<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, 1998

                                       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)

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

                 12277  134th Court N.E., Suite 110                                      98052
              (Address of principal executive offices)                                (Zip Code)
</TABLE>

                                 (425) 821-7535
                (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 $159,917

         As of March 29, 1999, 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 $30,115,484

      14,835,214 shares of Common Stock were outstanding at March 29, 1999.

                       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.


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                                     PART I

ITEM 1.  BUSINESS

THE COMPANY

         Epoch Pharmaceuticals, Inc. ("Epoch" or the "Company") is a biomedical
company utilizing nucleoside and nucleotide chemistry to develop molecular tools
for genetic analysis. Utilizing unique and proprietary technology in the
rational design, synthesis and chemical modification of oligonucleotides, the
Company has positioned itself to provide products and techniques for high
throughput genetic sequence analysis that are in increasing demand in the
rapidly expanding field of genetic pharmacology.

         Previously, Epoch's therapeutic research and development program had
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 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.

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 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 


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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 on compounds and techniques for gene sequencing analysis.

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 degrees to 30 degreesC 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 DNA sequence probes that the
Company believes offer the best solutions yet found for the following
situations:


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

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

         o        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 the technology can be used
to genotype and quantitate HIV-I viruses that are resistant to reverse
transcriptase or protease inhibitors. 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 SNPs 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.


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<PAGE>   6

SALES AND MARKETING

         The Company has no recent experience in marketing products and
anticipates that it will seek to enter into collaborative arrangements with
pharmaceutical companies to market its therapeutic and diagnostic products. The
Company entered into a license agreement for certain of its enabling genetic
analysis technology with the PE Biosystems division of Perkin Elmer Corporation
("Perkin-Elmer") in January 1999. See "Management's Discussion and Analysis or
Plan of Operation." There can be no assurance that the Company will be able to
enter into any additional collaborative arrangements on favorable terms or at
all.

MANUFACTURING AND SUPPLY

         The Company believes that raw materials and other components are
available in sufficient quantities to meet production requirements. The
Company's current plan for operations is to produce chemical reagent products
and small quantities of oligonucleotide products in it's Redmond facility. The
Company's longer term plan for operations is to enter into collaborative
arrangements with other companies to manufacture its oligonucleotide 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, 1998, the Company had 21
employees engaged in research and development, including 12 with Ph.D.'s. These
21 employees 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 ("VMRC"), 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 and $160,000 of these funds in 1997 and 1998, respectively, and
as of December 31, 1998, there was $228,000 remaining on this contract. 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 $2,682,000 and $2,759,000
in 1997 and 1998, respectively.


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<PAGE>   7

PATENTS AND PROPRIETARY TECHNOLOGY

         The Company attempts to protect its proprietary technology by relying
on several methods. As of February 8, 1999, the Company had eleven issued U.S.
patents and two 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 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.

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 


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development of diagnostic products. Most of these organizations have financial,
manufacturing, marketing and human resources greater than those of the Company.

EMPLOYEES

         As of December 31, 1998, the Company had 25 full-time employees, of
which 21 employees were devoted to research and development activities, and 4
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 Redmond, Washington, where the Company sub-leases and occupies
approximately 13,000 square feet. The Company's current building lease will
expire in October 1999 . The Company has entered into discussions with the
current landlord over extending the term of the lease into the year 2000. There
can be no assurance that the Company will be able to negotiate terms favorable
to the Company, in which case the Company would be required to relocate to new
facilities. There can be no assurance that the Company would be able to relocate
to new facilities on terms favorable to the Company, to manage the relocation
successfully or that the relocation would 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.

         None


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<PAGE>   9

                                     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, 1998                                     High               Low
                                                                              ---------          ---------
<S>                                                                        <C>                <C>        
        Fourth Quarter                                                     $      0.72        $      0.48
        Third Quarter                                                             0.76               0.57
        Second Quarter                                                            0.93               0.70
        First Quarter                                                             0.94               0.56

<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>


         As of December 31, 1998, there were approximately 174 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.

         The following is a summary of transactions by the Company during the
fiscal year ended December 31, 1998 involving sales of the Company's securities
that were not registered under the Securities Act:

         1. In April 1998, the Company issued five year warrants to purchase
300,000 shares of Common Stock to a consultant at $0.75 per share. The warrants
vest at the rate of 2.083% per month over four years. The Company recorded
additional paid-in capital and deferred compensation expense of $192,000 in
connection with the issuance of this warrant. This deferred compensation expense
is being amortized over the four year vesting period of the warrant. Deferred
compensation expense recognized in 1998 was $32,000.

         2. 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 ("BCC Fund I") as a bridge to the earlier of a public rights offering,
other financing, or February 25, 2000. The loan is accruing interest at 8% per
annum. In the event of a rights offering, BCC Fund I has agreed, subject 


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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 BCC Fund I's
agreement to purchase excess shares, if any, in a rights offering, BCC Fund I
received a fully vested five year warrant to purchase 2,000,000 shares of
Epoch's Common Stock at a price of $0.90 per share. Bay City Capital, which
manages BCC Fund I, 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 Managing
Director and Chief Financial Officer of Bay City Capital.

         The Company has recorded additional paid-in capital and deferred
financing expense of $1,333,000 in connection with the issuance of this warrant.
This deferred financing expense is being amortized over the two year term of the
note. Deferred financing expense recognized in 1998 was $516,000.

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 $57 million as of December 31, 1998. The Company expects to incur substantial
operating losses for the next year 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 January 1999 the Company entered into a License and Supply Agreement
with The Perkin-Elmer Corporation ("Perkin-Elmer"). Under the terms of the
agreement, Epoch licensed certain of its enabling genetic analysis technology to
Perkin-Elmer. Additionally, Perkin-Elmer will purchase Epoch's proprietary
chemical intermediates. Through February 1999, Epoch received $2,300,000 under
the agreement.

RESULTS OF OPERATIONS

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

         Years Ended December 31, 1997 and 1998

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

         Research and development expenses increased in total by $77,000 for
1998 over the prior year. This increase is the result of a modest increase in
research activity as well as normal business fluctuations.

     General and administrative expenses increased $501,000 in 1998 over the
prior year. The increase was primarily the result of the expenses incurred in
the abandonment of a proposed facility 


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which resulted in the recognition of $472,000 in costs during 1998. Also
included in 1998 is $88,000 in expenses associated with the move to a new
building.

         The Company's general legal expense was $84,000 more in 1998 than in
1997. This increase was the result of an increase in business transactions
requiring legal counsel.

         Offsetting some of the increase in general and administrative expenses
in 1998, is a decrease in expenditures for the filing of patents on new
technologies. During 1997, the Company expended $263,000 for patent filings on
new technologies, as compared to $212,000 in 1998.

         Additional variations in general and administrative expenses are the
result of normal business fluctuations.

         Interest income in 1998 is less than 1997 due to lower cash balances
available for investment.

         Interest and financing expense in the current year increased over the
prior year due to the increase in notes payable of $3,000,000, as well as
including the amortization of $516,000 of deferred financing expense incurred in
1998.

         Other income in 1997 includes $116,000 received from Saigene
Corporation ("Saigene") as payment for administrative support functions as well
as for rented laboratory and office space. Saigene relocated to separate
facilities in April 1998, after which this income ceased.

         In 1996, the Company disposed of the remaining assets of its
discontinued diagnostics division receiving a $1,100,000 note. Collections on
the note have been sporadic and, due to uncertainties regarding ultimate
collectibility, the Company has not recognized the receivable and recognizes
only that portion of the gain for which cash payments are received. At December
31, 1998, the unrecognized balance on the note and the unrecognized gain was
$973,000.

LIQUIDITY AND CAPITAL RESOURCES

         The Company has experienced recurring losses from operations and has a
total stockholders' deficit of $3,201,000 at December 31, 1998.

         At December 31, 1998, the Company had cash and cash equivalents of
$658,000. In January and February 1999, the Company received a total of
$2,300,000 under a license and supply agreement. Under the licensing and supply
agreement with Perkin-Elmer, the Company will receive an ongoing royalty stream
based on licensee sales and earn revenues from the sale of chemical
intermediates to Perkin-Elmer. Management estimates that its existing cash
balance provides sufficient working capital to operate until the third quarter
1999.

         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 is pursuing other financing arrangements but has no commitments for such
financing and there can be no assurance that such financing will be available 


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on satisfactory terms, if at all. If additional funds are not available, the
Company will be required to delay, reduce, or eliminate expenditures for certain
or all of its programs or products.

         Cash decreased by $827,000 from December 31, 1997 to December 31, 1998
due to normal expenditures on the Company's operations, offset by the receipt of
the $3,000,000 loan received from Bay City Capital which is due in 2000. The
comparable period of the prior year, December 31, 1996 to December 31, 1997, had
a cash decrease of $3,405,000 due to normal expenditures on the Company's
operations.

          Prior to September 1998, the Company had been in negotiations for a
lease on approximately 21,000 square feet in the general vicinity of its then
current facility in Bothell, Washington. A design build team had been selected
and was working on plans for the new space. In September 1998, the project was
canceled. Costs for architectural fees and long lead equipment items incurred
prior to cancellation of the project are estimated at $472,000, which were
included in general and administrative expenses in 1998. Of these expenses,
$391,000 remained in accrued liabilities at year end.

         Further variances in accounts payable and other accrued liabilities in
1998 and 1997 are the result of normal business fluctuations.

PLAN OF OPERATIONS

         Using the proceeds of the Perkin-Elmer licensing agreement 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 is focused on the development of its products with the goal
of entering into corporate partnering arrangements to further commercialize the
technology. The Company's primary future needs for capital are for continued
research and development, as well as relocation expenses anticipated to be
incurred in a move to new facilities, if the Company is unable to negotiate a
new lease at its existing facility. 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
25 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 


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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.

YEAR 2000 COMPLIANCE

         Many existing information technology ("IT") systems, such as computer
systems and software products, as well as non-IT systems that include embedded
technology, were not designed to correctly process dates after December 31,
1999. The Company has assessed the impact of such "Year 2000" issues on its
internal IT and non-IT systems, as well as on its suppliers and service
providers. The Company has evaluated its IT systems and has determined that the
Company's business systems are not Year 2000 compliant. The Company has
developed a plan to replace these systems in a timely fashion at a cost of
approximately $30,000. The Company has also initiated discussions with its
significant suppliers and service providers regarding their plans to
investigate, identify and remediate their Year 2000 issues. Although the Company
anticipates cooperation in these efforts from most of the Company's significant
suppliers and service providers, the Company is also dependent on certain
utility companies, telecommunication service companies and other service
providers that are outside the Company's control. Therefore, it may be difficult
for the Company to obtain assurances of Year 2000 readiness from such third
parties. Although the Company believes that it will have identified all of the
Company's material Year 2000 issues in the course of its assessments, given the
pervasiveness of Year 2000 issues and the complex interrelationships among Year
2000 issues both internal and external to the Company, there can be no assurance
that the Company will be able to identify and accurately evaluate all such
issues.

         If any suppliers or service providers fail to appropriately address
their Year 2000 issues, such failure could have a material adverse effect on the
Company's business, financial condition and results of operations. For example,
if Year 2000 problems are experienced by any of the Company's significant
suppliers or service providers and result in or contribute to delays or
interruptions in the delivery of products or services to the Company, such
delays or interruptions could have a material adverse effect on the Company's
business, financial condition and results of operations. Finally, disruption in
the economy generally resulting from Year 2000 issues could also materially
adversely affect the Company.

         The Company's activities with respect to the Year 2000 preparation will
include the development of contingency plans in the event the Company has not
completed all of its remediation programs in a timely manner and in the event
that any third parties who provide goods or services essential to the Company's
business, fail to appropriately address their Year 2000 issues. The Company
expects to conclude the development of these contingency plans by mid 1999. Even
if these plans are completed on time and put in place, there can be no assurance
that such plans will be sufficient to address any third party failures or that
unresolved or undetected internal and external Year 2000 issues will not have a
material adverse effect on the Company's business, financial condition and
results of operations.


                                       12
<PAGE>   14

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.


                                       13
<PAGE>   15

                                    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.          53       Chairman of the Board of Directors and
                                     Chief Executive Officer
Richard L. Dunning          53       Director
Kenneth L. Melmon, M.D.     64       Director
Sanford S. Zweifach         43       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 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


                                       14
<PAGE>   16

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.

         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.

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, 1998, 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, 1998 and 1997, 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($)(3)   Bonus($)    Compensation($)   Options(#)    All Other
      ------------------            ----      ------------   --------    ---------------   ----------    ---------
<S>                                 <C>       <C>            <C>         <C>               <C>           <C>      
Fred Craves                         1998       $100,000       $   --       $        --           --       $    --
    Chief Executive Officer         1997        100,000           --                --           --            --

Sanford S. Zweifach                 1998        135,000           --                --           --            --
    President and                   1997        140,625           --                --           --            --
      Chief Financial Officer

Rich B. Meyer, Jr. (1)              1998        119,083           --                --           --        43,307
    Vice President, Research        1997        145,008        2,789                --       14,900            --
      and Development

Robert Wydro (2)                    1998        140,016        2,693                --           --            --
    Vice President, Research        1997        140,016        2,693                --        5,000            --
       Management
</TABLE>


                                       15
<PAGE>   17

(1) Dr. Meyer left the Company in October 1998. Upon his separation from the
Company, Dr. Meyer received accrued vacation pay of $43,307.

(2) Dr. Wydro left the Company in January 1999.

(3) 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.

OPTION MATTERS

           None of the Company's executive officers exercised options or
warrants during the fiscal year ended December 31, 1998.

CONSULTING AGREEMENTS

         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 BBC Fund
I, 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 BCC Fund I loan, the Company has extended the term of the contract to
run through February 24, 2000.

         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.


                                       16
<PAGE>   18

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, 1998 certain
information about the beneficial ownership of Epoch's Common Stock by (i) each
stockholder known by us to be the beneficial owner of more than 5% of Epoch's
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.                                      5,013,193                 33.8%
     1560 Sherman Avenue                                                         
     Evanston, Illinois  60201                                                   
                                                                                 
Fred Craves, Ph.D.(2)                                    2,863,241                 16.3%
                                                                                 
Bay City Capital, LLC  (3)                               2,000,000                 11.9%
750 Battery Street, Suite 600                                                    
San Francisco, CA  94111                                                         
                                                                                 
Richard L. Dunning(4)                                      467,143                  3.1%
                                                                                 
VIMRx Pharmaceuticals, Inc.                                457,143                  3.1%
     2751 Centerville Road, Suite 210                                            
     Little Falls II                                                             
     Wilmington, Delaware 19808                                                  
                                                                                 
Sanford S. Zweifach(5)                                     400,000                  2.6%
                                                                                 
The Olmsted Group, LLC(6)                                  345,000                  2.3%
     81 Main Street                                                              
     White Planes, NY  10601                                                     
                                                                                 
Rich B. Meyer, Jr., Ph.D.(7)                               170,229                  1.1%
                                                                                 
Robert M. Wydro, Ph.D.(8)                                  130,000                   *
                                                                                 
Kenneth L. Melmon, M.D.(9)                                  80,999                   *
                                                                                 
All executive officers and directors as a group                                  
(5 persons)(10)                                          1,309,469                  8.1%
</TABLE>


                                       17
<PAGE>   19

* 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) Includes 2,585,741 shares subject to warrants and options exercisable within
60 days, including warrants to purchase 250,000 shares which are held by Burrill
& Craves, of which Fred Craves is a general partner and 2,000,000 shares subject
to Warrants exercisable within 60 days which are held by Bay City Capital, LLC.
See footnote (3). 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 and Bay City Capital, Inc.

(3) Includes 2,000,000 shares subject to warrants exercisable within 60 days.
Represents 2,000,000 shares held by Bay City Capital Fund I, L.P. Bay City
Capital, LLC, the general partner of Bay City Capital Fund I, L.P., is a
merchant banking partnership formed by The Craves Group and The Pritzker Family
business interest. Fred Craves, Ph.D., the chairman and chief executive officer
of the Company, is the majority owner and controlling person of The Craves
Group. By virtue of their status as members of Bay City Capital, LLC, each of
The Craves Group and The Pritzer Family may be deemed the beneficial owner of
all of the shares held of record by Bay City Fund I, L.P. (the "Bay City
Shares"). By virtue of his status as the majority owner and controlling person
of The Craves Group, Fred Craves may also be deemed a beneficial owner of the
Bay City Shares. Each of The Craves Group, The Pritzker Family and Fred Craves
disclaims beneficial ownership of any Bay City Shares except the extent, if any,
of such persons actual pecuniary interest therein.

(4) Includes 10,000 shares subject to warrants and options exercisable within 60
days and 457,143 shares of common stock which are held by VIMRx Pharmaceuticals
Inc., of which Richard L. Dunning is the President and CEO. Richard L. Dunning
disclaims beneficial ownership of such shares of common stock except to the
extent of his pecuniary interest in VIMRx Pharmaceuticals, Inc.

(5) Includes 400,000 shares subject to warrants and options exercisable within
60 days, including warrants to purchase 345,000 shares which are held by The
Olmstead Group L.L.C., of which Sanford Zweifach was a managing partner. (See
footnote 6.) Sanford Zweifach disclaims beneficial ownership of such warrants
and the shares underlying such warrants except to the extent of his pecuniary
interest in The Olmstead Group L.L.C.


                                       18
<PAGE>   20

(6) Includes 345,000 shares subject to warrants exercisable within 60 days.
Sanford Zweifach, President and CFO of the Company, was a managing partner of
The Olmstead Group L.L.C. Mr. Zweifach disclaims beneficial ownership of such
warrants and the shares underlying such warrants except to the extent of his
pecuniary interest in The Olmstead Group, L.L.C.

(7) Includes 145,229 shares subject to warrants exercisable within 60 days. Dr.
Meyer left the Company in October 1998.

(8) Includes 81,457 shares subject to options and warrants exercisable within 60
days. Dr. Wydro left the Company in January 1999.

(9) Includes 80,999 shares subject to warrants and options exercisable within 60
days.

(10) Includes directors' and executive officers' shares listed above, including
1,309,469 shares subject to warrants and options exercisable within 60 days.
Excludes 2,000,000 warrants and the shares underlying such warrants held by Bay
City Capital LLC. Excludes 457,143 shares of common stock held by VIMRx
Pharmaceuticals, Inc. Excludes 345,000 warrants and the shares underlying such
warrants held by the Olmstead Group, LLC.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         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 ("BCC Fund I") as a bridge to the earlier of a public rights offering,
other financing, or February 25, 2000. The loan is accruing interest at 8% per
annum. In the event of a rights offering, BCC Fund I 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 BCC Fund I's
agreement to purchase excess shares, if any, in a rights offering, BCC Fund I
received a fully vested five year warrant to purchase 2,000,000 shares of
Epoch's Common Stock at a price of $0.90 per share. Bay City Capital, which
manages BCC Fund I, 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 Managing
Director and Chief Financial Officer of Bay City Capital.

         In April 1998, the Company issued five year warrants to purchase
300,000 shares of Common Stock to Joel Hedgpeth, a consultant, at $0.75 per
share. The warrants vest at the rate of 2.083% per month over four years.


                                       19
<PAGE>   21

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

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

         (a)      Exhibits:

                                  EXHIBIT LIST

<TABLE>
<CAPTION>
    EXHIBIT
      NO.         DESCRIPTION
    -------       -----------
<C>               <S>
     3.1          Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3 of the
                  Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1998).

     3.2*         Bylaws of the Registrant, 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 Registrant.

    10.3          Letter Agreement between the Registrant and Fred Craves, dated August 3, 1993 (incorporated by
                  reference to Exhibit 10.12 of the Registrant's Registration Statement on Form SB-2, Registration
                  No. 33-66742, effective on September 29, 1993).

    10.4          Form of Common Stock Warrant issued December 31, 1991 (incorporated by reference to Exhibit
                  10.22 of the Registrant's Registration Statement on Form SB-2, Registration No. 33-66742,
                  effective on September 29, 1993).

    10.5          Second Amended and Restated Investment Agreement, dated April 28, 1992 among the Registrant and
                  certain investors (incorporated by reference to Exhibit 10.25 of the Registrant's Registration
                  Statement on Form SB-2, Registration No. 33-66742, effective on September 29, 1993).

    10.6          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 Registrant and certain investors (incorporated by
                  reference to Exhibit 10.26 of the Registrant's Registration Statement on Form SB-2, Registration
                  No. 33-66742, effective on September 29, 1993).
</TABLE>


                                       20
<PAGE>   22

<TABLE>
<CAPTION>
    EXHIBIT
      NO.         DESCRIPTION
    -------       -----------
<C>               <S>
    10.7          Form of Registration Agreement, dated February 12, 1993 among the Registrant and certain
                  investors (incorporated by reference to Exhibit 10.30 of the Registrant's Registration Statement
                  on Form SB-2, Registration No. 33-66742, effective on September 29, 1993).

    10.8          MicroProbe Corporation Incentive Stock Option, Nonqualified Stock Option and Restricted Stock
                  Purchase Plan--1993 (incorporated by reference to Exhibit 10.39 of the Registrant's Registration
                  Statement on Form SB-2, Registration No. 33-66742, effective on September 29, 1993).

    10.9          MicroProbe Corporation Non-Employee Directors Stock Option Plan (incorporated by reference to
                  Exhibit 10.40 of the Registrant's Registration Statement on Form SB-2, Registration No.
                  33-66742, effective on September 29, 1993).

    10.10         Warrant Agreement between the Registrant and American Stock Transfer & Trust Company dated April
                  29, 1997.

    10.11         Purchase Agreement dated as of November 30, 1993, by and among the Registrant, Animal
                  Biotechnology Cambridge Limited, and Herbert Stradler (without exhibits) (incorporated by
                  reference to Exhibit 10.47 of the Registrant's Registration Statement on Form SB-2, Registration
                  No. 33-76446, effective on July 7, 1994).

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

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

    10.11.3       Amendment dated May 26, 1994 to Put Agreement (incorporated by reference to Exhibit 10.48.3 of
                  the Registrant's Registration Statement on Form SB-2, Registration No. 33-76446, effective on
                  July 7, 1994).

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

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


                                       21
<PAGE>   23

<TABLE>
<CAPTION>
    EXHIBIT
      NO.         DESCRIPTION
    -------       -----------
<C>               <S>
    10.11.6       Amendment dated August 15, 1994 to Put Agreement (incorporated by reference to Exhibit 10.48.6
                  of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1994).

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

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

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

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

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

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

    10.15         Asset Purchase Agreement between the Registrant 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 Registrant's Definitive Proxy Materials for its Special Meeting of Stockholders held
                  November 27, 1995).

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

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


                                       22
<PAGE>   24

<TABLE>
<CAPTION>
    EXHIBIT
      NO.         DESCRIPTION
    -------       -----------
<C>               <S>
    10.18         Warrant Agreement between the Registrant and American Stock Transfer and Trust Company dated
                  June 21, 1996, with form of Warrant (incorporated by reference to Exhibit 4.2 of the
                  Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1996).

    10.19         Bridge Financing Agreement dated as of February 25, 1998, with form of note and warrant, between
                  the Registrant and Bay City Capital, LLC (incorporated by reference to Exhibit 10.69 of the
                  Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1997).

    10.20         Sublease between the Registrant as Tenant and Bion Diagnostic Sciences, Inc. for premises
                  located in Redmond, Washington, dated September 25, 1998.

    10.21         License Agreement between the Registrant and Perkin-Elmer Corporation dated January 11, 1999
                  (portions of this Exhibit are omitted and were filed separately with the Secretary of the SEC
                  pursuant to the Registrant's application requesting confidential treatment under Rule 406 of the
                  Securities Act).

    23.1          Consent of KPMG LLP.

    25.0          Power of Attorney (included on the signature page).

    27.0          Financial Data Schedules.
</TABLE>

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

(b)      Reports on Form 8-K:

                  None


                                       23
<PAGE>   25

                           EPOCH PHARMACEUTICALS, INC.

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                               PAGE
PART I.     FINANCIAL INFORMATION                                                                             NUMBER
<S>                                                                                                        <C>
       ITEM 1.    FINANCIAL STATEMENTS

                   Independent Auditors' Report......................................................          F-1

                   Balance Sheet as of December 31, 1998.............................................          F-2

                   Statements of Operations for the years ended
                        December 31, 1997 and 1998...................................................          F-3

                   Statements of Stockholders' Equity (Deficit) for the years ended
                        December 31, 1997 and 1998...................................................          F-4

                   Statements of Cash Flows for the years ended
                        December 31, 1997 and 1998...................................................          F-5

                   Notes to Financial Statements.....................................................          F-6
</TABLE>

<PAGE>   26

INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
Epoch Pharmaceuticals, Inc.

We have audited the accompanying balance sheet of Epoch Pharmaceuticals, Inc. as
of December 31, 1998, and the related statements of operations, stockholders'
equity (deficit), and cash flows for each of the years in the two-year period
ended December 31, 1998. 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, 1998, and the results of its operations and its cash flows for
each of the years in the two-year period ended December 31, 1998 in conformity
with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 11 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency which raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 11. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

                                      KPMG LLP


Seattle, Washington
February 10 , 1999


                                      F-1
<PAGE>   27

                           EPOCH PHARMACEUTICALS, INC.
                                  BALANCE SHEET

                                     ASSETS
<TABLE>
<CAPTION>
                                                                             DECEMBER 31, 1998
                                                                             -----------------
<S>                                                                            <C>         
Current assets:
     Cash and cash equivalents .........................................       $    658,363
     Receivables .......................................................             38,303
     Prepaid expenses ..................................................             45,769
                                                                               ------------
         Total current assets ..........................................            742,435

Equipment, net .........................................................            173,831

Other assets ...........................................................             53,937
                                                                               ------------

         Total assets ..................................................       $    970,203
                                                                               ============

                         LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
     Accounts payable ..................................................       $    215,813
     Accrued interest on note payable to related party .................            208,804
     Accrued expenses for canceled relocation ..........................            391,042
     Other accrued liabilities .........................................            356,033
                                                                               ------------

         Total current liabilities .....................................          1,171,692
                                                                               ------------

Note payable to related party ..........................................          3,000,000

Stockholders' deficit:
     Preferred stock, par value $.01; 10,000,000 shares authorized;
         no shares issued and outstanding ..............................                 --
     Common Stock, par value $.01;  50,000,000 shares authorized;
         14,824,227 shares issued and outstanding ......................            148,242
     Additional paid-in capital ........................................         54,460,706
     Deferred compensation expense .....................................           (159,826)
     Deferred financing expense ........................................           (817,794)
     Accumulated deficit ...............................................        (56,832,817)
                                                                               ------------

         Total stockholders' deficit ...................................         (3,201,489)
                                                                               ------------

Commitments, contingency and subsequent event

Total liabilities and stockholders' deficit ............................       $    970,203
                                                                               ============
</TABLE>


                 See accompanying notes to financial statements.


                                      F-2
<PAGE>   28

                           EPOCH PHARMACEUTICALS, INC.
                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                YEARS ENDED
                                                                DECEMBER 31,
                                                      --------------------------------
                                                          1997                1998
                                                      ------------        ------------
<S>                                                   <C>                 <C>         
Research contract revenue .....................       $    187,737        $    159,917
                                                      ------------        ------------

Operating expenses:
     Research and development .................          2,682,269           2,759,476
     General and administrative ...............          1,513,955           2,014,571
                                                      ------------        ------------
         Total operating expenses .............          4,196,224           4,774,047
                                                      ------------        ------------

         Operating loss .......................         (4,008,487)         (4,614,130)

Other income (expense):
     Interest income ..........................            157,215             104,985
     Interest and financing expense ...........             (3,835)           (727,156)
     Other income .............................            120,300              23,292
                                                      ------------        ------------
         Loss from continuing operations ......         (3,734,807)         (5,213,009)

Discontinued operations -
     gain on disposal of Diagnostics Division .            130,000             110,000
                                                      ------------        ------------

         Net loss .............................       $ (3,604,807)       $ (5,103,009)
                                                      ============        ============

Loss per share from continuing operations -
     basic and diluted ........................       $      (0.25)       $      (0.35)
Income per share from discontinued operations -
     basic and diluted ........................               0.01                0.01
                                                      ------------        ------------
         Net loss per share - basic and diluted       $      (0.24)       $      (0.34)
                                                      ============        ============

Weighted average number of common
     shares outstanding -
         basic and diluted ....................         14,755,462          14,818,960
</TABLE>


                 See accompanying notes to financial statements.


                                      F-3
<PAGE>   29

                           EPOCH PHARMACEUTICALS, INC.
                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                          Common Stock                             
                                                  -----------------------------        Additional  
                                                    Shares            Amount        Paid-In Capital
                                                  ----------        -----------     ---------------
<S>                                               <C>               <C>             <C>         
Balance at December 31, 1996                      14,723,856        $   147,239        52,892,549  
                                                 
Exercise of stock options                             90,937                909            38,238  
Amortization of deferred compensation                                                              
Net loss                                                                                           
                                                 -----------        -----------        ----------  
                                                 
Balance at December 31, 1997                      14,814,793            148,148        52,930,787  
                                                 
Exercise of stock options                              9,434                 94             4,767  
Warrants issued in debt financing                                                       1,333,361  
Issuance of warrants to a consultant                                                      191,791  
Amortization of deferred compensation                                                              
Amortization of deferred financing expense                                                         
Net loss                                                                                           
                                                 -----------        -----------        ----------  

Balance at December 31, 1998                      14,824,227        $   148,242        54,460,706  
                                                 ===========        ===========        ==========  
</TABLE>


<TABLE>
<CAPTION>
                                                                     Deferred                              Total      
                                                       Deferred      Financing        Accumulated       Stockholders  
                                                     Compensation     Expense           Deficit       Equity (Deficit)
                                                     ------------    ---------        -----------     ----------------
<S>                                                    <C>           <C>              <C>             <C>         
Balance at December 31, 1996                           (39,029)             --        (48,125,001)        4,875,758   
                                                                                                                      
Exercise of stock options                                                                                    39,147
Amortization of deferred compensation                   39,029                                               39,029   
Net loss                                                                               (3,604,807)       (3,604,807)  
                                                      --------      ----------        -----------        ----------   
                                                                                                                      
Balance at December 31, 1997                                --              --        (51,729,808)        1,349,127   
                                                                                                                      
Exercise of stock options                                                                                     4,861   
Warrants issued in debt financing                                   (1,333,361)                                  --   
Issuance of warrants to a consultant                  (191,791)                                                  --   
Amortization of deferred compensation                   31,965                                               31,965   
Amortization of deferred financing expense                             515,567                              515,567   
Net loss                                                                               (5,103,009)       (5,103,009)  
                                                      --------      ----------        -----------        ----------   
                                                                                                                      
Balance at December 31, 1998                          (159,826)       (817,794)       (56,832,817)       (3,201,489)  
                                                      ========      ==========        ===========        ==========   
</TABLE>

                See accompanying notes to financial statements.


                                      F-4
<PAGE>   30

                           EPOCH PHARMACEUTICALS, INC.
                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                             YEARS ENDED DECEMBER 31,
                                                                          ------------------------------
                                                                             1997               1998
                                                                          -----------        -----------
<S>                                                                       <C>                <C>         
Cash flows from operating activities:
     Net loss .....................................................       $(3,604,807)       $(5,103,009)
     Adjustments to reconcile net loss to net cash
        used in operating activities:

     Depreciation and amortization ................................           196,339             61,264
     Amortization of deferred financing expense ...................                --            515,567
     Amortization of deferred compensation expense ................                --             31,965
     Changes in operating assets and liabilities:
       Receivable, prepaid expenses, and other assets .............           (17,271)            29,143
       Accounts payable ...........................................            36,733            (21,158)
       Accrued interest on note payable to related party ..........                --            208,804
       Accrued expenses for canceled relocation ...................                --            391,042
       Other accrued liabilities ..................................            35,023            129,485
                                                                          -----------        -----------
     Net cash used in operating activities ........................        (3,353,983)        (3,756,897)
                                                                          -----------        -----------

Cash used in investing activities -
     acquisition of equipment .....................................           (78,851)           (75,084)
                                                                          -----------        -----------

Cash flows from financing activities:
     Proceeds from notes payable ..................................                --          3,000,000
     Principal payments on notes payable ..........................           (11,188)                --
     Exercise of stock options ....................................            39,147              4,861
                                                                          -----------        -----------
     Net cash provided by financing activities ....................            27,959          3,004,861
                                                                          -----------        -----------

Net decrease in cash and cash equivalents .........................        (3,404,875)          (827,120)
Cash and cash equivalents at beginning of year ....................         4,890,358          1,485,483
                                                                          -----------        -----------
Cash and cash equivalents at end of year ..........................       $ 1,485,483        $   658,363
                                                                          ===========        ===========

Supplemental disclosure of non-cash financing activities - warrants
     issued in debt financing .....................................       $        --        $ 1,333,361
                                                                          ===========        ===========
Supplemental disclosure of cash flow information - cash
     payments made during the year for interest ...................       $     3,836        $     2,785
                                                                          ===========        ===========
</TABLE>


                 See accompanying notes to financial statements.


                                      F-5
<PAGE>   31

                           EPOCH PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

         Epoch Pharmaceuticals, Inc. ("Epoch" or "the Company") was organized to
develop, manufacture and market therapeutic and diagnostic products utilizing
oligonucleotide technology. The Company's activities are focused on the
development of therapeutic technologies and products.

Discontinued Operations

         In 1995, the Company sold its then existing diagnostics division and in
1996 sold its remaining diagnostic technologies (see note 6). Accordingly,
amounts related to the diagnostics division have been reported as discontinued
operations.

Equipment

         Equipment is stated at cost. Depreciation and amortization are provided
on the straight-line method over the assets' estimated useful lives, generally
three to five years.

Impairment of Long-Lived Assets

         For long-lived assets including equipment, the Company evaluates the
carrying value of the assets by comparing the estimated future cash flows
generated from the use of the assets and their 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.

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 


                                      F-6
<PAGE>   32

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

         Basic earnings (loss) per share (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. The capital
structure of the Company includes stock options and stock warrants. At December
31, 1997 and 1998, there were outstanding options to purchase 1,123,516 and
1,135,986 shares of common stock and outstanding warrants to purchase 6,705,771
and 7,798,875 shares of common stock, respectively. The assumed conversion and
exercise of these securities has been excluded from diluted EPS as their effect
would be anti-dilutive.

Financial Instruments

         The Company has financial instruments consisting of cash and cash
equivalents, receivables, accounts payable and a note payable to related party.
The fair value of these financial instruments approximates their carrying amount
based on their short term nature and current market indicators.

Cash Equivalents

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

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.


                                      F-7
<PAGE>   33

(2)      EQUIPMENT

Equipment consists of the following:

<TABLE>
<S>                                              <C>             
         Machinery and equipment...........      $ 1,373,876
         Furniture and fixtures............          214,301
                                                 -----------
                                                 $ 1,588,177
         Less accumulated depreciation.....       (1,414,346)
                                                 -----------
         Equipment, net....................      $   173,831
                                                 ===========
</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 1997 or 1998.

(4)      EQUITY

Options to Purchase Common Stock

         The Company has a 1991 and a 1993 Incentive Stock Option Plan,
Nonqualified Stock Option and Restricted Stock Purchase Plan pursuant to which
1,436,470 shares and 500,000 shares of common stock, respectively, have been
reserved for grants. Under the plans, 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. The options are issued with a ten year
term and vest over a period of four years. At December 31, 1998, 373,976 shares
and 191,632 shares, respectively, remained available for grant under these
plans.

         The Company also has a Non-Employee Directors Option Plan (the
"Directors Plan") under which the Company granted each non-employee director, a
fully-vested 10-year option to purchase 10,000 shares of common stock at the
inception of the plan in 1993. Upon each anniversary of the inception of the
Directors Plan, each non-employee director receives 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.


                                      F-8
<PAGE>   34

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

<TABLE>
<CAPTION>
                                                    1997                            1998
                                       ------------------------------   ------------------------------
                                                     WEIGHTED-AVERAGE                 WEIGHTED-AVERAGE
                                         SHARES       EXERCISE PRICE      SHARES       EXERCISE PRICE
                                       ----------    ----------------   ----------    ----------------
<S>                                     <C>              <C>             <C>              <C>     
Outstanding at beginning of year        1,307,758        $   1.84        1,123,516        $   1.72
Granted ........................          271,999            0.77           29,000            0.70
Exercised ......................          (90,937)           0.69           (9,434)           0.52
Forfeited ......................         (365,304)           1.76           (7,096)           0.63
                                       ----------        --------       ----------        --------
Outstanding at end of year .....        1,123,516        $   1.72        1,135,986        $   1.71
                                       ==========        ========       ==========        ========
Options exercisable at year end           636,052        $   1.80          786,413        $   1.56
Weighted - average fair value of                                        
options granted during the year        $     0.77                       $     0.70
</TABLE>

         The following table summarizes information about stock options
outstanding at December 31, 1998:

<TABLE>
<CAPTION>
                                  OPTIONS OUTSTANDING                         OPTIONS EXERCISABLE
                  ---------------------------------------------------   -------------------------------
RANGE OF              NUMBER       WEIGHTED-AVERAGE       WEIGHTED         NUMBER          WEIGHTED-
EXERCISE          OUTSTANDING AT   REMAINING YEARS        AVERAGE       EXERCISABLE AT      AVERAGE
PRICES               12/31/98      CONTRACTUAL LIFE    EXERCISE PRICE     12/31/98       EXERCISE PRICE
-----------       --------------   ----------------    --------------   --------------   --------------
<S>               <C>              <C>                 <C>              <C>              <C>  
0.30 - 0.50          234,735             5.3                $0.44          209,067           $0.43
0.53 - 0.78          478,251             7.4                 0.62          327,971            0.62
0.87 - 1.13           58,000             7.6                 1.00           34,375            1.02
3.87 - 4.50          345,000             5.0                 3.97          195,000            4.04
5.87 - 5.88           20,000             4.7                 5.88           20,000            5.88
                   ---------             ---                -----          -------           -----
0.30 - 5.88        1,135,986             6.2                $1.71          786,413           $1.56
                   =========             ===                =====          =======           =====
</TABLE>


Warrants to Purchase Common Stock

         As part of a debt financing in February 1998, the company issued a
fully vested five year warrant to purchase 2,000,000 shares of the Company's
common stock at $.90 per share (see note 8).

         In April 1998, the Company issued five year warrants to purchase
300,000 shares of Common Stock to a consultant at $0.75 per share. The warrants
vest at the rate of 2.083% per month over four years. The Company recorded
additional paid-in capital and deferred compensation expense of approximately
$192,000 in connection with the issuance of this warrant. This deferred
compensation expense is being amortized over the four year vesting period of the
warrant. Deferred compensation expense recognized in 1998 was approximately
$32,000.


                                      F-9
<PAGE>   35

         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 (the "Public Warrants"), one new warrant to purchase one share of the
Company's Common Stock until June 20, 2001, 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.

         A summary of the Company's outstanding warrants follows.

<TABLE>
<CAPTION>
                                                   1997                                1998
                                       -----------------------------       -----------------------------
                                                          EXERCISE                            EXERCISE
                                         SHARES          PRICE RANGE         SHARES          PRICE RANGE
                                       ----------        -----------       ----------        -----------
<S>                                     <C>              <C>                <C>              <C>        
Outstanding at beginning of year        8,743,762        $0.30-10.40        6,705,771        $0.30-10.40
Granted                                 1,351,912         0.75- 2.50        2,300,000         0.75- 0.90
Exercised                                      --                 --               --                 --
Expired                                (3,389,903)        2.00- 6.50       (1,206,896)        3.00-10.40
                                       ----------        -----------       ----------        -----------
Outstanding at end of year              6,705,771         0.30-10.40        7,798,875         0.30- 9.21
                                       ==========        ===========       ==========        ===========
Warrants exercisable at year end        6,666,186        $0.30-10.40        7,521,780        $0.30- 9.21
Weighted - average value of
   exercisable warrants                                  $      2.29                         $      1.65
</TABLE>

         The outstanding warrants are fully vested at December 31, 1998 with the
exception of 277,095 warrants issued to a consultant which vest at a rate of
2.083% per month. All outstanding warrants will be fully vested in 2002. The
warrants have expiration dates that range to 2003.


                                      F-10
<PAGE>   36

Stock Based Compensation

         Had compensation cost for stock options and warrants issued to
employees 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>
                                                                      1997          1998
                                                                  -----------    -----------
<S>                                             <C>               <C>            <C>         
Loss from continuing operations                 As reported       $(3,734,807)   $(5,213,009)
                                                Pro forma         $(3,815,518)   $(5,443,207)

Loss per share from continuing operations       As reported       $     (0.25)   $     (0.35)
                                                Pro forma         $     (0.26)   $     (0.37)

Net loss                                        As reported       $(3,604,807)   $(5,103,009)
                                                Pro forma         $(3,785,518)   $(5,333,207)

Net loss per share - basic and diluted          As reported       $     (0.24)   $     (0.34)
                                                Pro forma         $     (0.25)   $     (0.36)
</TABLE>

         The fair value of each stock option and warrant 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 1997 and 1998:
dividend yield of 0.0% for both years; expected volatility of 123% in 1997 and
1998; risk free interest rates of 7.0% in 1997 and 5.33% in 1998; and expected
lives of 7.3 years in 1997 and 10 years in 1998.


                                      F-11
<PAGE>   37

(5)      INCOME TAXES

         There was no income tax benefit attributable to net losses for 1997 and
1998. The difference between taxes computed by applying the U.S. Federal
corporate tax rate of 34% and the actual income tax provision in 1997 and 1998
is primarily the result of limitations on utilizing net operating losses.

         The tax effects of temporary differences and carryforwards that give
rise to significant portions of the deferred tax assets at December 31, 1998 are
presented below:

<TABLE>
<S>                                                                 <C>       
           Net operating loss carryforwards..................       $6,769,000
           Research and development credit carryforwards.....        1,779,000
           Capitalized research and development..............        2,174,000
           Bad debt write-off ...............................        1,117,000
           Other ............................................          519,000
                                                                   -----------
           Total gross deferred tax assets...................       12,358,000
           Less deferred tax asset valuation allowance.......      (12,358,000)
                                                                   -----------
           Net deferred tax assets...........................      $        --
                                                                   ===========
</TABLE>

         The net change in the valuation allowance for 1997 and 1998 was an
increase of approximately $2,431,000 and $1,903,000 respectively, due primarily
to the inability to utilize net operating losses and research and development
credits.

         At December 31, 1998, the Company had net operating loss carryforwards
for income tax purposes of approximately $19,908,000 and unused research and
development tax credits of approximately $1,779,000 available to offset future
taxable income and income taxes, respectively, expiring through 2018. 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)      DISCONTINUED OPERATIONS

         In 1996, the Company disposed of the remaining assets of its
discontinued diagnostics division receiving a $1,100,000 note. Collections on
the note have been sporadic and, due to uncertainties regarding ultimate
collectibility, the Company has not recognized the receivable and recognizes
only that portion of the gain for which cash payments are received. At December
31, 1998, the unrecognized balance on the note and the unrecognized gain was
$973,000.


                                      F-12
<PAGE>   38

(7)      RESEARCH GRANTS AND CONTRACTS

         At December 31, 1998, 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 approximately $159,000 and
$160,000 of these funds in 1997 and 1998, respectively, and as of December 31,
1998, there was approximately $228,000 remaining on this contract.

         In December 1998, the Company was awarded an additional research grant
from the National Institutes of Health. Under this new grant, the Company will
receive $93,000 during 1999 as research is conducted.

(8)      NOTE PAYABLE

         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 ("BBC Fund I") as a bridge to the earlier of a public rights offering,
other financing, or February 25, 2000. The loan is accruing interest at 8% per
annum. In the event of a rights offering, BCC Fund I 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 BCC Fund I's
agreement to purchase excess shares, if any, in a rights offering, BCC Fund I
received a fully vested five year warrant to purchase 2,000,000 shares of
Epoch's Common Stock at a price of $0.90 per share. Bay City Capital, which
manages BCC Fund I, 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 Managing
Director and Chief Financial Officer of Bay City Capital.

         The Company recorded additional paid-in capital and deferred financing
expense of approximately $1,333,000 in connection with the issuance of this
warrant. This deferred financing expense is being amortized over the two year
term of the note. Deferred financing expense recognized in 1998 was
approximately $516,000.

(9)      COMMITMENTS

         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 BCC Fund I 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 BCC Fund I loan, the Company has extended the term of the contract to
run through February 24, 2000.

         During 1997 and 1998, rent expense on operating leases was
approximately $337,000 and 283,000, respectively.


                                      F-13
<PAGE>   39

(10)     SUBSEQUENT EVENT

         In January 1999 the Company entered into a License and Supply Agreement
with The Perkin-Elmer Corporation ("Perkin-Elmer"). Under the terms of the
agreement, Epoch licensed certain of its enabling genetic analysis technology to
Perkin-Elmer. Additionally, Perkin-Elmer will purchase Epoch's proprietary
chemical intermediates. Through February 1999, Epoch received $2,300,000 under
the agreement.

(11)     LIQUIDITY

         The Company has experienced recurring losses from operations and has a
total stockholders' deficit of approximately $3,201,000 at December 31, 1998.

         At December 31, 1998, the Company had cash and cash equivalents of
approximately $658,000. In January and February 1999, the Company received a
total of $2,300,000 under a license and supply agreement. Under the licensing
and supply agreement with Perkin-Elmer, the Company will receive an ongoing
royalty stream based on licensee sales and earn revenues from the sale of
chemical intermediates to Perkin-Elmer. Management estimates that its existing
cash balance provides sufficient working capital to operate until the third
quarter 1999.

         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 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. If additional funds are not available, the
Company will be required to delay, reduce, or eliminate expenditures for certain
or all of its programs or products.


                                      F-14
<PAGE>   40

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: April 13, 1999               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                      Chairman of the Board of Directors and
---------------------------------       Chief Executive Officer                      April 13, 1999
Fred Craves                             
                                        

  /s/ Sanford S. Zweifach               President/Chief Financial Officer (Chief
---------------------------------       Accounting Officer), and Director            April 13, 1999
Sanford S. Zweifach                     
                                        

  /s/ Richard Dunning                   Director
---------------------------------
Richard Dunning                                                                      April 13, 1999


 /s/ Kenneth L. Melmon                  Director
---------------------------------
Kenneth L. Melmon, M.D.                                                              April 13, 1999
</TABLE>


                                      F-15

<PAGE>   41

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
    EXHIBIT
      NO.         DESCRIPTION
    -------       -----------
<C>               <S>
     3.1          Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3 of the
                  Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1998).

     3.2*         Bylaws of the Registrant, 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 Registrant.

    10.3          Letter Agreement between the Registrant and Fred Craves, dated August 3, 1993 (incorporated by
                  reference to Exhibit 10.12 of the Registrant's Registration Statement on Form SB-2, Registration
                  No. 33-66742, effective on September 29, 1993).

    10.4          Form of Common Stock Warrant issued December 31, 1991 (incorporated by reference to Exhibit
                  10.22 of the Registrant's Registration Statement on Form SB-2, Registration No. 33-66742,
                  effective on September 29, 1993).

    10.5          Second Amended and Restated Investment Agreement, dated April 28, 1992 among the Registrant and
                  certain investors (incorporated by reference to Exhibit 10.25 of the Registrant's Registration
                  Statement on Form SB-2, Registration No. 33-66742, effective on September 29, 1993).

    10.6          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 Registrant and certain investors (incorporated by
                  reference to Exhibit 10.26 of the Registrant's Registration Statement on Form SB-2, Registration
                  No. 33-66742, effective on September 29, 1993).
</TABLE>

<PAGE>   42

<TABLE>
<CAPTION>
    EXHIBIT
      NO.         DESCRIPTION
    -------       -----------
<C>               <S>
    10.7          Form of Registration Agreement, dated February 12, 1993 among the Registrant and certain
                  investors (incorporated by reference to Exhibit 10.30 of the Registrant's Registration Statement
                  on Form SB-2, Registration No. 33-66742, effective on September 29, 1993).

    10.8          MicroProbe Corporation Incentive Stock Option, Nonqualified Stock Option and Restricted Stock
                  Purchase Plan--1993 (incorporated by reference to Exhibit 10.39 of the Registrant's Registration
                  Statement on Form SB-2, Registration No. 33-66742, effective on September 29, 1993).

    10.9          MicroProbe Corporation Non-Employee Directors Stock Option Plan (incorporated by reference to
                  Exhibit 10.40 of the Registrant's Registration Statement on Form SB-2, Registration No.
                  33-66742, effective on September 29, 1993).

    10.10         Warrant Agreement between the Registrant and American Stock Transfer & Trust Company dated April
                  29, 1997.

    10.11         Purchase Agreement dated as of November 30, 1993, by and among the Registrant, Animal
                  Biotechnology Cambridge Limited, and Herbert Stradler (without exhibits) (incorporated by
                  reference to Exhibit 10.47 of the Registrant's Registration Statement on Form SB-2, Registration
                  No. 33-76446, effective on July 7, 1994).

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

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

    10.11.3       Amendment dated May 26, 1994 to Put Agreement (incorporated by reference to Exhibit 10.48.3 of
                  the Registrant's Registration Statement on Form SB-2, Registration No. 33-76446, effective on
                  July 7, 1994).

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

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

<PAGE>   43

<TABLE>
<CAPTION>
    EXHIBIT
      NO.         DESCRIPTION
    -------       -----------
<C>               <S>
    10.11.6       Amendment dated August 15, 1994 to Put Agreement (incorporated by reference to Exhibit 10.48.6
                  of the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1994).

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

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

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

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

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

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

    10.15         Asset Purchase Agreement between the Registrant 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 Registrant's Definitive Proxy Materials for its Special Meeting of Stockholders held
                  November 27, 1995).

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

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

<PAGE>   44

<TABLE>
<CAPTION>
    EXHIBIT
      NO.         DESCRIPTION
    -------       -----------
<C>               <S>
    10.18         Warrant Agreement between the Registrant and American Stock Transfer and Trust Company dated
                  June 21, 1996, with form of Warrant (incorporated by reference to Exhibit 4.2 of the
                  Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1996).

    10.19         Bridge Financing Agreement dated as of February 25, 1998, with form of note and warrant, between
                  the Registrant and Bay City Capital, LLC (incorporated by reference to Exhibit 10.69 of the
                  Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1997).

    10.20         Sublease between the Registrant as Tenant and Bion Diagnostic Sciences, Inc. for premises
                  located in Redmond, Washington, dated September 25, 1998.

    10.21         License Agreement between the Registrant and Perkin-Elmer Corporation dated January 11, 1999
                  (portions of this Exhibit are omitted and were filed separately with the Secretary of the SEC
                  pursuant to the Registrant's application requesting confidential treatment under Rule 406 of the
                  Securities Act).

    23.1          Consent of KPMG LLP.

    25.0          Power of Attorney (included on the signature page).

    27.0          Financial Data Schedules.
</TABLE>

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