SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                  ------------

                                    FORM 10-K
        (Mark one)

        [X] Annual  report  pursuant  to  Section 13 or 15(d) of the  Securities
Exchange  Act of 1934  for the  fiscal  year  ended  September  30,  1998
                                       OR
        [ ] Transition  report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from -------- to --------

                           Commission File No. 1-10492

                                  EPITOPE, INC.

             (Exact name of registrant as specified in its charter)

                   Oregon                               93-0779127
       (State or other jurisdiction of      (I.R.S. employer identification no.)
       incorporation or organization)

          8505 S.W. Creekside Place
             Beaverton, Oregon                             97008
  (Address of principal executive offices)               (Zip code)
                                 (503) 641-6115
              (Registrant's telephone number, including area code)

        Securities registered pursuant to Section 12(b) of the Act: None
          Securities registered pursuant to Section 12 (g) of the Act:

                           Common Stock, no par value
                                (Title of Class)

                         Preferred Stock Purchase Rights
                                (Title of Class)

        Indicate by check mark whether the  registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  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 [ ]

        Indicate by check mark if disclosure of  delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [ ]

        State the  aggregate  market value of the voting and  non-voting  common
equity held by  non-affiliates  of the  registrant,  as of  December 1, 1998:  $
73,153,540

        Indicate the number of shares  outstanding  of each of the  registrant's
classes of common stock,  as of December 1, 1998:  Common  Stock,  no par value,
13,609,961 shares.

                      Documents Incorporated by Reference:

Definitive Proxy Statement for 1999 Annual Shareholders' Meeting:  Part III

<PAGE>

                                TABLE OF CONTENTS

                                     PART I
<TABLE>
                                                                                                               Page

<S>             <C>                                                                                             <C>
ITEM 1.         Business                                                                                          1

ITEM 2.         Properties                                                                                       13

ITEM 3.         Legal Proceedings                                                                                13

ITEM 4.         Submission of Matters to a Vote of Security Holders                                              13


                                     PART II


ITEM 5.         Market for Registrant's Common Equity and Related Stockholder Matters                            13

ITEM 6.         Selected Financial Data                                                                          14

ITEM 7.         Management's Discussion and Analysis of Financial Condition and Results of Operations            15

ITEM 7A.        Quantitative and Qualitative Disclosures About Market Risk                                       18

ITEM 8.         Financial Statements and Supplementary Data                                                      19

ITEM 9.         Changes in and Disagreements with Accountants on Accounting and Financial Disclosure             19


                                    PART III

ITEM 10.        Directors and Executive Officers of the Registrant                                               20

ITEM 11.        Executive Compensation                                                                           20

ITEM 12.        Security Ownership of Certain Beneficial Owners and Management                                   20

ITEM 13.        Certain Relationships and Related Transactions                                                   20


                                     PART IV


ITEM 14.        Exhibits, Financial Statement Schedules, and Reports on
                Form 8-K                                                                                         20
</TABLE>


<PAGE>

                                     PART I

ITEM 1.  BUSINESS.

Epitope, Inc. (Epitope or the Company), is an Oregon corporation incorporated in
1981.  Epitope  develops and markets oral specimen  collection  kits and related
diagnostic tests primarily for the detection of the Human Immunodeficiency Virus
(HIV),  the cause of Acquired Immune  Deficiency  Syndrome  (AIDS),  and for the
detection of other medical  conditions and analytes,  including  drugs of abuse.
Epitope's lead product,  the patented  OraSure(R)  collection device, is used as
part of an oral specimen  diagnostic  system.  The Company markets the device in
the United  States and  certain  foreign  countries  for use in  screening  life
insurance applicants and for public health use, and plans to begin marketing for
drugs of abuse testing in 1999.

The OraSure  device  consists of a small,  treated  cotton-fiber  pad on a nylon
handle  that is  placed  in the  patient's  mouth for two  minutes.  The  device
collects oral mucosal  transudate  (OMT),  a  serum-derived  fluid that contains
higher  concentrations  of antibodies  than saliva,  including HIV antibodies in
people  infected with the virus.  As a result,  OMT testing is a highly accurate
method  for  detecting  HIV  infection.  Because  OraSure  uses  a  noninvasive,
needle-free  collection  method  without need for privacy  during the collection
process,  the Company  believes that oral fluid testing has several  significant
advantages  over  blood or  urine-based  testing  systems  for  both  healthcare
professionals and patients.

Epitope also markets HIV-1 Western blot  confirmatory  test kits used to confirm
positive  results of initial  screening tests for HIV-1  infection.  Its OraSure
HIV-1  Western  blot   confirmatory   test  kit  is  used  in  conjunction  with
oral-specimen  based screening  tests,  while its EPIblot(R)  HIV-1 Western blot
confirmatory  test kit is used in conjunction with blood-based  screening tests.
The kits are  distributed  worldwide  under an exclusive  agreement with Organon
Teknika Corporation (Organon Teknika), a member of the Akzo Pharma group of Akzo
Nobel, NV., an international  chemical and pharmaceutical  manufacturer based in
Arnhem, The Netherlands.

The OraSure HIV-1 Oral Specimen  Collection device and the OraSure HIV-1 Western
blot and EPIblot  confirmatory  tests have all received  clearance from the U.S.
Food and Drug  Administration  (FDA)  for sale to  professional  markets  in the
United States.  In 1998, the FDA granted clearance for use of the OraSure device
with enzyme  immunoassays  manufactured by STC Technologies,  Inc. (STC) to test
for  cocaine,  methamphetamines,  opiates and opiate  metabolites,  cannabanoids
(marijuana),  and cotinine (a derivative of nicotine).  The FDA has also allowed
the  commercial  sale of  OraSure  to test for  phencyclidine  (PCP),  while the
Company and STC gather more clinical data.

Through December 1997,  Agritope,  Inc. (Agritope) was a wholly owned subsidiary
of Epitope.  Agritope is a biotechnology company specializing in the development
of new  fruit  and  vegetable  plant  varieties  for sale to the  fresh  produce
industry.  Epitope made a dividend distribution of all of its ownership interest
in Agritope to Epitope's  shareholders  (the Agritope  Spin-off) on December 30,
1997. Epitope no longer owns or controls any shares of Agritope stock.

BACKGROUND

HIV attacks the immune system,  slowly  weakening the body's ability to ward off
infection and certain forms of cancer. When these complications develop, the HIV
infection has  progressed to clinically  diagnosed  AIDS.  HIV is spread through
sexual  contact,  blood  transfusions,   the  sharing  of  intravenous  needles,
accidental  needle  sticks,  or contact  between a mother  and her child  during
gestation,  childbirth, or breast-feeding.  There is currently no known cure for
HIV/AIDS.  However,  the  introduction  of a new class of anti-HIV  drugs called
protease  inhibitors,  when used in combination  with nucleoside  analogs (e.g.,
AZT), has shown promising  results in slowing progress of the disease.  Clinical
studies have demonstrated that the early detection and treatment of HIV can help
to curb the  effects of the disease  and  significantly  prolong the life of the
patient.  Other studies have shown that  treatment  with AZT of an  HIV-infected
pregnant woman may prevent the transmission of HIV from the mother to her child.

Since the early 1980s more than 40 million  individuals have contracted HIV, and
almost 12 million  have died,  according to UNAIDS,  a program  sponsored by the
United  Nations.  In 1997 alone,  nearly 6 million people acquired HIV, and some
2.3 million perished from it,  including  460,000  children.  If the rate of new
infections  continues at

                                                                               1
<PAGE>

this pace, nearly 37 million people will be living with AIDS at the end of 1998.
In North America,  an estimated 860,000 people are infected with HIV. The UNAIDS
report  estimates that worldwide  1,600 children under 15 years old are infected
each day compared to 1,000 per day a year ago.

Based on industry estimates, the Company believes that approximately 100 million
HIV tests were  performed in the U.S. in 1997,  with blood banks  accounting for
about 25 million.  The Company  feels that a large  proportion  of the non-blood
bank HIV testing  market should be available to OraSure  because of the accuracy
of the test and the  benefits of not having to draw blood.  Currently,  most HIV
tests are  performed by testing a patient's  blood.  There are a number of blood
tests for HIV,  the most  common of which is the enzyme  immunoassay  (EIA).  In
order to reduce the possibility that an individual without HIV will be diagnosed
as having the virus (a false positive),  most  industrialized  countries require
the re-testing of the blood sample using a second, more specific test to confirm
an initial positive test result. The most commonly used confirmatory test is the
Western blot.

The Company believes that blood-based  testing,  in a situation other than blood
donation,  has a number of  disadvantages  which increase  healthcare  costs and
patient inconvenience,  pose a risk of infection to healthcare professionals and
make testing uneconomic or unavailable in certain applications or settings,  and
that the OraSure product  overcomes these problems.  The  disadvantages of blood
testing include:

Risk of HIV  Infection.  Blood  tests  involve  the use of needles or lancets to
obtain blood from the patient.  Healthcare  professionals  collecting blood risk
contracting  HIV if  accidentally  stuck by the needle or lancet  used to obtain
blood from an infected patient.

Limited Access.  Because blood must be collected by trained  professionals,  its
collection is often difficult or  prohibitively  expensive in certain  settings.
For  example,   community-based  outreach  programs,  homeless  shelters,  rural
communities,  and other  remote  settings  often lack  healthcare  professionals
trained  in blood  collection.  As a result,  blood  testing  may not be readily
available in some of these settings.

Higher  Overall  Cost.  The cost of  collecting  a blood  specimen  represents a
significant  component  of the total cost of HIV  testing.  Furthermore,  when a
healthcare professional must travel to the subject's office or home to collect a
blood sample, as is often the case with life insurance  applicant  testing,  the
cost of collecting the blood specimen is substantially increased.

Patient  Discomfort.  Blood tests require the use of needles or lancets that are
uncomfortable for patients.  In addition,  patients with small or damaged veins,
such as  intravenous  drug users,  the elderly and young  children,  may require
multiple needle sticks in order to obtain an adequate blood sample.

EPITOPE ORAL SPECIMEN COLLECTION TECHNOLOGY

In order to address the significant drawbacks associated with blood-based tests,
Epitope  developed and patented a device to collect an oral specimen  instead of
blood.  The  OraSure  device,  shaped  like a small  toothbrush,  consists  of a
cotton-fiber  pad treated with a proprietary  salt  solution.  The pad, which is
mounted on a nylon handle,  is placed in the  patient's  mouth between the lower
cheek and gum for two minutes.  The pad  collects  oral  mucosal  transudate,  a
serum-derived  fluid that contains  higher  concentrations  of  antibodies  than
saliva.  The  OraSure  sample  contains  approximately  four times the amount of
antibodies found in saliva  expectorated into a cup. Following  collection,  the
pad is sealed in a specimen vial containing a proprietary preservative solution.
The treated pad enhances the collection,  and the preservative solution enhances
the  stabilization,  of antibodies and other analytes  originating from the oral
mucosae. The specimen in the vial is stable for three weeks at room temperature,
although in most cases laboratory testing takes place within one to three days.

PRODUCTS

OraSure-HIV.  In December 1994, the Company  received  clearance from the FDA to
sell OraSure to  professional  markets for use with the screening test for HIV-1
antibodies.  The device is marketed by the Company for use by the life insurance
industry and public  health  programs in the United States and a number of other
countries. See "Marketing and Customers."

2
<PAGE>

The  OraSure  oral  specimen  collection  and  HIV-1  testing  system  is easily
administered  and involves three steps: (i) collection of an oral specimen using
the OraSure collection device, (ii) screening of the specimen for HIV antibodies
at a laboratory,  and (iii) laboratory  confirmation of positive  screening test
results with the  FDA-cleared  OraSure  Western  blot kit. A trained  healthcare
professional  then conveys test results and provides  appropriate  counseling to
the patient.

The OraSure HIV-1 testing  system  represents a highly  accurate  alternative to
traditional  blood-based tests. In clinical trials, OraSure provided the correct
result or triggered  appropriate  follow-up  testing in 3,569 out of 3,570 cases
(99.97  percent).  The Company  believes  OraSure has  several  advantages  over
blood-based tests, as outlined in the following table.

Feature                    Blood Collection                              OraSure
-------                    ----------------                              -------

<TABLE>
<S>                        <C>                                           <C>
Safety                     Poses risk of HIV infection                   Eliminates risk of needle-stick
                           through accidental needle sticks              accidents

Invasiveness               Requires use of a needle or lancet            Uses noninvasive collection technique

Ease of use                Requires blood collection by a                Sample collection requires minimal
                           trained healthcare professional               training

Portability                Generally performed in a physician's          Can be used rapidly and efficiently
                           office or other healthcare setting            in almost any setting

Cost                       Requires a nurse or other healthcare          Eliminates the need for and costs
                           professional trained in phlebotomy            associated with a healthcare professional
</TABLE>

OraSure-Drug  Testing. The FDA granted clearance in 1998 for use of OraSure with
enzyme immunoassays manufactured by STC Technologies,  Inc. to test for cocaine,
methamphetamines,  opiates and opiate metabolites, and cannabanoids (marijuana).
In addition,  the FDA has also allowed STC to distribute  OraSure for use with a
PCP test under "For  Investigational  Use Only" status in order to generate data
required for FDA review.  Management  anticipates  final approval for use of the
OraSure  device to test for PCP in 1999.  STC has agreed to act as the exclusive
distributor  of OraSure for use with STC's  drugs-of-abuse  assays in the United
States and much of Europe.

The OraSure device has also been approved in Japan for cotinine  testing of life
insurance  applicants.  Cotinine  is a  derivative  of nicotine  that  indicates
whether the tested subject is a smoker.  The Finance Ministry of Japan announced
in February  1998 that life  insurance  companies  could reduce  premiums on new
nonsmoker policies by as much as thirty percent,  effectively  creating a larger
market for cotinine  testing of life insurance  applicants in Japan. The Company
also sells  OraSure for cotinine  testing of life  insurance  applicants  in the
United  States.  Although  cotinine is not  currently  regulated  by the FDA for
insurance risk assessment,  a 510(k)  application for cotinine has been filed in
anticipation  that the  Company  will sell  OraSure  for  cotinine  testing  for
non-insurance purposes.

Oral-based and Serum-based  Western Blot  Confirmatory  Tests. In June 1996, the
Company  received  FDA  clearance  to market an  oral-based  HIV-1  Western blot
confirmatory test. This test uses the original oral specimen to confirm positive
results of initial  OraSure  HIV-1  screening  tests.  The Company  also markets
EPIblot, a serum-based Western blot HIV-1 confirmatory test kit. The kit is used
to confirm the positive results of initial blood-based screening tests for HIV-1
infection.

PRODUCTS UNDER DEVELOPMENT

OraSure.  Oral mucosal  transudate  contains  many  constituents  found in blood
serum. The Company  therefore  believes OraSure is a platform  technology with a
wide variety of potential  applications  beyond HIV  testing.  For example,  the
OraSure  device  may be useful  for the  diagnosis  of a variety  of  infectious
diseases in addition to HIV,  such as viral  hepatitis and a number of childhood
diseases.  In addition,  the Company believes that the use of oral specimens may
allow  physicians  to  diagnose   diseases  more  readily  in  children  without
subjecting them to the discomfort of drawing a blood sample,  thereby increasing
the frequency of testing for diseases.

                                                                               3
<PAGE>

The  Company  has  demonstrated  that the OraSure  device is  effective  for the
collection  of samples  which can be tested  for the  NIDA-5  drugs of abuse and
cotinine,  a  derivative  of  nicotine.  Under an agreement  with  Epitope,  STC
Technologies,  Inc.,  has  developed  enzyme  immunoassays  for the detection of
cocaine, methamphetamine, cannabanoids (THC), opiates, PCP, and cotinine present
in oral  specimens.  Five 510(k)  notifications  for cocaine,  methamphetamines,
cannabanoids (THC),  opiates, and cotinine have been cleared by the FDA. The FDA
has also allowed the Company to distribute OraSure for use with a PCP test under
"For  Investigational  Use  Only"  status  that  allows  the  Company  to gather
additional  samples for  submission  to the FDA. When all  clearances  have been
received,  Epitope  plans  to  market  OraSure  through  STC for  drugs of abuse
detection and directly to the life insurance industry to test applicants for the
presence of drugs of abuse.  Although cotinine is not currently regulated by the
FDA for risk  assessment,  a 510(k)  application  for cotinine has been filed in
anticipation  that the  Company  will sell  OraSure  for  cotinine  testing  for
non-insurance purposes at some time in the future.

Physicians may also find the OraSure device useful for monitoring level of drugs
and  hormones  that  must  be  maintained  within  narrow  therapeutic   ranges.
Monitoring  of these  substances  currently  requires  frequent  blood  tests to
determine drug  concentration.  The Company  believes that oral specimen testing
would eliminate the discomfort and  inconvenience  associated with this frequent
blood testing.

OraQuick. Epitope is currently developing OraQuick(R), a one-step,  rapid-format
oral  specimen  testing  system  designed  to provide  test  results  within ten
minutes. The Company believes that OraQuick has significant potential as a rapid
test for professional use, and possibly as an OTC home-based test. Like OraSure,
OraQuick is a platform  technology  with a variety of potential  applications in
addition to HIV testing. Prototype OraQuick devices, to be used for pre-clinical
testing,  are in the final stages of development and the Company is establishing
manufacturing  specifications  for the device. One patent is pending on this new
platform  technology  and a second  patent is in  process.  The  Company is also
evaluating the  regulatory  hurdles and clinical  trials  required to bring this
product to market.

Modifications  of the basic  OraQuick  technology may allow use of this approach
for detection of antibodies  against the  ulcer-causing  bacterium  Helicobacter
pylori, as well as for a variety of infectious diseases such as syphilis,  viral
hepatitis, and childhood infections. The application of this technology to drugs
of abuse  testing  appears  possible and is a high  priority  within the Epitope
development  group,  although  some  drugs are  expected  to  present  technical
difficulty to achieve desired results.  The Company will carefully  analyze each
application  to  determine  the  cost of  development  and  regulatory  approval
compared to the potential  benefits of each market and will focus its efforts on
those with the best business return.

DNA Forensic Testing. During 1998, the Company entered into a research agreement
with Analytical  Genetic Testing Center (AGTC) to explore the use of OraSure for
DNA collection. Results of this research have been positive,  demonstrating that
OraSure  collects a high  quality DNA sample.  This sample is in addition to the
antibody  sample  that is used to test for HIV,  making it  possible to test for
antibodies and produce a DNA "fingerprint" with a single OraSure collection. The
Company is now developing a beta-site  testing program with AGTC to evaluate the
use of  OraSure  in  several  key  user  settings.  Because  there  are  limited
regulatory requirements in this market, it is anticipated that if the results of
research  continue  to be  promising  the  commercial  launch of OraSure for DNA
collection can be accomplished soon after customer testing is completed.

MARKETS

Life Insurance  Industry.  Epitope  believes there is a significant  need in the
life   insurance   industry   for   an   easy-to-administer,   noninvasive   and
cost-effective  HIV  testing  system  such as  OraSure.  In the  United  States,
approximately  7  million  HIV  tests  were  administered  in 1997  by the  life
insurance  industry  in  connection  with the  issuance  of about 11 million new
policies. In addition,  data from the American Council of Life Insurance and the
Health Insurance  Association of America indicate that  approximately $1 billion
in  AIDS-related  death  benefits  were  paid in 1997.  The  organizations  also
cautioned that, due to difficulty in identifying all  AIDS-related  claims,  the
data may significantly  understate the financial impact of AIDS on the insurance
industry.

Traditional  HIV  testing of life  insurance  applicants  involves  the use of a
paramedic or other trained healthcare professional to obtain a blood sample. The
cost to the insurance company for an HIV test includes the cost of the

4
<PAGE>

paramedic  as well as the  cost of the  collection  kit and  laboratory  testing
services.  The cost of collecting and processing a blood sample is approximately
$70 per test versus a cost of $15 for an OraSure sample test. As a result of the
higher cost of collecting  blood  samples,  insurance  companies  have generally
limited HIV testing to policies with face amounts of $100,000 or more.  Based on
industry  statistics,  Epitope estimates that in 1997  approximately 8.9 million
policies  were issued for face amounts of less than  $100,000,  representing  80
percent of all policies issued. The Company believes that the use of OraSure can
significantly  reduce the cost of HIV testing to the insurance  industry because
collection  of an oral fluid  specimen can be  performed by insurance  agents or
other persons without professional medical training, eliminating the cost of the
paramedic and making  testing at policy levels below  $100,000 a  cost-effective
practice.   Over  the  next  several  years  insurance   companies  and  testing
laboratories  expect the market for oral fluid  testing of applicants to grow by
at least 50 percent.

Epitope also believes that the use of OraSure will allow the insurance  industry
to address "anti-selection."  Anti-selection occurs when an individual who knows
that he or she is infected with HIV  intentionally  applies for one or more life
insurance policies that do not entail HIV testing. The Company believes that the
adoption of OraSure by a number of insurance companies,  and the availability of
an  over-the-counter  (OTC)  HIV blood  test,  may  increase  the  incidence  of
anti-selection.  By allowing  insurance  companies  to lower the policy level at
which HIV  testing is  cost-effective,  the use of OraSure  may allow  insurance
companies to reduce their exposure to losses from  anti-selection and thereby to
lower overall claims costs.

Insurance  companies have also begun using the same OraSure  specimen  collected
for HIV testing to identify smokers and users of cocaine. Cotinine, a metabolite
of nicotine, and cocaine can be detected using OraSure. In a presentation at the
105th annual  meeting of The American  Academy of Insurance  Medicine in 1997, a
major life insurance  company reported results of the use of the OraSure testing
system in  Canada  and in the  Bahamas  from  1992 to 1995.  The life  insurance
company  reported that OraSure  sample  collection  by agents had  significantly
reduced its testing  costs per policy.  During the four-year  study period,  the
insurer  found that it saved $1.7  million by using  OraSure for HIV and cocaine
testing.  In addition,  the life insurance  company  determined that it realized
$1.6  million in  increased  premiums  as a result of  identifying  smokers  who
claimed  on their  applications  that they were  nonsmokers.  In  another  study
presented to this same Academy, Crown Life of Canada reported that the five year
savings from OraSure  testing for cocaine,  cotinine and HIV were  approximately
$1.4 million.

Japanese Insurance Market. The Japanese life insurance market in 1996 was served
by 44 companies which sold  approximately  35 million  policies,  of which about
one-third  were new ordinary life  policies,  the type for which  applicants are
most likely to be tested for smoking and other risk  factors.  While  non-smoker
policies have been available in the U.S.  insurance  market since the mid-1960s,
it was only in early 1998 that Japanese  regulators  allowed premium  reductions
for non-smokers. Some insurance companies have begun the process of applying for
new premium  schedules and are using OraSure to test for evidence of smoking for
these policies.

Physician and Public Health  Clinical  Market.  The  physician  market  consists
primarily  of  individual  doctors'  offices  which  are  supplied  through  the
physician's supply house network.  Selling to this market requires a substantial
sales force to call on the many offices throughout the country,  each making its
own purchasing decisions. Epitope has chosen not to focus on this market at this
time  because of the high cost of selling to these  customers  as the product is
currently available to physicians through various physician supply channels. The
Company is exploring the  feasibility  of  implementing  a direct  telemarketing
program to serve this market.

The public health market is more concentrated  than the physician  market,  with
typically more purchasing power in each decision maker. The customers consist of
a broad  range of  clinics  and  laboratories  and  includes  states,  counties,
colleges and  universities,  prison  systems and the military.  There are also a
number of smaller organizations in the public health market such as AIDS Service
Organizations and various  community based  organizations set up for the primary
purpose of  encouraging  and  enabling HIV testing to combat the spread of AIDS.
The  OraSure  device has  received a warm  welcome in the public  health  market
because of its ease of use and reliability.

The cost of OraSure had been an obstacle to its  adoption by some  providers  in
the public health market. The small size of some public health  organizations or
their decisions to begin OraSure testing on a small scale made volume  discounts
for OraSure or related tests  unavailable,  so that the cost of OraSure  testing
was higher than  blood-based  testing.  In order to avoid having cost be a major
obstacle to growth in volume and  adoption of this new testing

                                                                               5
<PAGE>

format,  Epitope has revised its volume  pricing  policy.  In addition,  both to
decrease the cost of testing and to provide fast  turnaround  with accurate test
methods,  Epitope has entered into an agreement  with LabOne,  Inc.  (LabOne) to
provide a prepackaged  OraSure test kit with prepaid testing and sample shipment
to LabOne via Airborne  Express.  This product package is being sold directly to
public health customers by the Epitope sales force.

International.  In light of the  worldwide  scope of the HIV  epidemic,  Epitope
believes   there  are   significant   opportunities   for  sale  of  OraSure  in
international  markets. The Company believes that the ease of use,  portability,
and increased safety of OraSure,  and aversion to blood draw in certain cultures
will provide  significant  advantages for oral fluid testing over blood tests in
international markets.

Drugs of Abuse Market. The analytic portion of the United States  drugs-of-abuse
testing market,  outside of the criminal justice system, is estimated to be over
$350 million, with approximately 36 million tests performed in 1997. The testing
is concentrated on a set of commonly abused drugs called the NIDA-5,  consisting
of cocaine, methamphetimines, opiates, marijuana and PCP.

This market is currently based primarily on urine testing,  which is susceptible
to  adulteration  of  samples  unless  precautions  are taken in the  collection
process.  The Company  believes  that oral fluid  testing  will  succeed in this
market  because of its  non-invasive  nature and ease of  maintaining a chain of
custody without embarrassment to the person being tested, as well as the lack of
requirement for specially prepared collection  facilities.  The FDA has approved
tests for  cocaine,  opiates,  methamphetimines  and  marijuana  with an OraSure
sample. In addition,  the FDA is allowing the Company to distribute  OraSure for
use with a PCP test  under  "For  Investigational  Use Only"  status in order to
generate data required for FDA review. Epitope has teamed with STC to distribute
products to this market. See "Marketing and Customers."

OTC Market. The  over-the-counter  market for HIV testing currently is served by
only one test,  distributed by Home Access Health Care, which uses a dried blood
spot to provide the patient's  sample.  This sample is then sent to a laboratory
for testing and test results are communicated to the customer via an 800 number.
In July 1997,  citing  lower sales than  expected  and lower  market  estimates,
Johnson & Johnson dropped its Confide HIV test from the OTC market.  Epitope has
significantly reduced the attention and resources it was devoting to preparation
for the OTC market because of the smaller than  anticipated  market size and the
high cost of setting up the  required  systems,  support,  and  clinical  trials
needed for FDA  approval.  The Company has shifted  instead to the public health
markets,  including  colleges and  corrections  facilities.  The Company has not
ruled out an eventual move into the OTC market, but it is not a high priority at
this time.

MARKETING AND CUSTOMERS

Life Insurance Industry. Epitope currently markets the OraSure device for use in
screening life insurance applicants for HIV, cocaine, and cotinine (a derivative
of nicotine).  The Company  maintains a direct sales force that markets  OraSure
directly  to  insurance  companies.  Insurance  companies  then  make  their own
decision regarding which insurance  reference  laboratory to use to supply their
devices and testing service. The major laboratories  currently using the OraSure
device include LabOne, Inc., Osborn Laboratories,  Clinical Reference Laboratory
and Heritage Laboratories.  As of November 1998, 30 of the top 100, and 5 of the
top 10 life  insurance  companies  were using  OraSure to  varying  degrees  for
testing applicants for life insurance.  As of that date there were 102 insurance
companies using OraSure.  Because the insurance  companies are in various stages
of their  adoption of OraSure,  there exists a wide range of policy limits where
the product is being  applied.  Some  insurance  companies have chosen to extend
their  testing to lower  policy  limits  where they did not test at all  before,
while others have used OraSure to replace some of their blood-based testing. The
Company's sales focus is on converting additional insurance companies to the use
of OraSure, and extending its use within the companies already using OraSure.

Physician and Public Health Clinical Market.  Through September 1997, SmithKline
Beecham,  plc (SB) marketed  Epitope's oral HIV testing system to the physician,
hospital and other professional healthcare provider markets. The Company resumed
responsibility  for servicing these markets in October 1997.  Epitope hired some
of SB's sales  personnel that had been focused on the public health market,  and
began  selling its products  directly to these  customers.  To better serve this
market,  Epitope  entered into an agreement with LabOne to provide a prepackaged
OraSure test kit, with prepaid  specimen  shipping costs and laboratory  testing
included.  The LabOne OraSure test kit

6
<PAGE>

is one of the primary products sold into this market and represented nearly half
of all the Company's sales to this segment in 1998.

International.  Epitope markets to  international  customers  primarily  through
carefully  chosen  distributors  with  knowledge  of  their  local  market.  The
distributor's  expertise  is  supplemented  by Epitope's  contacts  with testing
companies to assist in  registering  the necessary  tests in each  country,  and
Epitope's   assistance   with   training   and  support   materials.   Epitope's
international  marketing  program features direct  assistance to distributors in
establishing OraSure programs that include laboratory services, cooperation from
screening test manufacturers, and provision of Western blot confirmatory kits in
each country.  Epitope is currently  marketing  OraSure directly to customers in
Canada and through  distributors in the United Kingdom (UK), Ireland,  Thailand,
Argentina,  Brazil, South Africa,  Greece, the Philippines,  Taiwan,  Mexico and
Colombia.

The Company  entered into a distribution  agreement  with Altrix  Healthcare plc
(Altrix),  a  UK-based  health  diagnostic  service  provider,  for the sale and
distribution  of OraSure to the life  insurance,  public health,  and laboratory
markets in the UK and Ireland. The agreement  contemplates optional expansion of
the relationship to other European countries.

Epitope  participates in a joint venture in Japan which markets both the OraSure
device and STC's cotinine test to the Japanese  insurance market.  Epitope holds
exclusive  distribution  rights  in Japan for  STC's  laboratory-based  test for
cotinine,  sold for use in insurance risk assessment.  Epitope has the option to
expand its  exclusive  distribution  rights  for the  cotinine  test  worldwide,
excluding the U.S. In addition,  OraSure is now being used for Hepatitis testing
in Argentina and the Company is exploring opportunities to distribute OraSure in
Brazil.

Drugs of Abuse  Market.  In  November  1998,  the  Company  entered a supply and
distribution  agreement  with STC,  its research  partner in the  drugs-of-abuse
market.  Under the terms of the  agreement,  Epitope  will act as the  exclusive
supplier of oral fluid collection  devices for use with STC's  laboratory-based,
NIDA-5  drugs-of-abuse  tests in the U.S.  and Europe,  excluding  the U.K.  and
Ireland.  STC will act as the exclusive  distributor  of the OraSure  device for
drugs-of-abuse testing in the same territory. The agreement provides for Epitope
to sell  OraSure  devices to STC for a per-unit  price.  Epitope  will receive a
percentage  of STC's gross  revenue  from the resale of OraSure  devices and STC
oral fluid  drugs-of-abuse  test sales. The agreement also covers any additional
laboratory-based  drugs-of-abuse tests that STC may market,  including those STC
is now developing using  upconverting  phospher  technology.  The agreement will
remain in effect for a minimum term of five years.

Epitope and STC will participate  jointly in marketing  activities and obtaining
required  international  regulatory  approvals.  The two companies plan to begin
evaluation of drugs-of-abuse  testing products in selected test markets in early
1999.  Feedback  from these early  users,  along with the results of  additional
laboratory  testing,  will help determine  whether  modifications in the OraSure
device or the STC tests might be needed for optimal performance in the market.

Western  Blot  Distribution.  Epitope has entered  into supply and  distribution
agreements with Organon Teknika Corporation.  The supply agreement provides that
Organon  Teknika will supply the HIV-1 antigen used to manufacture  Western blot
confirmatory  test kits. The  distribution  agreement grants Organon Teknika the
exclusive right to purchase Western blot confirmatory test kits from Epitope and
to market them  worldwide.  Epitope and Organon  Teknika  recently  extended the
expiration dates for the supply and distribution agreements to March 31, 2000.

Customer  Concentration.  In fiscal 1998, the Company's  sales to LabOne,  Inc.,
Osborn Laboratories, Clinical Reference Laboratory and Organon Teknika accounted
for  over 62  percent  of  product  revenues.  The  Company  believes  that  its
relationship  with each of these customers is strong and believes that they will
purchase  comparable  or increasing  volumes of the  Company's  products for the
foreseeable  future.  There can be no  assurance,  however,  that sales to these
customers  will not decrease or that these  customers will not choose to replace
the  Company's  products  with  those of  competitors.  The loss of any of these
customers or a significant  decrease in the volume of products purchased by them
would have a material adverse effect on the Company.

                                                                               7
<PAGE>
COMPETITION

Competition in the emerging market for HIV testing is intense and is expected to
increase.  The Company  believes that the principal  competition  will come from
existing  blood-based HIV assays and from urine-based testing assays.  Epitope's
competitors  include  specialized  biotechnology firms as well as pharmaceutical
companies with biotechnology divisions and medical diagnostic companies, many of
which have considerably  greater financial,  technical,  and marketing resources
than Epitope.  Competition may intensify as technological  advances are made and
become more widely  known and as products  reach the market in greater  numbers.
Furthermore,  new testing  methodologies  could be  developed in the future that
render  Epitope's  oral-based HIV test  impractical,  uneconomical  or obsolete.
There  can be no  assurance  that  Epitope's  competitors  will not  succeed  in
developing or marketing  technologies  and products that are more effective than
those  developed  by Epitope or that would render its  technologies  or products
obsolete or otherwise commercially  unattractive.  In addition,  there can be no
assurance that competitors will not succeed in obtaining regulatory approval for
these products,  or in introducing or commercializing them before Epitope.  Such
developments  could have a material  adverse  effect on the Company's  business,
financial condition and results of operations.

Three  companies  have  submitted  applications  to the FDA  for  OTC HIV  blood
testing:  Direct Access  Diagnostics,  Home Access  Health  Corp.,  and ChemTrak
Incorporated.  The FDA has approved home  collection  kits for HIV blood testing
developed by Direct  Access  Diagnostics  (Johnson & Johnson) and by Home Access
Health Corp. In July 1997, Johnson & Johnson withdrew its HIV home-test from the
market, citing weak sales.

Cambridge Biotech  Corporation,  BioRad  Laboratories,  Inc. and Genetic Systems
Corp.   manufacture   HIV  Western  blot   confirmatory   tests,   and  Waldheim
Pharmazeutika  manufactures  immunofluorescent  HIV  confirmatory  tests,  which
compete with Epitope's EPIblot HIV-1 Western blot serum-based  confirmatory test
kits.

Several other  companies  market or have announced plans to market oral specimen
collection  devices and tests outside the United States and have announced plans
to seek FDA  approval of such tests in the United  States.  Epitope  expects the
number of devices  competing with its OraSure device to increase as the benefits
of oral specimen-based  testing become more widely accepted. The Company expects
that  FDA  approval  of  the  OraSure  device  will  also  encourage   potential
competitors to develop oral diagnostic  products.  No such devices have yet been
approved by the FDA for HIV testing. See "Government Regulation."

The FDA has approved an HIV screening test for use with a urine sample.  In June
1998,  the FDA notified  Cambridge  Biotech Corp that it had approved the use of
its HIV-1 Western Blot  confirmatory  test for use with urine samples.  Although
the sensitivity  and specificity are less than  blood-based or oral fluid tests,
urine  testing will compete in the same markets as the Company's  products.  The
Company  believes that urine  collection  can be  logistically  more  difficult,
inconvenient  and  potentially  embarrassing  for the patient or life  insurance
applicant,  and that privacy and chain-of-custody issues are further impediments
to routine use of urine-based  HIV tests.  The Company cannot predict the impact
of the  availability of urine-based  tests on the HIV testing market or on sales
of the Company's products.

GOVERNMENT REGULATION

General. Many of Epitope's proposed and existing diagnostic products are subject
to  regulation  by the FDA,  other  federal,  state,  and  local  agencies,  and
comparable  bodies in foreign  countries.  Such  regulation  governs  almost all
aspects of development and marketing,  including the introduction,  advertising,
promotion,  manufacturing practices, labeling,  distribution, and record keeping
for the products.  In the United States,  different types of diagnostic products
are regulated  differently  by the FDA, as discussed  below.  As part of the FDA
clearance  process,  Epitope often must  demonstrate  that its products are both
safe and effective for a particular indication or application.

Drugs and Biological Products.  Generally, drugs and biological products require
FDA approval  before  marketing.  The steps required before a drug or biological
product may be marketed in the United States include: (1) preclinical laboratory
and animal tests;  (2) submission of an application for an  investigational  new
drug or biological  product,  which must become  effective before human clinical
trials may commence;  (3) human  clinical  trials;  (4)  submission of a Product
License  Application (PLA) for the biological  product or a New Drug Application
(NDA) for most other new drug products; and (5) approval of the PLA or NDA.

8
<PAGE>

Preclinical  safety  and  initial  efficacy  testing is  usually  undertaken  in
animals. Results of such preclinical and other laboratory tests are submitted to
the FDA before human clinical  trials can begin.  Clinical  trials are typically
conducted in three phases.  Phase I uses human subjects to determine  safety and
tolerance. Phase II uses a limited patient population to determine effectiveness
and dosage and to identify side effects.  Compounds  found effective and safe in
Phase II are further tested in Phase III with an expanded patient  population at
geographically  dispersed  clinical study sites. Each phase may last from one to
two years or more.

Most  products are not approved  because of the failure to  demonstrate  safety,
effectiveness, or both. The FDA may suspend clinical trials at any time if it is
felt that subjects or patients are being exposed to an unacceptable health risk.
Obtaining FDA approval  requires  substantial  time and effort.  There can be no
assurance that any approval will be granted to Epitope on a timely basis,  if at
all.  As part of the  approval  process,  the FDA may  require  the  Company  to
initiate post-approval marketing studies.

Medical Devices.  Medical devices are classified either in Class I, Class II, or
Class III. Class I devices are subject only to general control provisions of the
Federal Food, Drug, and Cosmetic Act, as amended (the FDC Act). These provisions
include  requirements  that a device not be adulterated or misbranded.  Class II
devices  are those for which  general  controls  are  insufficient  to provide a
reasonable   assurance  of  safety  and  efficacy  and  for  which  a  "generic"
performance standard or other special controls are appropriate.  Devices that do
not meet the criteria for Class I or II are placed in Class III.  Class I and II
devices,  those Class III  devices  initially  marketed  prior to passage of the
Medical  Device   Amendments  of  1976  (MDA)  for  which   premarket   approval
applications (PMAs) are not yet required,  and devices substantially  equivalent
to such devices, may be marketed upon FDA clearance of a Premarket  Notification
(a 510(k)  Notice).  Other Class III devices may be  commercially  marketed only
after FDA approval of a PMA.  Generally,  the process for obtaining FDA approval
of a PMA is similar to that for obtaining approval of a biological or other drug
product.

Based upon the  information  provided in a 510(k) Notice  regarding the device's
intended use and  technological  features,  the FDA will  determine  whether the
device is  "substantially  equivalent"  to a predicate  device,  i.e.,  a device
legally  marketed  which  did not  require  a PMA.  If a  device  is found to be
substantially equivalent to a predicate device, it may be freely marketed in the
United States so long as the device is otherwise in compliance with the FDC Act.
If it is not so found, it will be considered a Class III device requiring a PMA.
Substantial  equivalence  means  that the FDA has found  that the device has the
same intended use as the predicate device, and either has the same technological
characteristics  or has different  characteristics,  but there is information in
the  510(k)  Notice  that  shows  the  device  is as safe and  effective  as the
predicate and does not present different questions of safety and effectiveness.

OraSure Collection Device. Use of the OraSure collection device for applications
involving the detection of antibodies to HIV is regulated by the FDA as use of a
Class III medical  device  requiring a PMA. In December  1994,  the FDA approved
Epitope's  PMA for use of the  OraSure  device in HIV  screening.  Post-approval
marketing  studies were  completed  and a final  report  submitted to the FDA on
August 28, 1997.  In June 1996,  the FDA approved the PMA for use of the OraSure
oral  specimen-based  Western blot confirmatory test kit for HIV-1 diagnosis.  A
second generation HIV-1 antibody EIA test for OraSure samples is currently under
review by the FDA.

Western Blot Test Kits.  Epitope's HIV-1 Western blot  serum-based  confirmatory
test kits are used to confirm whether  individuals are infected with HIV-1. They
are regulated by the FDA as biological  products,  unlike most other  diagnostic
tests which are regulated as medical devices. In March 1991, the FDA cleared the
EPIblot HIV-1 serum-based confirmatory test kit for commercial distribution.  As
noted above, a PMA seeking permission to market the OraSure oral  specimen-based
Western blot  confirmatory  test kit for HIV-1 diagnosis was approved by the FDA
in June 1996.

Manufacturing  Regulations.  Every company that manufactures  drugs,  biological
products,  or medical  devices  distributed  in the United  States is subject to
inspections  by  the  FDA  and  must  comply  with  the  FDA's  Quality  Systems
Regulations.   These  regulations  govern,  among  other  matters,  manufacture,
testing, release, packaging, distribution,  documentation, purchasing and design
control.

                                                                               9
<PAGE>

FDA Warning Letter. Epitope received a warning letter from the FDA in June 1998,
noting that the Company had not fully  adhered to the FDA's new Quality  Systems
Regulations.  These new regulations, which went into effect on June 1, 1997, are
part of the FDA's stepwise  approach to  international  harmonization of quality
standards  and  include  some new  requirements  such as  design  controls.  The
inspections  under these new regulations are part of an  industry-wide  standard
that the FDA has  adopted to  optimize  compliance  through  more  rigorous  and
detailed  inspection of companies operating in biologics  industries.  The items
cited in the warning  letter  mainly  address  incidents  relating to failure to
strictly  adhere  to  standard  operating   procedures  in  the  production  and
evaluation of products manufactured by Epitope.

Epitope is cooperating fully with the FDA to address all of the instances cited,
has already replied to each of the FDA's questions,  and is aggressively  making
changes in procedures and retraining personnel.  It is the Company's belief that
none of the FDA's concerns affected the safety or effectiveness of its products,
and  that the  cost of  compliance  to make  the  required  changes  will not be
material.

Other.  Epitope is also subject to  regulation  by the  Occupational  Safety and
Health Administration and may be subject to regulation by the U.S. Environmental
Protection  Agency  (EPA) under the Toxic  Substances  Control  Act (TSCA),  the
Resource  Conservation and Recovery Act, and other legislation.  Epitope is also
subject to foreign regulations governing, for example, human clinical trials and
marketing  with  respect to  products  distributed  outside  the United  States.
Approval processes vary from country to country, and the length of time required
for approval or to obtain other clearances may in some cases be longer than that
required for U.S.  governmental  approvals.  The extent of  potentially  adverse
governmental   regulation   affecting  Epitope  that  might  arise  from  future
legislative or administrative action cannot be predicted.

SUPPLIES

The HIV-1 antigen needed to manufacture  Epitope's Western blot HIV confirmatory
test kits is available from only a limited number of sources.  Organon  Teknika,
the  exclusive  distributor  of the test kits,  is required to supply  Epitope's
requirements  for  antigen  for the  term  of its  distribution  agreement  with
Epitope,  which ends March 31, 2000. If for any reason Organon Teknika should no
longer  be able to supply  the  Company's  antigen  needs,  management  believes
Epitope would be able to obtain its own supply of antigen at a competitive cost,
although  a change in the  antigen  would  require  FDA  approval.  Epitope  has
obtained a license  from the National  Technical  Information  Service  which is
required for the production of the HIV-1 antigen currently used in the Company's
Western blot test kits. It is unlikely that Epitope would choose to  manufacture
its own antigen because of its availability from other suppliers.

Other materials used by Epitope in manufacturing,  production,  and research and
development operations are widely available from a variety of sources.

GRANTS AND CONTRACTS

Epitope has received funding in the past from the National  Institute of Allergy
and Infectious  Diseases (NIAID),  for work in developing a rapid test to detect
HIV antibodies in oral fluid  specimens,  and from the National Cancer Institute
(NCI),  to fund  research for the treatment of cancer by exploiting a deficiency
of certain compounds in cancer cells. The Company  regularly makes  applications
for new grants,  but there is no assurance that additional  grant support can be
obtained.

PATENTS AND PROPRIETARY INFORMATION

Epitope has obtained patents in the United States and certain foreign  countries
for  the  OraSure  device  and  related  technology.  Epitope  has  applied  for
additional patents,  both in the United States and in certain foreign countries,
on the  OraSure  collection  device  and a  number  of  other  technologies  and
products.  The Company  anticipates filing patent applications for protection on
future products and technology.  United States patents  generally have a maximum
term of 20  years  from  the date an  application  is  filed  or 17  years  from
issuance, whichever is longer.

10
<PAGE>

Much of the  technology  developed  by the  Company is  subject to trade  secret
protection.  To  reduce  the risk of loss of  trade  secret  protection  through
disclosure,  the Company  requires its employees and  consultants  to enter into
confidentiality agreements.

The Company believes that patent and trade secret protection is important to its
business.  However,  the  issuance  of a patent  or  existence  of trade  secret
protection does not in itself ensure the Company's  success.  Competitors may be
able to produce  products  competing  with a patented  Company  product  without
infringing on the Company's  patent rights.  Issuance of a patent in one country
generally does not prevent  manufacture or sale of the patented product in other
countries.  The  issuance  of a patent to the  Company or to a  licensor  is not
conclusive  as to validity  or as to the  enforceable  scope of the patent.  The
validity or enforceability of a patent can be challenged by litigation after its
issuance,  and, if the outcome of such litigation is adverse to the owner of the
patent,  the owner's  rights  could be  diminished  or  withdrawn.  Trade secret
protection does not prevent independent discovery and exploitation of the secret
product or technique.

PERSONNEL

At September  30, 1998,  the Company had 85  full-time  employees,  including 17
persons in research and product development, 27 in administration and marketing,
31 in  manufacturing  and production,  and 10 in regulatory  affairs and quality
assurance.  The  Company  considers  its  relations  with  its  employees  to be
excellent. None of its employees are represented by labor unions.

The Company  employs 5 persons  holding Ph.D.  degrees with  specialties  in the
following  disciplines:   virology/molecular  biology,  biochemistry,  microbial
physiology,  microbiology and organic chemistry.  From time to time, the Company
also engages the services of scientists as  consultants to augment the skills of
its scientific staff.

SCIENTIFIC ADVISORY BOARD

The Company  also  utilizes the services of a  Scientific  Advisory  Board.  The
Scientific  Advisory Board meets  periodically to review the Company's  research
and  development  efforts and to apprise the Company of scientific  developments
pertinent to the Company's  business.  The Scientific  Advisory Board  comprises
chair Daniel Malamud,  Ph.D.,  Professor and Chair,  Department of Biochemistry,
University of Pennsylvania School of Dental Medicine;  J. Richard George, Ph.D.,
Chief  Scientific  Officer of Epitope;  James I.  Mullins,  Ph.D.,  Professor of
Microbiology and Medicine,  University of Washington;  Wayne R. Wecksler, Ph.D.,
General   Manager,   Esoteric  Testing  Center,   SmithKline   Beecham  Clinical
Laboratories, Van Nuys, CA; and John V. Parry, Ph.D., Deputy Director, Hepatitis
and Retrovirology Laboratory,  Central Public Health Laboratory, Virus Reference
Division, London, England.

FORWARD-LOOKING STATEMENTS; RISK FACTORS

Statements  above regarding  future events or performance  are  "forward-looking
statements" within the meaning of the Private  Securities  Litigation Reform Act
of 1995.  The  Company's  actual  results  could be quite  different  from those
expressed  or  implied by the  forward-looking  statements.  Factors  that could
affect results include the risk factors discussed below, those discussed in Item
7, and those  described  elsewhere in this Annual Report on Form 10-K.  Although
forward-looking  statements  help to  provide  complete  information  about  the
Company,  readers should keep in mind that  forward-looking  statements are much
less reliable than  historical  information.  Readers are cautioned not to place
undue reliance on the forward-looking statements.

Loss or  Impairment  of  Sources  of  Capital.  Although  the  Company  has made
significant  progress  in the last  fiscal  year  toward  controlling  expenses,
increasing  product  revenue,  and  achieving  profitability,  the  Company  has
historically depended to a substantial degree on capital raised through the sale
of equity securities to fund its operations.  The Company's future liquidity and
capital  requirements will depend on numerous  factors,  including the costs and
timing  of  expansion  of  manufacturing   capacity,   the  success  of  product
development  efforts,  the costs and timing of expansion of sales and  marketing
activities,   the  extent  to  which  existing  and  new  products  gain  market
acceptance,  competing technological and market developments,  and the scope and
timing of strategic acquisitions.

                                                                              11
<PAGE>

If additional  financing is needed,  the Company may seek to raise funds through
the sale of equity securities.  There can be no assurance that financing through
the sale of equity securities,  or otherwise,  will be available on satisfactory
terms,  if at all. In particular,  the fact that the Company's  common stock has
recently traded at historically low levels may make it difficult for the Company
to raise  necessary  funds  through  the sale of  common  stock or other  equity
securities.

Ability of the Company to Develop Product Distribution Channels. The Company has
marketed  most  of  its  products  by  collaborating  with   pharmaceutical  and
diagnostic  companies and distributors.  For example,  the Company's EPIblot and
OraSure Western blot confirmatory tests are distributed through Organon Teknika,
the OraSure  collection device is distributed to the insurance  industry through
major insurance testing  laboratories,  and the Company has entered an agreement
with STC to distribute the OraSure device for drugs-of-abuse  testing. Except in
the public health market,  the Company does not maintain a substantial  sales or
marketing force. Accordingly, the Company's sales depend to a substantial degree
on its ability to develop  product  distribution  channels and on the  marketing
abilities of the companies with which it collaborates.

Ability of the Company to Develop New Products. The Company's OraSure collection
device is becoming  recognized in the  insurance and public health  markets as a
reliable,  effective test system.  The Company's  long-term strategy is based on
continued  expansion of markets for OraSure and the development of new products.
OraQuick and other planned  products are in various  stages of  development.  In
some cases,  the Company  will be required to achieve  difficult  scientific  or
technical  objectives before the commercial or technological  feasibility of new
products can be  demonstrated.  There can be no assurance  that  products  under
development  will  perform  in  accordance  with  expectations,  that  necessary
regulatory approvals will be obtained,  or that the products can be successfully
and profitably manufactured, distributed, and sold.

Development of Competing Products.  Competition in the medical products business
is intense and will likely  increase.  The Company  believes  that the principal
competition for OraSure will come from blood-based and urine-based  assays,  and
could also come from other oral-fluid testing systems. New testing methods could
be developed in the future that render the Company's  products  uneconomical  or
obsolete.   Most  of  the  Company's   competitors  have  significantly  greater
financial,  manufacturing,  technical,  research, marketing, sales, distribution
and other  resources  than those of the Company.  There can be no assurance that
the Company will not experience competitive pressures, particularly with respect
to pricing, that could have a material adverse effect on the Company's business,
results of  operations  and financial  condition.  See  "Competition"  above for
additional information.

Market  Acceptance of Oral Testing  Products.  The Company has made  significant
progress in gaining  acceptance  of oral  testing for HIV in the  insurance  and
public health  markets.  The Company also expects that oral testing for drugs of
abuse will be accepted in employment  testing.  Other markets,  particularly the
physician  market,  may resist the adoption of oral testing as a replacement for
other testing  methods in use today.  There can be no assurance that the Company
will be able to expand use of its oral testing products in these markets.

Changes in Federal or State Law or  Regulations.  As described  more fully above
under  "Government  Regulation,"  many of the  Company's  proposed  and existing
products are subject to regulation by the FDA and other  governmental  agencies.
The process of obtaining required approvals from these agencies varies according
to the nature of and uses for the product and can involve  lengthy and  detailed
laboratory  and  clinical  testing,  sampling  activities,  and other costly and
time-consuming  procedures.  Changes in government regulations could require the
Company to undergo additional trials or procedures, or could make it impractical
or  impossible  for the  Company to market its  products  for certain  uses,  in
certain markets, or at all. Other changes in government regulations, such as the
adoption of the FDA's Quality Systems Regulations,  may not affect the Company's
products directly but may nonetheless  adversely affect the Company's  financial
condition  and results of  operations  by requiring  that the Company  incur the
expense of changing or implementing new manufacturing and control procedures.

Loss of Key  Personnel.  The Company  depends to a large extent on the abilities
and continued  participation of its executive officers and scientific personnel.
The loss of key personnel could have a material  adverse effect on the Company's
business,  financial  condition,  and  results of  operations.  Competition  for
management and  scientific  staff in the medical  products field is intense.  No
assurance  can be given that the Company will be able to continue to attract and
retain  personnel  with  sufficient  experience  and  expertise  to satisfy  the
Company's needs.

12
<PAGE>

The previous  discussion of the Company's business should be read in conjunction
with the Consolidated  Financial  Statements and accompanying  notes included in
Item 14 of this Annual Report on Form 10-K.


ITEM 2.  PROPERTIES.

The Company leases  approximately  35,600 square feet of office,  manufacturing,
and  laboratory  space in  Beaverton,  Oregon,  under two leases that  terminate
January 31, 2000. Each lease calls for fixed monthly payments over its term. The
Company also entered into a three-year  lease,  effective  October 1, 1996,  for
2,265 square feet of warehouse space used to store inventory and equipment.  The
total amount of the Company's lease obligation  through the term of the lease is
$456,348.


ITEM 3.  LEGAL PROCEEDINGS.

On April 7, 1998,  the  Company's  former  subsidiary  A&W  instituted a lawsuit
against  two former  officers  of the  Company  and an officer  of  Agritope  in
connection with events  surrounding  the recission of the A&W acquisition  (U.S.
District Court for the Southern  District of California,  Case No. 98 CV 0666 TW
(CGA)).  The defendants were not served with notice of the lawsuit until October
1, 1998. A&W alleges improper acts by the officers, and seeks damages claimed to
be in excess of $5.7  million,  an amount that  corresponds  to the  liquidation
value  of the  preferred  stock  issued  by A&W to the  Company  at the time the
acquisition  was  rescinded.  The Company is defending the officers and believes
the  lawsuit  to be  frivolous,  without  merit,  and  counter  to a  settlement
agreement signed by A&W at the time of the recission.  The defendants have moved
for  dismissal and will pursue the matter  vigorously.  The Company has filed an
action  in  Oregon  state  court  (Multnomah   County  Circuit  Court  Civ.  No.
9810-07537) against A&W for breaching the settlement agreement and is seeking as
damages the Company's costs of defending the California action.


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

No  matters  were  submitted  to a vote of  security  holders  during the fourth
quarter of the fiscal year covered by this report.

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Company's  Common Stock is listed for trading on the National Market tier of
The Nasdaq Stock Market (NASDAQ) under the symbol EPTO. Prior to January 2, 1997
the Company's Common Stock was listed for trading on the American Stock Exchange
(AMEX) under the symbol EPT.  High and low sales  prices  reported by NASDAQ and
AMEX during the periods indicated are shown below.

                             SALES PRICES PER SHARE

<TABLE>
YEAR ENDED SEPTEMBER 30                                       1998                        1997
                                                        HIGH          LOW         HIGH          LOW
<S>                                                  <C>           <C>         <C>          <C>     
First Quarter..................................      $ 8.125       $ 4.25      $ 16.375     $ 10.875
Second Quarter.................................        7.1875        4.75        17.375        9.75
Third Quarter..................................        6.875         4.5625      11.125        6.25
Fourth Quarter.................................        7.00          2.875        8.625        4.625
</TABLE>

On December 1, 1998,  there were 923 holders of record of the Common Stock,  and
the closing price of the Common Stock was $5.375. The Company has never paid any
cash  dividends,  and the Board of  Directors  does not  anticipate  paying cash
dividends in the  foreseeable  future.  The Company intends to retain any future
earnings to provide funds for the operation and expansion of its business.

                                                                              13
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA.

The  following  table sets forth  selected  consolidated  operating  results and
balance sheet data of Epitope, Inc. and its subsidiaries. The balance sheet data
at  September  30, 1998 and 1997 and the  operating  results  data for the years
ended  September  30,  1998,  1997 and  1996  have  been  derived  from  audited
Consolidated  Financial  Statements  and notes  thereto  included in this Annual
Report on Form 10-K.  The balance  sheet data at September 30, 1996,  1995,  and
1994 and operating  results data for the years ended September 30, 1995 and 1994
have been derived  from  audited  Consolidated  Financial  Statements  and notes
thereto not included in this Annual Report on Form 10-K. This information should
be read in  conjunction  with the  Consolidated  Financial  Statements and notes
thereto included in Item 14 and Item 7 "Management's  Discussion and Analysis of
Financial Condition and Results of Operations."



                           COMPARATIVE FINANCIAL DATA
                      (In thousands, except per share data)

<TABLE>
YEAR ENDED SEPTEMBER 30                                   1998        1997         1996         1995         1994

OPERATING RESULTS
<S>                                                  <C>          <C>           <C>          <C>          <C>      
Revenues.........................................    $   9,792    $   9,360     $  5,594     $  2,856     $   2,605
Operating costs and expenses.....................       12,042       14,323       10,881       14,464         8,890
Other income, net................................          322          882        6,388(1)     1,157           456
(Loss) income from continuing operations.........       (1,928)      (4,081)       1,101      (10,451)       (5,829)
Discontinued operations..........................            -      (18,359)      (2,501)      (8,045)       (9,804)
Net loss.........................................       (1,928)     (22,440)      (1,400)     (18,496)      (15,633)
(Loss) income per share from continuing
  operations.....................................        (0.14)        (.30)         .08(2)      (.88)        (.58)
Net loss per share...............................        (0.14)       (1.67)        (.11)       (1.56)       (1.56)
Shares used in per share
 calculations....................................       13,529       13,404       12,661(2)    11,886        10,050

BALANCE SHEET DATA
Working capital..................................    $   6,510    $   9,538     $ 24,793     $ 20,686     $  16,766
Total assets.....................................       10,357       17,012       29,784       26,142        19,993
Accumulated deficit..............................     (103,046)     (95,426)     (72,985)     (71,585)      (53,090)
Shareholders' equity.............................        8,274       15,014       27,967       22,347        18,470
</TABLE>

(1)  Includes one-time licensing fee of $5.0 million.

(2)  13,440,000  shares used in calculation of profit per share from  continuing
     operations due to common stock equivalents.

14
<PAGE>

ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

Statements  below regarding  future events or performance  are  "forward-looking
statements" within the meaning of the Private  Securities  Litigation Reform Act
of 1995.  The  Company's  actual  results  could be quite  different  from those
expressed  or  implied by the  forward-looking  statements.  Factors  that could
affect results include: loss or impairment of sources of capital; ability of the
Company to develop  product  distribution  channels;  ability of the  Company to
develop new products;  development of competing  products;  market acceptance of
oral  testing  products;  changes  in  federal  or  state  law  or  regulations;
uncertainties  related to customers' and suppliers' ability to achieve year 2000
compliance;  and loss of key  personnel.  These factors are discussed more fully
under  "Forward-Looking  Statements;  Risk  Factors" in Item 1, under "Year 2000
Readiness"  in this Item 7, and  elsewhere  in this Annual  Report on Form 10-K.
Although  forward-looking  statements help to provide complete information about
the Company,  readers  should keep in mind that  forward-looking  statements are
much less reliable  than  historical  information.  Readers are cautioned not to
place undue reliance on the forward-looking statements.


DISCONTINUED OPERATIONS

Agritope.  On  December  30,  1997,  Epitope  distributed  all of its  ownership
interest in Agritope,  Inc. (Agritope) to Epitope's shareholders through a stock
dividend (the Agritope Spin-off).  Epitope no longer owns or controls any shares
of Agritope stock.

Agritope's results of operations are presented as discontinued operations in the
Consolidated  Financial  Statements  included in this Annual Report on Form 10-K
through the date of the  spin-off.  Agritope's  net assets are  presented in the
September 30, 1997 balance sheet as net assets of discontinued  operations.  All
intercompany  loans from  Epitope to  Agritope  have been  reflected  as capital
contributions  to Agritope  consistent  with the  separation  agreement  between
Agritope and Epitope dated December 1, 1997.

Andrew and  Williamson  Sales,  Co. On December 12,  1996,  a subsidiary  of the
Company  completed a merger with  Andrew and  Williamson  Sales,  Co.  (A&W),  a
producer and wholesale  distributor  of fresh and frozen  fruits and  vegetables
based in San  Diego,  California.  Under the terms of the  merger,  the  Company
issued  520,000  shares  of  Epitope  common  stock in  exchange  for all of the
outstanding  common stock of A&W. On May 27, 1997, in accordance  with the terms
of a rescission  agreement,  the former shareholders of A&W returned the 520,000
shares of Epitope  common stock they received,  and Epitope  returned all of the
outstanding  shares of A&W common  stock.  Epitope also  received A&W  preferred
stock in  satisfaction of  intercompany  loans made to A&W between  December 12,
1996 and  March 19,  1997.  This A&W  preferred  stock  carries  a $5.7  million
liquidation  preference,  dividend preferences,  and various redemption features
and carries no value on the accompanying  balance sheet based upon  management's
estimate of fair value on the date it was received. In addition, the Company had
provided a guarantee to Wells Fargo Bank for a credit facility  provided to A&W.
On June 16, 1998,  the Company was released from any  contingent  liability with
regard to the guarantee.

RESULTS OF OPERATIONS

The table below shows the amount (in  thousands)  and  percentage  of  Epitope's
total revenue  contributed  by each of its principal  products and by grants and
contracts.

<TABLE>
FISCAL YEAR                                                  1998                  1997                  1996
Product Sales
<S>                                                     <C>       <C>         <C>      <C>          <C>      <C>
Oral specimen collection devices.....................   $7,195     74%        $6,279    67%         $3,311    59%
Western blot HIV confirmatory tests..................    2,370     24          1,791    19           1,540    28
Other product sales..................................      214      2             14     -              14     -
                                                       -------  -----       -------- -----        -------- -----
                                                         9,779    100%         8,084    86%          4,865    87%

Grants and contracts.................................       13      0          1,276    14             729    13
                                                      --------  -----          -----  ----        --------  ----
                                                        $9,792    100%        $9,360   100%         $5,594   100%
</TABLE>

                                                                              15
<PAGE>

Revenues.  Product  sales  increased  by $1.7 million or 21 percent from 1997 to
1998 and by $3.2 million or 66 percent  from 1996 to 1997  primarily as a result
of expanded  sales volume of Epitope's  lead product,  the OraSure oral specimen
collection  device.  Approximately 34 percent of 1998 sales were attributable to
shipments  in the fourth  quarter.  The  increase in sales volume of the OraSure
device is primarily  due to increased  purchases of the device by the  Company's
distributors for the life insurance testing market following the approval by the
FDA in June  1997  and the  reduction  of  inventories  built  up  beyond  pilot
programs.  This inventory  build-up resulted in reduced  OraSure device sales in
the  second  half of 1997  and the  first  half of 1998 as  insurance  customers
reduced their inventory levels. In addition,  the Company's  continued expansion
into the public health markets in 1998 contributed to the increase in sales.

OraSure device sales into the public health markets in 1998 totaled $2.5 million
or 25  percent  of total  product  sales.  The  life  insurance  testing  market
contributed  $4.2  million or  approximately  44  percent of total 1998  product
sales.  OraSure device sales into the international market totaled $420,000 or 4
percent  in 1998.  The  Company's  total  product  sales into  foreign  markets,
including cotinine test devices and product  components,  represented 10 percent
of total sales in 1998.

Fiscal year sales are anticipated to continue rising in 1999. However, sales may
be  affected  by  seasonality  of certain  market  segments  such as  insurance.
Expectations  for future sales are based primarily on forecasts  provided to the
Company  by  individual  customers  rather  than  firm  orders,  as  many of the
customers in the public health market do not have contractual  arrangements with
the Company.

Sales of the Company's  Western blot HIV confirmatory test increased by $579,000
or 32 percent  from 1997 to 1998 and  increased  by $251,000 or 16 percent  from
1996 to 1997.  Sales in 1997 were  negatively  affected by a reduction in orders
from the Company's  exclusive  distributor  for this product as the  distributor
lowered  inventory  levels.  In  addition,  1998 sales of the  Western  blot HIV
confirmatory  test have  increased as a result of  increased  use of the related
oral specimen collection devices and screening tests.

As  of  September  30,  1998,  the  Company  had  firm  orders  and  contractual
commitments  for delivery within 90 days of OraSure devices and Western blot HIV
confirmatory tests totaling approximately  $940,000 and $570,000,  respectively,
as compared to firm orders for delivery within 90 days of $900,000 and $450,000,
respectively, as of September 30, 1997.

Grant and contract revenues decreased by $1.3 million or nearly 100 percent from
1997 to 1998 and  increased  $547,000  or 75  percent  from  1996 to  1997.  The
decrease  in  1998  was due to the  termination  of the  Company's  development,
license and supply agreement with Smithkline Beecham, plc (SB) in July 1997. R&D
activities  related to the SB  agreement  accounted  for the  increase  in 1997.
Discussions  are under way with other  potential  partners  who may  provide R&D
funding to the Company. Grant applications for additional funding are also being
considered.

Gross Margin on product sales was 62 percent in 1998, 57 percent in 1997, and 45
percent in 1996. The  improvement in gross margins is  attributable to increased
sales and production  volumes for the OraSure device which resulted in lower per
unit costs and to the shift in product  mix towards  the  OraSure  device  which
carries a higher gross margin than does the Western blot HIV confirmatory  test.
The gross  margin in the  fourth  quarter  of 1998 was 65 percent as a result of
increased product sales volume.

Research and Development  Expenses.  Research and development expenses decreased
by $1.2 million or 30 percent from 1997 to 1998 and  increased by $991,000 or 31
percent  from 1996 to 1997.  The  decrease in 1998 was  primarily  the result of
decreased levels of research and clinical  studies activity  conducted the under
SB  agreement.  R&D  expenses  for 1999  should be near the 1998  level,  unless
funding for additional  R&D projects is forthcoming  from potential new partners
or from research grants.

Selling,   General   and   Administrative   Expenses.   Selling,   general   and
administrative  expenses  decreased  by $1.2  million or 18 percent from 1997 to
1998 and expenses increased by $1.6 million or 32 percent from 1996 to 1997. The
decrease  in 1998 was  primarily  a result of cost  containment  measures  and a
reduction  in  compensation   expense.   The  increase  in  1997  was  primarily
attributable to higher corporate and marketing  expenses as the Company expanded
its direct  sales  efforts.  1999 sales  expenses  are expected to increase as a
result of  increased

16
<PAGE>

advertising and promotion to support expansion in all markets.

Selling,  general and administrative  expenses have been reduced by $1.4 million
and $1.1  million  in 1997 and 1996,  respectively,  for  amounts  allocated  to
Agritope (see "Discontinued Operations").

Other Income (Expense), Net. Other income for 1996 included $5.0 million related
to license fees  received from SB as a result of FDA approval of an extension of
dating for the OraSure device.  Interest income decreased in 1998, primarily due
to lower levels of invested funds.

Year  2000  Readiness.  Epitope  is  aware  of the  issues  associated  with the
programming code in existing computer systems and other electronic  equipment as
the year 2000  (Y2K)  approaches.  The "year  2000  problem"  is  pervasive  and
complex.  Virtually every computer system and many electronic controlled devices
will be affected in some way by the rollover of the two-digit  year value to 00.
The  issue  is  whether  these  systems  and  devices  will  properly  recognize
date-sensitive  information  when the year changes to 2000.  Systems and devices
that do not properly recognize such information could generate erroneous data or
cause the system or device to fail.

The Company's management has conducted a review of Epitope's exposure to the Y2K
problem,  including the development of a plan of identifying systems and devices
that are non-compliant and a systematic approach to replacing or upgrading those
systems and devices that are compliant.  In addition,  Epitope is in the process
of contacting all vendors,  suppliers,  and customers, the interruption of whose
businesses  would have a material effect on the Company.  All non-Y2K  compliant
internal systems or devices, including those that affect technology, products or
service  functions,  will be  replaced or  upgraded  in the  ordinary  course of
business (as part of a regular ongoing upgrade  program) during fiscal 1999. The
Company is also  working  with  computer  and  electronic  device  hardware  and
software vendors to ensure that the replacement products are Y2K compliant.  The
Company has not  incurred  any  material  costs to date and does not  anticipate
incurring  any  material  costs to resolve  issues  relating  to the Y2K problem
internally. Such costs will be funded by cash flows from operations or available
cash and cash equivalents.

At the current time,  the Company  anticipates  that all essential  products and
internal  systems and  equipment are now or will be timely made Y2K compliant in
all  material  respects.  This  belief is based on the  progress to date and the
assessed degree of difficulty  associated  with the remaining  phases to achieve
Y2K  readiness,  the  representations  made by vendors and, where  possible,  by
testing.  Significant  uncertainty exists, however concerning the effects of the
Y2K problem,  primarily with regards to assurances  made by the Company's key or
significant  vendors,  suppliers,  and customers.  In addition,  Epitope has not
investigated  Y2K  compliance  of third  parties that are either not critical or
significant to the Company's operations or are not currently vendors, suppliers,
or  customers  of the  Company.  Any  failure  of the  Company  or its  vendors,
suppliers, customers, or any third party governmental or business entities to be
Y2K  compliant  could  materially  affect the business,  results of  operations,
financial  conditions  and  prospects of Epitope,  the impact of which cannot be
quantified at this time.

Contingency plans are under development at this time and the Company anticipates
that acceptable  alternatives  will be available in the event that a contingency
arises.  These  contingency  plans  anticipate  using  alternative  vendors  and
suppliers of goods and services.  It is impossible,  however, for the Company to
fully assess the likelihood or magnitude of consequences  of Y2K issues,  should
representations of vendors, suppliers, and customers prove to be inaccurate.

This section  captioned "Year 2000 Readiness" as well as other statements herein
relating  to Y2K issues are "Year 2000  Readiness  Disclosures"  pursuant to the
Year 2000 Information and Readiness Disclosure Act.

LIQUIDITY AND CAPITAL RESOURCES

<TABLE>
(IN THOUSANDS)                                                                        9/30/98               9/30/97
<S>                                                                                    <C>                 <C>     
Cash and cash equivalents..............................................                $1,164              $  1,934
Marketable securities..................................................                 4,455                 7,142
Working capital........................................................                 6,510                 9,532
</TABLE>

                                                                              17
<PAGE>

Net cash flows used in operating  activities decreased by $745,000 and the total
net decrease in cash and cash equivalents  declined $2,995,000 from 1997 to 1998
as a result of improved operating results, no longer having the need to fund the
operations of subsidiaries, and continued control of expenses.

Proceeds  from current  assets,  primarily  the sale of  marketable  securities,
represented the primary sources of funds for meeting the Company's  requirements
for  operations,  working  capital and business  expansion in 1998.  The Company
received proceeds of $448,000,  $1,668,000 and $5.9 million from the exercise of
warrants  and  options  to  purchase  common  stock  in  1998,  1997  and  1996,
respectively.  Research grant funding from strategic partners was $13,000,  $1.3
million  and  $729,000  in 1998,  1997 and 1996,  respectively.  Funding  of the
Company's  discontinued  operations,  Agritope and A&W,  required  $2.1 million,
$13.9 million and $3.2 million in 1998, 1997 and 1996, respectively.

The Company  anticipates  that it will continue to need funds to support ongoing
research and development projects as well as to provide additional manufacturing
capacity and related increases in working capital to support growth. The Company
believes that its operating  liquidity  requirements for the foreseeable  future
can be met by  existing  resources,  including  marketable  securities  and cash
generated by operations. The Company may also receive funds through the exercise
of outstanding stock options and warrants as well as research grants.


ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company does not hold material amounts of derivative financial  instruments,
other  financial   instruments,   or  derivative  commodity   instruments,   and
accordingly has no material market risk to report under this item. See Note 2 to
the Consolidated Financial Statements included under Item 14.

18
<PAGE>

ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Information  with respect to this item is (i) set forth below and (ii) contained
in the Company's  Consolidated  Financial Statements included in Item 14 of this
Annual Report on Form 10-K.


                   QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
                 (In thousands, except (loss) income per share)

The following table presents summarized quarterly results of operations for each
of the fiscal  quarters in the Company's  fiscal years ended  September 30, 1998
and 1997.  These  quarterly  results  are  unaudited,  but,  in the  opinion  of
management,  have  been  prepared  on the same  basis as the  Company's  audited
financial  information  and include all adjustments  (consisting  only of normal
recurring  adjustments) necessary for a fair presentation of the information set
forth  therein.  The data should be read in  conjunction  with the  Consolidated
Financial  Statements  and  related  notes  thereto  included in Item 14 of this
Annual Report on Form 10-K.

<TABLE>
                                                         FIRST       SECOND        THIRD       FOURTH
                                                       QUARTER       QUARTER      QUARTER      QUARTER       TOTAL
YEAR ENDED SEPTEMBER 30, 1998
<S>                                                     <C>          <C>          <C>          <C>          <C>  
Revenues...........................................      1,603        2,103        2,783        3,303         9,792
Operating costs and expenses.......................      2,653        2,921        3,109        3,360        12,043
Other income, net..................................         95           84           66           78           323
Net income (loss)..................................       (955)        (734)        (260)          21        (1,928)
Basic net loss per share...........................       (.07)        (.05)        (.02)        0.00        (0.14)
Diluted net loss per share.........................       (.07)        (.05)        (.02)        0.00        (0.14)

YEAR ENDED SEPTEMBER 30, 1997
Revenues...........................................      2,640        2,336        2,884        1,500         9,360
Operating costs and expenses.......................      3,250        3,574        4,005        3,494        14,323
Other income, net..................................        319          274          173          116           882
Loss from continuing operations....................       (291)        (964)        (948)      (1,878)       (4,081)
Discontinued operations............................     (4,093)      (9,202)      (1,366)      (3,698)      (18,359)
Net loss...........................................     (4,384)     (10,166)      (2,314)      (5,576)      (22,440)
Basic loss per share from continuing operations....       (.02)        (.07)        (.07)        (.14)        (.30)
Diluted loss per share from continuing operations..       (.02)        (.07)        (.07)        (.14)        (.30)
Basic and diluted net loss per share...............       (.34)        (.74)        (.17)        (.42)       (1.67)
</TABLE>


ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE.

None.

                                                                              19
<PAGE>

                                    PART III

The Company has omitted  from Part III the  information  that will appear in the
Company's definitive proxy statement for its 1999 annual meeting of shareholders
(the Proxy Statement),  which will be filed within 120 days after the end of the
Company's fiscal year pursuant to Regulation 14A.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The  information  required  by this item is  incorporated  by  reference  to the
information under the captions  "Election of Directors,"  "Executive  Officers,"
"Compensation  Committee  Interlocks  and Insider  Participation,"  and "Section
16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION.

The  information  required  by this item is  incorporated  by  reference  to the
information under the caption "Executive Compensation" in the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The  information  required  by this item is  incorporated  by  reference  to the
information under the caption "Principal Shareholders" in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

None.





                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a)(1) and (a)(2)  Consolidated Financial Statements and Schedules.



20
<PAGE>

<TABLE>
INDEX TO FINANCIAL STATEMENTS                                                                                  Page

<S>                                                                                                             <C>
Report of Independent Accountants................................................................................22

Consolidated Balance Sheets at September 30, 1998 and 1997.......................................................23

Consolidated Statements of Operations for years ended
   September 30, 1998, 1997, and 1996............................................................................24

Consolidated Statements of Changes in Shareholders' Equity for years ended
   September 30, 1998, 1997, and 1996............................................................................25

Consolidated Statements of Cash Flows for years ended
   September 30, 1998, 1997, and 1996............................................................................26

Notes to Consolidated Financial Statements.......................................................................27
</TABLE>

                                                                              21
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of Epitope, Inc.

In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated  statements of operations,  of changes in shareholders' equity, and
of cash flows present fairly, in all material  respects,  the financial position
of Epitope,  Inc. and its  subsidiaries  at September 30, 1998 and 1997, and the
results of their  operations and their cash flows for each of the three years in
the period ended  September  30, 1998,  in conformity  with  generally  accepted
accounting principles.  These financial statements are the responsibility of the
Company's  management;  our  responsibility  is to  express  an opinion on these
financial  statements  based on our  audits.  We  conducted  our audits of these
statements  in accordance  with  generally  accepted  auditing  standards  which
require that we plan and perform the audit to obtain reasonable  assurance about
whether the financial  statements  are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for the opinion expressed above.

PRICEWATERHOUSECOOPERS LLP

Portland, Oregon

November 12, 1998

22
<PAGE>

<TABLE>
EPITOPE, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30                                                                         1998                  1997

ASSETS
Current assets
<S>                                                                              <C>                  <C>          
Cash and cash equivalents..............................................         $   1,164,275         $   1,934,480
Marketable securities..................................................             4,455,044             7,141,640
Trade accounts receivable, net (Note 2)................................             1,519,652               928,047
Other accounts receivable..............................................                47,818               128,949
Inventories (Note 2)...................................................             1,092,577             1,324,647
Prepaid expenses.......................................................               313,941                78,240
                                                                                -------------         -------------
Total current assets...................................................             8,593,307            11,536,003

Property and equipment, net (Note 4)...................................               819,095             1,200,988
Patents and proprietary technology, net (Note 2).......................               596,169               657,487
Other assets and deposits..............................................               348,733                55,099
Net assets of discontinued operations (Note 3).........................                     -             3,562,726
                                                                                -------------         -------------
                                                                                $  10,357,304         $  17,012,303



LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................................         $     566,894         $     110,285
Salaries, benefits and other accrued liabilities ......................             1,516,395             1,887,825
                                                                                -------------         -------------
Total current liabilities..............................................             2,083,289             1,998,110

Commitments and contingencies (Notes 3 and 9)..........................                     -                     -

Shareholders' equity (Note 5)
Preferred stock, no par value - 1,000,000 shares authorized; no
  shares outstanding...................................................                     -                     -
Common stock, no par value - 30,000,000 shares authorized; 13,577,319
  and 13,454,330 shares issued and outstanding, respectively...........           111,319,573         $ 110,439,726
Accumulated deficit....................................................          (103,045,558)          (95,425,533)
                                                                                -------------         -------------
                                                                                    8,274,015            15,014,193

                                                                                $  10,357,304         $  17,012,303
</TABLE>

The accompanying notes are an integral part of these statements.

                                                                              23
<PAGE>

<TABLE>
EPITOPE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30                                         1998             1997              1996

Revenues
<S>                                                                 <C>             <C>               <C>
Product sales...............................................        $  9,778,930    $   8,083,606      $  4,864,378
Grants and contracts........................................              12,652        1,276,454           729,271
                                                                    ------------    -------------      ------------
                                                                       9,791,582        9,360,060         5,593,649

Costs and expenses
Product costs...............................................           3,684,702        3,512,054         2,681,429
Research and development costs..............................           2,917,742        4,156,996         3,165,838
Selling, general and administrative expenses................           5,439,743        6,654,553         5,033,491
                                                                    ------------    -------------      ------------
                                                                      12,042,187       14,323,603        10,880,758

Loss from operations........................................          (2,250,605)      (4,963,543)       (5,287,109)

Other income (expense), net
Interest income.............................................             362,694          885,583         1,386,968
Interest expense............................................              (8,868)          (8,165)                -
License fee.................................................                   -                -         5,000,000
Other, net..................................................             (31,229)           4,861             1,493
                                                                    -------------   -------------      ------------
                                                                         322,597          882,279         6,388,461

Net income (loss) from continuing operations................          (1,928,008)      (4,081,264)        1,101,352

Discontinued operations (Note 3)
Loss from discontinued operations; Agritope.................                   -       (9,890,599)       (2,501,268)
Income from discontinued operations; A&W....................                   -          170,646                 -
Estimated loss on disposal of A&W...........................                   -       (8,639,054)                -
                                                                    ------------    -------------      ------------
                                                                               -      (18,359,007)       (2,501,268)

Net loss....................................................        $ (1,928,008)   $ (22,440,271)     $ (1,399,916)

Basic (loss) income per share from continuing operations....        $       (.14)   $        (.30)     $        .09

Diluted (loss) income per share from continuing operations..        $       (.14)   $        (.30)     $        .08

Basic loss per share........................................        $       (.14)   $       (1.67)     $       (.11)

Diluted loss per share......................................        $       (.14)   $       (1.67)     $       (.11)

Weighted average number of shares
 outstanding................................................          13,528,596       13,404,402        12,661,420*
</TABLE>

*Diluted income per share from continuing operations calculated using 13,440,396
weighted average shares outstanding due to common stock equivalents.

The accompanying notes are an integral part of these statements.

24
<PAGE>

EPITOPE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

<TABLE>
                                                           COMMON STOCK              ACCUMULATED
                                                      SHARES           DOLLARS          DEFICIT            TOTAL

<S>                                                 <C>            <C>             <C>                <C>          
BALANCES AT SEPTEMBER 30, 1995 .............        12,485,130     $  93,931,947   $  (71,585,346)    $  22,346,601
Common stock issued upon
  exercise of options.......................           386,550         4,886,118                -         4,886,118
Common stock issued as compensation.........            19,353           263,586                -           263,586
Compensation expense for stock
  option grants.............................                 -         1,044,183                -         1,044,183
Common stock issued upon
  exercise of warrants......................            46,350           826,600                -           826,600
Equity issuance costs.......................                 -              (152)               -              (152)
Net loss for the year.......................                 -                 -       (1,399,916)       (1,399,916)
                                                    ----------     -------------   --------------     -------------
BALANCES AT SEPTEMBER 30, 1996 .............        12,937,383       100,952,282      (72,985,262)       27,967,020

Common stock issued upon
  exercise of options.......................            16,124           168,211                -           168,211
Common stock issued as
  compensation..............................            41,088           323,938                -           323,938
Compensation expense for
  stock option grants.......................                 -           489,668                -           489,668
Common stock issued upon exchange
  of convertible notes (Note 3).............           250,367         4,529,009                -         4,529,009
Equity issuance costs.......................                 -           (86,134)               -           (86,134)
Capital contributed in rescission (Note 3)..                 -         1,820,000                -         1,820,000
Common stock issued for cash................           209,368         1,500,000                -         1,500,000
Minority interest investment in Vinifera....                 -           742,752                -           742,752
Net loss for the year.......................                 -                 -      (22,440,271)      (22,440,271)
                                                    ----------     -------------   --------------     -------------
BALANCES AT SEPTEMBER 30, 1997 .............        13,454,330       110,439,726      (95,425,533)       15,014,193

Common stock issued upon
  exercise of options.......................            91,278           411,052                -           411,052
Common stock issued for the Employee
  Stock Purchase Plan.......................            14,451            54,814                -            54,814
Common stock issued as
  matching savings plan contributions.......            17,260            80,740                -            80,740
Compensation expense for
  stock option grants.......................                 -           333,241                -           333,241
Spin-off of Agritope, Inc. .................                 -                 -       (5,692,017)       (5,692,017)
Net loss for the year.......................                 -                 -       (1,928,008)       (1,928,008)
                                                    ----------     -------------   --------------     -------------
BALANCES AT SEPTEMBER 30, 1998 .............        13,577,319     $ 111,319,573   $ (103,045,558)    $   8,274,015
</TABLE>


The accompanying notes are an integral part of these statements.

                                                                              25
<PAGE>

EPITOPE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30

<TABLE>
                                                                         1998             1997              1996
Cash flows from operating activities
<S>                                                                <C>              <C>               <C>           
Net loss..................................................         $  (1,928,008)   $ (22,440,271)    $  (1,399,916)
Adjustments to reconcile net loss to net cash
  used in operating activities:
Loss from discontinued operations.........................                     -       18,359,007                 -
Depreciation and amortization.............................               669,839          729,970         1,045,632
Loss (gain) on disposition of property....................                31,290           17,888            (1,098)
(Increase) decrease in receivables........................              (510,474)         264,686           125,025
Decrease (increase) in inventories........................               232,070         (166,717)         (233,929)
(Increase) decrease in prepaid expenses...................              (235,701)          11,278            69,133
(Increase) decrease in other assets and deposits..........              (292,544)         (32,340)           20,649
Increase (decrease) in accounts payable and accrued
  liabilities.............................................                85,179          180,773        (1,656,478)
Common stock issued as compensation for services..........                     -          323,938           263,586
Compensation expense for stock option grants and
  deferred salary increases    ...........................               431,482          489,668         1,044,183
                                                                   -------------    -------------     -------------
Net cash used in operating activities.....................            (1,516,867)      (2,262,120)         (723,213)

Cash flows from investing activities
Investment in marketable securities.......................           (13,524,782)     (20,106,837)      (47,608,270)
Proceeds from sale of marketable securities...............            16,213,797       31,783,317        45,870,396
Additions to property and equipment.......................              (140,903)        (196,910)       (1,066,758)
Proceeds from sale of property............................                37,629                -             7,432
Expenditures for patents and proprietary technology.......              (157,063)        (265,435)         (770,262)
Investment in affiliated companies........................                (1,090)      (6,702,299)         (331,280)
Minority interest in affiliated companies.................                     -                -           215,407
                                                                   -------------    -------------     -------------
Net cash provided by (used in) investing activities.......             2,427,588        4,511,836        (3,683,335)

Cash flows from financing activities
Principal payments under installment purchase and
  capital lease obligations...............................                     -                -           (39,507)
Proceeds from issuance of common stock....................               448,365        1,668,211         5,885,573
Cost of common stock issuance.............................                     -                -              (152)
Cash to Agritope..........................................            (2,129,291)      (7,682,710)                -
                                                                   --------------   --------------    -------------
Net cash (used in) provided by financing activities.......            (1,680,926)      (6,014,499)        5,845,914

Net (decrease) increase in cash and cash equivalents......              (770,205)      (3,764,783)        1,439,366
Cash and cash equivalents at beginning of year............             1,934,480        5,699,263         4,259,897
                                                                   -------------    -------------     -------------
Cash and cash equivalents at end of year (Note 3).........         $   1,164,275    $   1,934,480     $   5,699,263
</TABLE>

The accompanying notes are an integral part of these statements.

26
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1     THE COMPANY

Epitope, Inc. (Epitope or the Company), is an Oregon corporation incorporated in
1981.  Epitope  develops and markets oral specimen  collection  kits and related
diagnostic tests primarily for the detection of the Human Immunodeficiency Virus
(HIV),  the cause of Acquired Immune  Deficiency  Syndrome  (AIDS),  and for the
detection of other medical  conditions and analytes,  including  drugs of abuse.
Epitope's lead product,  the patented  OraSure(R)  collection device, is used as
part of an oral specimen  diagnostic  system.  The Company markets the device in
the United  States and  certain  foreign  countries  for use in  screening  life
insurance applicants and for public health use, and plans to begin marketing for
drugs-of-abuse  testing  in  1999.  Epitope  also  markets  HIV-1  Western  blot
confirmatory  test kits used to confirm  positive  results of initial  screening
tests for HIV-1 infection.

See Note 3, Discontinued Operations, below.

NOTE 2     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis  of  Presentation.  The  accompanying  consolidated  financial  statements
include  the  accounts  of  the  Company  and  its  wholly  and  majority  owned
subsidiaries.  All significant  intercompany balances and transactions have been
eliminated in consolidation.

Cash and Cash  Equivalents;  Marketable  Securities.  The Company  considers all
highly liquid investments with maturities at time of purchase of three months or
less to be cash  equivalents.  At  September  30,  1998,  marketable  securities
consisted of  commercial  paper and U.S.  Treasury  securities  with an original
maturity  period  greater than three months,  but generally less than 12 months.
The Company's  policy is to invest its excess cash in  securities  that maximize
(a) safety of principal,  (b) liquidity for operating  needs,  and (c) after-tax
yields.

Pursuant to Statement of Financial Accounting Standards No. 115, "Accounting for
Certain  Investments in Debt and Equity Securities," the Company has categorized
all  of its  investments  as  available-for-sale  securities  and,  accordingly,
unrealized gains and losses on such investments,  if material,  are carried as a
separate  component of  shareholders'  equity.  Such unrealized gains and losses
were immaterial as of September 30, 1998 and 1997.

Trade Accounts  Receivable.  Accounts  receivable are stated net of an allowance
for doubtful  accounts of $49,513 and $32,284,  respectively,  at September  30,
1998 and 1997.

Inventories.  Inventories  are  recorded  at the lower of  standard  cost (which
approximates  actual cost on a first-in,  first-out basis) or market.  Inventory
components are summarized as follows:

<TABLE>
SEPTEMBER 30                                                                        1998               1997
<S>                                                                             <C>                <C>        
Raw materials..........................................................         $   238,916        $   296,432
Work-in-process........................................................             627,503            343,585
Finished goods.........................................................             211,703            670,175
Supplies...............................................................              14,455             14,455
                                                                                -----------        -----------
                                                                                $ 1,092,577        $ 1,324,647
</TABLE>

Depreciation and Capitalization  Policies.  Property and equipment are stated at
cost less accumulated depreciation. Expenditures for repairs and maintenance are
charged  to  operating  expense  as  incurred.  Expenditures  for  renewals  and
betterments are capitalized.

Depreciation and amortization of property and equipment are calculated using the
straight-line  method over the estimated  lives of the related  assets (three to
seven years). Leasehold improvements are generally amortized over the shorter of
estimated useful lives or the terms of the related leases.  When assets are sold
or  otherwise  disposed  of, cost and the related  accumulated  depreciation  or
amortization  are removed from the accounts  and any  resulting  gain or loss is
included in operations.

                                                                              27
<PAGE>

Patents  and  Proprietary  Technology.   Direct  costs  associated  with  patent
submissions  and acquired  technology are  capitalized  and amortized over their
minimum estimated economic useful lives, generally five years.

Amortization and accumulated amortization are summarized as follows:
<TABLE>
                                                                      1998         1997          1996
<S>                                                               <C>            <C>          <C>      
Amortization expense for the year ended September 30......        $   218,381    $ 209,180    $ 172,095
Accumulated amortization at September 30..................          1,048,671      830,290      621,110
</TABLE>

Fair Value of Financial Instruments.  The carrying amounts for cash equivalents,
accounts receivable,  and accounts payable approximate fair value because of the
immediate or short-term maturity of these financial instruments.

New  Accounting  Pronouncements.  On June  15,  1997  the  Financial  Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 130,  Reporting  Comprehensive  Income.  SFAS No. 130 is  effective  for all
fiscal  quarters of all fiscal years  beginning after December 15, 1997 (October
1, 1998 for the Company).  The Company will adopt this pronouncement  subsequent
to that date.  Also on June 15, 1997 the FASB  issued SFAS No. 131,  Disclosures
about  Segments  of an  Enterprise  and  Related  Information.  SFAS No.  131 is
effective for all fiscal  quarters of all fiscal years  beginning after December
15,  1997  (October  1, 1998 for the  Company).  The  Company  will  adopt  this
pronouncement  subsequent  to that  date.  Both  statements  require  additional
disclosures and reclassification of previously issued financial  information but
will not have a material  effect on the  results  of  operations  and  financial
position  of the  Company.  On June  15,  1998,  SFAS  No.  133  Accounting  for
Derivative  Instruments  and  Hedging  Activities  was  issued.  SFAS No. 133 is
effective for all fiscal  quarters of all fiscal years  beginning after June 15,
1999  (October 1, 1999 for the Company).  Management of the Company  anticipates
that,  because  the Company  does not make use of  derivative  instruments,  the
adoption  of SFAS No. 133 will not have any effect on the  Company's  results of
operations or its financial position.

Revenue  Recognition.  Product  revenues are generally  derived from the sale of
products and are  recognized  as revenue when the related  products are shipped.
Grant  and  contract   revenues   include  funds  received  under  research  and
development  agreements with various  entities.  Such revenues are recognized in
accordance with the contract terms.

Research and Development. Research and development expenditures are comprised of
those costs  associated with the Company's own ongoing  research and development
activities  including  the costs to prepare  for,  obtain and  compile  clinical
studies  and  other   information  to  support  product  license   applications.
Expenditures  for research and  development  also include costs  incurred  under
contracts to develop certain  products,  including those contracts  resulting in
grant and contract revenues.  All research and development costs are expensed as
incurred.

Shared  Services.  For the  years  ended  September  30,  1997 and 1996  certain
corporate  overhead services were provided by Epitope on a centralized basis for
the  benefit  of the  Company's  subsidiaries  (Shared  Services).  The  related
subsidiaries'  operating  results are included in discontinued  operations.  See
Note 3, Discontinued  Operations.  Selling,  general and administrative expenses
have been reduced by Shared Services allocated to the discontinued operations of
$1,402,895  and  $1,069,249  for the years  ended  September  30, 1997 and 1996,
respectively.

Income  Taxes.  The  Company  accounts  for certain  revenue  and expense  items
differently for income tax purposes than for financial reporting  purposes.  The
Company  accounts  for income  taxes under  Statement  of  Financial  Accounting
Standards No. 109,  "Accounting for Income Taxes," (SFAS 109) which requires the
use of the asset and liability  method for  accounting  for income taxes.  Under
SFAS 109,  deferred tax assets and liabilities are recognized based on temporary
differences  between  the  financial  statement  and the tax bases of assets and
liabilities  using  enacted  tax  rates in  effect  for the  year in  which  the
temporary differences are expected to reverse.

Stock-Based   Compensation.   SFAS  No.   123,   "Accounting   for   Stock-Based
Compensation"  (SFAS 123) allows companies which have  stock-based  compensation
arrangements  with employees to adopt a fair-value basis of accounting for stock
options and other  equity  instruments  or to  continue to apply the  accounting
rules specified in Accounting  Principles Board Opinion No. 25,  "Accounting for
Stock Issued to Employees"  (APB 25), but with  additional  financial  statement
disclosure.  The Company has elected to continue to account for its  stock-based
compensation under APB 25. See Note 5, Shareholders' Equity.

28
<PAGE>

Income  (Loss) Per Share.  Basic and  diluted  income  (loss) per share has been
computed  using the  weighted  average  number  of  shares  of common  stock and
potential  common stock  outstanding  during the period.  Potential common stock
consists of the number of shares issuable upon exercise of outstanding warrants,
options  and  convertible  notes less the number of shares  assumed to have been
purchased  for the treasury  with the  proceeds  from such  exercise.  Potential
common stock is excluded from the  computation  if its effect is  anti-dilutive.
Basic and diluted  net income  (loss) per share are the same for the years ended
September 30, 1998,  1997, and 1996. On September 30, 1998,  1997, and 1996, the
weighted average shares outstanding were 13,528,596, 13,404,402, and 12,661,420,
respectively.  Shares of potential common stock on September 30, 1998, 1997, and
1996, respectively of 6,206,279,  4,428,141,  and 3,058,555 were not included in
the  calculation  of  diluted  loss per  share  as they  were  antidilutive.  At
September  30, 1996,  778,878 of potential  common  shares were  included in the
calculation of diluted earnings per share.

Statement of Cash Flows. Cash paid for interest approximated interest expense in
1998,  1997, and 1996. No cash was paid for income taxes in 1998, 1997, or 1996.
Compensation  expense  amounted to $431,482,  $813,606,  and $1,307,769 in 1998,
1997, and 1996,  respectively,  related to the issuance of  compensatory  equity
securities, which also represent non-cash transactions.

Management Estimates. The preparation of financial statements in conformity with
generally accepted  accounting  principles requires management to make estimates
relating  to  assumptions  that  affect  the  reported  amounts  of  assets  and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  as well as the  reported  amounts  of  revenues  and
expenses  during the  reporting  period.  Actual  results  could vary from these
estimates.

Reclassifications. Certain reclassifications have been made to prior years' data
to conform with the current year's presentation.  These reclassifications had no
impact on previously reported results of operations or shareholders' equity.

NOTE 3     DISCONTINUED OPERATIONS

On December 30,  1997,  the Company  distributed  all of its shares of Agritope,
Inc. (Agritope) common stock through a stock dividend to Epitope shareholders of
record as of December 26, 1997. Epitope no longer owns or controls any shares of
Agritope  stock.  The costs of the  spin-off  and  Agritope's  operating  losses
through  December 30, 1997 were estimated and accounted for in fiscal year 1997.
Fiscal 1997 also included the loss from discontinued  operations of Agritope and
Andrew and Williamson Sales, Co. (A&W).

Agritope. From its acquisition in 1987 through December 29, 1997, Agritope was a
wholly owned  subsidiary of Epitope.  Agritope's  results of operations  and net
assets are presented as discontinued operations in the accompanying consolidated
financial  statements  for the periods ended  September  30, 1997 and 1996.  All
intercompany  loans from Epitope to Agritope  were deemed to be  terminated  and
reflected  as  capital  contributions  to  Agritope  as  of  the  spin-off  date
consistent  with the  separation  agreement  between  Epitope and Agritope dated
December  1,  1997.  The 1997  loss from  discontinued  operations  of  Agritope
includes  an accrual of $1.2  million  for  Agritope's  operating  losses,  from
October 1, 1997 to December 1, 1997, and costs of the spin-off of Agritope which
occurred on December 30, 1997 in accordance  with APB Opinion No. 30,  Reporting
the Effects of  Disposal  of a Portion or Segment of a Business.  This amount is
not included in the table  below.  All net  expenses of Agritope  subsequent  to
December 1, 1997, were borne by Agritope.

Andrew and  Williamson  Sales,  Co. On December 12,  1996,  a subsidiary  of the
Company  completed a merger with  Andrew and  Williamson  Sales,  Co.  (A&W),  a
producer and wholesale  distributor  of fresh and frozen  fruits and  vegetables
based in San  Diego,  California.  Under the terms of the  merger,  the  Company
issued 520,000 shares of its common stock in exchange for all of the outstanding
common stock of A&W.

On May 27, 1997, in  accordance  with the terms of a rescission  agreement,  the
former  shareholders  of A&W returned the 520,000 shares of Epitope common stock
they received,  and Epitope returned all of the outstanding shares of A&W common
stock. Epitope also received A&W preferred stock in satisfaction of intercompany
loans  made to A&W  between  December  12,  1996 and  March 19,  1997.  This A&W
preferred  stock  carries  a  $5.7  million  liquidation  preference,   dividend
preferences, and various redemption features. The A&W preferred stock carries no

                                                                              29
<PAGE>

value on the accompanying balance sheet based upon management's estimate of fair
value on the date it was received.  A&W's  results of operations  for the period
from  December  13, 1996  through May 27, 1997 and the total  estimated  loss on
disposal are presented in the accompanying  financial statements as discontinued
operations.

The components of Agritope's net assets are summarized as follows:

<TABLE>
SEPTEMBER 30                                                                                          1997
<S>                                                                                                <C>
Cash..................................................................................             $     4,384
Trade accounts receivable, net........................................................                 617,359
Inventories...........................................................................               2,081,295
Other current assets..................................................................                 281,778
                                                                                                   -----------
Total current assets..................................................................               2,984,816

Property and equipment, net...........................................................               2,749,788
Patents and proprietary technology, net...............................................               1,276,692
Investment in affiliates..............................................................                 246,962
Other assets..........................................................................                  26,797
                                                                                                   -----------
                                                                                                     7,285,055

Other current liabilities.............................................................               1,326,008
Long-term liabilities.................................................................               1,196,321
Accrued losses........................................................................               1,200,000
                                                                                                   -----------
Net assets of discontinued operations.................................................             $ 3,562,726
</TABLE>

The  summarized  Statements of Operations  for Agritope and  subsidiaries  is as
follows:

<TABLE>
SEPTEMBER 30                                                                         1997               1996
<S>                                                                              <C>              <C>         
Revenue....................................................................      $  1,551,190     $    585,485
Operating costs and expenses...............................................         6,088,883(1)     2,821,397

Other income (expense), net................................................        (4,427,275)        (265,356)
Minority interest in subsidiary net loss...................................           274,369                - 
                                                                                 ------------     ------------
Net loss from operations...................................................      $ (8,690,599)    $ (2,501,268)
</TABLE>

(1)  Does not include  $1.2  million of accrued  operating  losses and  spin-off
     costs for the period of October 1, 1997 to December 1, 1997. Such operating
     losses and spin-off costs have been reflected in the consolidated statement
     of operations in 1997.

NOTE 4     PROPERTY AND EQUIPMENT

Property and equipment are summarized as follows:

<TABLE>
SEPTEMBER 30                                                                         1998               1997
<S>                                                                               <C>              <C>        
Research and development laboratory equipment..........................           $ 1,014,015      $ 1,096,425
Manufacturing equipment................................................             1,423,580        1,389,304
Office furniture and equipment.........................................             1,753,455        1,772,698
Leasehold improvements.................................................             1,102,895        1,102,895
Construction in progress...............................................                63,503          109,380
                                                                                  -----------      -----------
                                                                                    5,357,448        5,470,702
Less accumulated depreciation and amortization.........................            (4,538,353)      (4,269,714)
                                                                                  -----------      -----------
                                                                                  $   819,095      $ 1,200,988
</TABLE>

NOTE 5     SHAREHOLDERS' EQUITY

Authorized  Capital  Stock.  The  Company's  amended  articles of  incorporation
authorize  1,000,000  shares of preferred stock and 30,000,000  shares of common
stock. The Company's Board of Directors has authority to determine  preferences,
limitations and relative rights of the preferred stock.

30
<PAGE>

On December 15, 1997, Epitope's Board of Directors approved a Shareholder Rights
Plan that would  allow the  Company to protect  shareholders'  interests  in the
event of an attempted  takeover of the Company.  A dividend  distribution of one
Right for each  outstanding  share of common stock was issued to shareholders of
record at the close of business on December  26, 1997.  Each Right  entitles the
registered  holder to purchase from Epitope 1/1000 of a share of Series A Junior
Participating  Cumulative Preferred Stock at a price of $60 per share subject to
adjustment.  The Rights  become  exerciseable  in the event a person or group of
affiliated or associated persons (other than the Company or its employee benefit
plans)  acquires or obtains the right to acquire 15% or more of the  outstanding
shares of common  stock.  With  certain  exceptions,  if any person  becomes the
beneficial  owner  of 15% or more of the  Company's  common  stock,  each of the
Rights  (other than  Rights held by that person and certain of its  transferees,
all of which  will be  voided)  entitles  the  holder to  acquire  shares of the
Company's common stock having a value equal to twice the Right's exercise price.
The Rights will expire on the  earliest of the close of business on December 26,
2007,  upon exchange by the Company for common stock,  or upon redemption at the
option of the Company for $0.01 per Right.

Common  Stock  Reserved for Future  Issuance.  As of  September  30,  1998,  the
following  shares  of the  Company's  common  stock  were  reserved  for  future
issuance, as more fully described below:

<TABLE>
PURPOSE                                                                                                SHARES
<S>                                                                                                  <C>      
Outstanding warrants...................................................                              2,537,307
Outstanding stock options..............................................                              3,630,727
Employee Stock Purchase Plan subscriptions.............................                                 38,245
                                                                                                     ---------
                                                                                                     6,206,279
</TABLE>

Common Stock  Warrants.  As of September  30, 1998,  the  following  warrants to
purchase shares of common stock were outstanding:

<TABLE>
                                                                             EXERCISE
DATE OF ISSUANCE                                                SHARES        PRICE         EXPIRATION DATE
<S>                                                           <C>              <C>         <C>
September 26, 1991........................................      159,150        5.91        September 30, 2000
December 23, 1992.........................................      988,390        5.91        September 30, 2000
July 20, 1993.............................................      375,000        5.91        September 30, 2000
August 1, 1993............................................      200,000        5.91        September 30, 2000
October 17, 1994..........................................       50,000        5.91        September 30, 2000
November 22, 1994.........................................      228,100        5.91        September 30, 2000
May 15, 1998..............................................      416,667        5.91        December 30, 2000
September 30, 1998........................................      120,000        6.13        September 30, 2008
                                                              ---------
                                                              2,537,307
</TABLE>

Stock  Award  Plans.  The  Company's  1991 Stock  Award Plan (the 1991 Plan) was
approved by the  shareholders  during 1991,  replacing the  Company's  Incentive
Stock  Option Plan (ISOP).  The 1991 Plan  provides  for  stock-based  awards to
employees,  outside directors and members of scientific  advisory  committees or
other  consultants.  Awards  which may be  granted  under the 1991 Plan  include
qualified   incentive   stock  options,   nonqualified   stock  options,   stock
appreciation rights, restricted awards, performance awards and other stock-based
awards.

Options  issued to employees  under the ISOP were issued at prices not less than
the fair  market  value of a share of common  stock on the date of grant.  These
options generally expire ten years from the date of grant.

Under the terms of the 1991 Plan, qualified incentive stock options on shares of
common stock may be granted to eligible employees,  including  officers,  of the
Company at an exercise price not less than the fair market value of the stock on
the date of grant.  The maximum term during which any option may be exercised is
ten years from the date of grant.  To date,  options have generally been granted
with four-year vesting  schedules.  The options are generally  exercisable after
one year  from the  date of  grant  at the  rate of 25%  after  one year and the
balance at 1/36th monthly thereafter.

                                                                              31
<PAGE>

The 1991 Plan also provides that nonqualified  options may be granted at a price
not less than 75% of the fair  market  value of a share of  common  stock on the
date of grant. The option term and vesting schedule of such awards may either be
unlimited or have a specified period in which to vest and be exercised.  For the
discounted   nonqualified   options  issued,   the  Company   amortizes,   on  a
straight-line  basis over the  vesting  period of the  options,  the  difference
between the exercise  price and the fair market value of a share of stock on the
date of grant.

SFAS 123 requires the following financial statement disclosure:

Options  granted and  outstanding  under the  Company's  stock  option plans are
summarized as follows:

<TABLE>
                                        1998                         1997                        1996
                                   SHARES       PRICE          SHARES       PRICE           SHARES       PRICE
<S>                            <C>          <C>    <C>      <C>         <C>    <C>        <C>        <C>     <C>  
Outstanding at
 beginning of period .......    3,499,865  $3.50 - 20.38     3,365,726 $3.50 - 24.00     3,636,103   $1.09 - 24.00
Granted.....................    4,237,156   1.29 - 18.17     2,801,403  3.50 - 14.81       901,379    9.81 - 18.13
Exercised...................      (91,278)  2.79 -  5.04       (16,124) 7.25 - 14.81      (386,550)   1.09 - 17.13
Canceled....................   (4,015,016)  3.50 - 20.38    (2,651,140) 3.50 - 24.00      (785,206)  14.38 - 24.00
                               ----------   ------------    ----------  ------------      --------   -------------
Outstanding at end of period    3,630,727   1.29 - 18.17     3,499,865 $3.50 - 20.38     3,365,726   $3.50 - 24.00

Exercisable.................    2,621,613   1.29 - 18.17     2,474,623 $3.50 - 20.38     2,302,212   $3.50 - 24.00
</TABLE>

<TABLE>
                                       Number of             Weighted            Average Remaining
Exercise Price Range                    Shares             Average Price         Contractual Life
                                        ------             -------------         ----------------
<S>           <C>                     <C>                      <C>                     <C> 
$1.29     -    $4.04                    461,950                3.25                     8.98
$4.17     -    $4.17                    825,000                4.17                     7.27
$4.22     -    $4.97                    201,150                4.48                    23.37
$5.04     -    $5.04                  1,876,877                5.04                     9.26
$5.75     -   $18.17                    265,750                7.84                     8.71
</TABLE>

Option Repricing. On July 26, 1997, a repricing was approved for all outstanding
options held by directors or employees,  including executive officers, for which
the exercise price was greater than the market value of the underlying  stock on
that  date.  The  Executive  Compensation  Committee  of the Board of  Directors
believed  that,  as a result of a  decline  in the  price of the  Common  Stock,
outstanding  options were  ineffective to serve the purposes for which they were
granted  under the 1991 Plan,  namely to align the  interests of option  holders
with the  long-term  interests of the Company's  shareholders.  The options were
repriced  using a price  equal to fair  market  value,  in order to restore  the
utility of the options as effective  incentives.  In  addition,  the spin-off of
Agritope  resulted in a price  reduction  of $2.21 for  outstanding  options and
warrants.

Options exercisable at September 30, 1998 totaled 2,621,613 shares at a weighted
average  exercise price of $4.88.  Options  available for grant at September 30,
1998 totaled 892,304.

Pursuant  to the 1991 Plan,  2478,  0, and 973 shares of common  stock were also
awarded  to  consultants  and  members  of  the  Company's  scientific  advisory
committees during 1998, 1997 and 1996, respectively.

Employee Stock Purchase Plan. In 1993, the  shareholders  approved the Company's
adoption of the 1993  Employee  Stock  Purchase  Plan (1993 ESPP).  The plan, as
subsequently  approved  and  amended  by the  Company's  shareholders,  covers a
maximum of 500,000  shares of common  stock for  subscription  over  established
offering  periods.  The Company's  Board of Directors  was granted  authority to
determine the number of offering periods,  the number of shares offered, and the
length of each period,  provided that no more than three offering periods (other
than Special  Offering  Subscriptions as described below) may be set during each
fiscal year of the Company.  The purchase  price for stock  purchased  under the
1993 ESPP for each  subscription  period is the lesser of 85% of the fair market
value of a share of common stock at the commencement of the subscription  period
or the fair market value at the close of the  subscription  period.  An employee
may also  elect to  withdraw  at any time  during  the  subscription  period and
receive the amounts paid plus interest at the rate of 6%.

As of September  30, 1998,  38,245  shares of common stock were  subscribed  for
during two offerings under the 1993 ESPP. Shares subscribed for under these 1993
ESPP  offerings  may be  purchased  over 24 months and had initial

32
<PAGE>

subscription  prices of $6.99 and $6.00 per share. The subscription  prices were
adjusted  in 1998 as a result of the  spin-off  of  Agritope to $4.78 and $3.79.
During the year ended  September  30, 1998,  14,451 shares were issued at prices
ranging from $4.78 to $3.79 under the 1993 ESPP.

The 1993 ESPP was amended to allow the Company,  at its  discretion,  to provide
Special  Offering   Subscriptions  whereby  an  employee's  annual  increase  in
compensation could be deferred for a one-year period. At the end of the one-year
period,  the employee can elect to receive the deferred  compensation  amount in
the form of cash or shares of the Company's common stock. The purchase price for
stock issued under a Special  Offering  Subscription is the lesser of 85% of the
fair market  value of a share of common  stock on the first day of the  calendar
month the  employee's  increase  was  effective  or the fair market value at the
close of the one-year subscription period. No shares were issued under a Special
Offering Subscription during 1998, 1997 or 1996.

The Company has elected to account for its  stock-based  compensation  under the
provisions  of APB 25.  However,  as required  by SFAS No. 123,  the Company has
computed for pro forma  disclosure  purposes the value of options granted during
1998 and 1997 using the Black-Scholes option pricing model. The weighted average
assumptions  used for stock  option  grants  for 1998 and 1997 were a  risk-free
interest rate of 5.7% and 5.9%,  respectively,  no expected  dividend  yield, an
expected life of 3.9 and 4.3 years, respectively,  and an expected volatility of
60% and 53%,  respectively.  The weighted average assumptions used for 1993 ESPP
rights  for 1998 and  1997  were a  risk-free  interest  rate of 5.6% and  6.1%,
respectively,  no expected  dividend  yield,  an expected  life of 2 years and 2
years,  respectively,  and an expected volatility of 69% and 63%,  respectively.
The  weighted-average  fair value of ESPP rights granted in 1998 was $55,066 and
$248,700 for ESPP rights granted in 1997.

Options  were  assumed  to be  exercised  upon  vesting  for  purposes  of  this
valuation.  Adjustments are made for options forfeited prior to vesting. For the
years ended  September 30, 1998 and 1997, the total value of the options granted
was  computed to be  $6,861,799  and  $9,096,600,  respectively,  which would be
amortized on the straight-line basis over the vesting period of the options.

If the Company had accounted  for these plans in  accordance  with SFAS 123, the
Company's  net loss and pro forma net loss per share would have been reported as
follows:

<TABLE>
YEAR ENDED SEPTEMBER 30                                   1998                               1997
                                                                 BASIC AND                           BASIC AND
                                                                  DILUTED                             DILUTED
                                                NET LOSS         NET LOSS          NET LOSS          NET LOSS
                                                                 PER SHARE                           PER SHARE
<S>                                             <C>              <C>             <C>                 <C>     
As reported.................................    $ (1,928,008)    $ (0.14)        $ (22,440,271)      $ (1.67)

Pro forma...................................    $ (4,957,178)    $ (0.37)          (26,958,371)        (2.01)
</TABLE>

The effects of applying SFAS 123 in providing pro forma  disclosure for 1998 and
1997 are not likely to be  representative  of the effects on reported net income
and earnings per share for future  years since  options vest over several  years
and additional awards are made each year.

NOTE 6     INCOME TAXES

As of September 30, 1998,  the Company had net operating loss  carryforwards  to
offset federal and state taxable income of approximately $48.6 million and $45.5
million, respectively. Approximately $7.0 million of the Company's net operating
loss  carryforwards  were  generated  as a result of  deductions  related to the
exercise of stock options.  If utilized,  such  carryforwards,  as tax effected,
will be  reflected  in the  Company's  financial  statements  as an  increase in
shareholders' equity rather than a reduction of the provision for income taxes.

                                                                              33
<PAGE>

Significant components of Epitope's deferred tax asset were as follows:

<TABLE>
SEPTEMBER 30                                                                    1998                        1997
<S>                                                                          <C>                        <C>        
Net operating loss carryforwards.......................................      $18,532,000                $17,030,000
Deferred compensation..................................................        1,829,000                  1,707,000
Research and experimentation credit carryforwards......................        1,026,000                    888,000
Accrued expenses.......................................................          269,000                    868,000
Other..................................................................          779,000                    850,000
                                                                             -----------                -----------
Gross deferred tax assets..............................................       22,435,000                 21,343,000
Valuation allowance....................................................      (22,435,000)               (21,343,000)
                                                                             -----------                -----------
Net deferred tax asset.................................................      $   ---                    $   ---
</TABLE>

No benefit for these assets has been reflected in the accompanying  consolidated
financial  statements as they do not satisfy the recognition  criteria set forth
in SFAS 109. Accordingly, a valuation allowance of $22.4 million, representing a
$1.1 million increase since the prior fiscal year end, has been recorded.

The tax benefit of  approximately  $0.6 million for the year ended September 30,
1998,   calculated   using  the  statutory  tax  rate,  has  been  increased  by
approximately  $0.8  million  for the  effect of state and local  taxes  (net of
federal impact) and is reduced by  approximately  $1.1 million for the effect of
the  increase  in  valuation  allowance  and $0.3  million  for other  permanent
differences.

NOTE 7     DISTRIBUTION AND SUPPLY CONTRACTS

The Company has entered into several contractual  arrangements,  including those
discussed  in the  following  paragraphs,  for  distribution  of  certain of its
products to customers.

The Company  maintains supply and  distribution  agreements with Organon Teknika
Corporation  (Organon  Teknika),  whereby Organon Teknika supplies the Company's
antigen  requirements  and  exclusively  distributes  the Company's  EPIblot HIV
confirmatory  tests  (EPIblot) on a worldwide  basis.  The agreements  have been
extended to March 31, 2000 and  continue  to renew each year  thereafter  unless
prior notice of  cancellation  is given by the Company or Organon  Teknika.  The
distribution agreement includes pricing incentives based on volumes purchased by
Organon  Teknika  and  penalties  for  failure  to  purchase  specified  minimum
quarterly  volumes.  For the years  ended  September  30,  1998,  1997 and 1996,
respectively,  revenues  generated from sales of EPIblot to Organon Teknika were
$2,371,135, $1,791,290 and $1,539,164, including export sales of $1,250, $15,750
and $62,539.

LabOne,  Inc. (LabOne)  purchases oral specimen devices from the Company for use
in  insurance  testing in return for  non-exclusive  distribution  rights in the
United  States and Canada  under an agreement  which  expires on March 31, 2000,
with an automatic  five-year renewal,  unless either party notifies the other of
intent not to renew at least 180 days prior to the expiration date. In 1998, the
Company  entered  into  an  additional   agreement  with  LabOne  to  provide  a
prepackaged  OraSure test kit with prepaid testing and sample shipment to LabOne
via Airborne Express. This product package is sold directly to the public health
customers by the Epitope  sales force.  For the years ended  September 30, 1998,
1997 and 1996,  respectively,  revenues  generated  from product sales to LabOne
were $2,773,351,  $3,194,698, and $1,327,544 including export sales of $402,150,
$597,000 and $394,747.

In 1995, SmithKline Beecham plc (SB) and the Company entered an agreement giving
SB exclusive  rights to market the  Company's  oral specimen  collection  device
worldwide,  except in several foreign countries and to the insurance industry in
the U.S.,  Canada and Japan.  In July 1997,  SB and the Company  terminated  the
agreement.  As a result,  the Company acquired marketing rights for OraSure from
SB. In 1995, SB made an initial license fee payment of $1 million to the Company
and  committed  an  additional  license  fee of $4  million  to be paid upon FDA
approval  of a pending  request  to amend the  labeling  of the  Company's  oral
specimen collection device to indicate a two-year shelf life. In April 1996, the
FDA granted  the  Company's  request for  extended  dating and SB  disbursed  $4
million plus interest from escrow. Accordingly, the Company recognized income of
$5 million in 1996 operating results.

34
<PAGE>

NOTE 8     COMMITMENTS

The Company leases office,  manufacturing,  warehouse and laboratory  facilities
under  operating  lease  agreements  which require  minimum  annual  payments as
follows:

YEAR ENDING SEPTEMBER 30
<TABLE>
<S>                                                                                               <C>      
1999......................................................................................        $ 346,356
2000......................................................................................          109,992
                                                                                                  ---------
                                                                                                  $ 456,348
</TABLE>

Under the agreements for the lease of its office and laboratory facilities,  the
Company is obligated to the lessor for its share of certain  expenses related to
the use, operation,  maintenance and insurance of the property.  These expenses,
payable  monthly in addition to the base rent,  are not  included in the amounts
shown above.  Rent expense  aggregated  $433,002,  $409,970 and $538,665 for the
years ended September 30, 1998, 1997 and 1996, respectively.

NOTE 9     PROFIT SHARING AND SAVINGS PLAN

The Company  established a profit  sharing and deferred  salary  savings plan in
1986 and restated the plan in 1991. All employees are eligible to participate in
the plan. In addition, the plan permits certain voluntary employee contributions
to be excluded from the employees'  current  taxable income under the provisions
of  Internal  Revenue  Code  Section  401(k)  and  the  regulations  thereunder.
Effective  October 1, 1991, the Company replaced a discretionary  profit sharing
provision with a matching contribution (either in cash, shares of Epitope common
stock,  or  partly  in  both  forms)  equal  to  50%  of  an  employee's   basic
contribution,  not to exceed 2.5% of an  employee's  compensation.  The Board of
Directors  has the  authority to increase or decrease the 50% match at any time.
During  1998,  1997 and 1996,  respectively,  the  Company  contributed  $80,741
(17,260 shares), $101,737 (11,459 shares, totaling $101,721 and the remainder in
cash) and $73,315 (4,653 shares totaling  $73,279 and the remainder in cash). As
of September  30, 1998,  33,554  shares of Epitope  common stock are held by the
plan.

NOTE 10    GEOGRAPHIC AREA INFORMATION

The  Company's  products  are all  included  in the  medical  products  industry
segment.  See Note 1 for a description of the Company's business.  The Company's
products  are sold  principally  in the United  States,  Canada,  Asia and Latin
America.  In 1997 and  1996  product  sales  to Asia  were  included  in  Other.
Operating loss represents revenues less operating expenses.  No operating income
or loss is reflected for geographic  areas other than the United States and Asia
as all revenues for other geographic areas are exports from the United States.

IN THOUSANDS

<TABLE>
GEOGRAPHIC               REVENUES                         OPERATING LOSS                   IDENTIFIABLE ASSETS
AREAS            1998       1997       1996         1998       1997       1996         1998       1997      1996
United
<S>             <C>        <C>        <C>          <C>        <C>        <C>          <C>        <C>        <C>    
States.......   $8,774     $8,569     $4,903       $(2,264)   $(4,935)   $(5,244)     $10,357    $17,012    $29,784
Canada.......      415        608        404             -          -          -            -          -          -
Asia.........      341        130        122            13        (29)       (43)           -          -          -
Latin
America......      202          4        100             -          -          -            -          -          -
Europe.......       59         49         65             -          -          -            -          -          -
Other........        1          -          -             -          -          -            -          -          -
                ------     ------     ------       -------    -------    -------      -------    -------    -------
                $9,792     $9,360     $5,594       $(2,251)   $(4,964)   $(5,287)     $10,357    $17,012    $29,784
</TABLE>

NOTE 12    CONTINGENCIES

On April 7, 1998,  the  Company's  former  subsidiary  A&W  instituted a lawsuit
against  two former  officers  of the  Company  and an officer  of  Agritope  in
connection with events  surrounding  the recission of the A&W acquisition  (U.S.
District Court for the Southern  District of California,  Case No. 98 CV 0666 TW
(CGA)).  The defendants were not served with notice of the lawsuit until October
1, 1998. A&W alleges improper acts by the officers, and 


                                                                              35
<PAGE>

seeks  damages  claimed  to be  in  excess  of  $5.7  million,  an  amount  that
corresponds to the liquidation value of the preferred stock issued by A&W to the
Company at the time the acquisition was rescinded.  The Company is defending the
officers and believes the lawsuit to be frivolous, without merit, and counter to
a  settlement  agreement  signed  by A&W  at the  time  of  the  recission.  The
defendants have moved for dismissal and will pursue the matter  vigorously.  The
Company has filed an action in Oregon  state  court  (Multnomah  County  Circuit
Court Civ. No.  9810-07537)  against A&W for breaching the settlement  agreement
and is  seeking as damages  the  Company's  costs of  defending  the  California
action.





No schedules are included with the foregoing  financial  statements  because the
required information is inapplicable or is presented in the financial statements
or related notes thereto.

(a)(3) Exhibits.

See Index to Exhibits following the signature page of this report.

(b)      Reports on Form 8-K.

 None.





36
<PAGE>


                                   SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized, on December 23, 1998.

                                  EPITOPE, INC.

                                  By  * JOHN W. MORGAN
                                  John W. Morgan
                                  President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on December 23, 1998, by the following  persons on behalf of the
Registrant and in the capacities indicated.

                  SIGNATURE                          TITLE

         *JOHN W. MORGAN                   President, Chief Executive Officer, 
         John W. Morgan                    and Director
                                           (Principal Executive Officer)

         /S/ CHARLES E. BERGERON           Chief Financial Officer
         Charles E. Bergeron               (Principal Financial Officer)

         /S/ THEODORE R. GWIN              Controller
         Theodore R. Gwin                  (Principal Accounting Officer)

         *W. CHARLES ARMSTRONG             Director
         W. Charles Armstrong

         *ANDREW S. GOLDSTEIN              Senior Vice President and Director
         Andrew S. Goldstein

         *MARGARET H. JORDAN               Director
         Margaret H. Jordan

         *MICHAEL J. PAXTON                Director
         Michael J. Paxton

         *ROGER L. PRINGLE                 Director
         Roger L. Pringle

         *G. PATRICK SHEAFFER              Director
         G. Patrick Sheaffer

         *ROBERT J. ZOLLARS                Director
         Robert J. Zollars


         * /S/ CHARLES E. BERGERON
         Charles E. Bergeron
         (Attorney-in-Fact)

                                                                              37
<PAGE>

                                INDEX TO EXHIBITS
Exhibit
Number            Exhibit
------            -------
3.1               Restated Articles of Incorporation, as amended, of Registrant.
                  Incorporated  by  reference  to Exhibit 3 to the  Registrant's
                  Registration  Statement  on Form 8-A filed  December  26, 1997
                  (Registration Statement No. 000-15337).

3.2               Restated  Bylaws of Registrant.  Incorporated  by reference to
                  Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for
                  the year ended September 30, 1997 (the 1997 10-K).

4.1               Stock  Purchase  Agreement  dated  November  9, 1990,  between
                  certain  investors and  Registrant.  Copies of the  agreements
                  with  individual  investors shall be filed with the Commission
                  upon  request  pursuant  to  Instruction  2  of  Item  601  of
                  Regulation  S-K (Item 601,  Instruction  2).  Incorporated  by
                  reference to Exhibit 4.2 to the Registrant's  Annual Report on
                  Form  10-K for the year  ended  September  30,  1994 (the 1994
                  10-K).

4.2               Unit Purchase  Agreement  dated September 1991 between certain
                  investors  and  Registrant.  Copies  of  the  agreements  with
                  individual  investors  shall be filed with the Commission upon
                  request pursuant to Item 601,  Instruction 2.  Incorporated by
                  reference to Exhibits 4.1 and 4.2 to the Registrant's  Current
                  Report on Form 8-K dated September 17, 1991.

4.3               Warrant  Purchase  Agreement  dated as of November  25,  1992,
                  between  certain  investors  and  Registrant.  Copies  of  the
                  agreements with  individual  investors shall be filed with the
                  Commission upon request  pursuant to Item 601,  Instruction 2.
                  Incorporated  by reference to Exhibit 4.5 to the  Registrant's
                  Annual  Report on Form 10-K for the year ended  September  30,
                  1992 (the 1992 10-K).

4.4               1993 Technology  Transfer Warrant Issuance  Agreement dated as
                  of June 15, 1993,  between  certain  investors and Registrant.
                  Copies of the agreements  with  individual  investors shall be
                  filed with the Commission  upon request  pursuant to Item 601,
                  Instruction 2. Incorporated by reference to Exhibit 4.3 to the
                  Registrant's Registration Statement on Form S-3 (No. 33-68510)
                  (Registration Statement No. 33-68510).

4.5               Form of Letter dated August 1, 1993, from Registrant regarding
                  modification  of the  terms  of the 1993  Technology  Transfer
                  Warrants.   Incorporated   by  reference  to  Exhibit  4.5  to
                  Registration Statement No. 33-68510.

4.6               1993  Warrant  Purchase  Agreement  dated as of July 6,  1993,
                  between  certain  investors  and  Registrant.  Copies  of  the
                  agreements with  individual  investors shall be filed with the
                  Commission upon request  pursuant to Item 601,  Instruction 2.
                  Incorporated  by  reference  to  Exhibit  4.6 to  Registration
                  Statement No. 33-68510.

4.7               Notice  to   warrantholders   and  current   form  of  warrant
                  certificate  for warrants  issued in September  1991 offering,
                  reflecting  extension  of  expiration  date.  Incorporated  by
                  reference to Exhibit 4.1 to the Registrant's Current Report on
                  Form 8-K dated September 12, 1997.

4.8               Notice  to   warrantholders   and  current   form  of  warrant
                  certificate  for warrants  issued in December  1992  offering,
                  reflecting  extension  of  expiration  date.  Incorporated  by
                  reference to Exhibit 4.2 to the Registrant's Current Report on
                  Form 8-K dated September 12, 1997.

4.9               Notice  to   warrantholders   and  current   form  of  warrant
                  certificate   for  warrants  issued  in  July  1993  offering,
                  reflecting  extension  of  expiration  date.  Incorporated  by
                  reference to Exhibit 4.3 to the Registrant's Current Report on
                  Form 8-K dated September 12, 1997.

4.10              Notice  to   warrantholders   and  current   form  of  warrant
                  certificate  for  warrants  issued  in August  1993  offering,
                  reflecting  extension  of  expiration  date.  Incorporated  by
                  reference to Exhibit 4.4 to the Registrant's Current Report on
                  Form 8-K dated September 12, 1997.

38
<PAGE>

10.1              Incentive  Stock  Option  Plan  of  Registrant,   as  amended.
                  Incorporated by reference to Exhibit 10.1 to the 1994 10-K.*

10.2              Amended and  Restated  Epitope,  Inc.,  1991 Stock Award Plan.
                  Incorporated by reference to Exhibit 10.2 to the 1997 10-K.*

10.3              Form of Nonqualified  Stock Option Agreement issued to John W.
                  Morgan  pursuant  to  Epitope,  Inc.,  1991 Stock  Award Plan.
                  Incorporated by reference to Exhibit 10.20 to the 1997 10-K.*

10.4              Lease dated July 17, 1990,  among  Registrant,  Koll  Woodside
                  Associates,  a  California  general  partnership,  and  Petula
                  Associates,   Ltd.,  an  Iowa  corporation.   Incorporated  by
                  reference to Exhibit 10.5 to the 1994 10-K.

10.5              Fourth  Amendment  dated May 20, 1994, to Lease dated July 17,
                  1990, among Registrant, Koll Woodside Associates, a California
                  general  partnership,  and Petula  Associates,  Ltd.,  an Iowa
                  corporation.  Incorporated by reference to Exhibit 10.1 to the
                  Registrant's  Quarterly  Report  on Form  10-Q for the  fiscal
                  quarterly period ended June 30, 1994 (June 1994 10-Q).

10.6              Business Park Lease dated May 5, 1994, among Registrant,  Koll
                  Woodside  Associates,  a California general  partnership,  and
                  Petula Associates, Ltd., an Iowa corporation.  Incorporated by
                  reference to Exhibit 10.2 to the June 1994 10-Q.

10.7              Distribution  Agreement  dated as of April  1,  1994,  between
                  Registrant and Organon  Teknika  Corporation.  Incorporated by
                  reference to Exhibit 10.3 to the June 1994 10-Q.

10.8              Supply Agreement dated as of April 1, 1994, between Registrant
                  and Organon Teknika Corporation.  Incorporated by reference to
                  Exhibit 10.4 to the June 1994 10-Q.

10.9              Form of Indemnification  Agreement for directors and officers.
                  Incorporated by reference to Exhibit 10.4 to the  Registrant's
                  Registration Statement on Form S-4 (No. 333-15705).*

10.10             Amended and Restated  Employment  Agreement  dated  January 8,
                  1991 between Andrew S. Goldstein and Registrant.  Incorporated
                  by  reference  to  Exhibit  10.28 to the  Registrant's  Annual
                  Report on Form 10-K for the year ended September 30, 1991.*

10.11             Employment  Agreement  dated October 6, 1997,  between John W.
                  Morgan and  Registrant.  Incorporated  by reference to Exhibit
                  10.19 to the 1997 10-K .*

10.12             Employment  Agreement dated January 19, 1998,  between Charles
                  E.  Bergeron  and  Registrant.  Incorporated  by  reference to
                  Exhibit  10.21 to  Amendment  No. 1 to the 1997 10-K (the 1997
                  10-K Amendment).*

10.13             Employment  Agreement  dated  January  13,  1998,  between  J.
                  Richard  George,   Ph.D.  and   Registrant.   Incorporated  by
                  reference to Exhibit 10.22 to the 1997 10-K Amendment.*

10.14             Employment Agreement dated as of March 9, 1998, between Edward
                  V. Collum and Registrant.*

10.15             Separation Agreement between Epitope, Inc. and Agritope,  Inc,
                  dated December 1, 1997.  Incorporated  by reference to Exhibit
                  2.3 to the 1997 10-K.

10.16             Amended  and  Restated  Employee  Benefits  Agreement  between
                  Registrant and Agritope,  Inc. (Agritope),  dated December 19,
                  1997.  Incorporated  by reference to Exhibit 10.24 to the 1997
                  10-K.*

10.17             Transition   Services   and   Facilities   Agreement   between
                  Registrant and Agritope,  dated December 1,

                                                                              39
<PAGE>

                  1997.  Incorporated  by reference to Exhibit 10.25 to the 1997
                  10-K.

10.18             Tax  Allocation  Agreement  between  Registrant  and Agritope,
                  dated December 1, 1997.  Incorporated  by reference to Exhibit
                  10.26 to the 1997 10-K.

10.19             Settlement  and  Release   Agreement   among  Epitope,   Inc.,
                  Thamscoe,  Inc.,  Andrew and  Williamson  Sales,  Co., and the
                  shareholders of Andrew and Williamson Sales, Co., dated May 4,
                  1997.  Incorporated  by  reference  to  Exhibit  10.1  of  the
                  Registrant's  Quarterly  Report  on Form  10-Q for the  fiscal
                  quarterly period ended March 31, 1997.

23.               Consent of PricewaterhouseCoopers LLP.

24.               Powers of Attorney.

27.               Financial Data Schedule.

*        Management contract or compensatory plan or arrangement



40