Letter to Shareholders

To Our Shareholders

As I report on our results and activities for 2003, we are already three months into the following year. We accomplished a number of important milestones during 2003. We licensed a rosacea technology, acquired a spa distribution business, filed three new patent applications, revamped the sales organization and added several new products. Overall, we have strengthened our Company and we ended the year in a stronger position than we began the year. If one thought comes to mind to describe our activities in 2003, it is that we tried to do too many things at once with too few people. Also, the significant additional reporting and compliance requirements brought on by the Sarbanes-Oxley Act and changing regulatory environment continues to require more management time and increase compliance costs.

I would like to begin my 2003 report by referring to a December 2002 meeting between the Board of Directors and Company management that discussed the overall business and strategic focus of ProCyte Corporation. At this session, a series of strategic and business goals and objectives were established. Some of the goals and objectives plus our results are as follows:

ProCyte should retain an investment banking group by the first quarter to locate and acquire synergistic businesses or products to add revenue, technology or market access. We signed with Delafield-Hambrecht in February 2003. We reviewed a large number of companies and met with several of them during the following 6 months. The Delafield relationship ended in September. We retained Wells Fargo Securities in January 2004 as our new investment banking representatives and have an active program underway with them. We acquired a spa distribution business to gain direct access to the rapidly growing spa markets.

ProCyte should commit the necessary resources to complete and launch a successful Infomercial. We completed the Infomercial and initiated the first market test in March. We made a number of changes to the program and launched another test in late July and early August. When the results were still not acceptable, we made the decision to stop all work on the Infomercial. The Infomercial added over $770,000 in expenses to our 2003 results, an impact reduction of $.05 per diluted share.

ProCyte should locate an additional technology to integrate into its marketing efforts to accelerate revenue growth. During the year we identified the Quadrinone^® technology from Cutanix Corporation being marketed under the brand Dramatic Relief™ for individuals with rosacea. We signed a distribution agreement in June 2003 and launched the products in August.

ProCyte should make every effort to regain its listing on a national stock exchange. This goal is one of our most important and perhaps the most difficult goal. We remain in compliance with all corporate governance requirements and are in position to move onto an exchange in all respects except for share price. We continue to search for appropriate ways to achieve being listed on an exchange that will enhance shareholder value.

ProCyte needs to increase sales representative productivity. We have taken a number of steps to address this issue including changing our hiring profile, increasing sales training and expanding customer education programs. Some territories were reduced in size, others were closed and new territories were formed in locations with greater potential. We saw positive results from our efforts in the second half of the year. We dedicated one of our customer service representatives to telemarketing activities in October.

ProCyte should increase international activities and revenues. We hired a dedicated Director of International Sales to focus in this area. We are already seeing progress in the international area and have positive expectations for the next several years.

ProCyte needs to expand its patent portfolio. Three new patent applications were filed in 2003. This brings the total number to 10 new patent applications filed over the last three years. We believe that these patents, when they issue, will be valuable in our efforts to protect our franchise and increase our license opportunities.

ProCyte needs to sign one or more new consumer partners for skin care. We continue to seek partners in several distribution channels for our technology and products. We believe that some of the development efforts that we have underway with other peptides and our patent applications could lead to new partners in market segments that we currently do not address.

We have made excellent progress in 2003 in accomplishing goals or moving the goals forward. We expect to see the benefits in terms of revenues and earnings beginning in 2004.

Revenues started slowly in the first half of 2003 based on a number of factors including a slower economy, war and general consumer uncertainty. The Women’s Wear Daily, December 12, 2003 issue reported “the past two years were very difficult sales years in the prestige and mass retail markets. The combination of recession, SARs, Iraq war, and bad weather in first half of 2003 caused an unprecedented slowdown.” Early signs in 2004 indicate a more favorable climate with increasing sales.

During the year, we retained a sales training consultant with the mission of upgrading our sales representatives selling skills. A product training consultant was hired in June 2003 and we re-introduced customer education seminars, with eight programs conducted in 2003. These programs were well received and filled to capacity. We have scheduled ten programs for 2004. In addition, we attended over 35 trade shows and conducted over 200 customer trainings, in-service sessions or local patient education programs during 2003. Through the actions noted above, we have seen a reversal of these trends in the second half of 2003.

We experienced turnover in the Director of International Sales position during 2003, keeping us from reaching our expected potential in the international market. Our new Director of International Sales started in December 2003, and we now seem to be back on track and see a bright future. In the last several months, we have added several new international distributors and have ongoing requests to represent our products.

In September, we introduced Neova^® Therapy Creme de la Copper as a line extension to our highly successful Neova^® Therapy line of anti-aging skin care products for the dispensing physician. The product has been popular and we are seeing excellent sales results. A follow-on product, Neova^® Therapy Dual Action Lotion with GHK Copper Peptide Complex^® + Retinol was launched on March 1^st 2004. And in April 2004, we will launch Ti-Silc^® Scalp Defense^™, a spray sunscreen we developed specifically for individuals with thinning hair. This product is ideal for golfers and people who enjoy outdoor activities. It is a nice complement to our skin care, hair care and hair transplant products categories.

In December, we completed the acquisition of a company focused on serving the spa market. The past several years have seen an accelerating trend of medi-spa formation blurring the line between the physician’s office and the traditional day spa. A key player in all these markets is the esthetician. ProCyte’s move into the spa market helps capture the patient/consumer and the esthetician at each point of contact. We look forward to increasing our revenues in this category during the year. We have already added several new sales representatives who will be responsible for building the business in high end and prestige spa locations.

In late January 2004, we were informed that Emerald Pharmaceutical, LP had experienced significant customer delays in current and expected orders and therefore revenues were not going to provide sufficient cash to last beyond the current quarter. After a review of the facts available, it was determined that the Company should record a charge against 2003 earnings of $637,000 or $0.04 per diluted share. The Company also recognized an income tax benefit of $7.1 million or $0.44 per diluted share related to the reversal of a portion of its valuation allowance to properly reflect its deferred tax asset.

Total revenues for the year decreased by $1.2 million as a result of lower purchases of Copper Peptide compound, a reduction of $1.5 million in sales, partially offset by an increase in royalties and virtually flat product sales for the year. Operating expenses for the year increased by $1.8 million primarily as a result of the $770,000 expenditure for the Infomercial and the $637,000 asset impairment charge. Excluding these items, expenses on a year over year basis only increased by 5%.

Net earnings for the year were $7.3 million or $0.46 per diluted share. This figure was impacted by the $7.1 million income tax credit benefit, $637,000 impairment charge and the $770,000 Infomercial costs included in the year, without which would have made 2003 results directly in line with our 2002 net earnings.

During the year there are always numerous activities that the management and employees pursue to grow the business. It is impossible to recognize everything that happens on a daily basis except to say that we are moving in the right direction, profitable, generating cash and remain debt free. We feel that we are in a very good position to maintain the second half of 2003 momentum into 2004 and beyond. I want to thank our dedicated group of employees who are focused on servicing our customers, growing the business and increasing shareholder value.