<PAGE>

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                         WASHINGTON, D.C. 20549

                                  FORM 10-K

 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
                                   ACT OF 1934

For the fiscal year ended December 31, 1997      Commission file number 0-18044

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

<TABLE>
<CAPTION>
Washington                                                                  91-1307460
(State of incorporation)                                         (I.R.S. Employer Identification No.)
<S>                                                               <C>

8511 154th Avenue, N.E., Building A, Redmond, WA                             98052-3557
(Address of principal executive offices)                                      (Zip Code)

Registrant's telephone number, including area code:                          (425) 869-1239

Securities registered pursuant to Section 12(b) of the Act:                         None

Securities registered pursuant to the Section 12(g) of the Act:                 Common Stock,
                                                                            par value $.01 per share
</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
                           -----           -----

Indicate by check mark if disclosure of delinquency filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K /X/.

As of March 20, 1998, there were issued and outstanding 13,364,958 shares of
common stock, par value $.01 per share.

   The aggregate market value of common stock held by non-affiliates as of March
20, 1998 was $16.289 million, based upon the average of the closing high and low
prices of such stock as reported by the Nasdaq National Market.

                       DOCUMENTS INCORPORATED BY REFERENCE

Parts of the following documents are incorporated by reference in Parts II and
III of this Form 10-K report: (1) the Proxy Statement for the Registrant's 1998
Annual Meeting of Shareholders scheduled to be held June 10, 1998, and (2) the
Registrant's 1997 Annual Report to Shareholders.

                                        1

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                               ProCyte Corporation

                                 1997 Form 10-K

                                Table of contents

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<CAPTION>

<S>                                                                                                  <C>
PART I.................................................................................................3

         Item 1. Business..............................................................................3

         Item 2. Properties...........................................................................10

         Item 3. Legal Proceedings....................................................................10

         Item 4. Submission of Matters to a Vote of Security Holders..................................10

PART II...............................................................................................10

         Item 5. Market for Company's Common Stock and Related Shareholder Matters....................10

         Item 6. Selected Financial Data..............................................................11

         Item 7. Management's Discussion and Analysis of Financial Condition and
                   Results of Operations..............................................................11

         Item 7a Quantitative and Qualitative Disclosures About Market Risk...........................14

         Item 8. Financial Statements and Supplementary Data..........................................14

         Item 9. Changes in and Disagreements With Accountants on Accounting and
                   Financial Disclosure...............................................................28

PART III..............................................................................................28

PART IV...............................................................................................28

  Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...........................28

</TABLE>

                                        2

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                                      PART I

Item 1.  Business

         The entire discussion in this report, as well as other management
discussion of the Company's goals and expectations as reported in the Company's
1997 Annual Report to Shareholders, contains forward-looking statements. Any and
all statements of goals, beliefs, intent, plans, anticipation or expectations
set forth in the Company's reports to the Securities and Exchange Commission
(the "SEC") and other communications may be forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which reflect the Company's position only as of the date hereof. The Company
undertakes no obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances occurring after
the date of this report. See "--Important Factors Regarding Forward-looking
Statements."

General

         ProCyte Corporation ("ProCyte" or the "Company") is a Washington
corporation organized in 1986. ProCyte is a healthcare company that develops,
manufactures and markets products for wound care, skin health and hair care. The
Company's products incorporate its patented copper-peptide technology and
absorbent polymer technology.

         The Company's products are targeted for use in medical market sectors
that provide healthcare solutions for tissue repair, skin health and hair care
conditions, and also for the consumer markets that address skin and hair care.
The Company's business currently focuses on three target markets: chronic wound
care; plastic and cosmetic surgery and dermatology; and skin and hair care.

         ProCyte's goal is to generate profitability from the sale of products
developed from its own efforts, developed by others, and/or licensed or acquired
by the Company. To augment the commercialization of its products and technology,
the Company has entered into and plans to continue to enter into distribution
and license agreements. Consistent with this goal, the Company intends to retain
the proprietary rights to its products and technologies.

Products and Markets

         In 1997, ProCyte continued its focus on the role of its copper-peptide
formulations in products that address wound repair, skin health and hair care
needs. During the year, the Company identified three primary markets for its
products.

Chronic Wound Care

         The worldwide chronic wound care market is currently estimated to
exceed $2 billion in revenues. It is highly fragmented, with many competitors
and price constraints. For these reasons, ProCyte decided in 1997 to seek
partners to market its chronic wound care products.

         Since inception, the Company has focused its energies on the chronic
wound care market. In 1997, ProCyte introduced a number of products that were
promoted to wound care specialists for use in the care of chronic wounds in
hospitals, nursing homes and extended care facilities.

         The chronic wound care market is expansive and competitive. To compete
effectively, a company must have a well-received and cost-effective line of
products that can be promoted broadly to hospitals, nursing homes, home
healthcare and medical professionals. In 1997 ProCyte undertook to introduce its
own line of innovative products to these diverse markets. However, although the
Company believes its products were well-

                                        3

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received by the health care community, the Company recognized in 1997 that the
future success of its products would require a larger marketing and sales
effort.

         In December 1997, ProCyte entered into an exclusive distribution
agreement with the Bard Medical Division ("Bard") of C.R. Bard, Inc. Bard is a
newly formed division servicing the hospital, nursing home and extended care
markets. ProCyte's Iamin-Registered Trademark- Hydrating Gel, Iamin-Registered
Trademark- Wound Cleanser, and OsmoCyte-Registered Trademark- Pillow Wound
Dressings became the first Company products to be added to the Bard sales
effort, which began in January 1998.

         ProCyte granted Bard the exclusive rights to distribute ProCyte's
products for the wound care markets in the United States and Canada. As partial
consideration for this grant, Bard must make certain minimum purchases
quarterly. Although ProCyte expects to develop additional products for Bard's
introduction in 1998 or 1999, there can be no assurance that the Company's
product candidates will be developed on schedule, if at all, or, if such
products are developed, that they will be commercially successful. See
"--Important Factors Regarding Forward-looking Statements."

         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. The Company anticipates that
product registration in numerous countries may take well over one year, and
there can be no assurance that registration will be obtained or that the
products will be commercially successful in the various countries. See
"--Important Factors Regarding Forward-looking Statements - Government
Regulation."

         A related field of use for ProCyte's chronic wound care products is the
veterinary market. At present, the Company's products for veterinary care
applications are promoted through specialty distributors.

Plastic & Cosmetic Surgery and Dermatology

         ProCyte believes its products are well suited for use in the medical
specialties of plastic & cosmetic surgery and dermatology. There is an
increasing consumer and physician awareness of the ability to improve skin and
hair health with products designed specifically to meet the needs of the aging
population. During 1997, ProCyte introduced a number of new products tailored to
the needs of these markets, including the GraftCyte-TM- System, Pillo-TM- Pro
dressings and Complex Cu3-TM- Intensive Repair Creme.

         The Complex Cu3-TM- Intensive Repair Creme is used to treat patients
following chemical peels, dermabrasion and laser treatments. The Company's
Pillo-TM- Pro dressings provide moisture absorption required following
liposuction. Each year in the United States alone an estimated 400,000 such
surgeries are performed.

         ProCyte's GraftCyte-TM- System was introduced in 1997 to address the
special tissue repair needs of patients following hair restoration surgery. The
GraftCyte-TM- System currently consists of three differentiated products -
GraftCyte-TM- Moist Dressings for use during and after surgery; GraftCyte-TM-
Hydrating Mist to provide continuous hydration of the scalp after surgery; and
GraftCyte-TM- Post-Surgical Shampoo to provide a gentle cleansing of the scalp.

         ProCyte markets its products for use in these specialized skin and hair
care practices through specialty distributors in the United States.

Skin and Hair Care

         Most of ProCyte's products incorporate the Company's clinically tested
copper-peptide formulations. The biological actions of copper have been
documented in the scientific literature and include its ability to stimulate
collagen synthesis, new blood vessel growth and tissue repair. Given these
properties, the Company believes its technology has potential value in the skin
and hair care markets.

                                        4

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         In the fourth quarter of 1997, ProCyte 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. Osmotics announced, in January 1998, the first such product
- Blue Copper-TM- - an anti-aging formulation to be sold at cosmetic counters
in such stores as Saks, Neimann Marcus and others by March 1998.

Additional Product Development and/or Acquisitions

         The Company plans to continue its wound repair, skin health and hair
care product development, and expects to introduce additional products in 1998.
At year-end, the Company had three new 510(k) submissions pending with the
United States Food and Drug Administration ("FDA"). See "- Important Factors
Regarding Forward-looking Statements."

         The Company also plans to continue to evaluate complementary companies,
products and technologies for acquisition and/or distribution by the Company.

Contract Manufacturing

         During the period that the Company was developing its first products,
it elected to optimize the use of its manufacturing facility by offering select
services to industry clientele. During 1997, the Company continued to provide
contract manufacturing services to select clients in the biotechnology and
pharmaceutical industries, though efforts to seek new clients subsided somewhat
as the Company focused on meeting the demand for its own product manufacturing
requirements.

         In February 1998, the Company learned that one of its significant
contract manufacturing clients, responsible for approximately 34% of the
Company's 1997 contract manufacturing revenue, would face an indefinite delay in
receiving FDA clearance for its product. It is uncertain whether this client
will use any of the Company's contract manufacturing services in 1998 or beyond.

         ProCyte expects to continue to provide certain contract manufacturing
services in the future and to produce clinical and commercial quantities of
certain of its copper-peptide compounds for use by it and its partners.  See
"--Important Factors Regarding Forward-looking Statements."

Business Relationships

Bard Medical Division, C.R. Bard Inc.

         In December 1997, ProCyte entered into an exclusive distribution
agreement with the Bard Medical Division of C.R. Bard, Inc. (the "Bard
Agreement"), pursuant to which the Company granted to Bard the exclusive rights
in the United States and Canada to distribute wound care products manufactured
by ProCyte. The Bard Agreement, which has an initial term of three years,
specifies the products to be distributed by Bard in the hospital, nursing home
and home healthcare markets, and sets minimum purchases required of Bard during
the initial three-year term.

Hymedix International, Inc

         Effective November 20, 1997, ProCyte entered into a Restated Agreement
with Hymedix International Inc. ("Hymedix") in which the parties agreed to
reduce the scope of ProCyte's initial license rights for Hymedix's polymer
technology (the "Restated Agreement"). The Restated Agreement required a
one-time payment of $125,000 by ProCyte to Hymedix and delivery of a quantity of
bulk material held by ProCyte, the value of which was not significant. ProCyte
retained an exclusive worldwide license, outside of Asia, to make, have made,
use and sell absorbent polymer-based products in specified forms for wound care.

                                        5

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Osmotics Corporation

         In the fourth quarter of 1997, ProCyte entered into a supply and
marketing agreement with Osmotics Corporation (the "Osmotics Agreement"),
pursuant to which the Company granted to Osmotics a limited, worldwide,
non-transferable right to purchase and use one of ProCyte's copper-peptide
compounds for making and selling skin care products for prestige skin care
markets. Such rights are exclusive to the prestige skin care market where the
ultimate sale of products is at retail department store cosmetic counters and
international perfumeries, but nonexclusive where the ultimate sale of
products is at prestige skin care salons and spas. ProCyte has the exclusive
right to manufacture the copper-peptide compound for sale to Osmotics and may
purchase from Osmotics products made to its specifications for sale in the
dermatology, cosmetic/plastic surgery, and related medical markets. The
Osmotics Agreement sets forth certain milestones, minimum payments and
royalties payable by Osmotics to ProCyte.

Other Distribution Agreements

         In first quarter 1998, ProCyte formed distribution alliances for the
registration, promotion and distribution of ProCyte's products to the chronic
wound care markets in certain foreign countries.

         ProCyte intends to seek to establish corporate alliances with others
who are capable of pursuing device registrations of the Company's copper-based
wound care products and technology in Europe, Latin America, Asia and elsewhere.
There can be no assurance that the Company will be successful in attracting or
retaining corporate alliances on terms favorable to the Company, whether for the
Company's wound care technology or otherwise, that the interests and motivations
of any corporate partner or licensee would be or remain consistent with those of
the Company, or that such partners or licensees would successfully perform the
necessary technology transfer, clinical development, regulatory compliance,
manufacturing, marketing or other obligations. Suspension or termination of
agreements with the Company's current or future distributors, partners or
licensees could have a material adverse affect on the development of the
Company's proposed products and could materially adversely affect the Company's
financial position. See "--Important Factors Regarding Forward-looking
Statements - Uncertainty of Corporate Alliances."

Employees

         At December 31, 1997, the Company had 28 full-time employees, of whom
three hold Ph.D. degrees. At year-end, four employees were engaged in product
development, twelve in manufacturing and quality control, four in sales and
marketing, and eight in accounting, finance and administration. The Company does
not expect to add staff in 1998 for other than normal attrition replacements.
The Company believes that its relations with its employees are good.

Important Factors Regarding Forward-Looking Statements

         The following factors, among others, could affect the Company's actual
results with regard to such forward-looking statements, and could cause such
results to differ materially from those expressed in the Company's forward-
looking statements.

Need for Additional Capital

         The Company may be required to raise additional capital through equity
offerings, strategic alliances, sale of assets or other sources. There can be no
assurance that such funds will be available to the Company on acceptable terms,
if at all.

Uncertainty of Corporate Alliances

         There can be no assurance that the Company will be successful in
attracting or retaining corporate alliances on terms favorable to the Company,
whether for the Company's copper-peptide technology or otherwise, that the
interests and motivations of any corporate partner, distributor or licensee
would be or remain

                                        6

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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. Suspension or termination of agreements with the Company's current
or future partners, distributors or licensees could have a material adverse
effect on the development of the Company's proposed products and could
materially adversely affect the Company's financial position.

Clinical and Commercial Development of Novel Compounds and Products

         There can be no assurance that the Company will commence, continue or
successfully complete clinical testing or commercial development, including
commercial-scale manufacturing and market launch, of any of its current product
candidates, or that, if successfully developed, such product candidates would be
cleared by the FDA for sale in the United States or by comparable regulatory
authorities for sale in other countries. Approval of a product for marketing in
one country does not ensure approval for marketing in other countries. Launch of
a product does not ensure market acceptance. The results of clinical studies are
not necessarily indicative of efficacy or safety of a commercial product for
human use.

         Given the risks and uncertain timelines associated with device,
pharmaceutical and biotechnology products being developed, tested, reviewed or
sold by the Company's contract manufacturing clients, the Company will be
required to strive to maintain sufficient clientele to counter the effect that
regulatory delays, product failures, product recalls, and other such
circumstances may have on its contract manufacturing capabilities and revenues.
Also, such factors as unexpected or unsuccessful plant audits or regulatory
inspections, the potential impact of adverse weather conditions on plant
operations, the decision of a client to manufacture its own products or have
them manufactured elsewhere, inability or failure to manufacture a product to
established product specifications, market acceptance of clients' products, and
competition, mean there can be no assurance that the Company will be successful
in its contract manufacturing endeavors.

Product Development, Manufacture and Distribution

         ProCyte currently promotes certain of its products through specialty
distributors in accordance with distribution agreements, or it out-licenses
certain products and/or technology for incorporation into products sold by
others.

         Factors beyond the Company's control, such as delays in obtaining FDA
clearance to market new products, delays in product launch, the promotion and
introduction of competitive products by others with larger and more established
sales and marketing organizations, lack of product acceptance by the
marketplace, changes in Medicare reimbursement and the impact this would have on
product pricing, unexpected difficulties in scaling-up the full scale commercial
manufacturing processes, obtaining suitable raw materials, and staffing the
production operation, mean that there can be no assurance that the Company will
be able to commercialize any of its planned products in a cost-effective, timely
manner, if at all.

Patents and Proprietary Rights

         ProCyte's success depends in part upon its ability to protect its
products and technology under intellectual property laws in the Unites States
and abroad. As of December 31, 1997, 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 that
offer significant market potential.

         The Company currently holds several registered trademarks for its
products and product candidates. There can be no assurance as to the breadth or
degree of protection that the Company's existing trademarks or patents, or any
additional trademarks or patents that may be granted in the future, will afford
the Company, or that any additional trademarks or patents will be issued to the
Company. In addition, there can be no assurance that others will not
independently develop substantially equivalent proprietary technology that is
not covered by

                                        7

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the Company's patents or that others will not be issued patents that
may prevent the Company's manufacture, sale or use of its proposed products or
require licensing and the payment of significant fees or royalties by the
Company for the pursuit of its business. Litigation, which could result in
substantial cost to the Company, may be necessary to enforce the Company's
patents or to determine the scope and validity of other parties' proprietary
rights. If the outcome of any such litigation were adverse, the Company's
business could be materially affected. The Company is unable to predict how
courts would resolve any future issues relating to the validity and scope of the
Company's patents or trademarks should they be challenged.

         The Company also intends to rely on its unpatented proprietary
know-how, and there can be no assurance that others will not develop or acquire
equivalent proprietary information. 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.

Competition

         Competition in the Company's planned area of marketing, wound, skin and
hair care and related applications, is particularly intense, involving a number
of well-established, major pharmaceutical, cosmetic and healthcare companies,
such as Bristol Myers Squibb's ConvaTec division, Kendall Healthcare Company,
and Johnson and Johnson, as well as L'Oreal, Revlon and others. A significant
number of smaller companies as well are developing or marketing competitive
products, some of which may have an entirely different approach than products
being developed by the Company.

         Each of the markets in which the Company's products compete is evolving
in terms of technology, regulations, product innovation, and other factors. The
Company believes that its most substantial competition with respect to its
chronic wound care product line will come from established pharmaceutical and
healthcare companies, including, but not limited to, those listed above, which
are significantly larger than the Company and have substantially greater
financial resources, marketing and sales staffs, and experience in obtaining
regulatory approvals, as well as in manufacturing and marketing wound care
products, and which have considerable years of experience, and established
reputations, promoting to healthcare providers.

         Competition in all of the Company's areas of interest is based on
scientific and technological advances, the availability of patent protection,
access to adequate capital, the requirement for and ability to obtain government
approval for new products or testing, timing and scope of regulatory approvals,
product pricing, manufacturing and marketing capability. There can be no
assurance that the Company's competitors will not succeed in bringing to market
technologies and/or products that may make the products or proposed products
being developed by the Company obsolete or noncompetitive. Some of the Company's
competitors may achieve product commercialization earlier than the Company,
which may adversely affect market introductions and sales of the Company's
products or proposed products. Competition for highly qualified scientific,
technical, and managerial personnel, consultants and advisors on whose services
the Company depends is also intense.

         The contract manufacturing service business is 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.

         The chemical, commodity-products and pharmaceutical industries have
undergone and are expected to continue to undergo significant technological and
strategic change, and the Company expects the competition to intensify as
technical advances or business alliances are made by others in fields of
interest to the Company. The Company believes that its success in competing with
others will depend on such things as its ability to retain scientific expertise
and capable, experienced management, and identifying and pursuing scientifically
feasible, medically relevant, and commercially viable opportunities.

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Government Regulation

         The manufacture and marketing of ProCyte's products, whether internally
developed or in-licensed, 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,
recordkeeping, advertising and promotion of pharmaceutical 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.

         In order to obtain FDA clearance to market a new drug or 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 registration dossier such as a new drug application
or 510(k) 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.

         Before human testing of a therapeutic product candidate may commence,
the FDA, and like agencies in other countries, generally require certain
preclinical testing, such as toxicology studies in animals, to begin to
establish product safety. Results of such studies are submitted as part of the
application to the regulatory agency. Preclinical testing is not necessarily
indicative of the safety or effectiveness of a product candidate for human use.

         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 pre-market notification
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 FDA or other countries' approval or clearance
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
standards set forth in these regulations, which are subject to change at any
time without notice to the Company, manufacturers must continue to expend time,
effort and financial resources in production and quality control. Manufacturing
establishments, such as ProCyte's manufacturing plant, are also subject to
regulations from and inspections by other foreign, federal, state or local
agencies, such as the Drug Enforcement Agency, the city water and waste
treatment agencies, and state and federal safety and health regulations. There
can be no assurance that the Company's manufacturing facility or its operations
for the manufacture of its own products or product candidates or the bulk
products manufactured and processes followed by the Company on behalf of its
clients will be able to meet all appropriate guidelines or to pass inspections
by any government agency. If the Company's manufacturing operations should fail
to pass an inspection, for any reason, the possible resultant outcome on the
plant's continuing operations, and the impact on the Company's overall
reputation, operations and financial condition could be severe.

         The Company also is or may become subject to various other foreign, US,
state and local 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.

                                        9


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Factors Affecting 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 changes in earnings, research and development
program direction, results of clinical trials, addition or deletion of corporate
partnerships, technology licenses, clearance or approval to market products,
government regulations, healthcare reform, 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 2.  Properties

         The Company presently leases approximately 33,000 square feet of
production, laboratory and office space at its corporate and development offices
and production facility in Redmond, Washington. In July 1997, the Company
consolidated its facilities, moving from its 28,000 square foot laboratory and
corporate office space in Kirkland, Washington to the expanded Redmond site,
which houses the Company's production facility. The Company executed a ten year
lease for the Redmond location.

Item 3.  Legal Proceedings

         None.

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

         No matters were submitted to the shareholders for vote during fourth
quarter 1997.

                                     PART II

Item 5.  Market for Company's Common Stock and Related Shareholder Matters

         The Company's common stock is traded on the Nasdaq National Market
under the symbol "PRCY." The following table sets forth the high and low bid
prices as reported by the Nasdaq National Market for the periods indicated. Such
prices reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.

<TABLE>
<CAPTION>

                                           High       Low
                                         ---------  ---------
         <S>                             <C>        <C>
         1996

         First quarter                      5 1/4    2 9/16
         Second quarter                     5 1/8    3 5/16
         Third quarter                      3 7/8    2 7/16
         Fourth quarter                       3        2

         1997

         First quarter                      2 3/8    1 3/4
         Second quarter                     1 7/16   1 1/8
         Third quarter                      1 7/16   1 1/32
         Fourth quarter                     1 1/16    15/32

         1998

         Through March 20th                 1 5/8      7/8


</TABLE>

                                       10

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         At the close of business on March 20, 1998 there were 459 holders of
record of the Company's common stock. ProCyte has not paid any cash dividends on
its common stock and does not intend to pay cash dividends in the foreseeable
future.

Item 6.  Selected Financial Data

         The information required by this Item is incorporated by reference to
the information contained under the caption, "Financial Highlights," located in
the Registrant's 1997 Annual Report to Shareholders.

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

Overview

         Since its inception in 1986, the Company has been engaged in the
development of wound, skin care and hair care products that incorporate its
patented copper-peptide technology. The Company's research, development and
commercialization efforts have been principally funded from the Company's
equity-derived working capital and through collaborative agreements with other
companies. The Company's net operating losses incurred since inception are
primarily a result of the Company's independent research, development and
clinical evaluation activities, and investment in the Company's commercial-scale
production facility and product launches. Net losses for the fiscal years ended
December 31, 1997, 1996 and 1995 were $6.4 million, $9.4 million, and $12.4
million, respectively. It is anticipated that product sales will continue to
increase in 1998. However, based upon the factors described in "Business--
Important Factors Regarding Forward-looking Statements," there can be no
assurance that such results will be achieved.

Results of Operations

Product Sales

         In 1997, the Company earned revenues of approximately $184,000 from
products sales, up from approximately $31,000 in 1996. The Company had no
revenue from product sales in 1995. The increase from 1996 to 1997 was due to a
growing customer base for the Company's products as well as an increased number
of available products launched in 1997.

         During 1997, the Company received FDA clearance for a number of its
products that address one or more of the markets it or its distributors and
partners serve. These products include Pillo-TM- Pro dressings, GraftCyte-TM-
Moist Dressings and Complex Cu3-TM- Intensive Repair Creme.

         The Company's marketing and sales efforts during 1997 focused primarily
on identifying distributors who could assist the Company with product promotion,
introducing the Company's products to healthcare professionals, and identifying
markets where such products could compete. Product sales are expected to
increase as chronic wound care product distributors, such as Bard, begin to
introduce ProCyte products through their sales and marketing programs, as
international registration and distribution commence, and as specialty
distributors and specialized physicians become more familiar with the Company's
products.

Contract manufacturing revenues, license fees

         In 1997, ProCyte earned revenues of approximately $706,000 from
performing contract manufacturing services, almost unchanged from the
approximately $708,000 earned in 1996. The Company anticipates that contract
manufacturing revenues will decline in 1998 as a result of the loss of two
significant contract manufacturing clients, one of whom faces uncertain FDA
approval for its products. In late 1997, the Company increased its marketing
efforts to attract new contract manufacturing clients. The Company expects that
contract manufacturing revenues will be less than revenues from product sales in
1998.

                                       11

<PAGE>

         In accordance with the Osmotics Agreement, ProCyte is eligible for a
royalty payment on the sale of products containing the Company's copper-peptide
technology. Such royalty payments are expected to commence in 1998.
Additionally, Osmotics must purchase its requirements for bulk copper-peptide
compound from the Company. Osmotics placed its first such order in January 1998.
The Company does not currently expect that significant revenues will result from
the Osmotics Agreement in 1998.

Cost of product sales

         The aggregate cost of product sales as a percentage of product sales
was approximately 244% for the year ended December 31, 1997, as compared to 45%
in 1996. The change in gross margin percentage was principally due to the effect
of creating a reserve for surplus and obsolete inventory of $380,000. If this
inventory reserve had not been created, the aggregate cost of product sales as a
percentage of product sales would have been approximately 38% for the year ended
December 31, 1997. In 1996, product revenue resulted only from the sale of the
Company's initial product, Iamin-Registered Trademark- Hydrating Gel. The
Company did not have any product sales in 1995.

Research and development expenses

         During the fiscal years ended December 31, 1997, 1996 and 1995, the
Company had research and development expenses of approximately $3.77 million,
$6.74 million, and $7.24 million, respectively.

         Research and development expenses decreased by approximately 44% from
1996 to 1997. The primary reasons for this decrease include: the increased focus
on development of existing, rather than new, compounds and formulations;
decreased research staff levels and staff-related expenditures; reduced license
fees paid to Hymedix; and greater reliance on outside service vendors for
certain product formulation and other services.

         Research and development expenses decreased by approximately 7% from
1995 to 1996. The primary reasons for this decrease include: decreased research
and development staff levels and staff-related expenditures; and significantly
decreased expenditures for human clinical trial activities associated with the
Company's chronic wound care products.

         The Company anticipates that total research and development expenses in
fiscal 1998 will continue to decrease from levels reported in fiscal 1997.
However, if, among other things, the Company's current products or product
candidates are not commercially successful, or if the development of new
products does not proceed as expected, the Company could incur greater than
expected research and development expenses as well as possible excess inventory
charges. See "Business -- Important Factors Regarding Forward-Looking
Statements."

Selling, general and administrative expenses

         Selling, general and administrative expenses decreased by approximately
31% from 1996 to 1997. The primary reasons for this decrease include: reduced
staffing levels (including the elimination of the Company's eight-person sales
force in September 1997 and the associated reduction in staff-related expenses
in the fourth quarter); elimination of expenses incurred in 1995 and 1996
related to the litigation and settlement of the Company's October 1994
shareholders lawsuit (including a $400,000 insurance settlement payment received
in 1997 and treated as a reduction in expense); reduced rent expenses with the
termination of the lease on the Kirkland facility; and reductions in other
miscellaneous expenses.

         Selling, general and administrative expenses increased by approximately
3% from 1995 to 1996, primarily as a result of the Company's defense and
settlement of the shareholder suit and related insurance arbitrations.

         The Company anticipates that total selling, general and administrative
expenses in fiscal 1998 will continue to decrease from levels reported in fiscal
1997 due largely to the continuing cost savings from the elimination of the
Company's direct sales force and the utilization of the services of
distributors, partners and

                                       12

<PAGE>

licensees to promote its products.  However, there can be no assurance that the
Company will be successful in attracting or retaining corporate alliances on
terms favorable to the Company or that the interests and motivations of any
distributor, partner, or licensee would be or remain consistent with those of
the Company.  See "Business -- Important Factors Regarding Forward-Looking
Statements."

Interest and other income

         Interest income decreased by approximately 44% from 1996 to 1997 due
principally to reduced cash available for investing. Interest income decreased
from 1995 to 1996 by approximately 31%, also due principally to reduced cash
available for investing. The Company anticipates that, absent additional revenue
sources or a significant change in interest rates, fiscal 1998 interest income
will be less than that of fiscal 1997.

Liquidity and Capital Resources

         Historically, the Company has relied principally on equity financings
and corporate collaborations to fund its operations and capital expenditures.
However, beginning in mid 1996 and continuing into 1997, the Company commenced
initial sales of its first chronic wound care products and has continued to
expand the commercialization of its products since that time. The Company
anticipates that net sales of its total product lines will increase during 1998,
thereby providing a contribution toward funding the Company's operations.

         At December 31, 1997, the Company had net working capital of
approximately $14.5 million, a decrease of $6.1 million from December 31, 1996
due principally to the continuing use of the Company's cash to finance
operations. It is anticipated that the Company's cash and short-term investments
will continue to be used in operations until and unless product sales increase.
At December 31, 1997, the Company had cash, cash equivalents and short-term
investments of approximately $12.9 million. The Company used approximately $7.3
million in cash for operating activities in 1997, compared to approximately
$13.6 million in 1996. Investing activities provided approximately $8.5 million
in cash in 1997, compared to approximately $9.2 million in cash provided by
investing activities in 1996.

         The Company believes that its existing capital resources, even in
the absence of any increase in revenues from commercial activities, should be
sufficient to fund its cash requirements for at least the next year. This
belief is based on current product development plans, anticipated working
capital requirements associated with the expanding commercialization of the
Company's new and existing products, acquisitions, the current regulatory
environment, historical industry experience in the development of medical
devices and related products and general economic conditions. It also assumes
completion of the transaction described in "--Recent Developments." However,
there can be no assurance that the Company will have sufficient resources to
fund the cost of all its planned activities, or that it will be able to
obtain any additional financial resources on acceptable terms or in time to
fund any necessary or desirable expenditures. See "Business -- Important
Factors Regarding Forward-Looking Statements."

         The Company believes that additional financing may be required to meet
the planned operating needs after fiscal 1998 if significant positive cash flows
are not generated from commercial activities. Such needs would include the
expenditure of funds to continue to expand product acquisition and development
activities, and to support the increasing working capital requirements of a
growing commercial infrastructure, including manufacturing and distribution
capabilities. The Company may be required to pursue various financing
alternatives, such as commercial lines of credit, collaborative arrangements,
licenses, or additional public offerings or private placements of Company
securities. If such alternatives are not available, or are not available on
terms acceptable to the Company, the Company may be required to defer or
eliminate certain planned commercial activities, delay or eliminate expenditures
for certain of its potential products under development or license third parties
to commercialize products or technologies that the Company would otherwise seek
to develop or commercialize itself.

Capital Expenditures

         Capital expenditures totaled approximately $587,000 for the year ended
December 31, 1997, compared with $1,740,000 for 1996. The Company had no capital
expenditures in 1995. Of the company's total capital

                                       13

<PAGE>

expenditures during 1997 and 1996, approximately $499,000 and $1,250,000,
respectively, represented leasehold improvement costs associated with certain of
the Company's facilities. With the exception of the leasehold improvement costs,
virtually all of the capital expenditures during 1997 and 1996 represented
manufacturing and scientific laboratory equipment to support a research,
development, and manufacturing infrastructure.

For 1998, capital expenditures are expected to be approximately $100,000 to
support continued product manufacturing capabilities. The Company does not
anticipate any leasehold improvements expenditures on its existing facility in
1998.

Year 2000 Software Issue

         The Company utilizes various computer software packages as tools in
running its operations. Management plans to implement any necessary vendor
upgrades and modifications to ensure continued functionality with respect to the
widely discussed software problems associated with the Year 2000. At present,
management does not expect that material incremental costs will be incurred in
the aggregate or in any single future year.

Recent Developments

         On March 1, 1998, ProCyte signed a non-binding letter of intent to
purchase the assets of a privately owned company involved in the distribution
of skin care products. The aggregate purchase price for the company's assets
is currently expected to be $3.0 million, half of which would be payable in
cash and the other half of which would be payable in ProCyte's common stock.
The transaction is contingent upon, among other things, satisfactory
completion of due diligence and execution of a final purchase agreement.
Assuming all contingencies are satisfied, ProCyte expects the transaction to
close in the second quarter of 1998.

Item 7a  Quantitative and Qualitative Disclosures About Market Risk

         Not applicable.


Item 8.  Financial Statements and Supplementary Data

<TABLE>
<CAPTION>

Index to Financial Statements and Schedules                                                  Page
-------------------------------------------                                                 ------
<S>                                                                                         <C>
Balance Sheets as of December 31, 1997 and 1996...........................................    15

Statements of Operations for the years ended December 31, 1997, 1996, and 1995............    16

Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995............    17

Statements of Stockholders' Equity for the years ended December 31, 1997, 1996, and 1995..    18

Notes to Financial Statements.............................................................    19

Report of Independent Accountants.........................................................    27
</TABLE>

Note:    All schedules have been omitted because of the absence of conditions
         under which they are required or because the required information is
         included in the Financial Statements or notes thereto.

                                       14

<PAGE>


                               ProCyte Corporation
                                 Balance Sheets

<TABLE>
<CAPTION>

                                             December 31,1997  December 31, 1996
                                             ----------------  -----------------
<S>                                          <C>               <C>
ASSETS
Current Assets
   Cash and cash equivalents...............      $3,003,524        $1,804,875
   Securities available for sale ..........       9,863,093        19,041,961
   Inventories, net of reserve.............       1,927,325           596,740
   Other...................................         363,134           318,580
                                             ----------------  -----------------
   Total current assets....................      15,157,076        21,762,156

Property and Equipment, at cost
    Equipment..............................       2,484,535         3,604,764
    Leasehold improvements.................       5,513,850         5,097,833
    Improvements in progress...............               0         1,463,940
    Less accumulated depreciation and
      amortization.........................      (2,394,562)       (4,306,094)
                                             ----------------  -----------------
    Property and equipment, net............       5,603,823         5,860,443

Patents, at cost...........................         290,930           290,930
    Less accumulated amortization..........        (125,269)         (109,270)
                                             ----------------  -----------------
    Patents, net...........................         165,661           181,660

Other......................................         384,399           159,399
                                             ----------------  -----------------
Total Assets...............................     $21,310,959       $27,963,658
                                             ----------------  -----------------
                                             ----------------  -----------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
    Accounts payable.......................        $203,764          $334,843
    Accrued liabilities....................         470,643           779,890
                                             ----------------  -----------------
    Total current liabilities..............         674,407         1,114,733

Deferred Lease Payments....................          20,055            10,148

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; shares
      issued and outstanding 13,364,958....         133,650          132,776
    Additional paid-in capital.............      82,801,830       82,576,340
    Accumulated deficit....................     (62,318,983)     (55,870,339)
                                             ----------------  -----------------

    Total stockholders' equity.............      20,616,497       26,838,777
                                             ----------------  -----------------
Total Liabilities and Stockholders' Equity.     $21,310,959      $27,963,658
                                             ----------------  -----------------
                                             ----------------  -----------------
</TABLE>

See notes to financial statements

                                       15

<PAGE>

                               ProCyte Corporation
                            Statements of Operations

<TABLE>
<CAPTION>
                                                                   Twelve Months Ended December 31,
                                                       ---------------------------------------------------------
                                                              1997                1996               1995
                                                       ------------------- ------------------- -----------------
<S>                                                        <C>                  <C>                      <C>
Revenues
   Product sales....................................       $184,034             $30,563                  $0
   Contract manufacturing...........................        705,706             708,104             151,836
   License fees.....................................              0             900,000                   0
   R&D revenue under collaborative agreements.......              0                   0           1,536,316
                                                       ------------------- ------------------- -----------------
   Total revenue....................................        889,740           1,638,667           1,688,152

Operating Expenses
   Cost of product sales............................        449,261              13,910                   0
   Research & development...........................      3,774,415           6,738,911           7,235,298
   General & administrative.........................      4,481,744           4,880,255           4,729,693
   Litigation settlement............................       (400,000)          1,000,000           4,750,000
                                                       ------------------- ------------------- -----------------
   Total costs and expenses.........................      8,305,420          12,633,076          16,714,991

Operating Loss......................................     (7,415,680)        (10,994,409)        (15,026,839)

Other Income
   Interest income..................................        907,628           1,622,944           2,631,904
   Other income.....................................         59,408              14,346                   0
                                                       ------------------- ------------------- -----------------
   Total other income...............................        967,036           1,637,290           2,631,904

Net loss............................................    $(6,448,644)        $(9,357,119)       $(12,394,935)

Net loss per common share...........................        $(0.48)             $(0.71)            $(0.95)

Weighted average number of common shares used in
  computing net loss per common share...............     13,326,929          13,210,036          13,100,818


</TABLE>

See notes to financial statements

                                       16

<PAGE>

                                              ProCyte Corporation
                                            Statements of Cash Flows
<TABLE>
<CAPTION>

                                                                       Twelve Months Ended December 31,
                                                              ---------------------------------------------------
OPERATING ACTIVITIES                                               1997              1996             1995
                                                              ---------------- ----------------- ----------------
<S>                                                           <C>              <C>               <C>
Net Loss                                                          ($6,448,644)      ($9,357,119)    ($12,394,935)
Adjustments to reconcile net loss to net cash used in
operating activities:

   Depreciation...........................................            730,330         1,061,294          781,445
   Patent expense.........................................             15,999            16,000          213,358
   (Gain) loss on sale of securities available for sale...               (765)           50,036         (324,534)
   Gain on sale of property & equipment...................            (58,643)                0                0
   Stock grants and restricted stock grants...............            226,366           259,000           32,634
   Compensation expense on stock options..................                  0           (58,101)          69,657
   Changes in assets and liabilities:

     Increase in inventories..............................         (1,330,585)         (596,740)               0
     (Increase) decrease in other current assets..........            (44,554)          158,536          (16,892)
     (Increase) decrease in insurance receivable..........                  0         3,000,000       (3,000,000)
     Increase (decrease) in accounts payable..............           (131,079)         (343,855)         385,232
     Increase (decrease) in accrued liabilities...........           (309,247)           92,438         (406,502)
     Increase (decrease) in litigation settlement payable.                  0        (7,750,000)        7,750,000
     Decrease in deferred income..........................                  0                 0         (340,344)
     Increase (decrease) in deferred lease payments.......              9,907           (59,024)         (13,831)
     Decrease in deferred sales tax.......................                  0           (23,682)         (28,862)
                                                              ---------------- ----------------- ----------------
   Net cash used in operating activities..................         (7,340,915)      (13,551,217)      (7,293,574)
                                                              ---------------- ----------------- ----------------
FINANCING ACTIVITIES

   Proceeds from issuance of stock - net..................                  0           110,444           27,423
                                                              ---------------- ----------------- ----------------
   Net cash provided by financing activities..............                  0           110,444           27,423
                                                              ---------------- ----------------- ----------------
INVESTING ACTIVITIES

   Purchase of property and equipment.....................           (586,740)       (1,739,875)               0
   Sale of property and equipment.........................            171,671                 0                0
   Purchase of securities available-for-sale..............        (45,652,513)     (171,186,634)    (142,491,420)
    Proceeds from sale or maturity of securities
      available for sale..................................         54,832,146       182,152,417      129,528,389
    Patents reimbursements................................                  0                 0            5,000
    Increase in other assets..............................          (225,000)                 0                0
                                                              ---------------- ----------------- ----------------
    Net cash provided by (used in) investing activities...          8,539,564         9,225,908     (12,958,031)
                                                              ---------------- ----------------- ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS                           1,198,649       (4,214,865)     (20,224,182)

CASH AND CASH EQUIVALENTS

  AT BEGINNING OF PERIOD                                            1,804,875         6,019,740       26,243,922
                                                              ---------------- ----------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                         $3,003,524        $1,804,875       $6,019,740
                                                              ---------------- ----------------- ----------------
                                                              ---------------- ----------------- ----------------
</TABLE>

See notes to financial statements


                                       17


<PAGE>

                               ProCyte Corporation
                       Statements of Stockholders' Equity
<TABLE>
<CAPTION>
                                                   Common Stock          Additional
                                              ------------------------    Paid-in      Accumulated     Unearned
                                                Shares     Par Value      Capital        Deficit     Compensation      Total
                                              ------------ ----------- -------------- ------------- -------------- ------------
<S>                                           <C>          <C>         <C>            <C>           <C>            <C>
Balance, January 1, 1995....................   12,920,296    $129,203    $82,292,913  $(34,118,285)    $(154,056)  $48,149,775

Exercise of stock options...................      198,199       1,982         25,441                                    27,423
Hymedix restricted stock released...........       12,600         126         32,508                                    32,634
Amortization of unearned compensation.......                                                              69,657        69,657
Net loss....................................                                          (12,394,935)                 (12,394,935)
                                              ------------ ----------- -------------- ------------- -------------- ------------
Balance, December 31, 1995                     13,131,095     131,311     82,350,862  (46,513,220)       (84,399)   35,884,554
                                              ------------ ----------- -------------- ------------- -------------- ------------
Exercise of stock options...................       46,463         465        109,978                                   110,443
Hymedix restricted stock released...........      100,000       1,000        258,000                                   259,000
Cancel compensatory stock option grants.....                                (142,500)                                 (142,500)
Amortization of unearned compensation.......                                                               84,399       84,399
Net loss....................................                                           (9,357,119)                  (9,357,119)
                                              ------------ ----------- -------------- ------------- -------------- ------------
Balance, December 31, 1996..................   13,277,558     132,776     82,576,340  (55,870,339)              0   26,838,777
                                              ------------ ----------- -------------- ------------- -------------- ------------
Hymedix restricted stock released...........       87,400         874        225,490                                   226,364
Net loss....................................                                           (6,448,644)                  (6,448,644)
                                              ------------ ----------- -------------- ------------- -------------- ------------
Balance, December 31, 1997..................   13,364,958    $133,650    $82,801,830  ($62,318,983)            $0  $20,616,497
                                              ------------ ----------- -------------- ------------- -------------- ------------
                                              ------------ ----------- -------------- ------------- -------------- ------------
</TABLE>

See notes to financial statements

                                       18

<PAGE>



                               ProCyte Corporation
                          Notes to Financial Statements

Note 1. Description of Business and Summary of Significant Accounting Policies

Nature of Operations

         ProCyte Corporation ("ProCyte" or the "Company") is a healthcare
products company engaged in the discovery, development and commercialization of
a new class of wound care products incorporating the Company's proprietary
copper- peptide technology and other wound care technologies.

         ProCyte commenced operations on September 22, 1986 (inception). Since
that time, the Company's research and development programs have focused
principally on wound healing and tissue repair applications with its topically
administered copper-peptide compounds. In November 1995, the Company acquired
certain rights to a polymer technology for use in wound care applications.

         The Company launched its first commercial product, Iamin-Registered
Trademark- Hydrating Gel, in June 1996. Additional wound care product lines were
launched throughout 1997, including OsmoCyte-Registered Trademark- Pillow Wound
Dressings (which incorporate the Company's licensed polymer technology);
Iamin-Registered Trademark- Wound Cleanser; a line of transparent film
dressings; and several products under the GraftCyte-TM- brand name for
application following hair restoration surgery. The Company also concurrently
markets several of its products to the veterinary market under the
Iamin-Registered Trademark- Vet and OsmoCyte-Registered Trademark- brand names.
Additional product launches are expected in 1998.

         In December 1997, the Company signed an exclusive distribution
agreement with the Bard Medical Division ("Bard") of C.R. Bard, Inc. Bard will
be the exclusive supplier of the Company's wound care products into the
hospital, nursing home, and extended care markets in the United States and
Canada. The Company retains the rights to distribute its wound care products
independently or with other partners to different market segments, including the
cosmetic surgery market, the hair restoration market, the dermatology market,
the retail cosmetic market, the veterinary market, and the international market
outside of the United States and Canada.

         Most of the Company's products are sold as medical devices requiring
FDA regulatory clearance. None of the Company's products have clearance to be
sold as prescription drugs in the United States or elsewhere.

         The Company maintains a manufacturing plant at its Redmond, Washington
facility. The manufacturing facility includes a small-scale chemical plant that
produces the Company's copper-peptide compounds. It also includes a processing
facility for the Company's polymer-based OsmoCyte-Registered Trademark-
products. Additional product manufacturing services are out-sourced to
independent suppliers. The Company also provides contract manufacturing services
to companies in the pharmaceutical, biotechnology, and related industries in
order to more fully utilize its existing facility's capacity.

         The Company has a total investment of approximately $6.1 million ($5.2
million net book value) in its manufacturing facility, including capital
equipment and leasehold improvement construction costs. At this time, management
believes that the cost of the facility will be recovered from the processing of
current and anticipated bulk substance requirements for product sales, and from
performing contract manufacturing services.

         To date, the Company's revenues have principally been from interest
income, research fees, license fees, and fees for performance of contract
manufacturing services. For the year ended December 31, 1997, revenues generated
from product sales totaled approximately $184,000. From inception through
December 31, 1997, the Company incurred expenses for, among other things,
research, development, administration, and settlement of litigation that
resulted in an accumulated deficit of approximately $62.3 million. Further
expenditures will be required for development, regulatory submissions, marketing
and manufacturing for the Company's existing products and product candidates.
There can be no assurance that the Company will be able to generate sufficient
product sales to achieve a profitable level of operation.

                                       19

<PAGE>


         As of December 31, 1997, the Company had cash, cash equivalents and
securities available for sale of $12.9 million which management believes will be
sufficient to fund its planned operating losses and other cash requirements for
at least the next year.

         The Company was in development stage at December 31, 1996. During 1997,
the Company substantially completed its initial product development activities
and commenced its planned principal operations. Accordingly, the Company's
Statements of Operations, Statements of Cash Flows, and Statements of
Stockholders' Equity no longer show inception-to-date information.

Summary of Significant Accounting Policies

Revenue recognition

         Product revenues are recognized when products are shipped, and contract
manufacturing revenues are recognized when services are performed. Development
revenues under collaborative agreements and nonrefundable license fees are
recognized when earned for the performance of research activities under contract
terms.

         During 1997 and 1996, one customer accounted for approximately 34% and
10%, respectively, of contract manufacturing revenue. In February 1998, the
Company learned that this customer would face an indefinite delay in receiving
FDA clearance for its products. It is uncertain whether this client will provide
significant revenues to the Company in 1998 and beyond.

Research and development

         Research and development costs are expensed as incurred. The Company
enters into contracts with outside laboratories for certain clinical,
biocompatibility, and toxicology studies. Payment for such contracts are
typically made in installments at the initiation, completion and other specified
stages of the studies. The Company recognizes the expenses associated with these
contracts when the related services are performed.

Inventories

         Inventories are stated at the lower of cost, as determined by the first
in, first out method, or market, and consist of materials, work-in-process, and
finished goods as follows:

<TABLE>
<CAPTION>

                                                 1997             1996
                                           ---------------  ----------------
<S>                                        <C>              <C>
Raw materials...........................       $371,313        $ 99,698
Work in process.........................      1,440,215         316,848
Finished goods..........................        495,797         180,194
Reserve for surplus/obsolete inventory..       (380,000)             --
                                           ---------------  ----------------
Total...................................     $1,927,325        $596,740
                                           ---------------  ----------------
                                           ---------------  ----------------
</TABLE>


         During the fourth quarter of 1997, the Company established a reserve
for surplus and obsolete inventory of $380,000, based upon review of quantities
and forecasted needs of individual items included within raw materials,
work-in-process and finished goods.


                                       20

<PAGE>


Depreciation and amortization

         Equipment is depreciated using accelerated methods over the estimated
useful lives of the related assets, ranging from 5 to 20 years. Leasehold
improvements are amortized over the term of the facility lease (See Note 5).

Long-lived assets

         In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed of, the Company periodically reviews long-lived assets,
including intangible assets, for impairment to determine whether events or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable and that adjustments might accordingly be necessary. No loss
provisions have been required to date.

Patents and amortization

         Patent application costs are amortized on a straight-line basis over 17
years from the date the related U.S. patents are issued. Application costs for
abandoned patents are expensed in the period abandoned.

         Beginning in fourth quarter 1992, the Company changed its accounting
policy to capitalize only those recoverable patent costs that relate to
indications for which licensing agreements have been in place. As a result, in
the fourth quarters of 1992 and 1995, the Company recorded non-cash write-downs
of $378,615 and $200,760, respectively, for previously capitalized patent costs
that do not meet the above criteria. No additional patents were capitalized in
1997.

Net loss per common share

         In 1997 the Company adopted SFAS No. 128, Earnings per Share. Adoption
of this standard had no significant effect on previously reported loss per share
for 1995, 1996 and 1997.

         Net loss per common share is based upon the weighted average number of
common shares outstanding. Common stock equivalents include shares issuable upon
the exercise of stock options and assignment of shares granted to Hymedix
International, Inc. (see Note 3). However, only the vested portion of the shares
granted is considered in the computation of the net loss per common share as the
remaining shares would have an anti-dilutive effect.

Federal income taxes

         The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. The Company has provided a full valuation allowance
for tax benefits of net operating losses and research and development tax credit
carry forwards.

Cash equivalents

         The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. Such investments are
primarily in a United States Treasury money market fund.

Securities available for sale

         The Company's investments, consisting of U.S. Treasury notes and bills
and investment-grade commercial paper, are all classified as "available for
sale" and are stated at fair value, with valuation adjustments recorded directly
to equity, if significant. Fair value is based upon quoted market prices and
approximates cost as of December 31, 1997 and 1996. For purposes of computing
realized gains and losses, the specific identification method is used to
determine the cost of investments sold.


                                       21

<PAGE>



Stock options

         In 1996, the Company implemented SFAS No. 123, Accounting for
Stock-Based Compensation. The statement defines a fair value method of
accounting for an employee stock option or similar equity instrument and
encourages, but does not require, adoption of that method. Under SFAS No. 123
certain disclosures about stock-based compensation arrangements are made
regardless of the method used to account for them. As permitted by SFAS No. 123,
the Company continues to follow the existing accounting requirements for stock
options and stock-based awards contained in APB Opinion No. 25, Accounting for
Stock Issued to Employees.

Use of estimates in financial statements

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. At December 31, 1997, the most
significant such estimate relates to the allowance for surplus and obsolete
inventory. It is reasonably possible that actual losses may differ from the
estimate.

Note 2. Investments

         At December 31, 1997 and 1996, the Company's investments consisted
primarily of U.S. Treasury notes and bills and investment-grade commercial
paper. All investments are classified as "available for sale." At December 31,
1997, the amortized cost and estimated market value for investments maturing in
one year or less was $6,884,238 and those maturing in one through five years was
$2,978,855. Unrealized gains or losses at December 31, 1997, 1996 and 1995 were
insignificant. Realized gains (losses) from sales of investments during 1997,
1996 and 1995 were $765, ($50,036) and $324,534, respectively.

Note 3. Collaborative Agreements

         The Company earned revenue under collaborative agreements as follows:
<TABLE>
<CAPTION>

                                        Year ended December 31,
                              -----------------------------------------------
                                 1997            1996             1995
                              ------------- ---------------- ----------------
<S>                           <C>           <C>              <C>
R&D Funding:
   Kaken Pharmaceutical.....      $0                  $0         $690,345
   Kissei Pharmaceutical....       0                   0          750,000

Cost Reimbursement:
   Kaken Pharmaceutical.....       0                   0            3,027
   Kissei Pharmaceutical....       0                   0           92,944

License Fees................       0             900,000                0
                              ------------- ---------------- ----------------
Total.......................      $0            $900,000       $1,536,316
                              ------------- ---------------- ----------------
                              ------------- ---------------- ----------------

</TABLE>

                                       22

<PAGE>



Hymedix International, Inc.

         In November 1995, the Company entered into a license agreement with
Hymedix International, Inc. ("Hymedix"). Under the agreement, the Company
acquired from Hymedix an exclusive license to make, have made, use and sell
products for the wound care field using Hymedix's HYPAN polymer technology. The
agreement gave the Company exclusive worldwide rights, outside Asia, to five
wound care products that have received market clearance from the United States
Food and Drug Administration.

         In November 1997, the Company renegotiated the license agreement with
Hymedix. The Company retained a full license to certain of the Hymedix patents
and technology in exchange for a one-time payment of $125,000, and the delivery
of certain polymer raw materials to Hymedix, the value of which was not
considered significant. The Company was relieved of its obligation to make
future milestone payments totaling $2,000,000, as well as royalty payments from
product sales. As a result, the Company made a fourth quarter adjustment of
$375,000 to reverse a previously accrued liability for such obligations. As part
of the renegotiated agreement, the Company relinquished the rights to certain
products that it had no plans to market. (Also see Note 7.)

Kissei Pharmaceutical Co., Ltd.

         In November 1993, the Company entered into a strategic alliance with
Kissei Pharmaceutical Co., Ltd. ("Kissei"). Under the terms of the agreement,
the Company granted Kissei an exclusive license to make, have made, use and sell
the Company's Iamin-Registered Trademark- compound in Japan, China, Korea and
Taiwan for topical wound healing applications, including chronic human dermal
wounds such as diabetic, venous stasis or pressure ulcers, surgical wounds and
burns.

         On March 7, 1997, the Company received notice from Kissei that it was
terminating the agreement. The Company regained the exclusive license rights for
its copper-peptide products in Japan, China, Korea and Taiwan for topical wound
healing applications. All previous funding obligations were satisfied and no
payments were required as a result of the termination.

Kaken Pharmaceutical Co., Ltd.

         In December 1992, the Company entered into an agreement with Kaken
Pharmaceutical Co., Ltd. ("Kaken") for developing and marketing hair growth
products in Asia based on the Company's technology. The agreement gave Kaken
exclusive license rights for copper-peptide hair growth and hair loss prevention
products in Asian countries.

         On January 31, 1996, the Company's license agreement with Kaken was
terminated. The Company regained the exclusive license rights for its copper-
peptide hair growth and hair loss prevention products in Asian countries. In
1995, Kaken satisfied all of its research and development funding and cost
reimbursement obligations under the agreement, and no payments were required as
a result of this termination.

Note 4. Federal Income Taxes

         The following is a summary of the components of deferred taxes (in
millions) at December 31, 1997 and December 31, 1996:

<TABLE>
<CAPTION>
                            1997      1996
                        ----------  ---------
<S>                     <C>         <C>
Deferred Tax Asset....   $ 22.6      $  18.4
Valuation Allowance...    (22.6)       (18.4)
                        ----------  ---------
Total                    $  0.0      $   0.0
                        ----------  ---------
                        ----------  ---------

</TABLE>

                                       23

<PAGE>



         At December 31, 1997, the Company's deferred tax asset relates to net
operating losses and research and development tax credit carry forwards of
approximately $60.2 million and $1.5 million, respectively, which are scheduled
to expire from 2000 to 2010. As a result of issuing common stock subsequent to
inception, the Company's ability to use these net operating losses and tax
credit carry forwards in the future will be subject to limitations under
Internal Revenue Code Section 382. A full valuation allowance has been recorded
since realization of this deferred tax asset is not reasonably assured.

Note 5. Lease Commitments

         The Company presently leases approximately 33,000 square feet of
manufacturing, warehouse, laboratory, and administrative space in Redmond,
Washington under a lease executed in August 1993, as amended in January 1994 and
again in March 1997. Prior to the second amendment to the lease in March 1997,
the Company leased approximately 16,000 square feet of manufacturing space at
the facility. The amended lease provided an additional 17,000 square feet, which
allowed the Company to consolidate all of its manufacturing, research, and
administrative functions into one location in July 1997. As amended, the lease
term extends 120 months from July 1, 1997 through June 30, 2007, and contains a
renewal option for the Company to extend the original term by an additional five
years.

         On June 30, 1997, the Company terminated a lease for approximately
28,000 square feet of laboratory and administrative space in Kirkland,
Washington. No early termination fee was incurred by the Company as a result of
the Kirkland lease termination.

         Future minimum annual lease payments on the total leased space of
approximately 33,000 square feet are as follows:
<TABLE>

     <S>                 <C>
     1998..............  $  299,034
     1999..............     387,378
     2000..............     401,053
     2001..............     419,232
     2002..............     406,584
                         ----------
                         ----------
     Thereafter........   1,843,608
                         ----------

     Total.............  $3,756,889
                         ----------
                         ----------
</TABLE>

         Rent expense in 1997, 1996 and 1995 was $550,333, $519,629, and
$536,212, respectively.

Note 6. Legal Proceedings

         In May 1997, the Company received a negotiated final settlement payment
of $400,000 from one of its insurance carriers resulting from the 1996
settlement of the shareholder lawsuit filed against the Company and certain of
its officers and directors in October 1994. In 1995, the Company accrued the
then tentative liability to stockholders of $4.75 million, net of a related
insurance claim receivable of $3.0 million, related to settlement of the suit.
At December 31, 1996, the Company had provided a full valuation allowance for
the remaining $1.0 million insurance claim receivable from an insurance carrier
that had denied coverage. The $400,000 payment in 1997 was in settlement of this
claim. The provision for litigation settlement and related insurance claims and
settlements are reported as "litigation settlement" in the Statement of
Operations.


                                       24

<PAGE>

Note 7. Stockholders' Equity

Common stock

         On November 15, 1995, the Company issued 200,000 shares of its common
stock to Hymedix International, Inc. pursuant to a stock purchase agreement.
These shares were subject to forfeiture under certain conditions and were held
in escrow by the Company and released to Hymedix over a two-year period in four
equal installments of 50,000 shares each. The stock is subject to SEC Rule 144
restrictions and has piggyback registration rights for a limited period of time.
The Company released 100,000 of these shares to Hymedix in 1996 with the final
two installments of 50,000 shares each released to Hymedix in May 1997 and
November 1997. Other than these shares released to Hymedix, no shares of common
stock were issued or released during 1997.

Stock options

         The Company has stock option plans for directors, officers, employees
and consultants that provide for grants of nonqualified and incentive stock
options. Options generally are granted at fair market value, expire between five
and ten years from grant date and vest ratably over three to five years.

         The following table summarizes information about stock option activity
in 1997, 1996 and 1995.

<TABLE>
<CAPTION>


                                              1997                      1996                       1995
                                    ------------------------- -------------------------- --------------------------
                                                  Wtd. Avg.                  Wtd. Avg.                  Wtd. Avg.
                                      Shares     Exer. Price     Shares     Exer. Price     Shares     Exer. Price
                                    ----------- ------------- ------------ ------------- ------------ -------------
<S>                                 <C>         <C>           <C>          <C>           <C>          <C>
Outstanding, beginning of year....   1,442,193      $3.50      1,536,957       $4.44      1,412,710        $4.63
Granted...........................     415,500      $1.57        402,000       $2.94        479,500        $2.90
Exercised.........................           -       -           (46,463)      $2.38       (203,880)       $0.22
Canceled or expired...............    (553,319)     $3.46       (450,301)      $6.34       (151,373)       $7.20
Outstanding, end of year..........   1,304,374      $2.94      1,442,193       $3.50      1,536,957        $4.44
Exercisable, end of year..........     675,044                   742,383                    705,788
</TABLE>

         As required by SFAS 123, the Company has determined the fair value of
stock options granted during 1997, 1996 and 1995 using the Black-Scholes option
pricing model and the following assumptions:
<TABLE>
<CAPTION>

                                                  1997          1996          1995
                                              ----------- ------------- --------------
      <S>                                     <C>         <C>           <C>
      Risk-free interest rate...............       4.99%        5.88%         5.75%
      Expected option life (years)..........       5.81         5.81          5.81
      Dividend yield........................       0.00         0.00          0.00
      Expected volatility...................        117%          79%           47%

</TABLE>

         The weighted average fair value of options granted during 1997 and 1996
was approximately $1.35 and $2.04, respectively. The effect on net loss had the
Company elected to adopt the measurement provisions of SFAS 123 would have been
an increase in the net loss for the periods ending December 31, 1997, 1996 and
1995, respectively, by $596,401 to $7,045,045, by $552,913 to $9,910,032, and by
$318,632 to $12,713,567.

                                       25

<PAGE>


On a proforma basis, net loss per share would have increased by $0.05 to $0.53,
by $0.04 to $0.75, and by $0.02 to $0.97, respectively.



Note 8.  Benefit Plans

         On April 1, 1991, the Company adopted the 1991 ProCyte Corporation
Profit Sharing and Salary Deferral 401(k) Plan (the "401(k) Plan"). The 401(k)
Plan is funded by voluntary employee pretax salary deferrals, to the extent
permitted under law, and provides for employer matching contributions, at the
discretion of the Board of Directors. No employer contribution has been made
since adoption of the 401(k) Plan.

Note 9. Subsequent Event

         On March 1, 1998, the Company signed a non-binding letter of intent
to purchase the assets of a privately owned company involved in the
distribution of skin health products. The transaction is contingent upon
satisfactory completion of due diligence and execution of a final purchase
agreement. The tentative purchase price is $3.0 million in equal amounts of
cash and stock. Upon, among other things, satisfactory completion of due
diligence, execution of a final purchase agreement, and satisfaction of all
other closing contingencies, management expects the transaction to close in
the second quarter of 1998.

                                       26

<PAGE>




                               ProCyte Corporation
                          Independent Auditors' Report

Board of Directors
ProCyte Corporation
Redmond, Washington

         We have audited the accompanying balance sheets of ProCyte Corporation
as of December 31, 1997 and 1996, and the related statements of operations, cash
flows, and stockholders' equity for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

         We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion, such financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1997
and 1996, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.

DELOITTE & TOUCHE LLP

/s/ Deloitte & Touche LLP

Seattle, Washington
March 25, 1998


                                       27

<PAGE>




Item 9.  Changes in and Disagreements With Accountants on Accounting and
         Financial Disclosure

         Not applicable.


                                     PART III

         The information required under Part III, Items 10, 11, 12, and 13, is
included in the Company's Proxy Statement relating to the Company's annual
meeting of shareholders, and is incorporated herein by reference. Such Proxy
Statement will be filed with the Securities and Exchange Commission not later
than 120 days after the close of the Company's fiscal year end, December 31,
1997.


                                      PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

a.       List of documents filed as part of this report:

         (1)      Financial Statements and Supplementary Data - Reference is
                  made to the Index to Financial Statements and Schedules under
                  Item 8 in Part II hereof, where such documents are listed.

         (2)      Exhibits - see (c) below

b.       Reports on Form 8-K

         None


                                       28

<PAGE>




c.       Exhibits

<TABLE>
<CAPTION>


Exhibit      Description                                                                                  Note
-------      -------------------------------------------------------------------------------------------  ----
<C>          <S>                                                                                          <C>
3.1          Restated Articles of Incorporation of the Registrant                                           A
3.2          Restated Bylaws of the Registrant                                                              A
10.1*        1987 Stock Benefit Plan of ProCyte Corporation                                                 A
10.2*        ProCyte Corporation 1989 Restated Stock Option Plan                                            B
10.3*        ProCyte Corporation 1991 Restated Stock Option Plan for Nonemployee Directors and
             amendments thereto                                                                             D
10.4+        Teachers Insurance & Annuity Association Lease dated as of October 1, 1993 and second
             amendment thereto dated February 28, 1997                                                      D
10.5*        1996 Stock Option Plan                                                                         D
10.6*        Consulting and Separation Agreement for Mr. Joseph Ashley                                      D
10.7*        Change of Control Agreement for Ms. Karen L. Hedine                                            C
10.8*        Change of Control Agreement for Mr. John F. Clifford                                           D
10.9*        Form of Indemnity Agreement dated February 23, 1995 between the Registrant and each of
             Mr. Ashley, Dr. Blake, Ms. Hedine, Mr. Patterson, Mr. Tierney, Mr. Clifford, Mr. Green
             and Mr. Sullivan                                                                               C
10.10*       Form of Severance Agreement for Ms. Karen Hedine, Mr. Kenneth Green and Mr. John Clifford      D
10.11*       Part-time Employment and Separation Agreement for Ms. Karen L. Hedine                          E
10.12+       Distribution & License Agreement dated December 12, 1997 between the Registrant and Bard
             Medical Division                                                                               E
13.1         1997 Annual Report to Shareholders                                                             E
23.1         Consent of Deloitte & Touche LLP                                                               E
27.1         Financial Data Schedule                                                                        E

</TABLE>
--------------------------

*   Management contract or compensatory plan or arrangement.

+   Confidential treatment has been granted or requested with respect to
    portions of this exhibit.

A.  Incorporated by reference to the Registrant's Registration Statement of
    Form S-1 (No. 33-31353).

B.  Incorporated by reference to the Registrant's Registration Statement of
    Form S-1 (No. 33-46364).

C.  Incorporated by reference to the Registrant's Annual Report on Form 10-K
    for the year ended December 31, 1994.

D.  Incorporated by reference to the Registrant's Annual Report on Form 10-K
    for the year ended December 31, 1996.

E.  Filed herewith.


                                       29

<PAGE>


                                   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)

                             By:              /s/ John F. Clifford
                                ------------------------------------------------
Date:       March 31, 1998                        John F. Clifford
                                         President and Chief Executive Officer

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>

       Name                              Title                        Date
------------------------  -------------------------------------  ---------------
<S>                       <C>                                    <C>


/s/ Jules Blake
------------------------  Director                               March 31, 1998
Jules Blake, Ph.D.


/s/ John F. Clifford      President and Chief Executive Officer  March 31, 1998
------------------------  (Principal Executive Officer and
John F. Clifford          Principal Financial Officer)


/s/ Robert E. Patterson
------------------------  Director                               March 31, 1998
Robert E. Patterson


/s/ William M. Sullivan
------------------------  Director                               March 31, 1998
William M. Sullivan


/s/ Thomas E. Tierney
------------------------  Chairman of the Board                  March 31, 1998
Thomas E. Tierney


/s/ Jon Sortland          Manager of Finance                     March 31, 1998
------------------------  (Principal Accounting Officer)
Jon Sortland

</TABLE>

                                       30