<PAGE>   1

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
(Mark One)
   [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
         EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1997

                                       OR

   [ ]   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 0-22170
                 -----------------------------------------------

                           EPOCH PHARMACEUTICALS, INC.
                 (Name of Small Business Issuer in its charter)

           Delaware                                      91-1311592
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

1725 220th Street, S.E., No. 104 Bothell, Washington                    98021
        (Address of principal executive offices)                      (Zip Code)

                                 (425) 485-8566
                (Issuer's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:     None
Securities registered pursuant to Section 12(g) of the Act:   Common Stock
                                                        Common Stock Purchase
                                                       Warrants (Title of class)

        Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports); and (2) has been subject to such filing requirements for the past 90
days. YES [X] NO

        Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [X]

        Issuer's revenues for its most recent fiscal year were $187,737

        As of February 28, 1998, the aggregate market value of the voting stock
held by non-affiliates, computed by reference to the price at which the stock
was sold on such date, was approximately $12,962,943

     14,814,793 shares of Common Stock were outstanding at February 28, 1998

                       DOCUMENTS INCORPORATED BY REFERENCE


                                      None


<PAGE>   2

                                INTRODUCTORY NOTE

        This Annual Report on Form 10-KSB contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and the Registrant intends
that such forward-looking statements be subject to the safe harbors created
thereby. These forward-looking statements include, without limitation, (i) the
development of the Registrant's technology, and (ii) the need for, and
availability of, additional financing.

        The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties. These
forward-looking statements are based on assumptions that the Registrant will be
able to obtain sufficient financing to continue operations, that the
Registrant's technology will continue to be developed, and will not be replaced
by new technology, that Registrant will retain key technical and management
personnel, and that there will be no material adverse change in the Registrant's
operations or business. Assumptions relating to the foregoing involve judgments
with respect to, among other things, future technology, economic, competitive
and market conditions, and future business decisions, all of which are difficult
or impossible to predict accurately and many of which are beyond the control of
the Registrant. Although the Registrant believes that the assumptions underlying
the forward-looking statements are reasonable, any of the assumptions could
prove inaccurate and, therefore, there can be no assurance that the results
contemplated in forward-looking statements will be realized. In addition, the
business and operations of the Registrant are subject to substantial risks which
increase the uncertainty inherent in such forward-looking statements. In light
of the significant uncertainties inherent in the forward-looking information
included herein, the inclusion of such information should not be regarded as a
representation by the Registrant or any other person that the objectives or
plans of the Registrant will be achieved.


                                       1

<PAGE>   3

                                     PART I

ITEM 1.  BUSINESS

THE COMPANY

        Epoch Pharmaceuticals, Inc. ("Epoch" or the "Company") (formerly
MicroProbe Corporation) is a biomedical company focused on the development of
oligonucleotides (short chains of nucleotides which are the building blocks of
DNA and RNA) as new biologically useful compounds. Utilizing unique and
proprietary technology in the rational design, synthesis and chemical
modification of oligonucleotides, the Company has been developing a gene-therapy
approach to inactivate or reverse mutate disease associated genes.

        Epoch's therapeutic research and development program has focused on the
modification of gene expression by altering cellular genomic DNA using
oligonucleotide targeting technology combined with chemical reactivity. The
Company's technology is based on its expertise in designing and synthesizing
oligonucleotides bearing modifications that selectively bind to and interact
with the target genes.

        Epoch has recently discovered that the compounds and techniques that
were being developed for its gene modification therapeutic program can be
adapted to several gene sequencing analysis systems currently in use or being
developed by others. The Company believes that this technology has broad
application potential in the developing fields of molecular diagnostics and
genomics, including the detection of infectious diseases, inheritable diseases
through prenatal testing, screening populations to identify genetic markers that
correlate with disease risk or drug response, as well as any other genetic
analysis based on DNA sequence determination.

        The Company was incorporated in Delaware on August 14, 1985, under the
name MicroProbe Corporation and changed its name in December 1995 to Epoch
Pharmaceuticals, Inc.

BACKGROUND

        Nucleic acids are found in all living organisms and are the sole
carriers of the genetic code that specifies an organism's makeup. There are two
types of closely related nucleic acids, deoxyribonucleic acid (DNA) and
ribonucleic acid (RNA). DNA carries the permanent genetic information for
construction of all proteins in higher living organisms, while RNA carries a
temporary copy of this information to direct protein synthesis. Proteins perform
most of the normal physiological functions of living organisms, and aberrant
production or activity of proteins may cause numerous diseases.

        DNA is comprised of two linear strands that are formed in a double
helix. Each strand is a sequential array of four nucleotide bases: adenine (A),
guanine (G), thymine (T) and cytosine (C), which are linked together in DNA by a
sugar and phosphate backbone. Every gene contains unique sequences of these
bases and it is these unique sequences which constitute the genetic information
or code which guides all cellular processes. The two chains, or strands,
normally comprising DNA are held together by chemical attractions between
opposing paired bases according to certain rules: A 



                                       2
<PAGE>   4

always pairs with T, G always pairs with C. Figure 1 is a schematic diagram of
double-stranded DNA showing this highly specific interaction between the bases
in the two strands. This process of base pairing, called hybridization, can
occur between DNA strands of any size, as long as the segments hybridizing are
complementary.

                                    [GRAPHIC]

FIGURE 1. SEGMENT OF DOUBLE-STRANDED DNA SHOWING THE BASE PAIR RELATIONSHIP


        Hybridization can also occur between a DNA strand and a complementary
RNA strand or two complementary RNA strands. RNA occurs in several forms in
cells, and each of these forms has a different function. Messenger RNA (mRNA) is
copied, or transcribed, from the DNA comprising a gene and carries the genetic
code which is translated into the proteins synthesized by the cell. Transfer RNA
(tRNA) transports the necessary building block amino acids to ribosomes, complex
intracellular structures where protein synthesis occurs through the
"translation" of the mRNA message. Ribosomal RNA (rRNA) functions to bring mRNA
and tRNA together so protein synthesis can occur. The process of transcription
and translation which results in protein synthesis is called gene expression.

        Oligonucleotides are well suited for development as pharmaceuticals and
diagnostic probes because they can be designed to bind selectively to, and
inhibit or inactivate specific sequences in, DNA and RNA or the proteins they
produce. The Company's expertise in the chemistry, design and synthesis of
oligonucleotides forms the basis of the Company's research and development
activities for therapeutic and diagnostic products.

DIAGNOSTIC RESEARCH AND DEVELOPMENT

        A probe molecule is designed to be complimentary to a unique sequence of
bases in the DNA or RNA of the target cell or organism. This probing is usually
done with short pieces of DNA (oligonucleotides) of known sequence. However,
short oligonucleotides (10 to 18 nucleotides) do not form (as a group) very
stable duplexes and longer oligonucleotides can form stable duplexes that are
not perfect complements (i.e., that have mismatches) leading to errors in
sequence determination. The ability to overcome these issues is the key to the
Company's technology.

        Certain naturally occurring antibiotics have a shape which allows them
to "fold" into the "minor groove" of the DNA helix. The Company has found that
it can direct the binding of these "minor groove binders" ("MGB") to a specific
site on DNA by coupling it to a short DNA molecule (an oligonucleotide) such
that when the oligonucleotide reacted with its complement, the MGB folded into
the minor groove of the duplex formed by the oligonucleotide and its complement.
The MGB-oligonucleotide duplex could not be disassociated at temperatures that
would normally separate the two strands. When the MGB was coupled to
oligonucleotides as short as seven nucleotides, the duplex formed with its
complement was stable at temperatures 15(degree) to 30(degree)C higher than the
non-MGB oligonucleotide. However, the duplex was stabilized to this extent only
if a perfect duplex (i.e., with no mismatches) was formed. This finding enabled
the Company to develop MGB-oligonucleotides into exquisite DNA sequence probes
that the Company believes offer the best solutions yet found for the following
situations:



                                       3
<PAGE>   5

        -       Single base mismatch discrimination at high temperatures with
                short oligonucleotides;

        -       Enhancement and sequence-independent equalization of
                oligonucleotide hybrid stability concurrently; and

        -       Mismatch "hiding" with longer oligonucleotide conjugates.


        The Company believes that the ability of oligonucleotides to precisely
bind to matching DNA sequences will have broad use in the developing fields of
molecular diagnostics and genomics. The Company believes that the technology
offers immediate advantages to any PCR-based assay where sensitive detection of
mutations is required. The Company anticipates that its use in genotyping and
quantitation of HIV-I to follow load of virus-resistant to inhibitors of reverse
transcriptase or protease. Similarly, it can be used to identify and type other
infectious organisms. The Company also believes that the mismatch sensitivity
offered by its technology is ideal for the detection of inheritable diseases by
prenatal genotyping.

        Epoch's technology has potential applications to the emerging area of
genetic testing. The correlation of genetic make-up with phenotypic (physically
evident) response is a developing field. Genetic markers, which are changes in
DNA sequence, can be linked either directly (e.g., sickle cell trait and cystic
fibrosis) or indirectly (e.g., Alzheimer's disease, Type II diabetes) to disease
traits. Some of these genetic markers with single nucleotide changes, Single
Nucleotide Polymorphisms (SNPs), have recently been identified. However, several
hundred thousand more of these sites exist throughout the human genome. True
SNPs are stable genetic markers, likely established thousands of years ago. As
these are characterized, they are being linked to genetic traits. Thus, one can,
by identifying one or more SNP in an individual's DNA, correlate the SNP with
physical or metabolic traits. This will allow the prediction of, for instance,
the individual's propensity to a given disease or responsiveness to a given
drug. This field is rapidly growing and depends upon screening populations to
correlate known physical traits with sets (one or more) of SNPs. In practice,
potential SNPs will be discovered as differences in gene sequences among a few
individuals. However, in order to definitively identify these differences as
true allelic polymorphisms, and to link them to relevant characteristics
(disease propensity, drug response, etc.) large populations must be screened for
the sequence differences. Current sequencing methods are too slow and costly to
be effective for this effort. The Company believes that it will be able to
deliver this technology and analytical tools on a cost-effective basis, thus
making the Company's technology the method of choice in SNP screening.

        Other sorts of mutations of a similar nature are known to occur in
precancerous or cancer cells. These mutations in specific genes which regulate
cell growth can be associated with characteristics of different cancers and will
be used in diagnosis and prognosis in cancer therapy. The Company believes that
its technology can be used in these test systems as well.

THERAPEUTIC RESEARCH AND DEVELOPMENT

        Epoch's current therapeutic research and development program is focused
on the modification of gene expression by altering cellular genomic DNA using
oligonucleotide targeting 



                                       4
<PAGE>   6


technology combined with chemical reactivity. The Company's technology is based
on its expertise in designing and synthesizing oligonucleotides bearing
modifications that selectively bind to and interact with the target genes. The
Company is currently applying this novel method of gene therapy to the treatment
of certain autoimmune diseases, viral infections and cancers.

        Pharmaceutical compounds can be developed from oligonucleotides designed
to act at different points in the process of gene expression. Oligonucleotides
may regulate the expression of targeted genes in two ways, at the mRNA or DNA
level. Whereas "antisense" oligonucleotides act against messenger RNA and are
transient, the Company's gene modifying oligonucleotides ("GMOs") could act
directly and more permanently on the genetic code itself at the DNA level.

        Epoch's GMOs form sequence-specific three-stranded complexes with the
genetic double-stranded DNA in order to alter its function. This alteration of
function is due to mutations in the gene at the targeted site induced by the
reactive function of the GMO. Because the DNA sequences of many
disease-associated genes are known, the Company believes that it may be able to
treat these diseases by rationally designing and synthesizing GMO's capable of
altering the chosen sequence of the targeted gene. Depending on the desired
effect, the mutation may be designed so as to eliminate the expression of a
disease-associated gene, or to correct a genetic defect.

        Oligonucleotide-based gene modification technology potentially
represents a significant advance over other therapeutic approaches. While
traditional drugs generally act on the millions of proteins generated from mRNA
and antisense drugs are designed to act on the thousands of mRNA molecules
generated from a gene, GMOs act directly against the gene. In contrast to
certain antibiotics that also act directly on DNA, GMOs can be targeted by
design to act only on DNA sequences which are disease-related.

        The Company's oligonucleotide technology has led to proprietary advances
which it believes can overcome the current limitations on developing gene
modifying oligonucleotides as pharmaceuticals.

        The first of these advances is enzyme mediated complexing (triplexing)
of the oligonucleotide drug with both DNA strands. Under natural cellular
conditions, such as the process of repairing certain damaged DNA, an enzyme (or
a member of a family of enzymes) called recombinase promotes the
sequence-specific binding of single-stranded DNA with double-stranded DNA to
form a three-stranded complex. In the presence of this recombinase, a single
stranded GMO whose sequence can contain all DNA bases can recognize and bind to
its exact complement in the double stranded DNA of a gene, in a rapid and
sequence-specific fashion. Many of the oligonucleotide drugs under investigation
by others contain chemical modifications to the backbone of the oligonucleotide
which, the Company believes, results in the inability of such oligonucleotide to
take advantage of recombinase promoted association with double-stranded DNA. By
using its proprietary technology, Epoch is able to design and synthesize
sufficiently stable gene modifying oligonucleotides with non-modified backbones,
resulting, the Company believes, in the ability to interact with naturally
occurring recombinase to rapidly form triple-stranded complexes involving all
four DNA bases.

        The second of these two advances is the crosslinking of the
oligonucleotide to the double-stranded DNA after the recombinase-promoted
sequence recognition and complexing has 



                                       5
<PAGE>   7

occurred. Crosslinking "freezes" this complex and covalently modifies the
targeted gene. By using its proprietary technology, the Company adds a reactive
site to its oligonucleotides which, when properly aligned in a three-stranded
DNA/oligonucleotide complex, forms a chemically stable (covalent) linkage with a
targeted reactive site on the target DNA. The effect of this reaction will vary
by design. Certain modifications will induce the cell to make errors when it
attempts to repair the lesion. The Company believes that this will irreversibly
inactivate the gene by mutation. Alternatively, rational design of the chemical
modification can, the Company believes, give a targeted change of a single base
pair in a gene at the site of a genetic defect, providing correction of certain
of those genetic defects.

        Epoch Pharmaceuticals has refined these crosslinkers so that, in in
vitro studies, crosslinking occurs rapidly and efficiently in systems as complex
as the entire human genome. To enhance the effectiveness of this technology, the
Company believes that by using multiple crosslinkers on a single
oligonucleotide, both DNA strands of the target gene will be irreversibly bound
and the efficiency of inactivation by mutation, hence the therapeutic effect,
will be very high. Alternatively, this binding process may directly inactivate
the gene, halting the expression of disease-associated proteins. In addition to
the pivotal role that the Company's proprietary crosslinking chemistry plays in
the Company's 4-letter targeting technology, it is also applicable to 2-letter,
or triplex, DNA targeting.

        The Company believes it was the first to demonstrate the successful
targeting and chemical reaction of an oligonucleotide with both strands of a
double-stranded DNA sequence. It believes that it was the first to show highly
specific targeting and chemical modification of a sequence containing all 4
genetic code letters on a double stranded DNA target, including genomic DNA. It
furthermore believes it has been the first to show covalent modification of a
targeted native gene in living cells.

        The Company is currently developing the use of GMOs in a collaborative
drug development program with the Virginia Mason Research Center ("VMRC"),
Seattle, WA. This program will apply GMO technology to type I diabetes and other
autoimmune diseases. VMRC has discovered a gene that indicates predisposition to
type I diabetes, and the Company and its collaborators believe that inhibition
or alteration of the expression of that gene will attenuate the immunologic
response causing the diabetes. Epoch and its collaborators believe that
treatment of blood stem cells with this GMO treatment, followed by
reintroduction of those cells into the patient, will sufficiently alter the
patient's immune response to affect a treatment. If successful, as to which
there can be no assurance, the resultant technology may have broad application
in a wide number of diseases, especially chronic viral diseases, cancer, and
other autoimmune diseases, such as rheumatoid arthritis.

        The Company is in the early development stages of its GMO technology and
substantial additional research and development efforts will be required to
develop effective therapeutics, including research and development in the area
of drug delivery. There can be no assurance, however, that the Company will be
able to successfully commercialize its GMO technology.

        The Company had previously developed lead compounds in two classes of
protein blockers, one for inhibition of human immunodeficiency virus
replication, and the other for potential 



                                       6
<PAGE>   8

treatment of certain types of cancers. Due to limited financial resources, the
Company has deferred the substantial additional research and development that
these compounds require.

SALES AND MARKETING

        The Company has no recent experience in marketing products and
anticipates that it will seek to enter collaborative arrangements with
pharmaceutical companies to market its therapeutic and diagnostic products. To
date, the Company has not entered into any collaborative arrangements for any of
its proposed products and there can be no assurance that the Company will be
able to enter into any such arrangements on favorable terms or at all.

MANUFACTURING

        The Company's current plan for operations is to enter collaborative
arrangements with pharmaceutical companies to manufacture its products. To date,
the Company has not entered into any collaborative arrangements for any of its
proposed products and there can be no assurance that the Company will be able to
enter into any such arrangements on favorable terms or at all.

RESEARCH AND DEVELOPMENT

        The Company conducts the majority of its research and development
activities through its own staff and facilities. The Company has assembled a
scientific staff with a variety of complementary skills in a broad range of
advanced research technologies. As of December 31, 1997, the Company had 18
employees engaged in research and development, including 12 with Ph.D.'s and/or
MD.'s.. Of these 18 employees, 4 were engaged in research and development
related to therapeutics and 14 were engaged in research and development related
to technology applications. The Company's in-house research and development
efforts are focused primarily on the development of DNA probes, probe labeling
and detection techniques and reagent chemistries.

        In addition to its in-house research programs, the Company collaborates
with academic and research institutions to support research in areas of interest
to the Company. In October 1996, The National Institute of Arthritis and
Musculoskeletal and Skin Disease, of the National Institutes of Health, awarded
a four-year contract to Virginia Mason Research Center, and the Company as
subcontractor, to develop and test a compound designed to inactivate a gene
which causes rheumatoid arthritis. The federal research award is for $1.2
million of which Epoch will receive $584,000 over the four year period. Epoch
earned $159,000 of these funds in 1997, and as of December 31, 1997, there was
$388,000 remaining on this contract.

        Virginia Mason, with its expertise in arthritis, will partner with
Epoch, with its expertise in gene-modification, to develop novel therapeutic
compounds for the treatment of arthritis. Such compounds are expected to search
the DNA structure to locate and attach to the affected gene. Researchers then
hope to turn off the genetic element which causes the patient's immune system to
attack cells in patients' joints, resulting in rheumatoid arthritis.

        Research and development expenses amounted to approximately $2,149,000
and $2,682,000 for the years ended December 31, 1996, and 1997, respectively.



                                       7
<PAGE>   9

PATENTS AND PROPRIETARY TECHNOLOGY

        The Company has pursued a patent portfolio to protect its technology. As
of February 20, 1998, the Company had seven issued U.S. patents and three U.S.
patent applications with Notices of Allowance and ten additional U.S. patent
applications in process. There are international patent applications
corresponding to many of the U.S. patents and patent applications. The issued
patents and pending patent applications cover inventions relating to the
components of Epoch's core therapeutics and diagnostics technology. The
expiration dates of these patents range from January 2010 to August 2014.

        The therapeutics technology covered includes solid support synthesis of
oligonucleotides, crosslinking oligonucleotides, and oligonucleotides having
antiviral and anticancer activity. The Company's policy is to file patent
applications to protect technology, inventions and improvements that are
important to the development of its business. The Company also relies upon trade
secrets, know-how, continuing technological innovation and licensing
opportunities to develop and maintain its competitive position.

        The patent position of biomedical companies, including Epoch, is
uncertain and may involve complex legal and factual issues. Consequently, the
Company does not know whether any of its patent applications will result in the
issuance of any further patents, or whether issued patents will provide
significant proprietary protection or will not be circumvented or invalidated.
Epoch cannot be certain that it was the first creator of inventions covered by
pending patent applications or that it was the first to file patent applications
for such inventions, largely because patent applications in the U.S. are
maintained in secrecy until patents issue, and because publications of
discoveries in the scientific or patent literature tend to lag behind actual
discoveries by several months. Moreover, the Company may have to participate in
interference proceedings declared by the U.S. Patent and Trademark Office to
determine the priority of inventions, which could result in substantial costs to
the Company. There can be no assurance that the Company's patent applications
will result in further issued patents or that such issued patents will offer
protection against competitors with similar technology. Additionally, there can
be no assurance that any manufacture, use or sale of the Company's technology or
products will not infringe on patents or proprietary rights of others, and the
Company may be unable to obtain licenses or other rights to these other
technologies that may be required for commercialization of the Company's
proposed products.

        The Company requires its employees, consultants and advisors to execute
confidentiality agreements upon the commencement of an employment or consulting
relationship with the Company. Each agreement provides that all confidential
information developed or made known to the individual during the course of the
relationship will be kept confidential and not disclosed to third parties except
in specified circumstances. In the case of employees, the agreements provide
that all inventions conceived by an individual shall be the exclusive property
of the Company, other than inventions unrelated to the Company's business and
developed entirely on the employee's own time. There can be no assurance,
however, that these agreements will provide meaningful protection or adequate
remedies for misappropriation of the Company's trade secrets in the event of
unauthorized use or disclosure of such information.



                                       8
<PAGE>   10

COMPETITION

Diagnostic Products

        Competition in the development and marketing of infectious disease
diagnostics using a variety of technologies is intense. There are many
pharmaceutical, diagnostic and biotechnology companies, public and private
universities and research organizations engaged in the research and development
of diagnostic products. Most of these organizations have financial,
manufacturing, marketing and human resources greater than those of the Company.

Therapeutics Products

        If successfully developed, the Company's products will compete with
existing products for market share. In addition, a number of companies are
pursuing the development of gene therapy products, some of which include
oligonucleotide technology. The Company competes with fully integrated
pharmaceutical companies, most of which have more experience, financial and
other resources and superior expertise in research and development,
manufacturing, testing, obtaining regulatory approvals, marketing and
distribution. Smaller biotechnology companies may also prove to be significant
competitors, particularly through their collaborative arrangements with large
pharmaceutical companies or academic institutions. Many of the Company's
competitors are significantly more advanced in their research and development
activities. The Company currently does not have any collaborative arrangements
with large pharmaceutical companies. Furthermore, academic institutions,
governmental agencies and other public and private research organizations have
conducted and will continue to conduct research, seek patent protection and
establish arrangements for commercializing products. Such products may compete
directly with any products which may be offered by the Company.

        The Company expects that competition among any products approved for
sale will be based, among other things, on product efficacy, safety,
reliability, availability, price, patent position and sales, marketing and
distribution capabilities.

GOVERNMENT REGULATION

        Manufacturers of therapeutic products are governed by the Food and Drug
Administration ("FDA") regulations as well as regulations of state agencies and
foreign countries. The testing, preparation of necessary applications, and
subsequent FDA review of those applications is expensive and time-consuming.
Failure to comply with applicable requirements can result in FDA refusal to
approve products or in the revocation of approvals or clearances previously
granted.

        The process of obtaining FDA approval for therapeutic products has
historically been costly and time consuming. To obtain such approval, a company
must first conduct pre-clinical studies in the laboratory and in animal models
to evaluate the potential efficacy and the safety of a product. The results of
these studies are submitted to the FDA as part of an Investigational New Drug
(IND) application, which must be approved before human clinical trials may
commence. This pre-clinical stage can take several years to complete and there
can be no assurance that such pre-clinical studies will be successful in
securing FDA approval of the IND so that proposed clinical trials can 




                                       9
<PAGE>   11

commence. Following pre-clinical testing, clinical trials are conducted pursuant
to the FDA-approved clinical protocol, typically in three sequential phases,
although the phases may overlap. In Phase I, clinical trials are conducted with
a small number of human subjects to determine the early safety profile, the
pattern of drug distribution and metabolism. In Phase II, clinical trials are
conducted with groups of patients afflicted with a specific disease in order to
determine preliminary efficacy, optimal dosages and expanded indices of safety.
In Phase III, large scale, multi-center comparative trials are conducted with
patients afflicted with a target disease in order to provide enough data to
demonstrate the efficacy and safety required by the FDA. The results of the
clinical testing for a pharmaceutical product are submitted to the FDA in the
form of a New Drug Application (NDA) for approval to commence commercial
marketing. In addition, detailed manufacturing information is also included with
each submission. In responding to an NDA, the FDA may grant marketing approval,
request additional information or deny the application if the FDA determines
that the application does not satisfy its regulatory approval criteria. The
process of completing clinical testing usually takes a number of years and
requires the expenditure of substantial resources. Additionally, the length of
time it takes for the FDA to evaluate an application for marketing approval
varies considerably as does the amount of pre-clinical and clinical data
required to demonstrate the safety and efficacy of a specific product.
Historically, the FDA has taken a minimum of two to four years to review drug
applications after submission, although the length of the review period may vary
widely depending upon the nature and indications of the proposed product. Also,
the FDA will require post-market reporting, and may require surveillance
programs to monitor the side effects of the drug product. There can be no
assurance that any of the Company's potential products will be approved by the
FDA or approved on a timely basis or that any approvals received will not
subsequently be revoked. In addition, future regulations could affect the
Company's operations or impose additional requirements before products are
approved.

        In addition to obtaining FDA approval for each product, each
manufacturing establishment for new drugs must be inspected and approved by the
FDA. Among the conditions for such approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to the FDA's Good Manufacturing Practices ("GMP") regulations, which must be
followed at all times. In complying with standards set forth in these
regulations, manufacturers must continue to expend time, money and effort in the
area of production and quality control to ensure full technical compliance.

        Therapeutic products that may be developed and sold by the Company
outside the United States will be subject to regulation by the various countries
in which they are to be distributed. In addition, products manufactured in the
United States which have not yet been cleared for domestic distribution will
require FDA approval in order to be exported to foreign countries for
distribution there.



                                       10
<PAGE>   12

EMPLOYEES

        As of December 31, 1997, the Company had 23 full-time employees, of
which 18 employees were devoted to research and development activities, and 5
were devoted to general and administrative activities. The Company believes it
has been successful in attracting skilled employees with experience in the
biomedical industry, although there can be no assurance that it will continue to
do so in the future. None of the employees is covered by a collective bargaining
agreement, and management considers relations with its employees to be good.

ITEM 2.  PROPERTIES

        The Company's principal administrative office and research laboratories
are located in Bothell, Washington, where the Company leases and occupies
approximately 19,000 square feet. The Company's current building lease will
expire in September 1998 at which time the Company intends to relocate to new
facilities. There can be no assurance that the Company will be able to relocate
on terms favorable to the Company, to manage the relocation successfully or that
the relocation will not disrupt the Company's operations.

ITEM 3.  LEGAL PROCEEDINGS

        The Company is not a party to any material legal proceedings.

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

(a)    Not applicable.

(b)    Not applicable.

(c)    Not applicable.



                                       11
<PAGE>   13

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      The Company's Common Stock trades on the OTC Bulletin Board. The following
table presents quarterly information on the high and low bid prices on the OTC
Bulletin Board, which reflects inter-dealer prices, without retail mark-up, mark
down or commission and may not represent actual transactions:

<TABLE>
<CAPTION>
        FISCAL YEAR ENDED DECEMBER 31, 1997                          High          Low
                                                                     ----          ---
<S>                                                                <C>            <C>    
        Fourth Quarter                                             $  0.84        $  0.47
        Third Quarter                                                 0.75           0.25
        Second Quarter                                                0.72           0.39
        First Quarter                                                 1.03           0.59
</TABLE>


<TABLE>
<CAPTION>
        FISCAL YEAR ENDED DECEMBER 31, 1996                        High        Low
                                                                   ----        ---
<S>                                                              <C>        <C>     
        Fourth Quarter                                           $  1.56    $   0.63
        Third Quarter                                               1.56        0.95
        Second Quarter                                              2.03        1.50
        First Quarter                                               1.04        0.50
</TABLE>

        As of December 31, 1997, there were approximately 198 stockholders of
record of the Company's Common Stock. The Company has not paid any dividends on
its Common Stock since its inception and does not contemplate or anticipate
paying any dividends upon its Common Stock in the foreseeable future. It is
currently anticipated that earnings, if any, will be used to finance the
development and expansion of the Company's business.

        There were no major transactions by the Company during the year ended
December 31, 1997 involving sales of the Company's securities.

        The following is a summary of transactions by the Company during the
fiscal year ended December 31, 1996 involving sales of the Company's securities
that were not registered under the Securities Act:

        1. On January 16, 1996, the Company issued five year warrants to
purchase 250,000 shares of Common Stock to Burrill & Craves, a consulting firm
of which Dr. Craves is a principal, and 345,000 shares of Common Stock to the
Olmsted Group, L.L.C., a merchant banking firm of which Mr. Zweifach is a
principal, at an exercise price of $0.50 per share in consideration for the
services performed by Burrill & Craves and the Olmsted Group, L.L.C.,
respectively, in connection with the sale of the Corporation's then existing
diagnostics division and other corporate matters. The warrants vest as follows:
(i) 33 1/3% at issuance; (ii) 33 1/3% upon the earlier of (1) June 30, 1997, or
(2) the date on which the corporation enters into an agreement with a corporate
partner; and 



                                       12
<PAGE>   14

(iii) 33 1/3% on January 1, 1999. All such warrants shall vest, to the extent
not already vested upon a change of control.

        2. On June 26, 1996, the Company issued 5,000,000 shares of Common Stock
and warrants to purchase 2,500,000 shares of Common Stock at an exercise price
of $2.50 to institutional and accredited individual investors, for an aggregate
purchase price of $5 million. In connection therewith, pursuant to an agreement
with David Blech, its financial advisor on the Private Placement, the Company
issued to Mr. Blech five year warrants to purchase 500,000 shares of Common
Stock at $1.00 per share.

        3. On October 1, 1996, the Company issued 457,143 shares of Common Stock
at $1.75 per share and warrants to purchase an additional 900,000 shares of
Common Stock, 450,000 of which are at an exercise price of $2.00, and 450,000 or
which are at an exercise price of $3.00 to VIMRx.

        Exemption from the registration provisions of the Securities Act for the
transactions described above is claimed under Section 4(2) of the Securities
Act, among others, on the basis that such transactions did not involve any
public offering and the purchasers were sophisticated with access to the kind of
information registration would provide.

        In June 1996, the Company announced that it intended to exchange for
every two Redeemable Common Stock Purchase Warrants, which were issued in
conjunction with the Company's public offering in September 1993 at $6.50 per
share, one new warrant to purchase one share of the Company's Common Stock until
June 20, 2001, (the "Public Warrants"), that is exercisable at $2.50 per share
(the "Exchange Warrants"). In June 1997, this exchange of warrants was
completed, with 2,603,825 of the Public Warrants being exchanged for 1,301,912
of the Exchange Warrants. Each Exchange Warrant is redeemable by the Company at
any time after eighteen months from the date that they were issued at $0.05 per
warrant, provided that the closing trading price per share of Common Stock is at
least $3.75 for twenty consecutive trading days. Exemption from registration
provisions of the Securities Act for this transaction is claimed under section
3(a)(9) of the Securities Act.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

        Since its inception in 1985, the Company has devoted its principal
efforts toward research and development. The Company has an accumulated deficit
of $52 million as of December 31, 1997. The Company expects to incur substantial
operating losses for the next several years as the Company continues research
and development spending in applying its oligonucleotide-based technology to the
expanding areas of genomics and molecular diagnostics, as well as for
therapeutic applications.

        In June 1997, the Company exchanged for every two Redeemable Common
Stock Purchase Warrants, which were issued in conjunction with the Company's
public offering in September 1993 at $6.50 per share, one new warrant to
purchase one share of the Company's Common Stock until June 20, 2001, (the
"Public Warrants"), that is exercisable at $2.50 per share (the "Exchange
Warrants"). 2,603,825 of the Public Warrants were exchanged for 1,301,912 of the
Exchange 



                                       13
<PAGE>   15

Warrants. Each Exchange Warrant is redeemable by the Company at any time after
eighteen months from the date that they were issued at $0.05 per warrant,
provided that the closing trading price per share of Common Stock is at least
$3.75 for twenty consecutive trading days. The Company received no proceeds from
the exchange of the Exchange Warrants for the Public Warrants.

        In February 1998, Bay City Capital LLC, ("Bay City Capital"), San
Francisco, California, loaned $3,000,000 to the Company from Bay City Capital
Fund I LP as a bridge to the earlier of a public rights offering or other
financing. In the event of a rights offering, Bay City Capital has agreed,
subject to certain conditions, to convert the loan into equity to the extent
that the current stockholders do not subscribe for their proportionate share of
the offering. In partial consideration for the bridge loan and Bay City
Capital's agreement to purchase excess shares, if any, in a rights offering, Bay
City Capital received a warrant to purchase 2,000,000 shares of Epoch's Common
Stock at a price of $0.90 per share. Bay City Capital is a merchant banking
partnership that was formed by The Craves Group and The Pritzker Family business
interests. The founding partner of The Craves Group, Fred Craves, Ph.D,, is the
Chairman and CEO of Epoch. Sanford S. Zweifach, Epoch's President and Chief
Financial Officer, is also the Chief Financial Officer of Bay City Capital.

RESULTS OF OPERATIONS

        The following discussion of results of operations reflects the Company's
diagnostics division as discontinued operations.

        Years Ended December 31, 1996 and 1997

        Research contract revenue reflects revenue from U.S. government grants
and contracts and subcontracts.

        Research and development expenses increased in total by $534,000 for the
year ended 1997 from the prior year. This increase is the result of increased
research funded with proceeds from the private placement completed in June 1996.

        General and administrative expenses increased $257,000 in the year ended
December 31, 1997 compared to the prior year. General and administrative
expenses in the year ended 1997 included $263,000 in fees toward filing patents
on new technologies, as compared to $87,000 in 1996. The Company believes that
these patents, if issued, will improve the Company's proprietary position with
regards to its targeted gene mutagenesis technologies. There can be no assurance
that the Company's patent applications will result in further issued patents or
that such issued patents will offer protection against competitors with similar
technology. Additionally, there can be no assurance that any manufacture, use or
sale of the Company's technology or products will not infringe on patents or
proprietary rights of others, and the Company may be unable to obtain licenses
or other rights to these other technologies that may be required for
commercialization of the Company's proposed products.

        Offsetting the increase in patent fees, the Company's general legal
expense was $82,000 less in 1997 than in 1996. This reduction was the result of
normal fluctuations in business transactions 



                                       14
<PAGE>   16

requiring legal counsel. Expenses in 1997 were further reduced by $21,000
compared to 1996 as deferred compensation from stock options became fully
amortized during the year. There is no deferred compensation remaining to be
amortized as of December 31, 1997. Further contributing to the variance, in July
1996 the In Re Blech Securities Litigation suit was dismissed. Accordingly,
$250,000 of estimated costs which had been accrued for this matter was reversed
as a reduction of expenses in the year ended December 31, 1996. Additional
variations in general and administrative expenses are the result of normal
business fluctuations.

        Interest income in the year ended December 31, 1997 decreased compared
with the prior year's results due to lower investable funds during 1997.
Interest expense decreased in 1997 as proceeds from the June 1996 private
placement were used to pay off debt. Additionally, 1996 included amortization of
$122,000 of discount on notes payable due to repricing of warrants associated
with a bridge financing which was completed in 1995.

        Other income in 1997 includes $116,000 received from Saigene Corporation
("Saigene") as payment for administrative support functions as well as for
rented lab and office space. As of March 1998, Saigene has secured separate
facilities and plans to relocate in April 1998. These administrative support
functions are not expected to continue beyond April 1998.

        The income (loss) from discontinued operations relates to the operations
and disposal of the assets of the Company's then existing diagnostics division.
The Company sold the majority of the diagnostic assets of the Company to Becton
Dickinson in November 1995. In November 1996, the Company entered into an
agreement with Saigene, whereby Epoch transferred its remaining diagnostic
technologies, including SBIR grants, to Saigene for $1,100,000. The $1,100,000
is in the form of an 8% note receivable with terms of $50,000 down and $10,000
per month. The note is secured by the assets and technologies transferred to
Saigene in the agreement. The balance of the note originally was due March 31,
1997, or upon Saigene completing financing arrangements, whichever occurred
first. On June 20, 1997, the note was amended to payments of $10,000 per month
up to the closing of an anticipated private placement which is currently in
process by Saigene and increasing to $20,000 per month after completion of the
anticipated private placement. If the private placement raises $1,500,000 or
more, then Epoch is to receive a payment on the note of $500,000. Additionally,
Epoch now holds a 12% equity position, acquired as compensation for the note
extensions, in Saigene. The note must be repaid in full upon completion of any
additional financing in excess of $1,000,000 or on June 20, 1999, whichever
occurs first.

        The gain on disposal of Diagnostic Division represents only that portion
of the gain, $67,000 and $130,000, for which cash payments were received during
1996 and 1997, respectively.

LIQUIDITY AND CAPITAL RESOURCES

        At December 31, 1997, the Company had cash and cash equivalents of
$1,485,000. On February 26, 1998, the Company received $3,000,000 from Bay City
Capital as a bridge to the earlier of a public rights offering that the Company
plans to undertake, or other financing. Combined, these cash and cash
equivalents provide sufficient working capital to operate until early 1999,
based on the Company's current plan of operation. Additionally, the Company
anticipates cash receipts of $388,000 over three years under the Virginia Mason
subcontract. See "Business - 



                                       15
<PAGE>   17

Therapeutic Research and Development." The Company's current operations do not
generate sufficient working capital to meet current and anticipated future
obligations.

        Since inception, the Company has financed its operations primarily
through the sales of its equity securities. In addition the Company received
$8,510,000 from the sale of its then existing diagnostics division in 1995. To
continue operations, the Company will be required to sell additional equity
securities, borrow additional funds, or obtain additional financing through
licensing, joint venture, or other collaborative arrangements. The Company has
no commitments for such financing and there can be no assurance that such
financing will be available on satisfactory terms, if at all.

        Cash decreased by $3,405,000 from December 31, 1996 to December 31, 1997
primarily due to normal expenditures on the Company's operations. The comparable
period of the prior year, December 31, 1995 to December 31, 1996, had a cash
increase of $1,151,000 due to the net cash generated by the sale of shares and
warrants offset by normal expenditures on the Company's operations.

        The changes in accounts payable and accrued liabilities in 1997 and 1996
are the result of normal business fluctuations.

Plan of Operations and Capital Requirements

        Following the consummation of the Sale of its then existing diagnostics
division in November 1995, the Company has focused substantially all of its
resources on the development of its therapeutic products with the goal of
entering into corporate partnering arrangements to further commercialize the
technology. See "Business-Therapeutic Research and Development." The Company,
however, has recently discovered that its compounds and techniques developed for
its gene modification therapeutic program can be adapted to several gene
sequencing analysis systems currently in use or being developed by others. The
Company believes that this technology has broad application potential in the
developing fields of molecular diagnostics and genomics, including the detection
of infectious diseases, inheritable diseases through prenatal testing, screening
populations to identify genetic markers that correlate with disease risk or drug
response, as well as any other genetic analysis based on DNA sequence
determination. From the proceeds of the Bridge Financing and any future
financing the Company plans to further develop and verify applicability of its
compounds and techniques in the developing fields of molecular diagnostics and
genomics and to determine how its technology may be exploited.

        The Company's primary future needs for capital are for continued
research and development as well as relocation expenses anticipated to be
incurred in the move to new facilities. The Company's working capital
requirements may vary depending upon numerous factors including the progress of
the Company's research and development, competitive and technological advances
and other factors. The Company anticipates operating with approximately 23
employees.

        The Company is focused on the development of its products with the goal
of entering into corporate partnering arrangements to further commercialize the
technology. See "Business-Therapeutics." The Company's primary future needs for
capital are for continued research and 



                                       16
<PAGE>   18

development, as well as relocation expenses anticipated to be incurred in the
move to new facilities. The Company's working capital requirements may vary
depending upon numerous factors including the progress of the Company's research
and development, competitive and technological advances, relocation expenses and
other factors. The Company anticipates operating with approximately 23 employees

        The Company will require additional funds to continue its operations
and, over the longer term, will require substantial additional funds to maintain
and expand its research and development activities and to ultimately
commercialize, with or without the assistance of corporate partners, any of its
proposed products. The Company will seek collaborative or other arrangements
with larger pharmaceutical companies, under which such companies would provide
additional capital to the Company in exchange for exclusive or non-exclusive
license or other rights to certain of the technologies and products the Company
is developing. However, the competition for such arrangements with major
pharmaceutical companies is intense, with a large number of biopharmaceutical
companies attempting to satisfy their funding requirements through such
arrangements. There can be no assurance that an agreement or agreements will
arise from these discussions in a timely manner, or at all, or that revenues
that may be generated thereby will offset operating expenses sufficiently to
reduce the Company's short- or long-term funding requirements.

ITEM 7. FINANCIAL STATEMENTS

        The financial statements of the Company required by this item begin on
Page F-1 of this Report.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

        Not applicable.

                                       17
<PAGE>   19

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(a)OF THE EXCHANGE ACT.

DIRECTORS AND EXECUTIVE OFFICERS

        The directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME                        AGE    POSITION
----                        ---    --------
<S>                         <C>    <C>
Fred Craves, Ph.D.          52     Chairman of the Board of Directors and
                                   Chief Executive Officer
Richard Dunning             52     Director
Kenneth L. Melmon, M.D.     63     Director
Rich B. Meyer, Ph.D.        54     Vice President, Research and Development,
                                   Chief Scientific Officer
Robert Wydro, Ph.D.         49     Vice President, Research Management
Sanford S. Zweifach         42     President,  Chief Financial Officer, and
                                   Director
</TABLE>

        Dr. Craves joined the Company as Chairman of the Board of Directors in
July 1993 and became Chief Executive Officer in April 1994. Since January 1997
Dr. Craves has been a principal of the consulting firm of The Craves Group. From
January 1994 until January 1997, Dr. Craves was a principal of the consulting
firm, Burrill & Craves. From January 1991 to May 1993, he was President and
Chief Executive Officer of Berlex Biosciences, a division of Schering A.G., and
Vice President of Berlex Laboratories, Inc., the U.S. subsidiary of Schering
A.G. From 1981 to 1982, Dr. Craves was Chief Executive Officer and, from 1982 to
June 1990, was Chairman, Chief Executive Officer and President of Codon, a
biotechnology company. Following Codon's acquisition by Schering A.G., Dr.
Craves was President and Chief Executive Officer of Codon from June 1990 to
December 1990. From 1981 to 1983, Dr. Craves was also a co-founder and director
of Creative Biomolecules. From 1979 to 1981, he was a sales and marketing
representative for Millipore Corporation. Dr. Craves received his Ph.D. in
Pharmacology and Experimental Toxicology from the University of California, San
Francisco. Dr. Craves is also Chairman of the Board of Directors of NeoRx
Corporation and a director of InCyte Pharmaceuticals, Inc.

        Mr. Dunning has been a Director of the Company since October 1996. Since
April 1996, Mr. Dunning has served as the President, Chief Executive Officer,
and as a Director of VIMRx Pharmaceuticals, Inc. From 1991 to 1996, Mr. Dunning
served as Executive Vice President and Chief Financial Officer of the Dupont
Merck Pharmaceutical Company. Mr. Dunning currently serves as a director of
several other companies, including Innovir laboratories, Inc. and Endorex Corp.

        Dr. Melmon has been a Director of the Company since November 1991. Dr.
Melmon is Professor of Medicine at Stanford University School of Medicine, where
he joined the faculty in 1978. He was previously on the faculty at the
University of California, San Francisco, specializing 



                                       18
<PAGE>   20

in clinical pharmacology. He is a member of the Institute of Medicine-National
Academy of Sciences, and a past president of the American Federation for
Clinical Research and the American Association of Clinical Investigation. He
holds an M.D. from the University of California Medical Center. He is also on
the Board of Directors of LLysis.

        Dr. Meyer joined Epoch in October 1986 as Director of Nucleic Acid
Chemistry. He has been Vice President, Research and Development of the Company
since August 1991 and was appointed Chief Scientific Officer in June 1993. From
1985 to 1986, Dr. Meyer was a group leader at the Nucleic Acid Research
Institute, a joint venture of ICN Pharmaceuticals, Inc. and Eastman Kodak
Company. From 1980 to 1985 he was Associate Professor of Medicinal Chemistry and
in 1985, Acting Associate Dean for Research of the Graduate School at Washington
State University. From 1975 to 1980, he was Assistant Professor in the
Department of Pharmaceutical Chemistry at the University of California, San
Francisco. Dr. Meyer received his Ph.D. in Chemistry from the University of
California, Santa Barbara.

        Robert M. Wydro, Ph.D joined Epoch in August 1996 as Vice President of
Research Management. Dr. Wydro worked for six years from 1981 to 1987, with
Integrated Genetics, Framingham, Massachusetts, and an additional four years,
through 1991, following Integrated Genetics being acquired by Genzyme
Corporation, Cambridge, Massachusetts. During the last two years at Genzyme, he
was Associate Director of Cardiovascular Research. From 1991 to 1995 Dr. Wydro
worked for Berlex BioSciences, Richmond, California as Director of Preclinical
Development and Head of one of the Strategic Research Units for Cardiovascular
Therapeutics. Dr. Wydro received his Bachelor of Arts degree in Biology from
Lycoming College. He received his Master of Science degree in Biology from
Indiana University and his Ph.D. in Microbiology from the University of Ottawa,
Ottawa, Ontario, Canada.

        Mr. Zweifach joined the Company in January 1995 as President and Chief
Financial Officer. From July 1994 to September 1994, and since September 1996,
Mr. Zweifach also served as a director of the Company. Since July 1997, Mr.
Zweifach has served as the Chief Financial Officer of Bay City Capital and,
since January 1995, Mr. Zweifach has served as a Managing Director of The
Olmsted Group, L.L.C., a merchant banking firm. Mr. Zweifach was a Managing
Director of D. Blech & Co. from 1991 to September 1994, and prior to 1991, he
was a Vice President of J.S. Frelinghuysen & Co., Inc., a risk capital and
merchant banking firm. He is a Certified Public Accountant and holds an M.S. in
Human Physiology from the University of California, Davis.

        Dr. Craves and Mr. Zweifach are also employed by other entities and,
although they devote a substantial portion of their time to the Company, they
also devote a portion of their time to their positions at the other entities.
Both Dr. Craves and Mr. Zweifach have been engaged by the Company pursuant to
Consulting Agreements.



                                       19
<PAGE>   21

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

        Based upon its review of the copies of reporting forms furnished to the
Company, the Company believes that all filing requirements under Section 16(a)
of the Securities Exchange Act of 1934 applicable to its directors, officers and
any persons holding ten percent or more of the Company's Common Stock with
respect to the Company's fiscal year ended December 31, 1997, were satisfied.

ITEM 10. EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

        The following table sets forth summary information concerning
compensation paid or accrued by the Company for services rendered during the
fiscal years ended December 31, 1996 and 1995, to the Company's Chief Executive
Officer, and the Company's two other most highly compensated executive officers:

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                                                                        Long Term
                                                                                      Compensation
                                                      Annual Compensation                Awards
                                       ----------------------------------------------- Securities
        Name and                                                       Other Annual    Underlying
   Principal Position                  Year   Salary($)(1)    Bonus($) Compensation($) Options(#)    All Other
   ------------------                  ----   ------------    -------- --------------- -----------   ---------
<S>                                    <C>    <C>             <C>         <C>          <C>           <C>
Fred Craves                            1997   $100,000        $  __       $    __            __       $   __
    Chief Executive Officer(2)         1996    125,000


Sanford S. Zweifach                    1997    140,625             0           __            __           __
    President and                      1996    135,000         5,625
      Chief Financial Officer

Rich B. Meyer, Jr                      1997    145,008         2,789           __        14,900           __
    Vice President, Research           1996    140,016         2,693
      and Development

Robert Wydro                           1997    140,106         2,693           __         5,000           __
    Vice President, Research           1996     52,506         2,693                    100,000
       Management

</TABLE>

(1)     Includes amounts deferred during 1996 and 1997 under the Company's
        401(k) employee savings and retirement plan. To date, the Company has
        not made any matching contributions under that plan.

(2)     Includes $25,000 payment earned in 1993, paid in 1996.



                                       20
<PAGE>   22

OPTION MATTERS

Option / SAR grants in the last fiscal year

<TABLE>
<CAPTION>
Name                   Number of Securities   % of Total Options/   Exercise     Expiration Date(2)
                       Underlying Options /     SARS Granted to     or Base      
                       SARs Granted (#) (1)     Employees in         Price
                                                 Fiscal Year
<S>                    <C>                    <C>                   <C>           <C> 
Rich B. Meyer, Jr.          14,900                    5.5%            $0.75       February 25, 2007

Robert Wydro                 5,000                    1.8%            $0.75       February 25, 2007

</TABLE>


(1)     The options vest 25% on February 26, 1998 and 2.083% on the 26th day of
        each month thereafter until February 26, 2001.

(2)     Options granted have a term of 10 years, subject to earlier termination
        in certain circumstances related to termination of employment.

          None of the Company's executive officers exercised options during the
fiscal year ended December 31, 1997.

EMPLOYMENT AND SEVERANCE AGREEMENTS

        Employment Agreements. Effective August 30, 1994, the Company entered
into a one-year employment agreement with Dr. Meyer. The Company and Dr. Meyer
have extended the agreement for successive periods and, most recently, the
agreement has been extended to December 31, 1998. Upon termination of Dr.
Meyer's services for reasons other than cause during the term of the agreement,
Dr. Meyer will be entitled to either notice or severance pay at his then current
salary, equal to the greater of the balance of the term or six months, subject
to reduction in certain circumstances. In the event of death or disability
during the term, Dr. Meyer will be entitled to six months salary (less any
amounts received from disability insurance). In addition, upon termination, Dr.
Meyer is subject to a five-year non-disclosure obligation and a six-month
non-competition obligation..

        Consulting Agreements. In July 1993, the Company entered into a one-year
consulting agreement with Dr. Craves. The Company and Dr. Craves have extended
the consulting agreement for successive one year periods and, in conjunction
with the Bay City Bridge Loan, the agreement has been extended through February
24, 2000.

        In January 1995, the Company entered into a consulting agreement with
Mr. Zweifach under which he received monthly payments of $11,250. In conjunction
with the Bay City Bridge Loan, the Company has extended the term of the contract
to run through February 24, 2000.



                                       21
<PAGE>   23

        Dr. Melmon also serves as a consultant to the Company and as a member of
the Company's Scientific Advisory Board and receives compensation in those
capacities.

DIRECTORS' COMPENSATION

        The Company pays all non-employee directors a fee of $1,000 for each
Board of Directors meeting attended in person. In July 1993, the Company adopted
a Non-Employee Directors Option Plan (the "Directors Plan") pursuant to which
the Company granted each non-employee director (except Dr. Craves) a
fully-vested 10-year option to purchase 10,000 shares of Common Stock at an
exercise price of $4.00 per share. In addition, upon each anniversary of the
inception of the Directors Plan each non-employee director will receive
fully-vested 10-year options to purchase 5,000 shares of Common Stock at the
then current fair market value. Non-employee directors who subsequently join the
Board of Directors will receive, upon each anniversary of joining the Board of
Directors, fully-vested 10-year options to purchase 5,000 shares of Common Stock
at the then current fair market value.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The following table sets forth as of December 31, 1997 certain
information with respect to the beneficial ownership of the Company's Common
Stock by (i) each stockholder known by the Company to be the beneficial owner of
more than 5% of its Common Stock, (ii) each director, (iii) each of the
executive officers named in the Summary Compensation Table, and (iv) all
executive officers and directors as a group.

<TABLE>
<CAPTION>
                                                     Number of Shares          Percentage of
Name and Address                                  Beneficially Owned (1)     Outstanding Shares
----------------                                  -----------------------   ---------------------
<S>                                               <C>                       <C>  
Grace Brothers Ltd                                        5,121,193                34.6%
    1560 Sherman Avenue
    Evanston, Illinois  60201

Entities and Persons affiliated with                      1,089,900                 7.4%
Biotechnology Investment Group, L.L.C. (2)
    c/o Collinson Howe Venture Partners
    1055 Washington Blvd
    Stamford, Connecticut 06901

The Edward Blech Trust (3)                                  925,000                 6.2%
    c/o Rabbi Mordechai Jofan
    418 Avenue I
    Brooklyn, New York 11230

VIMRx Pharmaceuticals, Inc.(4)                              907,143                 6.1%
    2751 Centerville Road, Suite 210
    Little Falls II
    Wilmington, Delaware 19808

Fred Craves, Ph.D. (5)                                      852,500                 5.8%
</TABLE>

                                       22
<PAGE>   24

<TABLE>
<S>                                               <C>                       <C>  
United Equities Commodities Company (6)                     750,000                 5.1%
    c/o Phillippe D. Katz
    160 Broadway
    New York, New York 10038

The Olmsted Group (7)                                       345,000                 2.3%
    81 Main Street
    White Planes, NY  10601

Rich Meyer, Jr., Ph.D. (8)                                  190,565                 1.3%

Kenneth L. Melmon, M.D. (9)                                  75,999                  *

Sanford Zweifach (10)                                        55,000                  *

Richard C. Dunning (11)                                       5,000                  *

All executive officers and directors as a group
(5 persons) (12)                                          1,152,064                 7.8%
</TABLE>

    * Less than one percent

(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in this table have sole
voting and investment power with respect to all shares of Common Stock.

(2) Biotechnology Investment Group, L.L.C. ("BIG") is a limited liability
company which invests in and otherwise deals with securities of biotechnology
and other companies. The members of BIG are (i) the managing member, Collinson
Howe Venture Partners, Inc. ("CHVP"), an investment management firm of which
Jeffrey J. Collinson is President, sole director and majority stockholder and
Timothy F. Howe is Vice President and a stockholder. (ii) The Edward Blech Trust
("EBT"), a trust for the benefit of the minor child of David Blech, a financial
advisor to the Company, and (iii) Wilmington Trust Company ("WTC"), as voting
trustee under a voting trust agreement (the "Voting Trust Agreement"), among
WTC, BIG and BIO Holdings, L.L.C. ("Holdings"). The managing member of BIG is
CHVP. Each of Citibank, N.A. ("Citibank") and Holdings has the right pursuant to
the Voting Trust Agreement to direct the actions of WTC as a member of BIG. WTC,
as the member holding a majority interest in Holdings, has the right to direct
the actions of Holdings under the Voting Trust Agreement. Citibank, pursuant to
a separate voting trust agreement among WTC, David Blech and Holdings, has the
right to direct the actions of WTC as a member of Holdings with respect to the
rights of Holdings under the Voting Trust Agreement. By virtue of their status
as members of BIG, each of CHVP and EBT may be deemed the beneficial owner of
all shares held of record by BIG (the "Biotechnology Group Shares"). By virtue
of his status as the majority owner and controlling person of CHVP, Jeffrey J.
Collinson may also be deemed and beneficial owner of the Biotechnology Group
Shares. Each of CHVP, EBT and Jeffrey J. Collinson disclaims beneficial
ownership of any Biotechnology Group Shares except to the extent, if any, of
such person's actual pecuniary interest therein. Includes 350,000 warrants
exercisable within 60 days.

(3) Includes 425,000 shares subject to warrants exercisable within 60 days.



                                       23
<PAGE>   25

(4) Includes 450,000 shares subject to warrants exercisable within 60 days.

(5) Includes 491,666 shares subject to warrants and options exercisable within
60 days, including warrants to purchase 166,666 shares which are held by Burrill
& Craves, of which Fred Craves is a general partner. Fred Craves disclaims
beneficial ownership of such warrants and the shares underlying such warrants
except to the extent of his pecuniary interest in Burrill & Craves.

(6) Includes 250,000 shares subject to warrants exercisable within 60 days.

(7) Includes 230,000 shares subject to warrants exercisable within 60 days.

(8) Includes 133,894 shares subject to options exercisable within 60 days.

(9) Includes 75,999 shares subject to warrants and options exercisable within 60
days.

(10) Includes 30,000 shares subject to options and warrants exercisable within
60 days.

(11) Excludes 907,143 shares including warrants to purchase 450,000 shares of
Common Stock held by VIMRx Pharmaceuticals, Inc. Mr. Dunning is the President
and Chief Executive Officer of VIMRx Pharmaceuticals, Inc. and disclaims
beneficial ownership of all such shares. Includes 5,000 shares subject to
options exercisable within 60 days.

(12) Includes directors' and executive officers' shares listed above, including
731,543 shares subject to warrants and options exercisable within 60 days.
Excludes 907,143 shares including warrants to purchase shares of Common Stock
held by VIMRx Pharmaceuticals, Inc.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        On January 16, 1996 the Company issued five year warrants to purchase
250,000 shares of Common Stock to Burrill & Craves, a consulting firm of which
Dr. Craves was a principal, and 345,000 shares of Common Stock to the Olmsted
Group, L.L.C., a merchant banking firm of which Mr. Zweifach is a Managing
Director , at an exercise price of $0.50 per share, in consideration for the
services performed by Burrill & Craves and The Olmsted Group, L.L.C.,
respectively, in connection with the sale of the Corporation's then existing
diagnostics division and other corporate matters. The warrants vest as follows:
(i) 33 1/3% at issuance; (ii) 33 1/3% upon June 30, 1997, and (iii) 33 1/3% on
January 1, 1999. All such warrants shall vest, to the extent not already vested,
upon a change of control.

        In June 1996, the Company completed the Private Placement of Units, each
Unit consisting of one share of the Company's Common Stock and one warrant to
purchase 0.5 shares of the Company's Common Stock. The Company sold a total of 5
million Units, for an aggregate purchase price of $5 million to institutional
and accredited individual investors. The term of the warrants is five years, and
they are exercisable at $2.50 per share (or $1.25 per 0.5 shares). Each warrant
is redeemable by the Company at any time after eighteen months from the date
that they are issued at $0.05 per warrant, provided that the closing trading
price per share of Common Stock is at least $3.75 for twenty (20) consecutive
trading days.



                                       24
<PAGE>   26

        In connection with the Private Placement, pursuant to an agreement with
David Blech, its financial advisor on the Private Placement, the Company paid
fees of $350,000 to Mr. Blech. In addition, the Company canceled fifty percent
(50%) of the obligations of Mr. Blech arising in connection with the
transactions involving Ribonetics, including the "put" rights contained in an
agreement dated December 1, 1993 between the Company and Mr. Blech. The
aggregate amount canceled was $1,635,588. The balance is accruing interest at
the minimum applicable federal rate. As the obligation had been fully reserved,
and the remaining balance is fully reserved, neither the cancellation nor the
remaining obligation impacted the Company's results of operations. The Company
also issued to Mr. Blech five year warrants to purchase 500,000 shares of Common
Stock at $1.00 per share. The warrants are not exercisable for one year and are
held in escrow by the Company until the balance of the Ribonetics debt is
satisfied.

        In February 1998, Bay City Capital, San Francisco, California, loaned
$3,000,000 to the Company from Bay City Capital Fund I LP as a bridge to the
earlier of a public rights offering that the Company intends to undertake, or
other financing. In the event of a rights offering, Bay City Capital has agreed,
subject to certain conditions, to convert the loan into equity to the extent
that the current stockholders do not subscribe for their proportionate share of
the offering. In partial consideration for the bridge loan and Bay City
Capital's agreement to purchase excess shares, if any, in a rights offering, Bay
City Capital received a warrant to purchase 2,000,000 shares of Epoch's Common
Stock and at a price of $0.90. Bay City Capital is a merchant banking
partnership that was formed by The Craves Group and The Pritzker Family business
interests. The founding partner of The Craves Group, Fred Craves, Ph.D,, is the
Chairman and CEO of Epoch. Sanford S. Zweifach, Epoch's President and Chief
Financial Officer, is also the Chief Financial Officer of Bay City Capital.

ITEM 13.       EXHIBITS AND REPORTS ON FORM 8-K

        The following documents are filed as part of this Form 10-KSB:

        (a)    Exhibits:

        (b)    Reports on Form 8-K:

               None



                                       25
<PAGE>   27

                           EPOCH PHARMACEUTICALS, INC.

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION                                           PAGE 
                                                                       NUMBER
<S>                                                                    <C>
     ITEM 1. FINANCIAL STATEMENTS
             Independent Auditors' Report .........................      F-1

             Balance Sheet as of December 31, 1997 ................      F-2

             Statements of Operations for the years ended
                  December 31, 1996 and 1997 ......................      F-3

             Statements of Stockholders' Equity for the years ended
                  December 31, 1996 and 1997 ......................      F-4

             Statements of Cash Flows for the years ended
                  December 31, 1996 and 1997 ......................      F-5

             Notes to Financial Statements ........................      F-6

</TABLE>


<PAGE>   28

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Epoch Pharmaceuticals, Inc.

We have audited the accompanying balance sheet of Epoch Pharmaceuticals, Inc.
(formerly MicroProbe Corporation) as of December 31, 1997, and the related
statements of operations, stockholders' equity, and cash flows for each of the
years in the two-year 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, the financial statements referred to above present fairly, in
all material respects the financial position of Epoch Pharmaceuticals, Inc. as
of December 31, 1997, and the results of its operations and its cash flows for
each of the years in the two-year period ended December 31, 1997 in conformity
with generally accepted accounting principles.


                                           KPMG Peat Marwick LLP


Seattle, Washington
February 27, 1998

                                      F-1

<PAGE>   29

                           EPOCH PHARMACEUTICALS, INC.
                                  BALANCE SHEET

                                     ASSETS

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                                       1997
                                                                -----------------
<S>                                                               <C>         
Current assets:
      Cash and cash equivalents ............................      $  1,485,483
      Receivables ..........................................            63,287
      Prepaid expenses .....................................            38,801
                                                                  ------------
         Total current assets ..............................         1,587,571

Equipment and leasehold improvements, net ..................           160,011

Other assets ...............................................            65,064
                                                                  ------------

       Total assets ........................................      $  1,812,646
                                                                  ============

                 LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
      Accounts payable .....................................      $    236,970
      Accrued liabilities ..................................           226,549
                                                                  ------------

        Total current liabilities ..........................           463,519
                                                                  ------------

Stockholders' equity:
      Preferred stock, par value $.01; authorized 10,000,000
        shares; no shares issued and outstanding ...........                --
      Common stock, par value $.01; authorized
         30,000,000, shares issued and outstanding
         14,814,793 shares .................................           148,148
      Additional paid-in capital ...........................        52,930,787
      Accumulated deficit ..................................       (51,729,808)
                                                                  ------------

        Total stockholders' equity .........................         1,349,127
                                                                  ------------

Commitments, contingency and subsequent events

Total liabilities and stockholders' equity .................      $  1,812,646
                                                                  ============
</TABLE>

                See accompanying notes to financial statements.


                                       F-2
<PAGE>   30

                           EPOCH PHARMACEUTICALS, INC.
                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                      YEARS ENDED
                                                                      DECEMBER 31,
                                                            -------------------------------
                                                                1996              1997
                                                            ------------       ------------
<S>                                                         <C>                <C>         
Research contract revenue ............................      $     37,029       $    187,737
                                                            ------------       ------------

Operating expenses:
      Research and development .......................         2,148,615          2,682,269
      Selling, general and administrative ............         1,256,495          1,513,955
                                                            ------------       ------------
           Total operating expenses ..................         3,405,110          4,196,224
                                                            ------------       ------------

           Operating loss ............................        (3,368,081)        (4,008,487)

Other income (expense):
      Interest income ................................           189,813            157,215
      Interest and financing expense .................          (183,371)            (3,835)
      Other income ...................................            35,795            120,300
                                                            ------------       ------------
           Loss from continuing operations ...........        (3,325,844)        (3,734,807)

Discontinued operations:
      Income (loss) from operations
           of Diagnostics Division ...................          (193,386)                --

      Gain on disposal of Diagnostics Division .......            67,072            130,000
                                                            ------------       ------------

           Net (loss) ................................        (3,452,158)        (3,604,807)
                                                            ============       ============

Loss per share from continuing operations -
      basic and diluted ..............................      $      (0.31)      $      (0.25)
Income (loss) per share from discontinued operations -
      basic and diluted ..............................             (0.01)              0.01
                                                            ============       ============
           Net (loss) per share - basic and diluted ..      $      (0.32)      $      (0.24)
                                                            ============       ============

Weighted average number of common
      shares outstanding -
           basic and diluted .........................        10,854,993         14,755,462
</TABLE>

                See accompanying notes to financial statements.


                                       F-3
<PAGE>   31


                           EPOCH PHARMACEUTICALS, INC.
                       STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                                                           Total
                                                      Common Stock           Additional     Deferred     Accumulated    Stockholders
                                                   Shares        Amount   Paid-In Capital  Compensation     Deficit        Equity
                                                -----------   -----------    -----------   -----------    -----------    -----------
<S>                                               <C>              <C>        <C>              <C>        <C>             <C>      
Balance at December 31, 1995                      7,023,400        70,234     46,860,059       (99,512)   (44,672,843)    2,157,938

Private placement of stock                        5,000,000        50,000      4,582,500                                  4,632,500
Sale of shares to VIMRx                             457,143         4,571        795,429                                    800,000
Exercise of stock options                            43,313           434         16,561                                     16,995
Exercise of warrants                              2,200,000        22,000        638,000                                    660,000
Amortization of deferred compensation                                                           60,483                       60,483
Net loss for the year ended December 31, 1996                                                              (3,452,158)   (3,452,158)
                                                -----------   -----------    -----------   -----------    -----------    -----------

Balance at December 31, 1996                     14,723,856       147,239     52,892,549       (39,029)   (48,125,001)    4,875,758

Exercise of stock options                            90,937           909         38,238                                     39,147
Amortization of deferred compensation                                                           39,029                       39,029
Net income
Net loss for the year ended December 31, 1997                                                              (3,604,807)   (3,604,807)
                                                -----------   -----------    -----------   -----------    -----------    -----------

Balance at December 31, 1997                     14,814,793       148,148     52,930,787            --    (51,729,808)    1,349,127
                                                ===========   ===========    ===========   ===========    ===========    ===========

</TABLE>

                See accompanying notes to financial statements.


                                      F-4
<PAGE>   32
                           EPOCH PHARMACEUTICALS, INC.
                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                    YEARS ENDED DECEMBER 31,
                                                                   ----------------------------
                                                                      1996             1997
                                                                   -----------      -----------
<S>                                                                <C>              <C>         
Cash flows from operating activities:
      Net (loss) .............................................     $(3,452,158)     $(3,604,807)
      Adjustments to reconcile net (loss) to net cash
           used in operating activities:

           Depreciation and amortization .....................         201,963          196,339
           Amortization of discount on notes payable .........         122,326               --
           Changes in operating assets and liabilities:
                Other assets .................................          90,425          (17,271)
                Accounts payable and accrued liabilities .....        (462,288)          71,756

                                                                   -----------      -----------
           Net cash used in operating activities .............      (3,499,732)      (3,353,983)
                                                                   -----------      -----------

      Cash flows from investing activities:
           Acquisition of equipment and leasehold improvements        (132,816)         (78,851)
           Proceeds from disposal of assets ..................           3,400
                                                                   -----------      -----------
           Net cash used in investing activities .............        (129,416)         (78,851)
                                                                   -----------      -----------

      Cash flows from financing activities:
           Principal payments on notes payable ...............      (1,329,133)         (11,188)
           Proceeds from sale of common stock ................       5,432,500               --
           Exercise of warrants and stock options ............         676,995           39,147
                                                                   -----------      -----------
           Net cash provided by financing activities .........       4,780,362           27,959
                                                                   -----------      -----------

      Net increase (decrease) in cash and cash equivalents ...       1,151,214       (3,404,875)
      Cash and cash equivalents at beginning of year .........       3,739,144        4,890,358
                                                                   -----------      -----------
      Cash and cash equivalents at end of year ...............     $ 4,890,358      $ 1,485,483
                                                                   ===========      ===========

      Supplemental disclosure of cash flow information -
            cash payments made during the year for interest ..     $    89,853      $     3,836
                                                                   ===========      ===========
</TABLE>


                See accompanying notes to financial statements.


                                      F-5
<PAGE>   33

                           EPOCH PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1997

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

        Epoch Pharmaceuticals, Inc. ("Epoch" or "the Company"), formerly
MicroProbe Corporation, was organized to develop, manufacture and market
therapeutic and diagnostic products utilizing oligonucleotide technology. In
November 1995, the Company sold its then existing diagnostics assets to Becton,
Dickinson and Company (see note 8). The Company's continuing activities are
focused on the development of therapeutic technologies and products. The
Company's revenues from continuing operations to date are primarily from Federal
government and other research grants and contracts.

Discontinued Operations

        In 1995, the Company sold its then existing diagnostics division and in
1996 sold its remaining diagnostic technologies (see note 8). Accordingly,
amounts related to the diagnostics division have been reported as discontinued
operations.

Equipment and Leasehold Improvements

        Equipment and leasehold improvements are stated at cost. Depreciation
and amortization are provided on the straight-line method over the shorter of
the assets' estimated useful lives, generally three to five years, or the lease
term.

        For long-lived assets, including equipment and leasehold improvements,
the Company evaluates the carrying value of the assets by comparing the
estimated future cash flows generated from the use of the asset and its eventual
disposition with the assets reported net book value. The carrying value of
assets are evaluated for impairment when events or changes in circumstances
occur which may indicate the carrying amount of the asset may not be
recoverable.

Revenue Recognition

        Research contract revenue is recognized as research and development
activities are performed under the terms of related agreements.



                                      F-6
<PAGE>   34

Income Taxes

        Deferred income taxes are provided based on the estimated future tax
effects of temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax basis.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on the deferred
tax assets and liabilities of a change in tax rates is recognized in the period
that includes the enactment date. A valuation allowance is recorded for deferred
tax assets when it is more likely than not that such deferred tax assets will
not be realized.

Stock-Based Compensation

        The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees and related Interpretations in measuring compensation costs for its
stock option plans. The Company discloses proforma net income (loss) and net
income (loss) per share as if compensation cost had been determined consistent
with Statement of Financial Accounting Standard (FAS) No. 123, Accounting for
Stock-Based Compensation.

Net Loss Per Share

        In 1997, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128, Earnings Per Share. This statement establishes standards for
computing and presenting earnings per share (EPS), replacing the presentation of
primary EPS with a presentation of Basic EPS. For entities with complex capital
structures, the statement requires the dual presentation of both Basic EPS and
Diluted EPS on the face of the statement of operations. Under this new
statement, Basic EPS is computed based on weighted average shares outstanding
and excludes any potential dilution. Diluted EPS reflects potential dilution
from the exercise or conversion of securities into common stock or from other
contracts to issue common stock and is similar to the previously required fully
diluted EPS. Basic EPS and diluted EPS have been restated for the year ended
December 31, 1996. The capital structure of the Company includes stock options
and stock warrants. The assumed conversion and exercise of these securities have
been excluded from Diluted EPS as their effect is anti-dilutive.

Financial Instruments

        The Company has financial instruments consisting of cash and cash
equivalents, receivables, and accounts payable. The fair value of the Company's
financial instruments based on their short term nature and current market
indicators approximates their carrying amount.

Cash Equivalents

        All highly liquid investments with a maturity of three months or less at
date of purchase are considered to be cash equivalents.


                                      F-7
<PAGE>   35

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 reported amounts of assets and liabilities and
disclosure of 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.

(2) EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements consist of the following:

<TABLE>
<S>                                                <C>        
Machinery and equipment ......................     $ 1,759,418
Furniture and fixtures .......................         329,422
Leasehold improvements .......................         145,723
                                                   -----------
                                                   $ 2,234,563
Less accumulated depreciation and amortization      (2,074,552)
                                                   -----------
Equipment and leasehold improvements, net ....     $   160,011
                                                   ===========
</TABLE>

(3) RETIREMENT SAVINGS PLAN

           The Company has a profit sharing plan, which is qualified under
Section 401(k) of the United States Internal Revenue Code. The plan allows
eligible employees to contribute up to 20% of their salary. The Company, at its
discretion, makes matching contributions to the plan. No matching contributions
were made to the plan in 1996 or 1997.

(4) EQUITY

The Company's three stock based compensation plans are as follows:

The 1991 Plan

           In August 1991, the Company established the 1991 Incentive Stock
Option Plan, Nonqualified Stock Option and Restricted Stock Purchase Plan (the
"1991 Plan"). The 1991 Plan provides for the granting of options or rights to
purchase up to 1,436,470 shares of common stock. Incentive stock options were
granted at the fair market value on the date of grant and nonqualified options
were granted at not less than 85% of the fair market value on the date of the
grant. All options generally expire 10 years from the date of grant. At December
31, 1997, there were 366,914 shares available for grant under this plan.



                                      F-8
<PAGE>   36

The 1993 Plan

           In July 1993, the Company established the 1993 Incentive Stock
Option, Nonqualified Stock Option and Restricted Stock Purchase Plan (the "1993
Plan"). The 1993 Plan provides for the grant of options or rights to purchase up
to 500,000 shares of Common Stock to employees, officers, directors and
consultants of the Company. Under the 1993 Plan, incentive stock options must
have an exercise price at least equal to the fair market value of the Common
Stock on the date of grant. Nonqualified stock options and rights to purchase
restricted stock must have an exercise price at least equal to 85% of the fair
market value of the Common Stock on the date of grant. Options are exercisable
over a period of ten years and vest over a period of three years after the date
of grant. At December 31, 1997 there were 220,619 shares available for grant
under this plan.

The Directors Plan

           In July 1993, the Company adopted a Non-Employee Directors Option
Plan (the "Directors Plan") pursuant to which the Company granted each
non-employee director who was a director prior to July 27, 1993, a fully-vested
10-year option to purchase 10,000 shares of Common Stock at an exercise price of
$4.00 per share for a total of 60,000 shares. In addition, upon each anniversary
of the inception of the Directors Plan, each non-employee director will receive
fully-vested 10-year options to purchase 5,000 shares of Common Stock at the
then current fair market value. Non-employee directors who subsequently join the
Board of Directors will receive, upon each anniversary of joining the Board of
Directors, fully-vested 10-year options to purchase 5,000 shares of Common Stock
at the then current fair market value.

           A summary of the status of the Company's three fixed stock option
plans follows.


<TABLE>
<CAPTION>
                                                               1996                       1997
                                                     -------------------------- ---------------------------
                                                                    WEIGHTED-                  WEIGHTED-
                                                                    AVERAGE                     AVERAGE 
                                                        SHARES   EXERCISE PRICE  SHARES      EXERCISE PRICE
                                                     ----------- -------------- ----------   --------------
<S>                                                     <C>          <C>        <C>            <C>  
Outstanding at beginning of year ...............        826,765      $1.96      1,307,758      $1.84
Granted ........................................        667,879       1.33        271,999       0.77
Exercised ......................................        (43,313)      0.39        (90,937)      0.69
Forfeited ......................................       (143,573)      0.62       (365,304)      1.76
                                                     ----------                 ---------  
Outstanding at end of year .....................      1,307,758       1.84      1,123,516
                                                     ==========                 =========
Options exercisable at year end ................        696,016       2.06        636,052       1.80

Weighted - average fair value of options granted
during the year ................................     $     0.28                     $0.77

</TABLE>



                                      F-9
<PAGE>   37

           The following table summarizes information about stock options
outstanding at December 31, 1997:

<TABLE>
<CAPTION>
                                          OPTIONS OUTSTANDING                                  OPTIONS EXERCISABLE
                      --------------------------------------------------------------  ----------------------------------------
 RANGE OF EXERCISE         NUMBER           WEIGHTED-AVERAGE           WEIGHTED            NUMBER               WEIGHTED-
       PRICES           OUTSTANDING          REMAINING YEARS            AVERAGE          EXERCISABLE             AVERAGE
                        AT 12-31-97         CONTRACTUAL LIFE        EXERCISE PRICE       AT 12-31-97          EXERCISE PRICE
-------------------   -------------------  ---------------------  ------------------  ------------------     -----------------
<S>                   <C>                  <C>                      <C>                 <C>                    <C>        
    0.30 -  0.50             236,735               6.3             $    0.43                  193,939         $      0.43
    0.51 -  0.88             481,751               8.3                  0.63                  212,083                0.62
    1.01 -  1.13              40,000               8.4                  1.06                   15,000                1.07
    3.87 -  4.50             345,000               6.0                  3.97                  195,000                4.04
    5.87 - 10.00              20,030               5.8                  5.88                   20,030                5.88
                      ---------------         ---------            ----------           --------------        ------------
    0.30 - 10.00           1,123,516               7.1             $    1.72                  636,052         $      1.79
                      ===============         =========            ==========           ==============        ============
</TABLE>

           Had compensation cost for the Company's three stock-based
compensation plans been determined consistent with FAS No. 123, the Company's
net (loss) and (loss) per share would have been increased to the pro forma
amounts below:

<TABLE>
<CAPTION>
                                                                     1996               1997
                                                                ---------------    ---------------
<S>                                               <C>           <C>                 <C>           
Loss from continuing operations                   As reported   $   (3,325,844)     $  (3,734,807)
                                                  Pro forma     $   (3,512,468)     $  (3,815,518)

Net (loss) per share from continuing operations   As reported   $        (0.31)     $       (0.25)
                                                  Pro forma     $        (0.33)     $       (0.26)

Net (loss)                                        As reported   $   (3,452,158)     $  (3,604,807)
                                                  Pro forma     $   (3,638,782)     $  (3,685,518)

 Net (loss) per share - basic and diluted         As reported   $        (0.32)     $       (0.24)
                                                  Pro forma     $        (0.34)     $       (0.25)
</TABLE>

           The fair value of each option grant is estimated on the date of grant
using the Black Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996 and 1997: dividend yield of 0.0 percent for
both years; expected volatility of 209% and 218% in 1996 and 123% in 1997; risk
free interest rates of 7.0% in 1996 and 1997; and expected lives of 5 and 10
years in both 1996 and 1997.

Stock Warrant Price Adjustment

           In connection with notes payable to stockholders of the Company due
March 31, 1996, the Company issued for $220, 5-year warrants to purchase
2,400,000 shares of the Company's common stock. The warrants can be exercised
through October 1999 and had an exercise price of $0.50 per share. In May 1995,
in connection with the extension of these notes to March 31, 1996, the exercise
price of such warrants was reduced to $0.30 resulting in a discount on notes
payable of $480,000. The discount was amortized over the remaining term of the
notes. In June 1996, warrants to 



                                      F-10
<PAGE>   38

purchase 2,200,000 shares of the Company's common stock were exercised at a
price of $0.30 per share. At December 31, 1997, 200,000 of these warrants remain
outstanding.

Warrants to Purchase Common Stock

           As of December 31, 1997, warrants were outstanding to purchase an
aggregate of 6,705,771 shares of common stock at exercise prices ranging from
$0.30 to $10.40 per share. These warrants have expiration dates that range to
2001. Commencing September 29, 1994, 1,875,000 warrants are redeemable, in whole
but not in part, for $.05 per warrant, at the option of the Company, upon 30
days written notice at any time after the last sale price of the Company's
common stock has been at least $9.10 for at least 30 consecutive business days
ending within 15 days of the date of the notice of redemption.

           On January 16, 1996 the Company issued five year warrants to purchase
250,000 shares of Common Stock to Burrill & Craves, a consulting firm of which
Dr. Craves was a principal, and 345,000 shares of Common Stock to the Olmsted
Group, L.L.C., a merchant banking firm of which Mr. Zweifach is a principal, at
an exercise price of $0.50 per share, in consideration for the services
performed by Burrill & Craves and The Olmsted Group, L.L.C., respectively, in
connection with the sale of the Corporation's then existing diagnostics division
and other corporate matters. The warrants vest as follows: (i) 33 1/3% at
issuance; (ii) 33 1/3% upon the earlier of (1) June 30, 1997, or (2) the date on
which the Corporation enters into an agreement with a corporate partner; and
(iii) 33 1/3% on January 1, 1999. All such warrants shall vest, to the extent
not already vested upon a change of control.

           In June 1996, the Company successfully completed a private offering
of Units, each Unit consisting of one share of the Company's Common Stock and
one warrant to purchase 0.5 shares of the Company's Common Stock. The Company
sold a total of 5 million Units, for an aggregate purchase price of $5 million
to institutional and accredited individual investors. The term of the warrants
is five (5) years, and they are exercisable at $2.50 per share (or $1.25 per 0.5
shares). Each warrant is redeemable by the Company at any time after eighteen
months from the date of issuance at $0.05 per warrant, provided that the closing
trading price per share of Common Stock is at least $3.75 for twenty consecutive
trading days.

           In connection with the private offering, pursuant to an agreement
with David Blech, its financial advisor on the Private Placement, the Company
paid fees of $350,000 to Mr. Blech. In addition, the Company canceled fifty
percent (50%) of the obligations of Mr. Blech arising in connection with the
transactions involving Ribonetics GmbH, including "put" rights contained in an
agreement dated December 1, 1993 between the Company and Mr. Blech. The
aggregate amount canceled was $1,635,588. The balance is accruing interest at
the minimum applicable federal rate. As the obligation had been fully reserved,
and the remaining balance is fully reserved, neither the cancellation nor the
remaining obligation is reflected in the Company's financial statements. The
Company also issued to Mr. Blech five year warrants to purchase 500,000 shares
of Common Stock at $1.00 per share. The warrants are not exercisable for one
year and are held in escrow by the Company until the balance of the Ribonetics
debt is satisfied.



                                      F-11
<PAGE>   39

           In June 1996, the Company announced that it intended to exchange for
every two Redeemable Common Stock Purchase Warrants, which were issued in
conjunction with the Company's public offering in September 1993 at $6.50 per
share, one new warrant to purchase one share of the Company's Common Stock until
June 20, 2001, (the "Public Warrants"), that is exercisable at $2.50 per share
(the "Exchange Warrants"). In June 1997 this exchange of warrants was completed,
with 2,603,825 of the Public Warrants being exchanged for 1,301,912 of the
Exchange Warrants. Each Exchange Warrant is redeemable by the Company at any
time after eighteen months from the date that they were issued at $0.05 per
warrant, provided that the closing trading price per share of Common Stock is at
least $3.75 for twenty consecutive trading days.

           In October 1996, the Company and VIMRx Pharmaceuticals, Inc.,
Wilmington, Delaware ("VIMRx") announced the establishment of an alliance
between the two companies to attempt to exploit the synergy's between their
respective technologies and markets, and a settlement of the outstanding dispute
between Epoch and VIMRx's German subsidiary, formerly known as Ribonetics. VIMRx
invested $800,000 in exchange for Epoch common stock at $1.75 per share. In
addition, VIMRx received 450,000 warrants to purchase common stock exercisable
at $2.00 and 450,000 warrants to purchase common stock exercisable at $3.00
which expire in October 1997 and 1998 respectively. The October 1997 warrants
were not exercised and have expired.

Underwriters Option

           The underwriters of the Company's initial public offering were issued
an option to purchase up to 250,000 shares of Common Stock and/or 250,000
warrants with an exercise price of $10.40 and $0.16, respectively. The
underwriters options are exercisable through September 1998.

(5) INCOME TAXES

           There was no income tax expense or benefit attributable to net income
or loss for 1996 and 1997. The difference between taxes computed by applying the
U.S. Federal corporate tax rate of 34% and the actual income tax provision in
1996 and 1997 is primarily the result of the utilization of net operating loss
carryforwards and limitations on utilizing net operating losses, respectively.



                                      F-12
<PAGE>   40

           The tax effects of temporary differences and carryforwards that give
rise to significant portions of the deferred tax assets at December 31, 1997 are
presented below:

<TABLE>
<S>                                              <C>        
Net operating loss carryforwards ...........     $ 5,705,000
Research and development credit carryforward       1,663,000
Capitalized research and development .......       1,757,000
Bad debt write-off .........................       1,117,000
Accrued expenses ...........................         118,000
Other ......................................          95,000
                                                 -----------
Total gross deferred tax assets ............      10,455,000
Less deferred tax asset valuation allowance       10,455,000
                                                 -----------
Net deferred tax assets ....................     $        --
                                                 ===========
</TABLE>

           The net change in the valuation allowance for 1996 and 1997 was a
decrease of approximately $2,620,000 and an increase of $2,431,000,
respectively, which were primarily due to the utilization of net operating
losses, and research and development expenses capitalized for tax purposes,
respectively.

           At December 31, 1997, the Company had net operating loss
carryforwards for income tax purposes of approximately $16,779,000 and unused
research and development tax credits of approximately $1,663,000 available to
offset future taxable income and income taxes, respectively, expiring through
2012. The Company's net operating loss and credit carryforwards have been
reduced to reflect the limitations pursuant to the Tax Reform Act of 1986, due
to cumulative changes in stock ownership in excess of 50%.


(6) SALE OF TECHNOLOGY

           In 1995 the Company sold its then existing diagnostics division and
in November 1996, the Company entered into an agreement with Saigene Corporation
(Saigene), whereby Epoch transferred its remaining diagnostic technologies,
including SBIR grants, to Saigene for $1,100,000. The $1,100,000 is in the form
of an 8% note receivable with terms of $50,000 down and $10,000 per month. The
note is secured by the assets and technologies transferred to Saigene in the
agreement. The balance of the note was due March 31, 1997, or upon Saigene
completing financing arrangements, whichever occurred first. On June 20, 1997,
the note was amended to payments of $10,000 per month up to the closing of an
anticipated private placement which is currently in process by Saigene and
increasing to $20,000 per month after completion of the anticipated private
placement. If the private placement raises $1,500,000 or more, then Epoch is to
receive a payment on the note of $500,000. Additionally, Epoch now holds a 12%
equity position, acquired as compensation for the note extensions, in Saigene.
No value was ascribed to the equity ownership of Saigene. The note must be
repaid in full upon completion of any additional financing in excess of
$1,000,000 or on June 20, 1999, whichever occurs first.

           Due to the uncertainty of Saigene obtaining financing, the Company
has recorded as Gain on Disposal of Diagnostics Division only that portion of
the gain, $67,000 and $130,000, for which cash payments were received during the
1996 and 1997 periods, respectively. As of December 31, 1997, 



                                      F-13
<PAGE>   41
Saigene was current on all payments; however, there can be no assurance that
Saigene will be able to pay the note receivable when due.

(7)   RESEARCH GRANTS AND CONTRACTS

           At December 31, 1997, the Company, as a subcontractor to Virginia
Mason Research Center, had one active research contract. Under this agreement,
the Company conducts research and is reimbursed for its direct costs plus an
amount to cover indirect administrative costs. Epoch earned $159,000 of these
funds in 1997, and as of December 31, 1997, there was $388,000 remaining on this
contract.

(8)   LIQUIDITY

           At December 31, 1997, the Company had cash and cash equivalents of
approximately $1,485,000. On February 26, 1998, the Company received a
$3,000,000 8% loan from Bay City Capital LLC, ("Bay City Capital"), San
Francisco, California, as a bridge to the earlier of a public rights offering
that the Company plans to undertake, or other financing. Two of the Company's
executive officers are affiliated with Bay City Capital through ownership or
management positions. As compensation for the loan, Bay City Capital also
received warrants to purchase 2,000,000 shares of the Company's common stock at
a price of $0.90 per share. Additionally, the Company anticipates cash receipts
of $388,000, over three years, under a subcontract with Virginia Mason Research
Center. Management estimates this provides sufficient working capital to operate
until early 1999

           Since inception, the Company has financed its operations primarily
through the sales of its equity securities. In addition, the Company received
$8,510,000 from the sale of its then existing diagnostics division. To continue
operations, the Company will be required to sell additional equity securities,
borrow additional funds, or obtain additional financing through licensing, joint
venture, or other collaborative arrangements. In addition to the Bay City
Capital financing, the Company is pursuing other financing arrangements but has
no commitments for such financing and there can be no assurance that such
financing will be available on satisfactory terms, if at all.

(9)   CONSULTING AGREEMENTS

           In July 1993, the Company entered into a one-year consulting
agreement with Dr. Craves under which he received monthly payments of $8,333.
The Company and Dr. Craves have extended the consulting agreement for successive
one year periods and, in conjunction with the Bay City Bridge Loan, the
agreement has been extended through February 24, 2000.

           In January 1995, the Company entered into a consulting agreement with
Mr. Zweifach under which he received monthly payments of $11,250. In conjunction
with the Bay City Bridge Loan, the Company has extended the term of the contract
to run through February 24, 2000.



                                      F-14
<PAGE>   42

                                POWER OF ATTORNEY

           Each person whose signature appears below hereby authorizes Fred
Craves and/or Sanford Zweifach, as attorney-in-fact, to sign in his behalf and
in each capacity stated below, and to file, all amendments and/or supplements to
this Annual Report on Form 10-KSB.


                                   SIGNATURES

           In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.


Dated:____________________               EPOCH PHARMACEUTICALS, INC.
                                         (Registrant)

                                          By: /s/ Sanford S. Zweifach
                                              ----------------------------------
                                              Sanford S. Zweifach
                                              President/Chief Financial
                                              Officer


           In accordance with the Securities Exchange Act of 1934, this report
has been signed below by the following persons of the registrant in the
capacities and on the dates indicated.


<TABLE>
<CAPTION>
Signature                                     Title                                              Date
---------                                     -----                                              ----
<S>                                           <C>                                             <C>
   /s/ FRED CRAVES
---------------------------------------
Fred Craves                                   Chairman of the Board of Directors and Chief
                                              Executive Officer
  /s/ RICHARD DUNNING
---------------------------------------
Richard Dunning                               Director

  /s/ SANFORD S. ZWEIFACH
---------------------------------------
Sanford S. Zweifach                           President/Chief Financial Officer (Chief
                                              Accounting Officer), and Director

---------------------------------------
Kenneth L. Melmon, M.D.                       Director

</TABLE>

                                      F-15
<PAGE>   43
ITEM 13.     EXHIBITS AND REPORTS ON FORM 8-K

        The following documents are filed as part of this form 10-KSB:

             (a)    Exhibits:

EXHIBIT
  NO.        DESCRIPTION
-------      -----------

3.1          Certificate of Incorporation of the Company, as amended
             (incorporated by reference to Exhibit 3 of the Company's Quarterly
             Report on Form 10-QSB for the quarter ended September 30, 1996)

3.2*         Bylaws of the Company, as currently in effect

10.1*        MicroProbe Corporation Incentive Stock Option, Nonqualified Stock
             Option And Restricted Stock Purchase Plan--1991, as amended

10.2*        Form of Indemnification Agreement entered into with officers and
             directors of the Company

10.12*       Letter Agreement between the Company and Fred Craves, dated August
             3, 1993

10.13*       Scientific Advisory Board Agreement between the Company and Kenneth
             L. Melmon, M.D., dated September 4, 1991

10.14*       Scientific Advisory Board Agreement between the Company and Roy
             Page, Ph.D., D.D.S., dated September 4, 1991

10.15*       Form of Scientific Advisory Board Agreement

10.16*       Lease between the Company as Tenant and WRC Properties, Inc. for
             premises located in Bothell, Washington, dated January 30, 1986, as
             amended March 21, 1986, January 20, 1988, February 4, 1988, July 1,
             1991, October 20, 1992 and February 8, 1993

10.16.1      Amendment to Lease between the Company and WRC Properties dated
             November 15, 1995 (incorporated by reference to Exhibit 10.16.1 of
             the Company's Annual Report on Form 10-KSB for the year ended
             December 31, 1995)

10.22*       Form of Common Stock Warrant issued December 31, 1991

10.25*       Second Amended and Restated Investment Agreement, dated April 28,
             1992 among the Company and certain investors

10.26*       Common Stock and Warrant Purchase Agreement, dated April 28, 1992
             as amended June 30, 1992 and July 31, 1992 (with form of warrant)
             among the Company and certain investors


                                      II-1

<PAGE>   44

EXHIBIT
  NO.        DESCRIPTION
-------      -----------

10.28*       Sales Agency Agreement, dated December 14, 1992, as amended
             February 3, 1993 between the Company and D. Blech & Company,
             Incorporated, with form of Sales Agent Warrant

10.30*       Form of Registration Agreement, dated February 12, 1993 among the
             Company and certain investors

10.32*       License Agreement between the Company and Yale University, dated
             May 1, 1993. (Portions of this Exhibit are omitted and were filed
             separately with the Secretary of the Commission pursuant to the
             Company's application requesting confidential treatment under Rule
             406 of the Securities Act of 1933)

10.33*       Material Transfer Agreement between the Company and Yale
             University, dated May 1, 1993. (Portions of this Exhibit are
             omitted and were filed separately with the Secretary of the
             Commission pursuant to the Company's application requesting
             confidential treatment under Rule 406 of the Securities Act of
             1933)

10.34*       Consulting Agreement between the Company and Dr. Y. C. Cheng, dated
             April 7, 1993. (Portions of this Exhibit are omitted and were filed
             separately with the Secretary of the Commission pursuant to the
             Company's application requesting confidential treatment under Rule
             406 of the Securities Act of 1933)

10.36*       Consulting Agreement between the Company and Dr. Arthur D. Broom,
             dated October 1, 1992. (Portions of this Exhibit are omitted and
             were filed separately with the Secretary of the Commission pursuant
             to the Company's application requesting confidential treatment
             under Rule 406 of the Securities Act of 1933)

10.39*       MicroProbe Corporation Incentive Stock Option, Nonqualified Stock
             Option and Restricted Stock Purchase Plan--1993

10.40*       MicroProbe Corporation Non-Employee Directors Stock Option Plan

10.42**      Warrant Agreement between the Company and American Stock Transfer &
             Trust Company with Form of Warrant dated September 29, 1993

10.43**      Underwriting Agreement by and among the Company, D. Blech &
             Company, Incorporated and Commonwealth Associates dated September
             28, 1993.


                                      II-2

<PAGE>   45

EXHIBIT
  NO.        DESCRIPTION
-------      -----------

10.45**      Supply Contract dated as of January 21, 1994, by and among the
             Company, Source Scientific Systems, Inc. and The Alton Group, Inc.

10.46**      License Agreement dated as of January 21, 1994, by and among the
             Company, Source Scientific Systems, Inc. and The Alton Group, Inc.

10.47**      Purchase Agreement dated as of November 30, 1993, by and among the
             Company, Animal Biotechnology Cambridge Limited, and Herbert
             Stradler (without exhibits).

10.48**      Put Agreement relating to Ribonetics GmbH dated as of December 1,
             1993 between the Company and David Blech, as amended December 3,
             1993 and February 18, 1994 (incorporated by reference to Exhibit
             10.48 of the Company's Annual Report on Form 10-KSB for the year
             ended December 31, 1993).

10.48.1      Amendment dated April 1, 1994 to Put Agreement (incorporated by
             reference to Exhibit 10.48.1 of the Company's Annual Report on Form
             10-KSB for the year ended December 31, 1993).

10.48.2      Amendment dated April 27, 1994 to Put Agreement (incorporated by
             reference to the Company's Quarterly Report on Form 10-QSB for the
             quarter ended March 31, 1994).

10.48.3**    Amendment dated May 26, 1994 to Put Agreement

10.48.4      Amendment dated June 30, 1994 to Put Agreement (incorporated by
             reference to Exhibit 10.48.4 of the Company's Quarterly Report on
             Form 10-QSB for the quarter ended June 30, 1994).

10.48.5      Amendment dated July 27, 1994 to Put Agreement (incorporated by
             reference to Exhibit 10.48.5 of the Company's Quarterly Report on
             Form 10-QSB for the quarter ended June 30, 1994).

10.48.6      Amendment dated August 15, 1994 to Put Agreement (incorporated by
             reference to Exhibit 10.48.6 of the Company's Quarterly Report on
             Form 10-QSB for the quarter ended September 30, 1994).

10.48.7      Amendment dated August 30, 1994 to Put Agreement (incorporated by
             reference to Exhibit 10.48.7 of the Company's Quarterly Report on
             Form 10-QSB for the quarter ended September 30, 1994).

10.48.8      Amendment dated September 14, 1994 to Put Agreement (incorporated
             by reference to Exhibit 10.48.8 of the Company's Quarterly Report
             on Form 10-QSB for the quarter ended September 30, 1994).


                                      II-3


<PAGE>   46

EXHIBIT
  NO.        DESCRIPTION
-------      -----------

10.48.9      Exercise Notice dated September 27, 1994 to Put Agreement
             (incorporated by reference to Exhibit 10.48.9 of the Company's
             Quarterly Report on Form 10-QSB for the quarter ended September 30,
             1994).

10.50        Sublease between the Company as sublessee and Abbott Laboratories
             as sublessor for premises located in Bothell, Washington, dated
             November 12, 1993, as amended November 18, 1993 and January 28,
             1994 (incorporated by reference to Exhibit 10.50 of the Company's
             Annual Report on Form 10-KSB for the year ended December 31, 1993).

10.51        Employment Agreement between the Company and Allan G. Cochrane,
             dated August 30, 1994 (incorporated by reference to Exhibit 10.51
             of the Company's Quarterly Report on Form 10-QSB for the quarter
             ended September 30, 1994).

10.53        Employment Agreement between the Company and Rich B. Meyer, Jr.,
             dated August 30, 1994 (incorporated by reference to Exhibit 10.53
             of the Company's Quarterly Report on Form 10-QSB for the quarter
             ended September 30, 1994).

10.55        Bridge Financing Agreement dated October 12, 1994 with form of note
             and warrant (incorporated by reference to Exhibit 10.55 of the
             Company's Quarterly Report on Form 10-QSB for the quarter ended
             September 30, 1994).

10.55.1      Amendment to Bridge Financing Agreement dated May 22, 1995, with
             form of note and warrant (incorporated by reference to Exhibit
             10.55.1 of the Company's Quarterly Report on Form 10-QSB for the
             quarter ended June 30, 1995).

10.56        Security Agreement dated October 12, 1994 (incorporated by
             reference to Exhibit 10.56 of the Company's Quarterly Report on
             Form 10-QSB for the quarter ended September 30, 1994).

10.57        Registration Rights Agreement dated October 12, 1994 (incorporated
             by reference to Exhibit 10.57 of the Company's Quarterly Report on
             Form 10-QSB for the quarter ended September 30, 1994).

10.58        Purchase Price Adjustment, Royalty and Release Agreement dated as
             of November 23, 1994 between MicroProbe Corporation and Alton
             Group, Inc. (incorporated by reference to Exhibit 10.58 of the
             Company's Current Report on Form 8-K filed December 7, 1994).

10.58.1      First Amendment to Purchase Price Adjustment, Royalty and Release
             Agreement between MicroProbe Corporation and Alton Group, Inc.,
             dated March 2, 1995 (incorporated by reference to Exhibit 10.58.1
             of the Company's Annual Report on Form 10-KSB for the year ended
             December 31, 1995).


                                      II-4

<PAGE>   47

EXHIBIT
  NO.        DESCRIPTION
-------      -----------

10.59        Consulting Agreement between the Company and Sanford S. Zweifach,
             dated January 18, 1995 (incorporated by reference to Exhibit 10.59
             of the Company's Annual Report on Form 10-KSB for the year ended
             December 31, 1995).

10.60        Promissory Note executed by the Company in favor of Becton,
             Dickinson and Company, dated March 14, 1995 (incorporated by
             reference to Exhibit 10.60 of the Company's Annual Report on Form
             10-KSB for the year ended December 31, 1995).

10.61        Equipment Purchase Agreement between the Company and CELx
             Corporation, effective as of January 6, 1995 (incorporated by
             reference to Exhibit 10.61 of the Company's Quarterly Report on
             Form 10-QSB for the quarter ended March 31, 1995).

10.61.1      Letter Agreement between the Company and CELx Corporation dated
             January 6, 1995 amending the Equipment Purchase Agreement of even
             date (incorporated by reference to Exhibit 10.61.1 of the Company's
             Quarterly Report on Form 10-QSB for the quarter ended March 31,
             1995).

10.62        License Agreement between the Company and CELx Corporation,
             effective as of January 6, 1995 (incorporated by reference to
             Exhibit 10.62 of the Company's Quarterly Report on Form 10-QSB for
             the quarter ended March 31, 1995).

10.63        Amendment to License Agreement between Orca Research, Inc. and the
             Company, dated September 20, 1995 (incorporated by reference to
             Exhibit 10.63 of the Company's Quarterly Report on Form 10-QSB for
             the quarter ended September 30, 1995).

10.64        Asset Purchase Agreement between the Company and Becton, Dickinson
             and Company, dated as of September 29, 1995 (incorporated by
             reference to the form of such Asset Purchase Agreement filed with
             the Company's Definitive Proxy Materials for its Special Meeting of
             Stockholders held November 27, 1995).

10.65        Consulting Agreement with David Blech dated March 29, 1996
             (incorporated by reference to Exhibit 10.65 of the Company's
             Quarterly Report on Form 10-QSB for the quarter ended June 30,
             1996).

10.66        Form of Subscription Agreement with Private Placement Investors
             (incorporated by reference to Exhibit 4.1 of the Company's
             Quarterly Report on Form 10-QSB for the quarter ended June 30,
             1996).



                                      II-5

<PAGE>   48

EXHIBIT
  NO.        DESCRIPTION
-------      -----------

10.67        Warrant Agreement between the Company and American Stock Transfer
             and Trust Company dated June 21, 1996, with form of Warrant
             (incorporated by reference to Exhibit 4.2 of the Company's
             Quarterly Report on Form 10-QSB for the quarter ended June 30,
             1996).

10.68        Stock and Warrant Purchase Agreement dated as of October 1, 1996,
             between the Company and VIMRx Pharmaceuticals, Inc. (incorporated
             by reference to Exhibit 10.65 of the Company's Quarterly Report on
             Form 10-QSB for the quarter ended September 30, 1996).

10.69        Bridge Financing Agreement dated as of February 25, 1998, with form
             of note and warrant between the Company and Bay City Capital, LLC.

21.0         Subsidiaries of the Company

23.1         Consent of KPMG Peat Marwick

23.2         Consent of Stradling, Yocca, Carlson & Rauth (included on Exhibit
             5)

25.0         Power of Attorney (included on the signature page)

27           Financial Data Schedule

---------------------- 
*  Incorporated by reference to the same numbered exhibit of the Company's
   Registration Statement on Form SB-2, No. 33-66742, effective on September 29,
   1993.
** Incorporated by reference to the same numbered exhibit of the Company's
   Registration Statement on Form SB-2, No. 33-76446, effective on July 7, 1994.


             (b) Reports on Form 8-K:

                             None














                                      II-6