##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549


FORM 10-Q

|           |  |                                                                                                                           
|---------- |  | --------------------------------------------------------------------------------------------------------------------------
|(Mark One)
|           |  |                                                                                                                           
|x          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE
ACT OF 1934                                      
|           |  |                                                                                                                           
|           |  | For the quarterly period ended September 30, 2003.                                                                        
|           |  |                                                                                                                           
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM 
TO .

Commission file number 0-22170

Epoch Biosciences, Inc.

(Exact name of Registrant as specified in its charter)


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

21720 23rd Drive SE, #150, Bothell, WA 98021(Address of principal executive office, including zip code)

(425) 482-5555(Issuers telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act 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  o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

YES  o NO  x

26,155,334 shares of Common Stock were outstanding at November 3, 2003.





---

TABLE OF CONTENTS



|                              |                                                                                               |  |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|Part I. Financial Information
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                              | Item 4. Controls and Procedures                                                              
|Part II. Other Information   
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|Signatures                   
|EXHIBIT INDEX                
|EXHIBIT 10.32.1              
|EXHIBIT 31.1                 
|EXHIBIT 31.2                 
|EXHIBIT 32.1                 
|EXHIBIT 32.2                 



---



##### Table of Contents



Epoch Biosciences, Inc.
Index To Form 10-Q

|                              |                                                                                               |  |             |    | 
|----------------------------- | --------------------------------------------------------------------------------------------- |  | ----------- | -- | 
|                              |                                                                                               |  | Page Number
|Part I. Financial Information |                                                                                               |  |             |   
|                              | Item 1. Financial Statements                                                                  |  |             | 3  | 
|                              | Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations |  |             | 10 | 
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |  |             | 20 | 
|                              | Item 4: Controls and Procedures                                                               |  |             | 21 | 
|Part II. Other Information    |                                                                                               |  |             |   
|                              | Item 6. Exhibits and Reports on Form 8-K                                                      |  |             | 22 | 
|                              | Note: Items 1, 2, 3, 4, and 5 are omitted, as they are not applicable.                        |  |             |    | 
|Signature                     |                                                                                               |  | 23          |   

2



---



##### Table of Contents






Part I. Financial Information

Epoch Biosciences, Inc.
Balance Sheets
(unaudited)

|                                            |                                                                                                                                                                 |                                            |           |              |            |               |           |             |            | 
|------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ------------ | ---------- | ------------- | --------- | ----------- | ---------- | 
|                                            |                                                                                                                                                                 |                                            |           | December 31, |            | September 30,
|                                            |                                                                                                                                                                 |                                            |           | 2002         |            | 2003         
|                                            |                                                                                                                                                                 |                                            |           |              |            |              
|Assets                                      |                                                                                                                                                                 |                                            |           |              |            |               |           |            
|Current assets:                             |                                                                                                                                                                 |                                            |           |              |            |               |           |            
|                                            | Cash and cash equivalents                                                                                                                                       |                                            | $         | 3,507,645    |            |               | $         | 4,586,048   |           
|                                            | Accounts receivable, net                                                                                                                                        |                                            |           | 2,031,600    |            |               |           | 1,321,448   |           
|                                            | Inventory                                                                                                                                                       |                                            |           | 461,381      |            |               |           | 87,236      |           
|                                            | Prepaid expenses and other assets                                                                                                                               |                                            |           | 348,778      |            |               |           | 277,007     |           
|                                            |                                                                                                                                                                 |                                            |           |              |            |               |           |             |           
|                                            |                                                                                                                                                                 | Total current assets                       |           |              | 6,349,404  |               |           |             | 6,271,739  | 
|                                           
|Property and equipment, net                 |                                                                                                                                                                 |                                            | 3,947,995 |              |            |               | 2,694,811 |            
|Identifiable intangible assets, net         |                                                                                                                                                                 |                                            | 1,967,632 |              |            |               | 1,316,350 |            
|Goodwill                                    |                                                                                                                                                                 |                                            | 2,151,846 |              |            |               |          |            
|Restricted cash                             |                                                                                                                                                                 |                                            | 614,739   |              |            |               | 643,897   |            
|Other assets                                |                                                                                                                                                                 |                                            | 24,550    |              |            |               | 10,000    |            
|                                            |                                                                                                                                                                 |                                            |           |              |            |               |           |             |           
|                                            |                                                                                                                                                                 | Total assets                               |           | $            | 15,056,166 |               |           | $           | 10,936,797 | 
|                                            |                                                                                                                                                                 |                                            |           |              |            |               |           |             |           
|Liabilities and Stockholders Equity        |                                                                                                                                                                 |                                            |           |              |            |               |           |            
|Current liabilities:                        |                                                                                                                                                                 |                                            |           |              |            |               |           |            
|                                            | Current portion of long term obligations                                                                                                                        |                                            | $         | 282,451      |            |               | $         | 556,499     |           
|                                            | Accounts payable and accrued liabilities                                                                                                                        |                                            |           | 2,033,575    |            |               |           | 1,615,309   |           
|                                            | Current portion of deferred revenue                                                                                                                             |                                            |           | 877,258      |            |               |           | 545,002     |           
|                                            |                                                                                                                                                                 |                                            |           |              |            |               |           |             |           
|                                            |                                                                                                                                                                 | Total current liabilities                  |           |              | 3,193,284  |               |           |             | 2,716,810  | 
|                                           
|Long term obligations, less current portion |                                                                                                                                                                 |                                            | 511,731   |              |            |               | 423,854   |            
|Deferred revenue, less current portion      |                                                                                                                                                                 |                                            | 2,324,744 |              |            |               | 2,515,796 |            
|Deferred rent                               |                                                                                                                                                                 |                                            | 245,582   |              |            |               | 313,248   |            
|Stockholders equity:                       |                                                                                                                                                                 |                                            |           |              |            |               |           |            
|                                            | 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; shares issued and outstanding: 25,683,589 at December 31, 2002 and 26,155,234
at September 30, 2003 |                                            |           | 256,836      |            |               |           | 261,552     |           
|                                            | Additional paid-in capital                                                                                                                                      |                                            |           | 82,743,658   |            |               |           | 83,190,961  |           
|                                            | Accumulated deficit                                                                                                                                             |                                            |           | (74,219,669  | )          |               |           | (78,485,424 | )         
|                                            |                                                                                                                                                                 |                                            |           |              |            |               |           |             |           
|                                            |                                                                                                                                                                 | Total stockholders equity                 |           |              | 8,780,825  |               |           |             | 4,967,089  | 
|                                            |                                                                                                                                                                 |                                            |           |              |            |               |           |             |           
|                                            |                                                                                                                                                                 | Total liabilities and stockholders equity |           | $            | 15,056,166 |               |           | $           | 10,936,797 | 
|                                            |                                                                                                                                                                 |                                            |           |              |            |               |           |             |           

See accompanying notes to financial statements.

3



---



##### Table of Contents



Epoch Biosciences, Inc.
Statements of Operations
(unaudited)

|                                                                         |                                      |                          |            |                    |           |                   |            |           |           |      |            |           |            |   |            |           |            |  
|------------------------------------------------------------------------ | ------------------------------------ | ------------------------ | ---------- | ------------------ | --------- | ----------------- | ---------- | --------- | --------- | ---- | ---------- | --------- | ---------- | - | ---------- | --------- | ---------- | -
|                                                                         |                                      |                          |            | Three Months Ended |           | Nine Months Ended
|                                                                         |                                      |                          |            | September 30,      |           | September 30,    
|                                                                         |                                      |                          |            |                    |           |                  
|                                                                         |                                      |                          |            | 2002               |           | 2003              |            | 2002      |           | 2003
|                                                                         |                                      |                          |            |                    |           |                   |            |           |           |     
|Revenue:                                                                 |                                      |                          |            |                    |           |                   |            |           |           |      |            |           |            |   |            |          
|                                                                         | Product sales                        |                          | $          | 1,974,592          |           |                   | $          | 690,126   |           |      | $          | 5,199,183 |            |   | $          | 2,127,171 |           
|                                                                         | License fees and royalty income      |                          |            | 276,864            |           |                   |            | 1,218,720 |           |      |            | 709,862   |            |   |            | 3,908,474 |           
|                                                                         | Contract research revenue            |                          |            | 407,407            |           |                   |            | 101,064   |           |      |            | 1,519,837 |            |   |            | 842,064   |           
|                                                                         |                                      |                          |            |                    |           |                   |            |           |           |      |            |           |            |   |            |           |           
|                                                                         |                                      | Total revenue            |            |                    | 2,658,863 |                   |            |           | 2,009,910 |      |            |           | 7,428,882  |   |            |           | 6,877,709  |  
|Operating expenses:                                                      |                                      |                          |            |                    |           |                   |            |           |           |      |            |           |            |   |            |          
|                                                                         | Cost of product sales                |                          |            | 1,052,955          |           |                   |            | 462,711   |           |      |            | 3,347,151 |            |   |            | 1,845,268 |           
|                                                                         | Research and development             |                          |            | 1,050,761          |           |                   |            | 951,924   |           |      |            | 3,236,632 |            |   |            | 3,295,408 |           
|                                                                         | Selling, general and administrative  |                          |            | 1,435,531          |           |                   |            | 932,354   |           |      |            | 4,205,911 |            |   |            | 3,214,457 |           
|                                                                         | Loss on sale of San Diego operations |                          |            |                   |           |                   |            |          |           |      |            |          |            |   |            | 2,804,862 |           
|                                                                         |                                      |                          |            |                    |           |                   |            |           |           |      |            |           |            |   |            |          
|                                                                         |                                      | Total operating expenses |            |                    | 3,539,247 |                   |            |           | 2,346,989 |      |            |           | 10,789,694 |   |            |           | 11,159,995 |  
|                                                                         |                                      |                          |            |                    |           |                   |            |           |           |      |            |           |            |   |            |          
|                                                                         |                                      | Operating loss           |            |                    | (880,384  | )                 |            |           | (337,079  | )    |            |           | (3,360,812 | ) |            |           | (4,282,286 | )
|                                                                        
|                                                                         | Interest income, net                 |                          |            | 19,401             |           |                   |            | 5,488     |           |      |            | 81,493    |            |   |            | 16,531    |           
|                                                                         |                                      |                          |            |                    |           |                   |            |           |           |      |            |           |            |   |            |           |           
|                                                                         |                                      | Net loss                 |            |                    | (860,983  | )                 |            |           | (331,591  | )    |            |           | (3,279,319 | ) |            |           | (4,265,755 | )
|                                                                         |                                      |                          |            |                    |           |                   |            |           |           |      |            |           |            |   |            |          
|Net loss per share - basic and diluted                                   |                                      | $                        | (0.03      | )                  |           | $                 | (0.01      | )         |           | $    | (0.13      | )         |            | $ | (0.16      | )        
|                                                                         |                                      |                          |            |                    |           |                   |            |           |           |      |            |           |            |   |            |          
|Weighted average number of common shares
outstanding - basic and diluted |                                      |                          | 25,661,032 |                    |           |                   | 26,088,593 |           |           |      | 25,656,784 |           |            |   | 25,923,936 |          

See accompanying notes to financial statements.

4



---



##### Table of Contents



Epoch Biosciences, Inc.
Statements of Cash Flows
(unaudited)

|                                      |                                                                             |                                                |                                |                                                     |          |                                 |            |            |           |         |          |  
|------------------------------------- | --------------------------------------------------------------------------- | ---------------------------------------------- | ------------------------------ | --------------------------------------------------- | -------- | ------------------------------- | ---------- | ---------- | --------- | ------- | -------- | -
|                                      |                                                                             |                                                |                                |                                                     |          | Nine Months Ended September 30,
|                                      |                                                                             |                                                |                                |                                                     |          |                                
|                                      |                                                                             |                                                |                                |                                                     |          | 2002                            |            | 2003      
|                                      |                                                                             |                                                |                                |                                                     |          |                                 |            |           
|Cash flows from operating activities: |                                                                             |                                                |                                |                                                     |          |                                 |            |           
|                                      | Net loss                                                                    |                                                | $                              | (3,279,319                                          | )        |                                 | $          | (4,265,755 | )        
|                                     
|                                      | Adjustments to reconcile net loss to net
cash used in operating activities: |                                                |                                |                                                     |          |                                 |            |            |          
|                                      |                                                                             | Depreciation and amortization:                 |                                |                                                     |          |                                 |            |            |           |        
|                                      |                                                                             |                                                | Property and equipment         |                                                     |          | 642,717                         |            |            |           | 625,976 |         
|                                      |                                                                             |                                                | Identifiable intangible assets |                                                     |          | 221,623                         |            |            |           | 154,958 |         
|                                      |                                                                             | Issuance of common stock warrants for services |                                |                                                     | 28,673   |                                 |            |            | 2,252     |        
|                                      |                                                                             | Loss on sale of San Diego operations           |                                |                                                     |         |                                 |            |            | 2,804,862 |        
|                                      |                                                                             | Interest accrued on restricted cash            |                                |                                                     | (30,267  | )                               |            |            | (29,158   | )      
|                                      |                                                                             | Deferred revenue                               |                                |                                                     | (617,365 | )                               |            |            | (141,204  | )      
|                                      |                                                                             | Deferred rent                                  |                                |                                                     | 79,187   |                                 |            |            | 67,666    |        
|                                      | Changes in operating assets and liabilities net of assets
sold:             |                                                |                                |                                                     |          |                                 |            |            |          
|                                      |                                                                             | Accounts receivable                            |                                |                                                     | (703,442 | )                               |            |            | 685,152   |        
|                                      |                                                                             | Inventory                                      |                                |                                                     | (315,023 | )                               |            |            | 269,110   |        
|                                      |                                                                             | Prepaid expenses and other assets              |                                |                                                     | (96,910  | )                               |            |            | 3,436     |        
|                                      |                                                                             | Accounts payable and accrued liabilities       |                                |                                                     | 507,445  |                                 |            |            | (418,266  | )      
|                                      |                                                                             |                                                |                                |                                                     |          |                                 |            |            |          
|                                      |                                                                             |                                                |                                | Net cash used in operating activities               |          |                                 | (3,562,681 | )          |           |         | (240,971 | )
|                                      |                                                                             |                                                |                                |                                                     |          |                                 |            |            |          
|                                      | Cash flows from investing activities:                                       |                                                |                                |                                                     |          |                                 |            |            |          
|                                      |                                                                             | Acquisition of property and equipment          |                                |                                                     | (780,134 | )                               |            |            | (398,125  | )      
|                                      |                                                                             | Proceeds from sale of assets, net              |                                |                                                     |         |                                 |            |            | 1,081,561 |        
|                                      |                                                                             | Release of security deposit on facilities      |                                |                                                     | 100,000  |                                 |            |            |          |        
|                                      |                                                                             |                                                |                                |                                                     |          |                                 |            |            |          
|                                      |                                                                             |                                                |                                | Net cash provided by (used in) investing activities |          |                                 | (680,134   | )          |           |         | 683,436  |  
|                                      |                                                                             |                                                |                                |                                                     |          |                                 |            |            |          
|                                      | Cash flows from financing activities:                                       |                                                |                                |                                                     |          |                                 |            |            |          
|                                      |                                                                             | Repayment of long term obligations             |                                |                                                     | (8,014   | )                               |            |            | (411,872  | )      
|                                      |                                                                             | Proceeds from bank loan                        |                                |                                                     | 638,038  |                                 |            |            | 598,043   |        
|                                      |                                                                             | Proceeds from exercise of warrants             |                                |                                                     |         |                                 |            |            | 212,500   |        
|                                      |                                                                             | Proceeds from exercise of stock options        |                                |                                                     | 10,957   |                                 |            |            | 237,267   |        
|                                      |                                                                             |                                                |                                |                                                     |          |                                 |            |            |          
|                                      |                                                                             |                                                |                                | Net cash provided by financing activities           |          |                                 | 640,981    |            |           |         | 635,938  |  
|                                      |                                                                             |                                                |                                |                                                     |          |                                 |            |            |          
|                                      | Net increase (decrease) in cash and cash equivalents                        |                                                |                                | (3,601,834                                          | )        |                                 |            | 1,078,403  |          
|                                      | Cash and cash equivalents at beginning of period                            |                                                |                                | 7,489,399                                           |          |                                 |            | 3,507,645  |          
|                                      |                                                                             |                                                |                                |                                                     |          |                                 |            |            |          
|                                      | Cash and cash equivalents at end of period                                  |                                                | $                              | 3,887,565                                           |          |                                 | $          | 4,586,048  |          
|                                      |                                                                             |                                                |                                |                                                     |          |                                 |            |            |          
|                                      | Supplemental disclosure of cash flow information -
Interest payments        |                                                | $                              | 1,538                                               |          |                                 | $          | 28,368     |          
|                                      |                                                                             |                                                |                                |                                                     |          |                                 |            |            |          

See accompanying notes to financial statements.

5



---



##### Table of Contents



Epoch Biosciences, Inc.
Notes to Financial Statements
September 30, 2003
(unaudited)

1. Summary of Significant Accounting Policies



|(a) |  | Nature of Business
|--- |  | ------------------

Epoch Biosciences, Inc. is a biotechnology company developing technologies
and products to help scientists around the world perform genetic research to
improve our lives and our environment. Genetic analysis has become a pervasive
activity in academic, biopharmaceutical, clinical, agricultural, veterinary and
forensic laboratories. Our technologies facilitate rapid, accurate and
cost-effective genetic analysis at the scale for the massive numbers of genetic
studies being conducted today.

As the human genome and other animal and plant genomes are sequenced, the
task of understanding the structure and function of genes lies before us
(genomics). Researchers want to know when and why a gene switches on and
begins producing its protein (gene expression) and what the genes protein does
in the body (proteomics). Finally, researchers want to know what peoples
genetic differences mean for their health and susceptibility to disease. For
example, single nucleotide polymorphisms, or SNPs, are tiny differences in our
DNA that make humans different from one another. SNPs have been linked to
individuals susceptibility to diseases and to their response to medications.

Because of the implications of understanding gene function on human health
and disease, institutions have moved quickly to design and manufacture
automated genetic analysis systems. We develop patented technologies that are
compatible with and improve the output of these systems. Just as
microprocessors are found in essentially all electronic appliances, our
chemistries and technologies have the potential to be incorporated in nearly
all genetic analysis systems.

Our technologies are useful in genetic research, diagnostics, drug
development, infectious disease detection, prenatal testing, and population
screening to assess our risk of disease or to predict our response to drugs.
Epochs products also have application in forensics, food testing, and
environmental testing, including biowarfare and bioterrorism.



|(b) |  | Basis of Presentation
|--- |  | ---------------------

The unaudited financial statements have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q. Accordingly,
they do not include all of the information and footnotes required to be
presented for complete financial statements. The accompanying financial
statements include all adjustments (consisting only of normal recurring
accruals), which are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods presented. Certain 2002
balances have been reclassified to conform with the 2003 presentation.

The financial statements and related disclosures have been prepared with
the presumption that users of the interim financial information have read or
have access to the audited financial statements for the preceding fiscal year.
Accordingly, these financial statements should be read in conjunction with the
audited financial statements and the related notes included in Epochs 2002
Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

6



---



##### Table of Contents





|(c) |  | Sale of San Diego Operations
|--- |  | ----------------------------

On May 30, 2003, we sold the assets and customer base of our
non-proprietary oligonucleotide operations located in San Diego, California to
Eurogentec S.A., a Belgium based supplier of products and services to life
sciences companies for $1.4 million in cash. The assets sold included
manufacturing and other equipment, inventory, prepaid maintenance contracts,
and a non-compete agreement from our acquisition of the business in November
2000. In addition, goodwill of $2,151,846 related to our original acquisition
was written-off in the transaction. The sale resulted in a loss of $2,804,862.
Net cash proceeds from the transaction were approximately $1.1 million.



|(d) |  | Stock-Based Compensation
|--- |  | ------------------------

We apply APB Opinion No. 25, Accounting for Stock Issued to Employees and
related interpretations in measuring compensation costs for its employee stock
option plans. We disclose proforma net loss and net loss per share as if
compensation cost had been determined consistent with Statement of Financial
Accounting Standard (SFAS) No. 123, Accounting for Stock-Based Compensation.
Stock options and warrants issued to non-employees are accounted for using the
fair value method prescribed by SFAS 123 and Emerging Issues Task Force 96-18.

Had we determined compensation cost based on the fair value of our stock
options on the grant date under SFAS 123, our net loss and net loss per share
would have been the pro forma amounts indicated below:

|                                        |                                                                                                   |  |                    |            |                   |  |      |          |      |  |   |            |   |  |   |            |  
|--------------------------------------- | ------------------------------------------------------------------------------------------------- |  | ------------------ | ---------- | ----------------- |  | ---- | -------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                        |                                                                                                   |  | Three months ended |            | Nine months ended
|                                        |                                                                                                   |  | September 30,      |            | September 30,    
|                                        |                                                                                                   |  |                    |            |                  
|                                        |                                                                                                   |  | 2002               |            | 2003              |  | 2002 |          | 2003
|                                        |                                                                                                   |  |                    |            |                   |  |      |          |     
|Net loss:                               |                                                                                                   |  |                    |            |                   |  |      |          |      |  |   |            |   |  |   |           
|                                        | As reported                                                                                       |  | $                  | (860,983   | )                 |  | $    | (331,591 | )    |  | $ | (3,279,319 | ) |  | $ | (4,265,755 | )
|                                        | Add: Stock-based employee
compensation expense included in
reported net loss                      |  |                    | -0-        |                   |  |      | -0-      |      |  |   | -0-        |   |  |   | -0-        |  
|                                        | Deduct: Stock-based employee
compensation determined under
fair value based method for all
awards |  |                    | (317,593   | )                 |  |      | (267,098 | )    |  |   | (963,886   | ) |  |   | (765,368   | )
|                                        |                                                                                                   |  |                    |            |                   |  |      |          |      |  |   |            |   |  |   |            |  
|                                        | Pro forma                                                                                         |  | $                  | (1,178,576 | )                 |  | $    | (598,689 | )    |  | $ | (4,243,205 | ) |  | $ | (5,031,123 | )
|                                        |                                                                                                   |  |                    |            |                   |  |      |          |      |  |   |            |   |  |   |            |  
|Net loss per share  basic and diluted: |                                                                                                   |  |                    |            |                   |  |      |          |      |  |   |            |   |  |   |           
|                                        | As reported                                                                                       |  | $                  | (0.03      | )                 |  | $    | (0.01    | )    |  | $ | (0.13      | ) |  | $ | (0.16      | )
|                                        |                                                                                                   |  |                    |            |                   |  |      |          |      |  |   |            |   |  |   |            |  
|                                        | Pro forma                                                                                         |  | $                  | (0.05      | )                 |  | $    | (0.02    | )    |  | $ | (0.17      | ) |  | $ | (0.19      | )
|                                        |                                                                                                   |  |                    |            |                   |  |      |          |      |  |   |            |   |  |   |            |  

7



---



##### Table of Contents



|                                                                                           |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------ |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                           |  | Three months ended |        | Nine months ended
|                                                                                           |  | September 30,      |        | September 30,    
|                                                                                           |  |                    |        |                  
|                                                                                           |  | 2002               |        | 2003              |  | 2002 |        | 2003
|                                                                                           |  |                    |        |                   |  |      |        |     
|Weighted average fair value of
option granted using the
Black-Scholes option pricing
model |  | $                  | 1.00   |                   |  | $    | 2.29   |      |  | $ | 1.72    |   |  | $ | 1.76    |  
|Options granted during the period                                                          |  |                    | 12,500 |                   |  |      | 30,000 |      |  |   | 520,667 |   |  |   | 202,500 |  
|Expected dividend yield                                                                    |  |                    | 0.0    | %                 |  |      | 0.0    | %    |  |   | 0.0     | % |  |   | 0.0     | %
|Risk-free interest rate                                                                    |  |                    | 3.19   | %                 |  |      | 3.15   | %    |  |   | 4.12    | % |  |   | 2.88    | %
|Expected volatility                                                                        |  |                    | 123    | %                 |  |      | 126    | %    |  |   | 131     | % |  |   | 126     | %
|Expected life in years                                                                     |  |                    | 5      |                   |  |      | 5      |      |  |   | 5       |   |  |   | 5       |  



|(e) |  | Loss Per Share
|--- |  | --------------

Basic loss per share is computed based on weighted average shares
outstanding during the reporting period and excludes any potential dilution.
Diluted per share amounts reflect potential dilution from the exercise or
conversion of securities into common stock or from other contracts to issue
common stock. Our capital structure includes common stock options and common
stock warrants, all of which have been excluded from net loss per share
calculations as they are antidilutive, as follows:

|                     |  |                  |           |      |  |  |           | 
|-------------------- |  | ---------------- | --------- | ---- |  |  | --------- | 
|                     |  | At September 30,
|                     |  |                 
|                     |  | 2002             |           | 2003
|                     |  |                  |           |     
|Outstanding options  |  |                  | 2,779,909 |      |  |  | 2,352,542 | 
|Outstanding
warrants |  |                  | 398,333   |      |  |  | 90,000    | 



|(f) |  | Concentration of Credit Risk
|--- |  | ----------------------------

Credit is extended based on an evaluation of a customers financial
condition and collateral is generally not required. The majority of revenues
are derived from private and public companies and public enterprises in the
research market in the United States.

The table below summarizes the revenue and approximate accounts receivable
of our customers where our risk is significantly concentrated.

|         |  |                     |    |                     |  |              |    |               |  |  |    |   |  |  |    |   |  |   |         |  |  |   |           | 
|-------- |  | ------------------- | -- | ------------------- |  | ------------ | -- | ------------- |  |  | -- | - |  |  | -- | - |  | - | ------- |  |  | - | --------- | 
|         |  | Percent of Revenues |    | Accounts Receivable
|         |  |                     |    |                    
|         |  | Three months        |    | Nine months         |  | December 31, |    | September 30,
|         |  | ended Sept 30,      |    | ended Sept 30,      |  | 2002         |    | 2003         
|         |  |                     |    |                     |  |              |    |              
|Customer |  | 2002                |    | 2003                |  | 2002         |    | 2003          |  |  |    |   |  |  |    |  
|         |  |                     |    |                     |  |              |    |               |  |  |    |   |  |  |    |  
|A        |  |                     | 39 | %                   |  |              | 69 | %             |  |  | 51 | % |  |  | 54 | % |  | $ | 875,000 |  |  | $ | 1,148,000 | 
|B        |  |                     | 15 | %                   |  |              | 1  | %             |  |  | 5  | % |  |  | 16 | % |  |   | 795,000 |  |  |   | 26,000    | 
|C        |  |                     | 15 | %                   |  |              | 0  | %             |  |  | 11 | % |  |  | 3  | % |  |   | 11,000  |  |  |   | -0-       | 

8



---



##### Table of Contents





|(g) |  | Bank Financing Agreements
|--- |  | -------------------------

In September 2003, we modified our term loan agreement used to finance
manufacturing equipment and other assets. Under the modified term loan we can
borrow up to $1,000,000 at any time through June 30, 2004. Our working capital
line of credit of up to $750,000 continues to be available and funds may be
drawn on the working capital line of credit at any time through August 2004,
provided that we are in compliance with the following covenants:



| |  |  | We maintain an Adjusted Quick Ratio of 1.3:1. Adjusted Quick
Ratio is defined as the sum of unrestricted cash and cash
equivalents and trade accounts receivable divided by the sum of
current liabilities, excluding current deferred revenues, and bank
debt.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We maintain Minimum Tangible Net Worth of $1,500,000.
Minimum Tangible Net Worth is defined as total equity in accordance
with generally accepted accounting principles less intangible
assets.                                                                
|
| |  |  | We maintain with the bank our primary operating accounts and
a minimum of 50% of our investment funds.                                                                                                                                                         

We are currently in compliance with each of these covenants. Advances
under the term loan and working capital line of credit are secured by a first
position security interest in our assets excluding intellectual property. On
the term loan, amounts advanced are repayable in 36 monthly payments of
principal and interest equal to the greater of the banks prime rate plus 0.5%
or 4.5%, but not more than 8%. On the working capital line of credit, interest
is payable monthly on any unpaid balances at the banks prime rate plus 0.5%,
with principal payable in full in September 2004. The banks prime rate on
October 23, 2003 was 4.0%. As of September 30, 2003, we have drawn $1,445,000
against the original term loan which expired June 30, 2003. We have not drawn
on the working capital line of credit or on the modified $1,000,000 equipment
line as of this time.



|(h) |  | Legal Proceedings
|--- |  | -----------------

Mordecai Jofen, as Trustee of the Harbor Trust, f/k/a The Edward Blech
Trust v. Epoch Biosciences, Inc., United States District Court for the Southern
District of New York, Case No. 01 CV 4129.

The Harbor Trust (formerly the Edward Blech Trust) filed a complaint
against us in 2001, alleging the breach of a 1996 letter agreement between us
and David Blech, allegedly resulting in damages to Blech and/or the Harbor
Trust of at least $10 million.

In July 2002, the Court granted our motion to dismiss without leave to
file an amended complaint and the Harbor Trust appealed the Courts dismissal
of its case to the United States Court of Appeal for the Second Circuit. On
May 14, 2003, the Second Circuit affirmed the dismissal.



|(i) |  | Subsequent Event
|--- |  | ----------------

On October 6, 2003, we terminated a distribution and licensing agreement
with Amersham Biosciences, the life sciences business of Amersham plc. The
agreement, which began in 2002, established Amersham as the exclusive worldwide
sales, marketing and distribution partner to the research field of Epochs MGB
Eclipse Probe Systems for SNPs, and the co-exclusive worldwide sales and
marketing partner to the research field for gene expression. We had disclosed
in August that anticipated revenues
from Amersham would be insignificant for the balance of 2003.

9



---



##### Table of Contents






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

This Quarterly Report on Form 10-Q includes forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
That Act provides a safe harbor for forward-looking statements to encourage
companies to provide prospective information about themselves so long as they
identify these statements as forward-looking and provide meaningful, cautionary
statements identifying important factors that could cause actual results to
differ from the projected results.

Other than statements of historical fact, all statements in this Quarterly
Report on Form 10-Q and, in particular, any projections of or statements as to
our expectations or beliefs concerning our future financial performance or
financial position or as to future trends in our business or in our markets,
are forward-looking statements. Forward-looking statements reflect our current
expectations and are inherently uncertain and our actual results in future
periods may differ materially from our expectations concerning our projections
of those results or of future business trends described in this Quarterly
Report on Form 10-Q. The sections below entitled Certain Factors that May
Affect Our Business and Future Results under Item 2, Managements Discussion
and Analysis of Financial Condition and Results of Operations, describe some,
but not all, of the factors, risks and uncertainties that could cause these
differences, including but not limited to the fact that we have been profitable
in only one quarter and anticipate future losses, and that we may require
additional capital; the possibility that potential products utilizing the
Companys technology may be ineffective or, although effective, may be
uneconomical to market; that third parties may hold proprietary rights that
preclude Epoch or its licensees from marketing its products; or that third
parties may market superior products. Readers of this Quarterly Report on Form
10-Q are urged to read those sections in their entirety. In light of the
significant uncertainties inherent in the forward-looking information included
in this document, the inclusion of information should not be regarded as a
representation by us or any other person that our objectives or plans will be
achieved. The forward-looking statements contained in this Quarterly Report on
Form 10-Q are made only as of the date of this Quarterly Report on Form 10-Q
and Epoch undertakes no obligation to update or revise the forward-looking
statements, whether as a result of new information, future events or otherwise.

The following discussion of Epochs financial condition and results of
operations should be read in conjunction with the financial statements and the
related notes thereto included elsewhere in this Quarterly Report on Form 10-Q
and other documents Epoch files from time to time with the Securities and
Exchange Commission, including subsequent Current Reports on Form 8-K,
Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K.

Results of Operations

Overview

Epoch develops technology and products that enable and accelerate genomic
analysis. The foundation of our business strategy is the continued funding of
innovative research and development and commercialization of the resultant
products through a number of channels.

We earn revenues through a variety of sources. We license our technology
and sell chemical intermediates to companies, thereby allowing them to
incorporate our technology into their products and we generate product revenue
and earn license fees and royalties from those companies. We also sell our
products to end-users through our direct sales force and through
distributors that provide worldwide

10



---



##### Table of Contents



reach. We also earn revenues through
contract research activities, whereby third parties pay for specific research
and development activities carried out by our scientists, and through research
grants.

We expect to incur operating losses for at least the current fiscal year
as we continue funding research and development to apply our technology to
genomic analysis for the research markets and other fields, and as we incur
costs to commercialize the resultant products through various channels.

Critical Accounting Policies

Our accounting policies are more fully described in Note 1 to our annual
financial statements for the year ended December 31, 2002. Our critical
accounting policy is revenue recognition. In applying this policy, our
management uses its judgment to determine the appropriate assumptions to be
used in the determination of the estimates. Those estimates are based on our
historical experience, terms of existing contracts, our observance of trends in
the industry, information provided by our customers and information available
from other outside sources, as appropriate.

Revenue
recognition. We earn revenues from product sales of
oligonucleotides to end users and distributors in the research field and of
chemical products and reagents to manufacturers for incorporation into their
products, from license fees for the use of our proprietary technology and
know-how, and by providing services to third parties for performing research
and development on their behalf. We also receive royalties upon ultimate sales
of products that incorporate our technology by our partners.



| |  |  | Revenues from product sales that require no ongoing
obligations are recognized when shipped to the customer and title
has passed. To the extent that sales are made to end distributors
and not sold through to end users our future sales could decline.                                                                                                                                                                                               
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | License fees are recognized over the term of the agreement to
which the license fees correspond, which may extend to the
expiration of the underlying patents, and based on the terms and
future performance obligations in the underlying agreements. These
up front fees are generally nonrefundable regardless of future
performance. Deferred revenue principally represents license fees
received in advance and prepayments for product purchases.
|
| |  |  | Contract research revenues are recognized as research and
development activities are performed under the terms of commercial
collaboration and supply agreements and government grants. Direct
costs related to these contracts and grants are reported as research
and development expenses.                                                                                                                                                           
|
| |  |  | Royalty revenues are recognized when earned under the terms
of the related agreements, which is generally upon sale of products
containing our component technologies by our partner. To the extent
our partners no longer use our component products or sales of their
products are less than expected, our royalty revenues could decrease
in the future.                                                                                             

Revenues

Revenues for the third quarter ended September 30, 2003 decreased 24% from
the comparable period of 2002 to $2,010,000 due to reductions in product sales
and contract research, offset by a significant increase in royalties. Revenues
for the nine-month period ended September 30, 2003 decreased 7% over the
comparable period of 2002 to $6,878,000 again due to a significant increase in
royalties offset by reductions in product sales and contract research revenue.

Product Sales. Product sales include sales of oligonucleotides to end
users and distribution partners in the research market and sales of chemical
intermediates and dyes, quencher, and modified

11



---



##### Table of Contents



bases to collaborative partners
and distributors. Product sales decreased 65% to $690,000 in the third quarter
of 2003 from $1,975,000 in the comparable period of 2002, and for the
nine-month period ended September 30, 2003, decreased 59% to $2,127,000 from
$5,199,000 in the comparable period of 2002. The decreases in product sales in
both the three and nine-month periods were the result of decreased revenues
from Applied Biosystems for both chemical intermediates and MGB TaqMan probe
manufacturing, and lower sales of non-proprietary oligonucleotides from our San
Diego operations that were sold in May 2003.

In October 2002 payments received from Applied Biosystems (in return for
manufacturing rights) which had previously been characterized as product sales
were recharacterized as royalties in accordance with the most recent amendment
to the Licensing and Supply Agreement between the companies. Accordingly,
product sales decreased and royalty revenue increased when comparing the
current periods with the comparable periods of 2002.

A reduction of $686,000 in the current quarter and $1,276,000 for the
nine-month period in sales of our non-proprietary oligonucleotides from our San
Diego operations reflects: 1) the sale of those operations on May 30, 2003
resulting in no sales in the current quarter and only five months of shipments
in the nine-month period ended September 30, 2003 (see note (c) Sale of San
Diego Operations); and 2) a reduction in shipments of oligonucleotides to one
customer that were unusually high in the second and third quarters of 2002.

Chemical intermediate revenues represent component chemistries that we
supply on cost-plus terms for incorporation in our partners products, and
sales of dyes, quencher, and modified bases through distributors. These
revenues decreased 21% in the quarter and 58% in the nine-month period ended
September 30, 2003, respectively, from the comparable periods of 2002 primarily
as a result of reduced shipments to Applied Biosystems. In 2002 Applied
Biosystems was actively building an initial inventory of finished goods as well
as inventory of component materials in support of their Assays-on-Demand and
Assays-by-Design product launches. The inventory levels have been
established, the products launched, and shipments to Applied Biosystems in 2003
have been lower than in 2002, as expected.

License Fees and Royalty Income. License fees reflect the amortization of
initial payments for transfers of technology and know-how. These amounts are
amortized over the life of the contract. Royalty income represents amounts due
under license agreements with other companies for their sales of products that
include our technologies and/or for contractual minimum amounts. License fees
and royalty income increased to $1,219,000 in the third quarter of 2003 from
$277,000 in the comparable period of 2002 and similarly increased to $3,908,000
in the nine-month period ended September 30, 2003 from $710,000 in the
comparable period of 2002. These increases are the result of higher
contractual minimums due to an amended agreement with Applied Biosystems that,
among other things, provides for quarterly rather than annual minimum royalties
and to a lesser extent technology access fees from new collaborations with
QIAGEN and Amersham Biosciences. In 2003, Amersham Biosciences paid us
technology access fees for a specified period that expired in June 2003. In
October 2003 we terminated our relationship with Amersham.

Contract Research Revenue. Contract research revenue primarily reflects
payments for contract research and development performed for our corporate
partners. Contract research revenues decreased from $407,000 in the third
quarter of 2002 to $101,000 in the third quarter of 2003 and similarly
decreased from $1,520,000 in the nine-month period ended September 30, 2002 to
$842,000 in the
comparable period of 2003. These decreases were primarily due to
completion of the Applied

12



---



##### Table of Contents



Biosystems research contract in August 2002 and
termination of contract research by Third Wave Technologies.

In October 2000, we entered into a Development, License and Supply
Agreement with Third Wave Technologies whereby we licensed our proprietary
quencher and fluorescent dye technologies to Third Wave. Third Wave also has
the option to license other proprietary chemistries of the company, in which
case additional license and royalty fees would be due to us. We received an
initial license fee that is being amortized over the life of the contract and
we receive royalties on sales of Third Wave products which incorporate the
licensed technology. Included in the agreement with Third Wave was a
collaborative research effort to be funded by Third Wave through December 31,
2003, subject to joint approval of annual research plans. In May 2002, Third
Wave informed us that it was ceasing funding development activities with us.
We instituted arbitration proceedings against Third Wave and in March 2003 held
a mediation hearing with Third Wave at which the parties agreed to the terms of
a settlement that was finalized in May 2003. The settlement provided that
Third Wave will no longer be obligated to fund research activities. In
exchange, Third Wave paid us $300,000 in two equal installations in May and
July 2003, of which $85,000 had been accrued as contract research revenue in
2002. In the second quarter, and reflected in the year to date numbers, of
2003, we recognized $40,000 in contract research revenue and $175,000 as a
reduction of selling, general, and administrative expenses as an offset against
arbitration expenses incurred by us. Third Wave also agreed to annual minimum
royalties under its license from us for dye and quencher technologies through
2006, subject to amended license termination provisions.

On October 6, 2003, we terminated a distribution and licensing agreement
with Amersham Biosciences, the life sciences business of Amersham plc. The
agreement, which began in 2002, established Amersham as the exclusive worldwide
sales, marketing and distribution partner to the research field of Epochs MGB
Eclipse Probe Systems for SNPs, and the co-exclusive worldwide sales and
marketing partner to the research field for gene expression. We had disclosed
in August that anticipated revenues from Amersham would be insignificant for
the balance of 2003.

Operating Expenses

Cost of Product Sales. The cost of product sales represents the costs of
material, labor and overhead allocations associated with product sales. Also
included is the cost of outside manufacturers that we use to produce some of
our chemical intermediates. The cost of product sales decreased to $463,000 in
the third quarter of 2003 compared to $1,053,000 in the comparable period of
the prior year and decreased to $1,845,000 in the nine-month period ended
September 30, 2003 from $3,347,000 in the 2002 period. Costs as a percentage
of product sales increased from 53% in the third quarter of 2002 to 67% in the
third quarter of the current year and from 64% in the nine-month period ended
September 30, 2002 to 87% in the comparable period of 2003.

Generally, changes in costs of product sales are tied to changes in
revenues, while the changes in costs as a percentage of product sales are
impacted by the product mix and economies of scale resulting from changes in
volume. The selling prices of our chemical intermediates and certain other
products, for example, are determined by contracts and are tied to fully
burdened manufacturing costs, which result in gross margins being fixed at
levels below those generally found in the commercial marketplace. Further, we
manufacture MGB Eclipse Probe Systems to various customer specifications-
custom orders, catalog orders, and functionally validated assays. The gross
margin on these different products can vary significantly.

13



---



##### Table of Contents



The increases in costs as a percentage of product sales experienced in the
2003 periods are primarily due to changes in product mix and the loss of
economies of scale caused by decreased product sales. In the third quarter of
2002, a significant portion of our product sales were initial stocking orders
of catalog MGB Eclipse Probe Systems by one of our distribution partners.
Large catalog orders are relatively high gross margin products and as such,
these shipments had a positive impact on that quarters overall gross margin on
product sales. Catalog orders for MGB Eclipse Probe Systems were significantly
lower in the third quarter of 2003. Additionally, many costs of our
non-proprietary oligonucleotide manufacturing operations in San Diego were
fixed within a wide range of capacity output. As a result, significant
decreases in volume experienced in early 2003 did not result in a proportional
decrease in costs and we experienced very poor gross margins on those sales
until we sold the assets and customer base in May 2003.

Research and Development. Research and development costs of $952,000 in
the third quarter of 2003 decreased 9% compared to the comparable period of
2002. For the nine-month period ended September 30, research and development
costs of $3,295,000 increased 2% over the comparable period of 2002. Research
and development costs are heavily impacted by our use of research and
development personnel in our manufacturing operations to meet variations in
customer demand. As such, the use of research and development personnel in
manufacturing has, and will continue to, fluctuate depending on volumes and mix
of product sales and the availability of research and development personnel to
conduct such activities. Significant changes in research and development costs
were due to:



| |  |  | The use of research and development personnel in
manufacturing being $252,000 lower in the third quarter of 2003, and
$1,148,000 lower for the nine-month period ended September 20, 2003,
compared to the comparable periods of 2002, causing an increase in
reported R&D costs.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Transfer of personnel from research and development to
manufacturing and also permanent staff reductions combined to reduce
research and development expenses by $306,000 and $751,000 in the
three and nine-month periods ended September 30, 2003, respectively.               
|
| |  |  | Reductions in professional fees and facility charges of
$49,000 for the quarter, and $271,000 for the nine-month period of
the current year compared to the prior year periods as a result of
fewer personnel and our continued focus on controlling costs.                      

Selling, General and Administrative. Selling, general and administrative
expenses of $932,000 in the third quarter of 2003 decreased $503,000, or 35%,
compared to the comparable period of 2002 and decreased $991,000, or 24%, for
the nine-month period ended September 30, 2003 to $3,214,000 compared to the
comparable period of 2002. Significant changes in 2003 were primarily the
result of:



| |  |  | Decreases in selling and marketing expenses of $154,000 and
$589,000 in the third quarter of 2003 and the nine-month period
ended September 30, 2003, respectively, due primarily to reduced
expenditures on print advertising and a decision on our part to
reduce sales efforts on our oligonucleotide business.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The sale of our oligonucleotide assets in May 2003 resulted
in the elimination of our administrative functions which supported
those operations and reduced administrative expenses by
approximately $284,000 and $360,000 in the three and nine-month
periods ended September 30, 2003, respectively.            
|
| |  |  | Recovery of $175,000 in arbitration expenses incurred by us
in our dispute with Third Wave which was settled in the second
quarter of 2003 and was applied against legal expenses recognized in
earlier periods.                                                                                                  

14



---



##### Table of Contents



Loss on Sale of San Diego Operations. On May 30, 2003, we sold the assets
and customer base of our oligonucleotide operations located in San Diego,
California to Eurogentec S.A., a Belgium based supplier of products and
services to life sciences companies, for $1,400,000 in cash. The assets sold
included manufacturing and other equipment, inventory, prepaid maintenance
contracts, and a non-compete agreement from our acquisition of the business in
November 2000. In addition, goodwill of $2,151,846 related to our original
acquisition was written-off in the transaction. The sale resulted in a loss of
$2,804,862.

Interest Income, net. Interest income, net, throughout 2003 has been
lower than the comparable periods of 2002 due to reduced cash balances
available for investment, lower interest rates, and higher interest expense as
a result of our term loan facility we entered into with Silicon Valley Bank in
late 2002.

Liquidity and Capital Resources

Cash and cash equivalents amounted to $4,586,000 at September 30, 2003, a
$1,078,000 increase from December 31, 2002 balances, primarily as a result of
the impact of changes in working capital accounts, net cash proceeds from the
sale of our non-proprietary oligonucleotide operations located in San Diego,
and proceeds from the exercise of stock options and warrants.

Cash used in operations during the nine-month period ended September 30,
2003 amounted to $241,000 primarily as a result of our net loss of $4,266,000
adjusted for the loss on the sale of our San Diego operations of $2,805,000 and
for certain non-cash reconciling items and fluctuations in working capital
accounts. The most significant changes in working capital accounts that
impacted cash used in operations were decreases in accounts receivable of
$685,000 and in inventories of $269,000 reflecting our decreased product sales,
offset by a net decrease in accounts payable and accrued liabilities of
$418,000, due primarily to payment of 2002 incentive compensation amounts and
normal fluctuations in timing of payments. Changes in deferred revenue,
representing up front license and technology access payments subject to
recognition over the terms of the underlying agreements, also impacts cash flow
from operations. During 2003, we received a portion of the technology access
fee from QIAGEN as part of our license and distribution agreement and other
smaller license fees. No such fees were received in the nine months ended
September 30, 2002.

Cash provided by investing activities of $683,000 in the nine months ended
September 30, 2003 consisted of $1,082,000 received from the sale of our San
Diego operations offset by the purchase of $398,000 of equipment required for
manufacturing operations in Bothell. Future capital expenditures may include
increased manufacturing capacity for our Bothell facility and other investments
to support our operational growth. We may also require a larger inventory of
raw materials and products to provide better service to our customers or to
meet our customers demand. We may finance these purchases from our cash and
cash equivalents on hand, cash generated from our operations, borrowings,
equity offerings, or a combination thereof.

Cash provided by financing activities in the nine months ended September
30, 2003 of $636,000 was the result of $598,000 in proceeds from the term loans
and $450,000 received from the exercise of stock options and warrants, offset
by repayments on term loans of $412,000. Included in the repayment of term
loans is the early repayment of $108,000 which was secured by assets sold with
our San Diego operations.

In September 2003 we completed negotiations with Silicon Valley Bank and
amended our term loan facility. Under the new terms, we have $1,000,000 of
term loan financing available for equipment

15



---



##### Table of Contents



purchases through June 30, 2004. Additionally, as of September 30, 2003, we
had $750,000 of available financing under a working capital line of credit
which may be used through August 2004.

The third quarter of 2003 was the first full quarter of operations after
the sale of our San Diego operations in May 2003. Based on results of
operations and cash flows during such quarter, we anticipate that existing cash
balances, projected cash from operations and unused borrowing capacity under
existing bank loans, will be sufficient to meet our anticipated working capital
and capital expenditure needs into at least 2005. However, it is possible that
we may need to raise additional capital to fund our activities and/or to
consummate acquisitions of other businesses, products or technologies. We may
be able to raise such funds by selling more stock to the public or to selected
investors, or by borrowing money. In addition, even though we may not need
additional funds, we may still elect to sell additional equity securities or
obtain credit facilities for other reasons. We may not be able to obtain
additional funds on terms that would be favorable to our shareholders and us,
or at all. If we raise additional funds by issuing additional equity or
convertible debt securities, the ownership percentages of existing shareholders
would be reduced. In addition, the equity or debt securities that we issue may
have rights, preferences or privileges senior to those of the holders of our
common stock.

Certain Factors That May Affect Our Business And Future Results

Forward Looking Statements

Some of the information included herein contains forward-looking
statements. These statements can be identified by the use of forward-looking
terms such as may, will, expect, anticipates, estimate, continue,
or other similar words. These statements discuss future expectations,
projections or results of operations or of financial condition or state other
forward-looking information. When considering these forward-looking
statements, you should keep in mind the risk factors and other cautionary
statements we make. These risk factors could cause our actual results to
differ materially from those contained in any forward-looking statement. If
any of the following risks actually occur, our business could be harmed and the
trading price of our common stock could decline.

We have been profitable in only one quarter and anticipate future losses, and
we may require additional capital

Since our formation in 1985, we have generated limited revenues and
realized only one profitable quarter, which was the quarter ended December 31,
2002. As of September 30, 2003, we had an accumulated deficit of approximately
$78 million. While we are commercializing our products and technologies, and
prior to adequate revenues being generated from these activities, we expect to
incur additional losses as we continue our research and development activities,
fund our product commercialization efforts, and, as demand warrants, expand our
manufacturing capacity. There is no assurance that we will ever become
profitable or that we will sustain profitability if we do become profitable.
Should we experience continued or unforeseen operating losses, our capital
requirements would increase and our stock price would likely decline.

As of September 30, 2003 we had approximately $4.6 million in cash and
cash equivalents, a commitment from a bank for a secured term loan of
$1,000,000, and have a working capital line of credit of $750,000. We can draw
on the equipment loan through June 2004 and on the working capital line of
credit through August 2004. We currently anticipate that our current cash
balances, cash from operations, and unused borrowing capacity will be
sufficient to meet our cash needs through at least the next twelve months.
However, we may need to seek additional equity and/or debt capital, and there
can be no assurance that such capital will be available to us on favorable
terms, or at all. If additional funds

16



---



##### Table of Contents



are not available, we would be required to delay, reduce, or eliminate
expenditures for some or all of our programs or products.

There is a risk that our technology may be non-competitive or might not work

The science and technology of synthetic DNA-based products is rapidly
evolving. While we have begun to produce and supply products to customers for
commercial use, the majority of our products are in the early stages of
commercialization and future products are in the discovery or early development
stage. These proposed products will require significant further research,
development, and testing. We face the risk that any or all of our products and
proposed products could prove to be ineffective or unsafe, or be inferior to
products marketed by others because our products are based on new and unproven
innovative technologies. Some of our current research and development
activities may not result in any commercially viable products. If we do not
have commercially viable products, we will not be able to sell our products, we
will not be able to attract partners, and we will not be able to generate funds
internally to support operations.

We have limited manufacturing experience

While we have experience in researching and developing unique, proprietary
technologies to enhance the study of genes, and in manufacturing
oligonucleotides at relatively small scales, our experience in manufacturing
other chemical reagent products is relatively limited. We have sufficient
manufacturing capacity to meet current customer needs. Anticipated increases
in customer demand over the next year may require us to expand our
manufacturing capacity in Bothell, acquire additional manufacturing capacity,
or utilize costly third-party manufacturing vendors, as necessary. Any delay
or inability to expand our manufacturing capacity could materially and
adversely affect our manufacturing ability.

We may be unable to maintain our listing on Nasdaq, which could cause our stock
price to fall materially and decrease the liquidity of our common stock

Our common stock is currently listed on The Nasdaq SmallCap Market. To
maintain the listing, we must continue to satisfy the ongoing Nasdaq compliance
requirements, including that our common stock have a minimum bid price of $1.00
per share. In the third and fourth quarters of 2002 our stock traded below the
$1 minimum for a few days.

If our common stock is delisted from trading on The Nasdaq SmallCap Market
and is not relisted thereon we would likely seek listing of our common stock on
the over-the-counter market, which is viewed by many investors as a less liquid
marketplace. As a result, the price per share of our common stock would likely
decrease materially and, the trading market for our common stock, our ability
to issue additional securities and our ability to secure additional financing
would likely be materially and adversely affected.

There is a risk that we do not own exclusive rights to our technology, or that
our competition may have access to our technology which may prevent us from
selling our products

We attempt to protect our proprietary technology by relying on several
methods, including United States patents. We also have international patent
applications that correspond to many of the U.S. patents and patent
applications. The issued patents and pending patent applications cover
inventions relating to the components of our core technologies. The expiration
dates of these patents range from January 2010 to July 2020. We make no
guarantee that any issued patents will provide us with

17



---



##### Table of Contents



significant proprietary protection, that pending patents will be issued,
or that products incorporating the technology covered by our issued patents or
pending applications will be free from challenges by competitors.

Some of our technology might infringe on the rights of others, which may
prevent us from selling our products

There is a great deal of litigation regarding patents and other
intellectual property rights in the biomedical industry. We were defendants in
one action of this kind, which we settled prior to 1997. Although patent and
intellectual property disputes in the biomedical area are sometimes settled
through licensing or similar arrangements, this kind of solution can be
expensive, if a license can be obtained at all. An adverse determination in a
judicial or administrative proceeding or our failure to obtain necessary
licenses could prevent us from manufacturing and selling our products. This
would substantially hurt our business.

We face numerous competitors and changing technologies which could make our
products obsolete

Many companies do research and development and market products designed to
analyze genes and diagnose conditions based on a number of technologies and are
developing additional products. Many of these companies have substantially
greater capital resources, larger facilities, larger research and development
and marketing staffs and greater experience in developing products than we
have. Furthermore, the specific field in which we operate is subject to
significant and rapid technological change. Even if we successfully introduce
our products or proposed products, our technologies could be replaced by new
technologies or our products or proposed products might be obsolete or
non-competitive.

We will be dependent upon our agreement with Applied Biosystems for a
significant portion of our revenues for 2003, and a reduction of sales under or
early termination of this agreement would seriously harm our revenues and
operating results and would likely cause our stock price to decline

In January 1999, Epoch and Applied Biosystems entered into a License and
Supply Agreement pursuant to which we licensed some of our technology to
Applied Biosystems for use in its TaqMan® 5-nuclease real-time PCR assays
(TaqMan® is a registered trademark of Roche Molecular Systems, Inc.) for the
research market. In July 1999, we licensed our proprietary software, which
speeds the design of oligonucleotide probes used in the study of genes, to
Applied Biosystems. In August 2000, we amended the agreement to, among other
things, provide for the manufacturing of product by Epoch for Applied
Biosystems. In July 2002 we further amended the agreement to discontinue
Epochs manufacturing obligations effective October 2002, redefine product
categories, increase the minimum royalties and royalty rates, and establish
that minimum royalties are measured and paid quarterly. We will depend upon
product sales and royalties from Applied Biosystems sales of its TaqMan®
assays under this agreement for a significant portion of our revenues in 2003
and future periods.

Either party may terminate the agreement upon 180 days written notice. In
the event that this agreement is terminated, our revenues, financial condition
and operating results would be adversely affected and our stock price would
likely decline.

18



---



##### Table of Contents



We will be dependent on our agreement with QIAGEN N.V. for the distribution of
our MGB Eclipse products and the resultant revenues. Lower than expected
sales, or early termination of this agreement would seriously harm our
projected revenues and operating results and would likely cause our stock price
to decline.

In October 2002, Epoch and QIAGEN entered into a license and supply
agreement under which QIAGEN became the co-exclusive worldwide sales, marketing
and distribution partner to the research field of our MGB Eclipse probe
products for gene expression.

We will depend upon product sales to QIAGEN under this agreement for a
significant portion of our revenues in future periods. In the event that this
agreement is terminated, or our partner is unsuccessful at commercializing our
technologies, our revenues, financial condition and operating results would be
adversely affected and our stock price would likely decline.

Some of our customers may experience financial difficulties, which could
adversely impact our collection of accounts receivable

Although historically we have experienced minimal credit losses from our
trade receivables, our experience is limited. At September 30, 2003, our
allowance for doubtful accounts was $60,000. We regularly review the
collectibility and credit worthiness of our customers and the receivables to
determine an appropriate allowance for doubtful accounts, however future
uncollectible accounts could exceed our current or future allowances.

The loss of key personnel could adversely affect operations by impairing our
research and our efforts to commercialize and license our products

Our performance is greatly dependent upon our key management, including
our President and Chief Executive Officer, Dr. William Gerber, and technical
personnel and consultants. Our future success will depend in part upon our
ability to retain these people and to recruit additional qualified personnel.
We must compete with other companies, universities, research entities and other
organizations in order to attract and retain highly qualified personnel.
Although we have entered into agreements with our key executive officers, we
make no guarantee that we will retain these highly qualified personnel or hire
additional qualified personnel. We currently maintain no key man life
insurance on any of our management or technical personnel.

The value of our common stock could change significantly in a very short time

The market price of our common stock may fluctuate significantly. For
example, our stock traded as high as $3.70 in September 2003, and as low as
$0.70 in October 2002. The rapid price changes Epoch has experienced recently,
and throughout our history, place your investment in our common stock at risk
of substantial loss over a short period of time. We are in the biotechnology
industry and the market price of securities of biotechnology companies have
fluctuated significantly and these fluctuations have often been unrelated to
the companies operating performance. Announcements by us or our competitors
concerning technological innovations, new products, proposed governmental
regulations or actions, developments or disputes relating to patents or
proprietary rights, and other factors that affect the market generally could
significantly impact our business and the market price of our securities.

19



---



##### Table of Contents



Public opinion regarding ethical issues surrounding the use of genetic
information may adversely affect demand for our products

Public opinion regarding ethical issues related to the confidentiality and
appropriate use of genetic testing results may influence governmental
authorities to call for limits on, or regulation of the use of, genetic
testing. In addition, these authorities could prohibit testing for genetic
predisposition to certain conditions, particularly for those that have no known
cure. Furthermore, adverse publicity of public opinion relating to genetic
research and testing, even in the absence of any governmental regulation, could
harm our business. Any of these scenarios could reduce the potential markets
for our products and technologies, which could materially and adversely affect
our revenues.

Government regulation of genetic research or testing may adversely affect the
demand for our products and impair our business and operations

Federal, state and local governments may adopt regulations relating to the
conduct of genetic research and genetic testing. These regulations could limit
or restrict genetic research activities as well as genetic testing for research
or clinical purposes. In addition, if state and local regulations are adopted,
these regulations may be inconsistent with, or in conflict with, regulations
adopted by other state or local governments. Regulations relating to genetic
research activities could adversely affect our ability to conduct our research
and development activities. Regulations restricting genetic testing could
adversely affect our ability to market and sell our products and our
technologies. Accordingly, any regulations of this nature could harm our
business.

Health care cost containment initiatives could limit the adoption of genetic
testing as a clinical tool, which would harm our revenues and prospects

In recent years, health care payers as well as federal and state
governments have focused on containing or reducing health care costs. We
cannot predict the effect that any of these initiatives may have on our
business, and it is possible that they will adversely affect our business. In
particular, gene-based therapeutics, if successfully developed and
commercialized, are likely to be costly compared to currently available drug
therapies. Health care cost containment initiatives focused either on
gene-based therapeutics or on genetic testing could cause the growth in the
clinical market for genetic testing to be curtailed or slowed. In addition,
health care cost containment initiatives could also cause pharmaceutical
companies to reduce research and development spending. In either case, our
business and our operating results would be harmed.




Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our financial instruments include cash and short-term investment grade
debt securities. We also have term loans on capital equipment through a
commercial bank. At December 31, 2002 and September 30, 2003 the carrying
values of our financial instruments approximated their fair values based on
current market prices and rates. We do not believe that fluctuations in
interest rates would have a material impact on us. It is our policy not to
enter into derivative financial instruments. We do not currently have material
foreign currency exposure as our international transactions are minimal and the
majority of our international transactions are denominated in U.S. currency.
Accordingly, we do not have significant exposure to foreign currency exchange
rate risk at September 30, 2003. In the future, under the terms of the QIAGEN
agreement, we will be conducting some of our business in Euros for QIAGEN sales
in Europe and in Yen for QIAGEN sales in Japan. We do not anticipate that
these transactions will create significant exposure to foreign currency
exchange rate risk.

20



---



##### Table of Contents






Item 4. Controls and Procedures

The Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including the Companys Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Companys disclosure controls and procedures as of the end of the period
covered by this report, pursuant to Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended. Based on that evaluation, the
Companys Chief Executive Officer and Chief Financial Officer have concluded
that the Companys disclosure controls and procedures, as of the end of the
period covered by this report, were effective in timely alerting them to
material information relating to the Company required to be included in the
Companys periodic SEC filings.

There has been no change in the Companys internal control over financial
reporting during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting.

21



---



##### Table of Contents






Part II. Other Information




Item 6. Exhibits and Reports on Form 8-K



| | (a) |  | Exhibits
| | --- |  | --------

|        |  |                                                                                                                                                     
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                     
|Number  |  | Description                                                                                                                                         
|       
|10.32.1 |  | Loan Modification Agreement between Epoch and Silicon
Valley Bank, dated September 18, 2003.                                                        
|        |  |                                                                                                                                                     
|31.1    |  | Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|        |  |                                                                                                                                                     
|31.2    |  | Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|        |  |                                                                                                                                                     
|32.1    |  | Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.  
|        |  |                                                                                                                                                     
|32.2    |  | Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.  



| | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | Reports on Form 8-K
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------
|
| | On August 5, 2003, Epoch furnished a report on Form 8-K regarding a press
release issued by Epoch to announce Epochs first quarter 2003 results. (The
information in the foregoing report on Form 8-K, including all exhibits
thereto, was furnished pursuant to Item 12 of Form 8-K and shall not be deemed
filed for the purposes of Section 18 of the Securities Exchange Act of 1934,
as amended, or otherwise subject to the liability of that section, nor shall it
be deemed incorporated by reference herein.)                                               
|
| | On August 8, 2003, Epoch furnished a report on Form 8-K regarding an August 5,
2003 conference call Epoch held with analysts and investors, the transcript of
which was furnished as an Exhibit. (The information in the foregoing report on
Form 8-K, including all exhibits thereto, was furnished pursuant to Item 12 of
Form 8-K and shall not be deemed filed for the purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or otherwise subject to the
liability of that section, nor shall it be deemed incorporated by reference
herein.)
|
| | On September 20, 2003, Epoch filed a report on Form 8-K regarding a press
release issued by Epoch announcing that it was not awarded a contract with the
United States Department of Defense to provide Block 1 of the Joint Biological
Agent Identification and Diagnostic Systems (JBAIDS).                                                                                                                                                                                                                                                                           
|
| | On October 14, 2003, Epoch filed a report on Form 8-K regarding a press release
issued by Epoch announcing that it had terminated a distribution and licensing
agreement with Amersham Biosciences.                                                                                                                                                                                                                                                                                                                                                                     

22



---



##### Table of Contents






Signatures

In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

|                       |  |                         |  |                                           
|---------------------- |  | ----------------------- |  | ------------------------------------------
|                       |  | Epoch Biosciences, Inc.
|                       |  |                         |  |                                           
|Date: November 6, 2003 |  | By:                     |  | /s/ Bert W. Hogue                         
|                       |  |                         |  |                                           
|                       |  |                         |  | Bert W. Hogue                             
|                       |  |                         |  | Vice President and Chief Financial Officer

23



---



##### Table of Contents






EXHIBIT INDEX

|        |  |                                                                                                                                                     
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                     
|Number  |  | Description                                                                                                                                         
|       
|10.32.1 |  | Loan Modification Agreement between Epoch and Silicon
Valley Bank, dated September 18, 2003.                                                        
|        |  |                                                                                                                                                     
|31.1    |  | Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|        |  |                                                                                                                                                     
|31.2    |  | Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|        |  |                                                                                                                                                     
|32.1    |  | Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.  
|        |  |                                                                                                                                                     
|32.2    |  | Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.