

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

On May 20, 1999 the Annual Meeting of Shareholders was held and the following
matters were submitted to the shareholders for a vote. There were 7,218,271
shares represented at the meeting in person or by proxy and set forth below is a
brief description of the matters voted on and the number of votes cast for,
against or withheld, as well as the number of abstentions. There were no broker
non-votes.

ELECTION OF DIRECTORS:

                                        Votes       Votes    Votes
Director              Votes For        Withheld    Against Abstained     Totals
--------              ---------        --------    ------- ---------     ------

Charles E. Austin     7,016,159         202,112        n/a       n/a   7,218,271
C. Daniel Blackshear  6,974,859         243,412        n/a       n/a   7,218,271
Lester M. Crawford,
D.V.M., Ph.D.         7,014,459         203,812        n/a       n/a   7,218,271
Peter J. Holzer       7,011,959         206,312        n/a       n/a   7,218,271
Randall L. Marcuson   6,918,142         300,129        n/a       n/a   7,218,271
Kenneth N. May, Ph.D. 7,017,259         201,012        n/a       n/a   7,218,271
Arthur M. Pappas      7,015,259         203,012        n/a       n/a   7,218,271
Walter V. Smiley      7,043,084         175,187        n/a       n/a   7,218,271



RATIFY THE ACTION OF THE BOARD OF DIRECTORS IN APPOINTING ERNST & YOUNG LLP AS
INDEPENDENT ACCOUNTANTS FOR THE FISCAL YEAR ENDING DECEMBER 31, 1999:

                                                              Broker
                          For       Against    Abstain         Non-Votes
                       ---------   ---------  ---------       ----------
                        7,170,507     28,629     19,135       0


Item 5.  Other Information.   Not applicable.
-------  ------------------

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

       (a) Exhibits

         10.1     Loan Agreement  between Embrex,  Inc. and Branch Banking and
                  Trust Company dated as of April 7,1999.

         27.      Financial Data Schedule.

       (b) Reports on Form 8-K. Not applicable.



                                       13
<PAGE>

                                  SIGNATURES



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


Date:  August 13, 1999

                                  EMBREX, INC.


                                    By:     /s/ Randall L. Marcuson
                                       ----------------------------------

                                    Randall L. Marcuson
                                    President and Chief Executive Officer



                                    By:      /s/ Don T. Seaquist
                                       ----------------------------------


                                    Don T. Seaquist
                                    Vice President, Finance and Administration




                                       14
<PAGE>



                                  Embrex, Inc.
                               File No. 000-19495

                                    Form 10-Q
                            For the Quarterly Period
                               Ended June 30, 1999



                                  EXHIBIT INDEX



Exhibit
-------

 10.1   Loan Agreement between Embrex, Inc. and Branch Banking and Trust
        Company dated as of April 7,1999.


 27.    Financial Data Schedule

                                       15