##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

FORM 10-Q

(Mark One)

|       |  |                                                                                     
|------ |  | ------------------------------------------------------------------------------------
|(XBOX) |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE
ACT OF 1934

For the quarterly period ended March 31, 2002.

|      |  |                                                                                                                                                              
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|(BOX) |  | 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                                                       |  | 91-1311592                          
|                                                              
|                                                              
|                                                              
|                                                              
|(State or other jurisdiction of incorporation or organization) |  | (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 (XBOX) NO (BOX)

State the number of shares outstanding of each of the issuers classes of
common equity as of the latest practicable date.

|                             |  |                            |            | 
|---------------------------- |  | -------------------------- | ---------- | 
|Class                        |  | Outstanding at May 9, 2002
|                             |  |                           
|Common Stock, $.01 par value |  |                            | 25,655,717 | 

Page 1 of 17





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TABLE OF CONTENTS



|                              |                                                                                               |                               |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------- |  |  |  |  |  | 
|Part I. Financial Information
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | Balance Sheets               
|                              |                                                                                               | Statements of Operations     
|                              |                                                                                               | Statements of Cash Flows     
|                              |                                                                                               | Notes to Financial Statements
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|PART II. Other Information   
|                              | Item 6. Exhibits and Reports on Form 8K                                                      
|Signatures                   



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##### 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                                    |                                                            |  | 8 |   
|         
|         
|         
|         
|          |         |                                                                        |                                                            |  |   |    |             | 
|         
|         
|         
|         
|          | Item 3. |                                                                        | Quantitative and Qualitative Disclosures About Market Risk |  |   | 15 |            
|         
|         
|         
|         
|          |         |                                                                        |                                                            |  |   |    |             | 
|         
|         
|         
|         
|Part II.  |         | Other Information                                                      |                                                            |  |   |   
|         
|         
|         
|         
|          |         |                                                                        |                                                            |  |   |    |             | 
|         
|         
|         
|         
|          | Item 6. |                                                                        | Exhibits and Reports on Form 8-K                           |  |   | 16 |            
|         
|         
|         
|         
|          |         |                                                                        |                                                            |  |   |    |             | 
|         
|         
|         
|         
|          |         | Note: Items 1, 2, 3, 4, and 5 are omitted, as they are not applicable. |                                                            |  |   |   
|         
|         
|         
|         
|          |         |                                                                        |                                                            |  |   |    |             | 
|         
|         
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|         
|Signature |         |                                                                        |                                                            |  |   |    | 17          | 





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##### Table of Contents












Epoch Biosciences, Inc.
Balance Sheets
(unaudited)

Assets

|                                                        |                                                                                                 |                                                |                                      |             |              |  |           |             |            |  | 
|------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | ---------------------------------------------- | ------------------------------------ | ----------- | ------------ |  | --------- | ----------- | ---------- |  | 
|                                                        |                                                                                                 |                                                |                                      |             | December 31, |  | March 31,
|                                                        |                                                                                                 |                                                |                                      |             | 2001         |  | 2002     
|                                                        |                                                                                                 |                                                |                                      |             |              |  |          
|Current assets:                                         |                                                                                                 |                                                |                                      |             |              |  |           |            
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Cash and cash equivalents                                                                       |                                                | $                                    | 7,489,399   |              |  | $         | 5,888,980   |           
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Restricted cash                                                                                 |                                                |                                      | 98,891      |              |  |           |            |           
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Accounts receivable                                                                             |                                                |                                      | 353,590     |              |  |           | 514,148     |           
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Inventory                                                                                       |                                                |                                      | 157,700     |              |  |           | 211,939     |           
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Prepaid expenses and other assets                                                               |                                                |                                      | 338,288     |              |  |           | 353,750     |           
|                                                        |                                                                                                 |                                                |                                      |             |              |  |           |             |           
|                                                        |                                                                                                 | Total current assets                           |                                      |             | 8,437,868    |  |           |             | 6,968,817  | 
|                                                       
|                                                       
|                                                       
|                                                       
|Property and equipment, net                             |                                                                                                 |                                                | 3,852,359                            |             |              |  | 3,794,560 |            
|                                                       
|                                                       
|                                                       
|                                                       
|Intangible assets, net                                  |                                                                                                 |                                                | 4,414,976                            |             |              |  | 4,341,102 |            
|                                                       
|                                                       
|                                                       
|                                                       
|Restricted cash                                         |                                                                                                 |                                                | 575,755                              |             |              |  | 585,367   |            
|                                                       
|                                                       
|                                                       
|                                                       
|Other assets                                            |                                                                                                 |                                                | 25,265                               |             |              |  | 37,266    |            
|                                                        |                                                                                                 |                                                |                                      |             |              |  |           |             |           
|                                                        |                                                                                                 | Total assets                                   |                                      | $           | 17,306,223   |  |           | $           | 15,727,112 | 
|                                                        |                                                                                                 |                                                |                                      |             |              |  |           |             |           
|                                                        |                                                                                                 |                                                | Liabilities and Stockholders Equity |             |              |  |           |             |            |  | 
|                                                       
|                                                       
|                                                       
|                                                       
|Current liabilities:                                    |                                                                                                 |                                                |                                      |             |              |  |           |            
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Accounts payable                                                                                |                                                | $                                    | 226,686     |              |  | $         | 466,875     |           
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Accrued liabilities                                                                             |                                                |                                      | 1,332,331   |              |  |           | 1,075,271   |           
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Deferred revenue  current portion                                                              |                                                |                                      | 620,043     |              |  |           | 720,043     |           
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Obligations under capital leases  current portion                                              |                                                |                                      | 12,732      |              |  |           | 11,381      |           
|                                                        |                                                                                                 |                                                |                                      |             |              |  |           |             |           
|                                                        |                                                                                                 | Total current liabilities                      |                                      |             | 2,191,792    |  |           |             | 2,273,570  | 
|                                                       
|                                                       
|                                                       
|                                                       
|Deferred revenue  less current portion                 |                                                                                                 |                                                | 3,026,012                            |             |              |  | 2,546,002 |            
|                                                       
|                                                       
|                                                       
|                                                       
|Deferred rent                                           |                                                                                                 |                                                | 143,503                              |             |              |  | 169,899   |            
|                                                       
|                                                       
|                                                       
|                                                       
|Obligations under capital leases  less current portion |                                                                                                 |                                                | 4,613                                |             |              |  | 3,292     |            
|                                                       
|                                                       
|                                                       
|                                                       
|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:     |                                      |             |              |  |           |             |            | 
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                                                                                                 | 25,651,677 at December 31, 2001 and 25,655,510 |                                      |             |              |  |           |             |            | 
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                                                                                                 | at March 31, 2002                              |                                      |             | 256,517      |  |           |             | 256,555    | 
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Additional paid-in capital                                                                      |                                                |                                      | 82,687,749  |              |  |           | 82,698,509  |           
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Accumulated deficit                                                                             |                                                |                                      | (71,003,963 | )            |  |           | (72,220,715 | )         
|                                                        |                                                                                                 |                                                |                                      |             |              |  |           |             |           
|                                                        |                                                                                                 | Total stockholders equity                     |                                      |             | 11,940,303   |  |           |             | 10,734,349 | 
|                                                        |                                                                                                 |                                                |                                      |             |              |  |           |             |           
|                                                        |                                                                                                 | Total liabilities and stockholders equity     |                                      | $           | 17,306,223   |  |           | $           | 15,727,112 | 
|                                                        |                                                                                                 |                                                |                                      |             |              |  |           |             |           

See accompanying notes to financial statements.

3



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##### Table of Contents






Epoch Biosciences, Inc.
Statements of Operations
(unaudited)

|                                         |                                 |                          |         |                    |            |      |        |            |            |  
|---------------------------------------- | ------------------------------- | ------------------------ | ------- | ------------------ | ---------- | ---- | ------ | ---------- | ---------- | -
|                                         |                                 |                          |         | Three Months Ended
|                                         |                                 |                          |         | March 31,         
|                                         |                                 |                          |         |                   
|                                         |                                 |                          |         | 2001               |            | 2002
|                                         |                                 |                          |         |                    |            |     
|Revenue:                                 |                                 |                          |         |                    |            |      |        |           
|                                        
|                                        
|                                        
|                                        
|                                         | Product sales                   |                          | $       | 1,021,243          |            |      | $      | 1,524,194  |           
|                                        
|                                        
|                                        
|                                        
|                                         | License fees and royalties      |                          |         | 28,152             |            |      |        | 177,089    |           
|                                        
|                                        
|                                        
|                                        
|                                         | Contract research               |                          |         | 500,000            |            |      |        | 580,673    |           
|                                         |                                 |                          |         |                    |            |      |        |            |           
|                                         |                                 | Total revenue            |         |                    | 1,549,395  |      |        |            | 2,281,956  |  
|                                        
|                                        
|                                        
|                                        
|Operating expenses:                      |                                 |                          |         |                    |            |      |        |           
|                                        
|                                        
|                                        
|                                        
|                                         | Cost of product sales           |                          |         | 878,728            |            |      |        | 1,099,365  |           
|                                        
|                                        
|                                        
|                                        
|                                         | Research and development        |                          |         | 1,131,789          |            |      |        | 1,066,938  |           
|                                        
|                                        
|                                        
|                                        
|                                         | Sales and marketing             |                          |         | 68,250             |            |      |        | 382,311    |           
|                                        
|                                        
|                                        
|                                        
|                                         | General and administrative      |                          |         | 934,528            |            |      |        | 987,506    |           
|                                         |                                 |                          |         |                    |            |      |        |            |           
|                                         |                                 | Total operating expenses |         |                    | 3,013,295  |      |        |            | 3,536,120  |  
|                                        
|                                        
|                                        
|                                        
|                                         |                                 | Operating loss           |         |                    | (1,463,900 | )    |        |            | (1,254,164 | )
|                                        
|                                        
|                                        
|                                        
|Interest income, net                     |                                 |                          | 158,737 |                    |            |      | 37,412 |           
|                                         |                                 |                          |         |                    |            |      |        |            |           
|                                         |                                 | Net loss                 |         | $                  | (1,305,163 | )    |        | $          | (1,216,752 | )
|                                         |                                 |                          |         |                    |            |      |        |            |           
|Net loss per share  basic and diluted   |                                 | $                        | (0.05   | )                  |            | $    | (0.05  | )         
|                                         |                                 |                          |         |                    |            |      |        |            |           
|Weighted average number of common shares |                                 |                          |         |                    |            |      |        |           
|                                        
|                                        
|                                        
|                                        
|                                         | outstanding  basic and diluted |                          |         | 25,434,684         |            |      |        | 25,653,520 |           

See accompanying notes to financial statements.

4



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##### Table of Contents






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

|                                      |                                                    |                                                |                                   |                                                     |            |                              |            |            |          |          |            |  
|------------------------------------- | -------------------------------------------------- | ---------------------------------------------- | --------------------------------- | --------------------------------------------------- | ---------- | ---------------------------- | ---------- | ---------- | -------- | -------- | ---------- | -
|                                      |                                                    |                                                |                                   |                                                     |            | Three Months Ended March 31,
|                                      |                                                    |                                                |                                   |                                                     |            |                             
|                                      |                                                    |                                                |                                   |                                                     |            | 2001                         |            | 2002      
|                                      |                                                    |                                                |                                   |                                                     |            |                              |            |           
|Cash flows from operating activities: |                                                    |                                                |                                   |                                                     |            |                              |            |           
|                                     
|                                     
|                                     
|                                     
|                                      | Net loss                                           |                                                | $                                 | (1,305,163                                          | )          |                              | $          | (1,216,752 | )       
|                                     
|                                     
|                                     
|                                     
|                                      | Adjustments to reconcile net loss to net           |                                                |                                   |                                                     |            |                              |            |            |         
|                                     
|                                     
|                                     
|                                     
|                                      |                                                    | cash used in operating activities:             |                                   |                                                     |            |                              |            |            |          |         
|                                     
|                                     
|                                     
|                                     
|                                      |                                                    | Depreciation and amortization:                 |                                   |                                                     |            |                              |            |            |          |         
|                                     
|                                     
|                                     
|                                     
|                                      |                                                    |                                                | Property and equipment            |                                                     |            | 161,746                      |            |            |          | 200,188  |           
|                                     
|                                     
|                                     
|                                     
|                                      |                                                    |                                                | Intangible assets                 |                                                     |            | 101,426                      |            |            |          | 73,874   |           
|                                     
|                                     
|                                     
|                                     
|                                      |                                                    |                                                | Deferred compensation             |                                                     |            | 11,988                       |            |            |          |         |           
|                                     
|                                     
|                                     
|                                     
|                                      |                                                    | Issuance of common stock warrants for services |                                   |                                                     | 3,001      |                              |            |            | 9,648    |         
|                                     
|                                     
|                                     
|                                     
|                                      |                                                    | Interest accrued on restricted cash            |                                   |                                                     | (11,102    | )                            |            |            | (10,721  | )       
|                                     
|                                     
|                                     
|                                     
|                                      |                                                    | Deferred revenue                               |                                   |                                                     | (60,256    | )                            |            |            | (380,010 | )       
|                                     
|                                     
|                                     
|                                     
|                                      |                                                    | Deferred rent                                  |                                   |                                                     | 52,461     |                              |            |            | 26,396   |         
|                                     
|                                     
|                                     
|                                     
|                                      |                                                    | Changes in operating assets and liabilities:   |                                   |                                                     |            |                              |            |            |          |         
|                                     
|                                     
|                                     
|                                     
|                                      |                                                    |                                                | Accounts receivable               |                                                     |            | (539,049                     | )          |            |          | (160,558 | )         
|                                     
|                                     
|                                     
|                                     
|                                      |                                                    |                                                | Inventory                         |                                                     |            | (111,225                     | )          |            |          | (54,239  | )         
|                                     
|                                     
|                                     
|                                     
|                                      |                                                    |                                                | Prepaid expenses and other assets |                                                     |            | 31,598                       |            |            |          | (27,463  | )         
|                                     
|                                     
|                                     
|                                     
|                                      |                                                    |                                                | Accounts payable                  |                                                     |            | (151,676                     | )          |            |          | 240,189  |           
|                                     
|                                     
|                                     
|                                     
|                                      |                                                    |                                                | Accrued liabilities               |                                                     |            | (83,901                      | )          |            |          | (257,060 | )         
|                                      |                                                    |                                                |                                   |                                                     |            |                              |            |            |         
|                                      |                                                    |                                                |                                   | Net cash used in operating activities               |            |                              | (1,900,152 | )          |          |          | (1,556,508 | )
|                                      |                                                    |                                                |                                   |                                                     |            |                              |            |            |         
|                                      | Cash flows from investing activities:              |                                                |                                   |                                                     |            |                              |            |            |         
|                                     
|                                     
|                                     
|                                     
|                                      |                                                    | Release of security deposit on facilities      |                                   |                                                     |           |                              |            |            | 100,000  |         
|                                     
|                                     
|                                     
|                                     
|                                      |                                                    | Acquisition of property and equipment          |                                   |                                                     | (1,243,386 | )                            |            |            | (142,389 | )       
|                                     
|                                     
|                                     
|                                     
|                                      |                                                    | Acquisition of Synthetic Genetics              |                                   |                                                     | (357,692   | )                            |            |            |         |         
|                                      |                                                    |                                                |                                   |                                                     |            |                              |            |            |         
|                                      |                                                    |                                                |                                   | Net cash used in investing activities               |            |                              | (1,601,078 | )          |          |          | (42,389    | )
|                                     
|                                     
|                                     
|                                     
|                                      | Cash flows from financing activities:              |                                                |                                   |                                                     |            |                              |            |            |         
|                                     
|                                     
|                                     
|                                     
|                                      |                                                    | Repayment of capital leases                    |                                   |                                                     | (12,599    | )                            |            |            | (2,672   | )       
|                                     
|                                     
|                                     
|                                     
|                                      |                                                    | Proceeds from exercise of warrants             |                                   |                                                     | 332,376    |                              |            |            |         |         
|                                     
|                                     
|                                     
|                                     
|                                      |                                                    | Proceeds from exercise of stock options        |                                   |                                                     | 17,969     |                              |            |            | 1,150    |         
|                                      |                                                    |                                                |                                   |                                                     |            |                              |            |            |         
|                                      |                                                    |                                                |                                   | Net cash provided by (used in) financing activities |            |                              | 337,746    |            |          |          | (1,522     | )
|                                      |                                                    |                                                |                                   |                                                     |            |                              |            |            |         
|                                      | Net decrease in cash and cash equivalents          |                                                |                                   | (3,163,484                                          | )          |                              |            | (1,600,419 | )       
|                                     
|                                     
|                                     
|                                     
|                                      | Cash and cash equivalents at beginning of period   |                                                |                                   | 12,122,461                                          |            |                              |            | 7,489,399  |         
|                                      |                                                    |                                                |                                   |                                                     |            |                              |            |            |         
|                                      | Cash and cash equivalents at end of period         |                                                | $                                 | 8,958,977                                           |            |                              | $          | 5,888,980  |         
|                                      |                                                    |                                                |                                   |                                                     |            |                              |            |            |         
|                                      | Supplemental disclosure of cash flow information - |                                                |                                   |                                                     |            |                              |            |            |         
|                                     
|                                     
|                                     
|                                     
|                                      |                                                    | Interest payments                              |                                   | $                                                   | 4,173      |                              |            | $          | 513      |         
|                                      |                                                    |                                                |                                   |                                                     |            |                              |            |            |         

See accompanying notes to financial statements.

5



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##### Table of Contents






Epoch Biosciences, Inc.
Notes to Financial Statements
March 31, 2002
(unaudited)

1. Summary of Significant Accounting Policies

(a) Nature of Business

Epoch Biosciences, Inc. is a biotechnology company developing technologies
and making 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 necessary to generate
the massive amounts of genetic information being studied 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 similarities and 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 good and bad traits, including hereditary and acquired diseases,
and to peoples 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
improve the output of these systems. Our technologies are compatible with many
of the genetic analysis systems currently in use or in development. 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.

(b) Basis of Presentation

The unaudited financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q. 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 2001 balances have been reclassified to conform
with the 2002 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 2001
Annual Report on Form 10-K as filed with the Securities and Exchange
Commission.

6



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##### Table of Contents



(c) 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 loss per share reflects 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 March 31,
|                     |  |             
|                     |  | 2001         |           | 2002
|                     |  |              |           |     
|Outstanding options  |  |              | 2,123,194 |      |  |  | 2,555,998 | 
|                    
|                    
|                    
|                    
|Outstanding warrants |  |              | 883,333   |      |  |  | 398,333   | 

(d) Revenue Recognition

We earn revenues through a variety of sources. We license our technology
for incorporation into other companies products and earn license fees and
royalties from those companies and generate product revenue from sales of our
chemistries to them. We also sell our products to end-users; both through our
direct sales force and through distributors that provide worldwide reach. We
also earn revenues through contract research activities, whereby third party
companies pay for specific research and development activities carried out by
our scientists.

Revenues from product sales that require no ongoing obligations are
recognized when shipped to the customer and title has passed.

Up front 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. Deferred revenue represents advance payments for
license fees, product purchases and contract research.

Contract research revenues are recognized as the 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 by our partners of products containing
our component products.

(e) 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.

One customer accounted for approximately 60% of revenues in the current
quarter and 53% of revenues in the comparable quarter of the prior year.
Accounts receivable from this customer amounted to $205,000 at March 31, 2002.
There were no amounts due from this customer December 31, 2001.

Another customer accounted for approximately 13% of revenues in the
current quarter and 19% of revenues in the comparable quarter of the prior
year. Accounts receivable from this customer amounted to $52,000 at March 31,
2002, and $46,000 at December 31, 2001.

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(f) Intangible Assets

In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets. Under SFAS No. 142, goodwill and other indefinite-lived
intangible assets, including any such intangibles recorded in past business
combinations, are not amortized beginning January 1, 2002. SFAS No. 142 also
requires the assets to be written down with a goodwill impairment charge
against current earnings whenever the recorded values exceed their fair values.
We adopted SFAS No. 142 on January 1, 2002 and accordingly have not recorded
any amortization of our goodwill and other indefinite-lived intangible assets
during the three months ended March 31, 2002. If this standard had been
implemented as of January 1, 2001, amortization expense for the three months
ended March 31, 2001 would have been reduced by $38,699.




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 possibility that potential
products utilizing the Companys technology may be ineffective or, although
effective, may be uneconomical to market; that third parties 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.

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Results of Operations

Overview

We develop proprietary products with commercial applications in the fields
of genomics and molecular diagnostics, including specialty chemistries, probes
and other genomic detection systems. We sell our products to end users, and
also provide chemical intermediate products that are utilized by our
collaborative partners and other parties in the manufacture of end-user
products by those parties. The sale of chemical intermediates began in
December 1999, and have continued to grow steadily as our technologies become
better known and validated, and as we executed collaborative agreements with
Applied Biosystems and Third Wave Technologies, among others. In November
2000, we acquired the assets of Synthetic Genetics, a provider of specialty
probes. The transaction was accounted for using the purchase method of
accounting.

We report revenues in three categories:



| |  |  | Product Sales, which include revenues from sales of chemical
intermediates, probes, and related genetic detection systems;                                                                                                                        
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | License fees and royalties, reflect the amortization of
license fees received for the transfer of technology and know-how to
our partners, plus contractual royalties for the sale by third
parties of products that include our technologies; and
|
| |  |  | Contract research, representing payments for research and
development performed under various collaborative agreements and
grants.                                                                                                                

Revenues

Product Sales. Product sales increased 49% to $1,524,000 in the quarter
ended March 31, 2002 from $1,021,000 in the comparable quarter of the prior
year. Growth in the companys San Diego custom oligonucleotide operation and
in chemical intermediate shipments to our collaborative partners and
distribution partners drove this quarters increased product sales.

License Fees and Royalties. License fees and royalties increased to
$177,000 in the quarter ended March 31, 2002 from $28,000 in the comparable
quarter of the prior year, indicative of the growth in the product revenues of
our corporate partners.

Contract Research. Contract research revenue increased to $581,000 in the
quarter ended March 31, 2002 from $500,000 in the comparable period of the
prior year, primarily as a result of our new SBIR grant work which began in
August 2001.

Operating Expenses

Cost of Product Sales. Cost of product sales increased to $1,099,000 in
the quarter ended March 31, 2002 from $879,000 in the comparable quarter of the
prior year primarily as a result of the increase in product sales. Costs as a
percentage of product sales decreased from 86% in first quarter 2001 to 72%
this quarter for a number of reasons, including a significantly different
product mix, and increased sales from our San Diego manufacturing facility.

Research and Development. Research and development expenses decreased to
$1,067,000 in the quarter ended March 31, 2002 from $1,132,000 in the
comparable quarter of the prior year due primarily to a higher level of
personnel and other costs being involved in the manufacturing of chemical
intermediates versus working on research and development activities, partially
offset by higher personnel costs.

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Sales and Marketing. Sales and marketing expenses increased to $382,000
in the quarter ended March 31, 2002 from $68,000 in the comparable quarter of
the prior year. The primary reason for the increase is a concerted effort on
our part to market and sell our products and includes an expanded direct sales
group, the establishment of a marketing department, and expanded print
advertising activities.

General, and Administrative. General and administrative expenses
increased to $988,000 in the quarter ended March 31, 2002 from $935,000 in the
comparable quarter of the prior year due primarily to increased personnel
costs, partially offset by decreased recruiting and relocation expenses in
2002.

Interest Income, Net. Interest income, net, decreased to $37,000 in the
first quarter of 2002 compared to $159,000 in the first quarter of 2001 as a
result of lower average cash balances available for investment and lower
realized interest rates.

Liquidity and Capital Resources

Cash and cash equivalents amounted to $5,889,000 at March 31, 2002, a
$1,600,000 decrease from December 31, 2001 balances.

Cash used in operations during the quarter ended March 31, 2002 amounted
to $1,557,000 as a result of our net loss of $1,217,000 adjusted for certain
non-cash reconciling items and fluctuations in working capital accounts. Two
factors, both of which were anticipated and somewhat unique to the quarter,
impacted cash used by operations. First, approximately $344,000 in product
sales and royalties recognized during the quarter ended March 31, 2002,
compared to $175,000 in first quarter of 2001 and $60,000 in fourth quarter
2001, had been received in advance and recorded as deferred revenue and
therefore didnt generate cash in the current quarter. The amounts and timing
of these offsets are based on contracts with our partners. Second, we made
2001 incentive compensation payments during the quarter which were reported in
accrued liabilities at December 31, 2001. Further variances in accounts
payable and receivable were the result of normal business fluctuations coupled
with increased product sales.

Cash used in investing activities amounted to $42,000 in the current
quarter. Acquisition of property and equipment totaling $142,000 was offset by
$100,000 in security deposits on our Bothell facility being returned to us for
general use. We expect that we will continue to make expenditures for capital
equipment and other investments prospectively as our operations expand. We
anticipate the need for additional space for our manufacturing operation in San
Diego in 2002 and we are currently evaluating options. We may also require a
larger inventory of raw materials and products to provide better service to our
customers. 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.

We anticipate that existing cash balances and projected cash from
operations will be sufficient to meet our anticipated working capital and
capital expenditure needs through at least the next 12 months. However, it is
possible that we may need to raise additional funds to fund our activities 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

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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 never been profitable and anticipate future losses, and we may require additional capital

We have never been profitable. Since our formation in 1985, we have
generated limited revenues. As of March 31, 2002, we had an accumulated
deficit of approximately $72 million. We expect to incur additional losses as
we expand our manufacturing capacity, and our research and development
activities and related product commercialization efforts. 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.

Additionally, as of March 31, 2002 we had $5,889,000 in cash and cash
equivalents. We currently anticipate that current cash balances and cash from
operations 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 are not available, we
would be required to delay, reduce, or eliminate expenditures for some of all
of our programs or products.

There is a risk that our technology may not be effective or might not work

The science and technology of synthetic DNA-based products is rapidly
evolving. While we are beginning to produce and supply products to customers
for commercial use, the majority of our products and proposed products are in
the discovery or early development stage. The 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 an inferior product 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

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enhance the study of genes, and in manufacturing oligonucleotides, our
experience in manufacturing other chemical reagent products is relatively
limited. While we are producing and supplying products to customers for
commercial use, we do not currently have the capacity for high-volume
production of our reagents, nor do we currently have the capacity to meet our
projected sales of specialty oligonucleotides. We will need to expand our
reagent and oligonucleotide manufacturing capacity in connection with the
continued development and commercialization of our products. Any delay or
inability to expand our manufacturing capacity could materially adversely
affect our manufacturing ability.

There is a risk that we do not own exclusive rights to our technology and 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 November 2019. We make no
guarantee that any issued patents will provide us with significant proprietary
protection, that pending patents will be issued, or that products incorporating
the technology from our issued patents or pending applications will be free
from challenges by competitors. Further, third parties may hold proprietary
rights, which precede our claims and, therefore, could prohibit us from
marketing the proposed products.

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
diagnose conditions based on a number of technologies and are developing
additional products using gene-based technologies. Many of these companies
have substantially greater capital resources, larger research and development
and marketing staffs and facilities and greater experience in developing
products than we have. Furthermore, our 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 2002, 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-

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nuclease real-time PCR assays, or tests (TaqMan® is a registered trademark of
Roche Molecular Systems, Inc.). In July 1999, we licensed our proprietary
software, which speeds the design of chemical tools used in the study of genes,
to Applied Biosystems. In August 2000, the agreement was amended to include
Epoch manufacturing product for Applied Biosystems. In October 2001, we
further amended our agreement with Applied Biosystems. Under the terms of this
amendment, Applied Biosystems will either purchase a specified minimum number
of probes from us each quarter at a specified price, or pay us a lesser amount
per probe for any probes not ordered below the minimum. This agreement is
effective from October 2001 through December 2002. 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 for 2002 and future
periods. In addition, we have incurred significant expenditures to date to
equip our facilities for the development of the assays we are developing under
this agreement.

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.

Credit

Some of our customers may experience financial difficulties, which could
adversely impact our collection of accounts receivable. Although historically
we have not experienced credit losses from our trade receivables, our
experience is limited. At March 31, 2002, our allowance for doubtful accounts
was approximately $24,000. We regularly review the collectibility and credit
worthiness of our customers and the receivables to determine an appropriate
allowance for doubtful accounts, however future uncollectable 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
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.

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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, in the year 2001, our stock traded as high as $6.31 and as low as
$1.46. The rapid price changes Epoch has experienced recently, and throughout
our history, place your investment in our common stock at risk of total 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.

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.

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Item 3.     Quantitative and Qualitative Disclosures About Market Risk

Our financial instruments include cash and short-term investment grade
debt securities. At March 31, 2002 the carrying values of our financial
instruments approximated their fair values based on current market prices and
rates. It is our policy not to enter into derivative financial instruments. We
do not currently have material foreign currency exposure as the majority of its
international transactions are denominated in U.S. currency. Accordingly, we
do not have a significant currency exposure at March 31, 2002.

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PART II. Other Information




|        |  |                                
|------- |  | -------------------------------
|Item 6. |  | Exhibits and Reports on Form 8K

| |  |     |                   
| |  | --- | ------------------
|
|
|
|
| |  | (a) | Exhibits          
|
|
|
|
| |  |     |                   
|
|
|
|
| |  |     | None              
|
|
|
|
| |  |     |                   
|
|
|
|
| |  | (b) | Reports on Form 8K
|
|
|
|
| |  |     |                   
|
|
|
|
| |  |     | None              

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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: | May 13, 2002 |  |  | By: /s/ Bert W. Hogue

Bert W. Hogue
Vice President and Chief Financial Officer

17