SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)

[X]       Quarterly Report pursuant to Section 13 or 15(d) of the Securities
          Exchange Act of 1934 for the quarterly period ended June 30, 1999

          Transition report pursuant to section 13 or 15(d) of the Securities
          Exchange Act of 1934 for the transition period from _______ to _______

Commission File Number     0-24760

                              Orphan Medical, Inc.
             (Exact name of registrant as specified in its charter)

          Minnesota                                     41-1784594
(State or other jurisdiction of          (I.R.S. Employer Identification Number)
incorporation or organization)

   13911 Ridgedale Drive, Suite 475,
          Minnetonka, MN 55305                          (612) 513-6900
  (Address of principal executive offices        (Registrant's telephone number,
              and zip code)                           including area code)

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, and (2) has been subject to such filing requirements
for the past 90 days.
           Yes   __X__             No _____

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.

Common Stock, $.01 par value                                 6,588,707
         (Class)                                 (Outstanding at August 2, 1999)




<PAGE>


                                      INDEX

                             ORPHAN MEDICAL, INC.(R)

<TABLE>
<CAPTION>

PART I.  FINANCIAL INFORMATION                                                                           Page No.


Item 1.  Financial Statements (Unaudited)
<S>                                                                                                         <C>
Balance Sheets - June 30, 1999 and December 31, 1998.                                                        3


Statements of Operations - Three and six months ended June 30, 1999 and June 30, 1998                        4


Statements of Cash Flows - Six months ended June 30, 1999 and June 30, 1998.                                 5

Notes to Financial Statements                                                                                6

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.              8
Item 3.  Quantitative and Qualitative Disclosures about Market Risks                                        14


PART II.  OTHER INFORMATION

Items 1 through 3 and 5 have been omitted since all items are inapplicable or
answers negative.

Item 4.  Submission of Matters to Vote of Security Holders                                                  15
Item 6.  Exhibits and Reports on Form 8-K                                                                   16
         Signature                                                                                          17

</TABLE>

Antizol(R), Antizol-Vet(R), Caprogel(TM), Busulfex(R), Intrachol(TM),
Colomed(TM), Cystadane(R), Elliotts B(R) Solution, Sucraid(R), Xyrem(R), "The"
Orphan Drug Company(TM), Orphan Medical, Inc.(R) and Dedicated to Patients with
Uncommon Diseases(R) are trademarks of the Company.


<PAGE>


                         PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements
                                 BALANCE SHEETS
                              ORPHAN MEDICAL, INC.

<TABLE>
<CAPTION>
                                                                            June 30,      December 31,
                                                                             1999             1998
                                                                         ------------     ------------
<S>                                                                      <C>              <C>
       ASSETS                                                             (Unaudited)        (Note)
       Current assets:
          Cash and cash equivalents                                      $  3,225,717     $  2,980,342
          Available-for-sale securities                                       997,550        4,541,141
          Accounts receivable, less allowance for doubtful
             accounts and returns of $100,983 and $48,620                     530,736          989,339
          Other receivables                                                     5,425            6,925
          Inventories                                                         252,275          112,725
          Prepaid expenses                                                     66,456          115,231
                                                                         ------------     ------------
       Total current assets                                                 5,078,159        8,745,703

       Property and equipment:
          Property and equipment                                              588,292          556,358
          Accumulated depreciation                                           (309,365)        (255,331)
                                                                         ------------     ------------
                                                                              278,927          301,027

                                                                         ------------     ------------
       Total assets                                                      $  5,357,086     $  9,046,730
                                                                         ============     ============

       LIABILITIES AND SHAREHOLDERS' EQUITY
       Current liabilities:
          Accounts payable                                               $    250,584     $    586,816
          Accrued outdated product return allowance                           413,058          304,582
          Accrued expenses                                                  2,082,797        2,579,755
                                                                         ------------     ------------
       Total current liabilities                                            2,746,439        3,471,153

       Commitments

       Shareholders' equity:
          Senior Convertible Preferred Stock, $.01 par value; 14,400
             shares authorized; 7,798 and 7,500 shares issued and
             outstanding, respectively                                             78               75
          Common Stock, $.01 par value; 25,000,000 shares
             authorized; 6,569,207 and 6,560,096 shares issued and
             outstanding, respectively                                         65,692           65,601
          Additional paid-in capital                                       40,302,822       39,946,113
          Accumulated deficit                                             (37,757,185)     (34,433,640)
                                                                         ------------     ------------
                                                                            2,611,407        5,578,149
          Unrealized gain (loss) on available-for-sale securities                (760)          (2,572)
                                                                         ------------     ------------
       Total shareholders' equity                                           2,610,647        5,575,577
                                                                         ------------     ------------
       Total liabilities and shareholders' equity                        $  5,357,086     $  9,046,730
                                                                         ============     ============
</TABLE>

NOTE: THE BALANCE SHEET AT DECEMBER 31, 1998 HAS BEEN DERIVED FROM THE AUDITED
FINANCIAL STATEMENTS AT THAT DATE BUT DOES NOT INCLUDE ALL OF THE INFORMATION
AND FOOTNOTES REQUIRED BY GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR COMPLETE
FINANCIAL STATEMENTS.

SEE ACCOMPANYING NOTES.



                                       3
<PAGE>


                            STATEMENTS OF OPERATIONS
                              ORPHAN MEDICAL, INC.

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                For the Three Months Ended        For the Six Months Ended
                                                ---------------------------     ----------------------------
                                                  June 30,        June 30,        June 30,        June 30,
                                                    1999            1998            1999            1998
                                                -----------     -----------     -----------     -----------
<S>                                             <C>             <C>             <C>             <C>
Revenues, net                                   $ 1,524,458     $ 1,032,730     $ 2,926,298     $ 2,645,809

Cost of sales                                       277,405         231,804         526,330         540,344
                                                -----------     -----------     -----------     -----------
Gross Profit                                      1,247,053         800,926       2,399,968       2,105,465

Operating expenses:
   Research and development                       1,359,047       1,822,282       2,667,810       3,617,960
   Sales and marketing                              798,932         708,555       1,536,917       1,319,843
   General and administrative                       654,070         702,019       1,367,095       1,271,094
                                                -----------     -----------     -----------     -----------
Total operating expenses                          2,812,049       3,232,856       5,571,822       6,208,897
                                                -----------     -----------     -----------     -----------
Loss from operations                             (1,564,996)     (2,431,930)     (3,171,854)     (4,103,432)

Other income:
   Interest, net                                     61,362          14,137         147,282          34,279
                                                -----------     -----------     -----------     -----------
Net loss                                         (1,503,634)     (2,417,793)     (3,024,572)     (4,069,153)

Less:  Preferred stock dividends                    145,812             -           288,062             -
                                                -----------     -----------     -----------     -----------


Net loss attributable to common shareholders    $(1,649,446)    $(2,417,793)    $(3,312,634)    $(4,069,153)
                                                ===========     ===========     ===========     ===========

Basic and diluted loss per
    common share                                $      (.25)    $      (.39)    $      (.50)    $      (.66)
                                                ===========     ===========     ===========     ===========

Weighted average number of
    shares outstanding                            6,566,652       6,186,357       6,586,273       6,147,145
                                                ===========     ===========     ===========     ===========

</TABLE>



                                       4
<PAGE>


                            STATEMENTS OF CASH FLOWS
                              ORPHAN MEDICAL, INC.

                                   (Unaudited)



<TABLE>
<CAPTION>
                                                                    For the Six Months Ended
                                                                   ---------------------------
                                                                     June 30,       June 30,
                                                                       1999           1998
                                                                   -----------     -----------
<S>                                                                <C>             <C>
OPERATING ACTIVITIES
Net loss                                                           $(3,024,572)    $(4,069,153)
Adjustments to reconcile net loss to net cash used
   in operating activities:
     Depreciation and amortization                                      54,034          47,372
     Compensatory options                                               51,195             -
     Changes in operating assets and liabilities:
         Accounts payable and accrued expenses                        (724,714)        591,572
         Inventories                                                  (139,550)         29,575
         Accounts receivable and current assets                        508,878        (240,374)
                                                                   -----------     -----------
Net cash used in operating activities                               (3,274,729)     (3,641,008)

INVESTING ACTIVITIES
   Purchase of office equipment                                        (31,934)        (35,434)
   Purchases of short-term investments                              (3,475,208)     (2,989,232)
   Maturities of short-term investments                              7,020,611       6,325,000
                                                                   -----------     -----------
Net cash provided by (used in) investing activities                  3,513,469       3,300,334

FINANCING ACTIVITIES:
   Chronimed Inc. obligation                                               -          (901,437)
   Stock option exercise proceeds                                      684,171         145,597
   Stock issued to Chronimed                                               -           947,451
   Common stock redeemed                                              (676,563)            -
   Cash dividends                                                         (973)            -
                                                                   -----------     -----------
Net cash provided by financing activities                                6,635         191,611
                                                                   -----------     -----------

Increase (decrease) in cash and cash equivalents                       245,375        (149,063)
Cash and cash equivalents at beginning of
   period                                                            2,980,342       2,150,877
                                                                   -----------     -----------
Cash and cash equivalents at end of
   period                                                          $ 3,225,717     $ 2,001,814
                                                                   ===========     ===========

SUPPLEMENTAL CASH FLOW INFORMATION
    Cash interest received                                         $   185,082     $   252,643
                                                                   ===========     ===========

</TABLE>


SEE ACCOMPANYING NOTES


                                       5

<PAGE>


                              ORPHAN MEDICAL, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                   (Unaudited)

1. BASIS OF PRESENTATION
Orphan Medical, Inc. (the "Company") acquires, develops, and markets products of
high medical value intended to address inadequately treated or uncommon diseases
within selected strategic therapeutic market segments. A drug has high medical
value if it offers a major improvement in the safety or efficacy of patient
treatment and has no substantial equivalent substitute. The Company has six
products that have been approved for marketing by the Food and Drug
Administration (the "FDA") and is currently developing one potential product.
The Company expects to seek additional products for development. In the first
quarter of 1999, the Company no longer considered itself to be in the
development stage.

The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, these financial statements do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal, recurring accruals) considered necessary for fair presentation have
been included. Operating results for the three and six month periods ended June
30, 1999 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1999. For further information, refer to the audited
financial statements and accompanying notes contained in the Company's Annual
Report filed on Form 10-K for the year ended December 31, 1998.

2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

3. COMMITMENTS
The Company has various commitments under agreements with outside consultants,
contract drug development companies, manufacturers, technical service companies,
license and research agreements, agreements with drug distributors, and other
sales and marketing agreements. At June 30, 1999, the Company estimates that it
could incur approximately $2,684,000 of additional expenditures in subsequent
periods under existing commitments. Commitments for research and development
expenditures will likely fluctuate from quarter to quarter and from year to year
depending on, among other factors, the timing of product development and the
progress of clinical development programs.



                                       6
<PAGE>


4. BORROWINGS
The Company has a commercial revolving line of credit with a bank, which expires
on May 15, 2000. The maximum amount available to the Company under this
arrangement is $500,000, subject to certain limitations. The Company's
indebtedness to the bank may not exceed the lesser of (1) 75 percent of the
Company's trade accounts receivable that have been outstanding for 90 days or
less or (2) $500,000. In addition, the Company must maintain a minimum balance
of at least $250,000 in accounts which the bank controls. Advances are charged a
variable rate of interest equal to the prime rate plus one half of a percent.
Through June 30, 1999, the Company has not borrowed under this arrangement.

5. RECLASSIFICATIONS
Certain prior period balances have been reclassified in order to conform with
the presentation for the period ended June 30, 1999. These reclassifications
have no impact on the net loss or shareholders' equity as previously reported.

6. SUBSEQUENT EVENT
On August 2, 1999, the Company completed a $5.0 million financing transaction
with UBS Capital, a subsidiary of UBS AG. The funding consists of $2.95 million
of the Company's Series B Convertible Preferred Stock and $2.05 million of debt
in the form of a line of credit. The Series B Convertible Preferred Stock may be
converted prior to August 2, 2009 into common shares at a price of $6.50 per
share. The debt bears an interest rate of 7.5% and matures on August 2, 2002.

In connection with the financing, UBS Capital also received two seven-year
warrants. One of the warrants entitles UBS Capital to receive, upon payment of
the $2.05 million exercise price, either $2.05 million of Series C Convertible
Preferred Stock (which is similar to the Series B Convertible Preferred Stock
and also has a conversion price of $6.50 per share) or 315,385 shares of Series
D Non-Voting Preferred Stock (which is equivalent to common stock except that it
has no voting rights). The other warrant, issued in relation to the debt,
entitles UBS Capital to purchase 282,353 shares of Series D Non-Voting Preferred
Stock at an exercise price of $4.25 per share. The Company can require the
exercise of the warrants under certain conditions.

The financing triggered antidilution provisions relating to the $8.1 million of
the Senior Preferred Stock held by UBS Capital as of August 1 (after giving
effect to the semi-annual in-kind dividend distributions, the most recent of
which was August 1, 1999), which resulted in a decrease in the conversion price
of those shares from $8.50 to $8.14 per share.



                                       7
<PAGE>


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


CAUTIONARY STATEMENT
This Quarterly Report on Form 10-Q contains statements that are not descriptions
of historical facts. The words or phrases "will likely result", "look for", "may
result", "will continue", "is anticipated", "expect", "project", or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
may be forward-looking statements that are subject to risks and uncertainties.
Actual results could differ materially from those currently anticipated due to a
number of factors, including those identified in the Company's "Cautionary
Statements" on Exhibit 99 to this Quarterly Report filed on Form 10-Q for the
quarterly period ended June 30, 1999.

GENERAL
Orphan Medical, Inc. was incorporated on June 17, 1994 in order to carry on the
business previously conducted by the Orphan Medical Division of Chronimed, Inc.
("Chronimed"). The Company's activities have consisted primarily of obtaining
the rights for pharmaceutical products, hiring the personnel required to
implement the Company's business plan, managing the development of these
products, preparing for the commercial introduction of six products and fund
raising. At June 30, 1999, six of the Company's products have been approved by
the Food and Drug Administration ("FDA") for marketing and are commercially
available and one product was in active development. The Company has not
generated sufficient levels of revenue from its approved products to date to
fund its operating activities and has sustained significant operating losses
each year since inception. In addition, the Company expects operating losses to
continue through 1999.

RECENT DEVELOPMENTS
On August 2, 1999, the Company completed a $5.0 million financing transaction
with UBS Capital, a subsidiary of UBS AG. The funding consists of $2.95 million
of the Company's Series B Convertible Preferred Stock and $2.05 million of debt
in the form of a line of credit. The Series B Convertible Preferred Stock may be
converted prior to August 2, 2009 into common shares at a price of $6.50 per
share. The debt bears an interest rate of 7.5% and matures on August 2, 2002.

In connection with the financing, UBS Capital also received two seven-year
warrants. One of the warrants entitles UBS Capital to receive, upon payment of
the $2.05 million exercise price, either $2.05 million of Series C Convertible
Preferred Stock (which is similar to the Series B Convertible Preferred Stock
and also has a conversion price of $6.50 per share) or 315,385 shares of Series
D Non-Voting Preferred Stock (which is equivalent to common stock except that it
has no voting rights). The other warrant, issued in relation to the debt,
entitles UBS Capital to purchase 282,353 shares of Series D Non-Voting Preferred
Stock at an exercise price of $4.25 per share. The Company can


                                       8
<PAGE>

require exercise of both warrants, in whole or in part, any time after July 23,
2002 in the event the last sale price of the Company's common stock is greater
or equal to $13 per share for ten (10) consecutive trading days immediately
preceding the date the Company gives notice to the holder.

All series of stock and warrants issued in connection with this financing
transaction have antidilution provisions.

The financing triggered antidilution provisions relating to the $8.1 million of
the Senior Preferred Stock held by UBS Capital as of August 1 (after giving
effect to the semi-annual in-kind dividend distributions, the most recent of
which was August 1, 1999), which resulted in a decrease in the conversion price
of those shares from $8.50 to $8.14 per share.

THREE MONTHS ENDED JUNE 30, 1999 VS. THREE MONTHS ENDED JUNE 30, 1998
Net loss applicable to common shareholders was $1.6 million for the three months
ended June 30, 1999 compared to $2.4 million for the three months ended June 30,
1998. The decrease in the loss results principally from increases in sales
resulting from the commercialization of Busulfex(R) (busulfan) Injection in the
first quarter of 1999 and lower research and development spending for Busulfex,
offset by higher research and development spending for Xyrem(R) (sodium oxybate)
oral solution. In addition, the Company had higher sales and marketing spending
for Busulfex as a result of the commercialization of the product in February
1999. A preferred stock dividend, which did not exist in the comparable period
of 1998, increased the net loss applicable to common shareholders in the current
quarter.

Net sales increased 48% to $1.5 million for the three months ended June 30, 1999
compared to $1.0 million the prior year. The increase in net sales reflects the
addition of Busulfex to the Company's commercialized products in February 1999.
Sales of Busulfex in the quarter are consistent with the Company's expectations.
The Company expects sales of Busulfex to increase in future periods as more
hospitals include Busulfex in theirtreatment protocols. The sales of Antizol(R)
(fomepizole) Injection were slightly above the Company's expectations. Sales of
Elliotts B Solution, Cystadane, Antizol-Vet , and Sucraid are consistent with
the Company's expectations for 1999.

Gross profit margins increased slightly to 82% for the 1999 quarter compared to
78% for the 1998 quarter. Cost of sales increased 20% to $0.3 million for the
three months ended June 30, 1999 compared to $0.2 million for the same period
the prior year. The increase in cost of sales is primarily the result of the
increase in revenue discussed above. Cost of sales as a percentage of net sales
will fluctuate from quarter to quarter and from year to year depending on, among
other factors, demand for the Company's products, new product introductions and
the mix of approved products shipped.

Research and development expense decreased 25% from $1.8 million for the three
months ended June 30, 1998 to $1.4 million for three months ended June 30, 1999.
The decrease



                                       9
<PAGE>

is the result of lower research and development spending for Busulfex offset by
increased spending for Xyrem. In addition, the prior year's quarter included
research and development spending on products whose clinical trials have been
concluded. The Company expects research and development expense to increase
significantly over current levels in subsequent quarters due to an acceleration
of the development plans for Xyrem. In February 1999, the Company began shipping
Xyrem for use in its Treatment IND trial and expects to charge enrolled patients
for the drug utilized in the trial. Any income generated by the Treatment IND,
which is not expected to be material, will be used to offset development
expense. Clinical spending for Xyrem will continue to be dependent on a number
of factors, including among others: the number of human subjects required for a
trial, the number of human subjects screened and enrolled in a trial, and the
number of active clinical sites.

Sales and marketing expense increased 13% from $0.7 million for the three months
ended June 30, 1998 to $0.8 million for the three months ended June 30, 1999.
This increase is largely attributable to significantly higher spending related
to the commercialization of Busulfex. Sales and marketing expenses will likely
continue to increase in subsequent quarters.

General and administrative expense was consistent from period to period and
remained $0.7 million. General and administrative expenses are not expected to
increase significantly in subsequent quarters.

Other income is the sum of interest income from investment activities less
interest expense from financing activities. The increase from the prior year is
the result of additional invested funds from the successful preferred stock
offering in the third quarter of 1998 and the settlement of the Company's
obligation to Chronimed in December 1998.

Preferred stock dividends relate to the Senior Convertible Preferred Stock that
was issued on July 23, 1998 and has a dividend rate of 7.5%. Preferred stock
dividends commenced on February 1, 1999 and were $0.1 million for the three
months ended June 30, 1999. Preferred stock dividends are payable in arrears,
when and as declared by the Company's Board of Directors on August 1 and
February 1 of each year. The Company intends to satisfy its dividend payment
obligations by the issuance of additional preferred stock through August 1,
2000, which will cause preferred stock dividends to increase in subsequent
quarters.

SIX MONTHS ENDED JUNE 30, 1999 VS. SIX MONTHS ENDED JUNE 30, 1998
Net loss applicable to common shareholders was $3.3 million for the six months
ended June 30, 1999 compared to $4.1 million for the six months ended June 30,
1998. The decrease in the loss results principally from higher sales volume
resulting from the commercialization of Busulfex in February 1999 and lower
research and development spending for Busulfex, offset by higher research and
development spending for Xyrem and increases in sales and marketing and general
and administrative expenses. The Company had higher sales and marketing spending
for Busulfex as a result of the commercialization of the product in February
1999. The Company also had increased general and


                                       10
<PAGE>

administrative expense resulting from compensation expense associated with
staffing increases. A preferred stock dividend, which did not exist in the
comparable period of 1998, increased the net loss applicable to common
shareholders in the current year.

Net sales increased 11% to $2.9 million for the six months ended June 30, 1999
compared to $2.6 million for the six months ended June 30, 1998. The increase in
net sales reflects the addition of Busulfex to the Company's commercialized
products in February 1999. Initial sales of Busulfex are consistent with the
Company's expectations. The Company expects sales of Busulfex to increase in
future periods, as more hospitals include Busulfex in their treatment protocols.
The sales of Antizol will be at lower levels on an annualized basis than the
prior periods since future orders will most likely be based on use as poisonings
occur. Sales of Elliotts B Solution, Cystadane, Antizol-Vet, Antizol, and
Sucraid are consistent with the Company's expectations for 1999.

Gross profit margins increased to 82% for the six months ended June 30, 1999
compared to 80% for the same period the prior year. Cost of sales for the period
ended June 30, 1999 was $0.5 million, which approximated the prior year. Cost of
sales as a percentage of net sales will fluctuate from quarter to quarter and
from year to year depending on, among other factors, demand for the Company's
products, new product introductions and the mix of approved products shipped.

Research and development expense decreased 26% to $2.7 million for the six
months ended June 30, 1999 compared to $3.6 million for the same period the
prior year. The decrease is the result of lower research and development
spending for Busulfex offset by increased spending for Xyrem. In addition, the
prior year's period included research and development spending on products whose
clinical trials have been concluded. The Company expects research and
development expense to increase significantly over current levels in subsequent
quarters due to an acceleration of the development plans for Xyrem. In February
1999, the Company began shipping Xyrem for use in its Treatment IND trial and
expects to charge enrolled patients for the drug used in the trial. Any income
generated by the Treatment IND, which is not expected to be material, will be
used to offset development expense. Clinical spending for Xyrem will continue to
be dependent on a number of factors, including among others: the number of human
subjects required for a trial, the number of human subjects screened and
enrolled in a trial, and the number of active clinical sites.

Sales and marketing expense increased 16% to $1.5 million for the six months
ended June 30, 1999 from $1.3 million for the six months ended June 30, 1998.
This increase is largely attributable to higher spending related to the
commercialization of Busulfex in February 1999. Sales and marketing expenses
will likely increase in subsequent quarters.

General and administrative expense increased 8% to $1.4 million for the six
months ended June 30, 1999 from $1.3 million for the same period the prior year.
This increase is principally related to increased salary expense resulting from
staffing increases and salary adjustments. General and administrative expenses
are not expected to increase


                                       11
<PAGE>

significantly in subsequent quarters.

Other income is the sum of interest income from investment activities less
interest expense from financing activities. The increase from the prior year is
the result of additional invested funds from the successful preferred stock
offering in the third quarter of 1998 and the settlement of the Company's
obligation to Chronimed in December 1998.

Preferred stock dividends relate to the Senior Convertible Preferred Stock that
was issued on July 23, 1998 and has a dividend rate of 7.5%. Preferred stock
dividends commenced on February 1, 1999 and were $0.3 million for the six months
ended June 30, 1999. Preferred stock dividends are payable in arrears, when and
as declared by the Company's Board of Directors on August 1 and February 1 of
each year. The Company intends to satisfy its dividend payment obligations by
the issuance of additional preferred stock through August 1, 2000, which will
cause preferred stock dividends to increase in subsequent quarters.

LIQUIDITY AND CAPITAL RESOURCES
Since July 2, 1994, the effective date the Company was spun-off from Chronimed,
it has financed its operations principally from initial working capital
balances, the net proceeds from the 1995 and 1996 public offerings, the net
proceeds from the 1998 private placement, interest income and product sales. The
1995 and 1996 public offerings, and the 1998 private placement, resulted in
aggregate net proceeds, after commissions and expenses, of $30.7 million.

Net working capital (current assets less current liabilities) decreased from
$5.3 million at December 31, 1998 to $2.3 million at June 30, 1999. Cash and
cash equivalents, and available-for-sale securities decreased from $7.5 million
at December 31, 1998 to $4.2 million at June 30, 1999. The Company continues to
invest its excess cash in interest-bearing, investment grade securities. The
Company has a $0.5 million commercial revolving line of credit with a bank,
expiring on May 15, 2000. As discussed previously, the Company has obtained a
$2.05 million line of credit facility with UBS capital bearing interest at 7.5%
maturing on August 2, 2002.

The Company's commitments for outside development spending decreased from
approximately $3.4 million at December 31, 1998 to $2.7 million at June 30,
1999. The decrease resulted principally from the commercialization of Busulfex
offset by additional commitments for the development of Xyrem The Company
expects additional future commitments for Xyrem as the product advances toward
NDA submission to the FDA.

The Company has experienced recurring losses from operations since inception,
with continuing losses expected through at least the end of fiscal 1999. The
Company believes that its current working capital and anticipated gross profits
from product sales will be sufficient to fund its operations through December
31, 1999. These assumptions are based upon the Company substantially increasing
development expenses and revenues from the sale of its six marketed products.
These conditions give rise to the question


                                       12
<PAGE>

about the Company's ability to generate positive cash flow and fund operations.
Any material reduction in projected revenues will require the Company to seek
additional equity or debt financing or substantially reduce the Company's
expense structure through reductions in personnel and development.

The Company's ability to raise additional capital and/or raise capital on
acceptable terms could be negatively affected in the event it no longer meets
the Nasdaq's requirements for continued listing on the National Market tier. For
continued listing on the Nasdaq National Market, a company must satisfy a number
of requirements, which in the Company's case includes either: (1) net tangible
assets in excess of $4.0 million as reported on Form 10-Q or Form 10-K or (2) a
market capitalization of at least $50.0 million. At June 30, 1999, the Company's
net tangible assets equaled $2.6 million and its market capitalization was
approximately $39.4 million (based on the last sale price of $6.00 and 6,569,207
shares outstanding). Net tangible assets are defined as total assets, less any
intangible assets, less total liabilities. Through the private placement of
$2.95 million of the Company's Series B Convertible Preferred Stock, the Company
exceeds the minimum net tangible asset requirement as of August 2, 1999. The
Company estimates that it will have net tangible assets in excess of the $4.0
million minimum requirement as of September 30, 1999. The Company is continuing
to seek additional capital to ensure compliance with the Nasdaq requirements and
maintain its Nasdaq listing. As long as the Company meets at least one of the
aforementioned Nasdaq listing requirements, the Company's Common Stock would
qualify for listing on the Nasdaq National Market. If the Company did not meet
either of the Nasdaq requirements, the Company would qualify for quotation on
the Nasdaq Small Cap Market provided it had net tangible assets in excess of
$2.0 million.

IMPACT OF YEAR 2000 READINESS ISSUE
The Company has assessed and continues to assess the impact of the so called
"Year 2000 Readiness Issue" on its reporting systems and operations. The Year
2000 Readiness Issue relates to the ability of computer hardware, software, and
firmware products to accurately process date/time data (including calculating,
comparing, and sequencing) from, into, and between the twentieth and
twenty-first centuries, and the years 1999 and 2000 and leap year calculations.
The Year 2000 Readiness Issue also relates to the ability to properly exchange
time/date data between such products. When the year 2000 occurs, systems that
are not year 2000 compliant might recognize the year 2000 as the year 1900, or
not at all. This inability to recognize or properly treat the year 2000 may
cause the Company's systems, or the systems used by its suppliers, distributors,
customers or regulatory agencies (i.e., FDA) to process critical financial and
operational information incorrectly, or not at all.

The Company's information technology ("IT") systems consist of computer hardware
systems and software applications supplied by third parties. The Company's
strategy has been to replace its IT systems with current technology, which is
both year 2000 compliant and more efficient. The Company has also purchased and
implemented financial and operational software upgrades that are year 2000
compliant. For the three months ended



                                       13
<PAGE>

June 30, 1999, the Company IT system purchases have not been material. The
Company's IT systems are year 2000 compliant.

The Company's assessment of internal systems includes a review of
non-information technology ("non IT") systems. This assessment includes a review
of the Company's internal equipment and facilities. Based upon this review, the
Company believes that its processes and equipment are year 2000 compliant.

The Company has identified third parties with which it has material
relationships, including suppliers, distributors and other key vendors of
materials and services. The Company has confirmed with these parties or
organizations that they have implemented Year 2000 Readiness Programs. The
Company has not developed a contingency plan to provide for continuity of
business operations in the event material third parties experience a disruption
of service due to the Year 2000 Readiness Issue, which could include, but not
limited to, loss of electricity, loss of communications (data and voice), and
loss of transportation services. However, even if all material third parties
confirm that they are or expect to be year 2000 compliant by December 31, 1999,
it is not possible to state with certainty that such parties will be compliant.
If the Company's remediation plan is not successful, or if third party systems
on which the Company relies should fail, there could be a significant disruption
of the Company's ability to transact business with its customers and suppliers.
It is impossible to fully assess the potential consequences in the event service
interruptions from suppliers occur or in the event that there are disruptions in
such infrastructure areas as utilities, communications, transportation, banking
and government.


Item 3.  Quantitative and Qualitative Disclosures about Market Risks

Not Applicable



                                       14
<PAGE>


PART II  -  OTHER INFORMATION

Item 4.  Submission of Matters to Vote of Security Holders

The annual meeting of the shareholders of the Company was held on May 26, 1999.
Three matters were submitted to the shareholders for approval: (1) the election
of directors, (2) a proposal to ratify amendment to 1994 Stock Option Plan and
(3) a proposal to ratify the selection of Ernst & Young LLP as the independent
public accountants for the Company.

Six nominees, namely John Howell Bullion, Michael Greene, Julius A Vida Ph.D.,
W. Leigh Thompson, Ph.D., M.D., William M. Wardell, M.D., Ph.D., and Lawrence C.
Weaver, Ph.D., D.Sc. (Hon.), were duly elected as directors of the Company until
the next annual meeting of shareholders. Each nominee received at least
approximately ninety-seven percent of the votes cast in favor of his election.
Results of the voting were as follows:


<TABLE>
<CAPTION>

Director                                   Votes Cast for the Director       Votes Withheld
--------                                   ---------------------------       --------------
<S>                                                <C>                           <C>
John Howell Bullion                                7,066,386                     240,478
Michael Greene                                     7,066,266                     240,598
Julius A Vida Ph.D.                                7,065,532                     241,532
W. Leigh Thompson, Ph.D., M.D.                     7,066,386                     240,478
William M. Wardell, M.D., Ph.D.                    7,066,246                     240,618
Lawrence C. Weaver, Ph.D., D.Sc. (Hon.)            7,064,801                     242,063

</TABLE>

The proposal to ratify an amendment of the 1994 Stock Option Plan was approved
by the Company's shareholders. A total of 2,447,434 shares of the Company's
common stock voted in favor of the proposal, 662,751, shares of the Company's
common stock voted against the proposal and 35,978 shares of the Company's
common stock abstained from voting. There were 4,160,701 broker non-voters in
connection with the shareholders vote for this proposal. The proposal to ratify
an amendment of the 1994 Stock Option Plan received approximately seventy-eight
percent of the vote cast.

The proposal to ratify the selection of Ernst & Young LLP as the independent
public accountants for the Company was approved by the Company's shareholders. A
total of 7,216,210 shares of the Company's common stock voted in favor of the
proposal, 76,556 shares of the Company's common stock voted against the proposal
and 14,098 shares of the Company's common stock abstained from voting. There
were no broker non-voters in connection with the shareholders vote for this
proposal. The proposal to ratify the selection of Ernst & Young LLP as the
independent public accountants for the Company received approximately
ninety-nine percent of the vote cast.


                                       15

<PAGE>


Item 6.  Exhibits and Reports on Form 8-K

(a) Exhibits
EXHIBIT INDEX

<TABLE>
<CAPTION>
------------------------- ------------------------------------------------------ --------------
                                                                                 Sequentially
Exhibit Number            Description                                            Numbered Page
------------------------- ------------------------------------------------------ --------------
<S>                       <C>                                                    <C>
27                        Financial Data Schedule - For SEC EDGAR filing         27
------------------------- ------------------------------------------------------ --------------
99                        Cautionary Statements                                  18
------------------------- ------------------------------------------------------ --------------

</TABLE>

(b) Reports on Form 8-K

Not applicable



                                       16
<PAGE>


SIGNATURE


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






                                                    Orphan Medical, Inc.
                                                        Registrant

        Date  August 12, 1999        By             /s/ John H. Bullion
              ---------------                       -------------------
                                                    John H. Bullion
                                                Chief Executive Officer
                                              (principal executive officer)



                                       17