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

FORM 10-Q

Commission file number 0-22170

Epoch Biosciences, Inc.
(Exact name of Registrant as specified in its charter)

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

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

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

     Check whether the issuer (1) filed all reports to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES  [X]       NO  [   ]

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

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Epoch Biosciences, Inc.
Index To Form 10-Q

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Part I.  Financial Information

Epoch Biosciences, Inc.
Balance Sheets
(unaudited)

Assets

See accompanying notes to financial statements.

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Epoch Biosciences, Inc.
Statements of Operations
(unaudited)

See accompanying notes to financial statements.

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

See accompanying notes to financial statements

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Epoch Biosciences, Inc.
Notes to Financial Statements
June 30, 2002
(unaudited)

1.   Summary of Significant Accounting Policies

(a)

Nature of Business

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

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

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

(b)

Basis of Presentation

     The unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required to be presented for complete financial statements. The accompanying financial statements include all adjustments (consisting only of normal recurring accruals), which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Certain 2001 balances have been reclassified to conform with the 2002 presentation.

     The financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited financial statements and the related notes included in Epoch’s 2001 Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

(c)

Loss Per Share

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

(d)

Revenue Recognition

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

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

     Up front license fees are recognized over the term of the agreement to which the license fees correspond, which may extend to the expiration of the underlying patents, and based on the terms and future performance obligations in the underlying agreements. Deferred revenue represents advance payments for license fees, product purchases and contract research.

     Contract research revenues are recognized as the research and development activities are performed under the terms of commercial collaboration and supply agreements and government grants. Direct costs related to these contracts and grants are reported as research and development expenses.

     Royalty revenues are recognized when earned under the terms of the related agreements, which is generally upon sale by our partners of products containing our component products.

(e)

Concentration of Credit Risk

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

     One customer accounted for approximately 56% of revenues in the current quarter and 58% of revenues in the current year to date. Revenues from this customer were 55% of total revenues in the comparable quarter of the prior year and 54% of revenues in the first six months of 2001. Accounts receivable from this customer amounted to $197,000 at June 30, 2002. There were no amounts due from this customer December 31, 2001.

     A second customer accounted for approximately 15% of revenues in the current quarter and 9% of revenues in the current year to date. Revenues from this customer were 3% of total revenues in the

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comparable quarter of the prior year and 5% of revenues in the first six months of 2001. Accounts receivable from this customer amounted to $97,000 at June 30, 2002, and $28,000 at December 31, 2001.

     Another customer accounted for approximately 5% of revenues in the current quarter and 8% of revenues in the current year to date. Revenues from this customer were 16% of total revenues in the comparable quarter of the prior year and 18% of revenues in the first six months of 2001. Accounts receivable from this customer amounted to $85,000 at June 30, 2002, and $46,000 at December 31, 2001.

(f)

Intangible Assets

     In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill and other indefinite-lived intangible assets, including any such intangibles recorded in past business combinations, are not amortized beginning January 1, 2002. SFAS No. 142 also requires the assets to be written down with a goodwill impairment charge against current earnings whenever the recorded values exceed their fair values. We adopted SFAS No. 142 on January 1, 2002 and accordingly have not recorded any amortization of our goodwill and other indefinite-lived intangible assets during the six months ended June 30, 2002. If this standard had been implemented as of January 1, 2001, amortization expense for the three months ended June 30, 2001 would have been reduced by $39,000, and amortization expense for the six month period ended June 30, 2001 would have been reduced by $77,000.

(g)

Bank Financing Commitment

     In August 2002, we received a commitment from a commercial bank for a secured term loan of up to $2,500,000 to finance manufacturing equipment and other assets and a working capital line of credit of $750,000. Subject to the execution of definitive loan documents, funds may be drawn on the equipment facility at any time through June 30, 2003, and on the working capital line of credit at any time for two years from the closing date, provided that we are in compliance with the following covenants:

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

     We are currently in compliance with each of these covenants. On the term loan, amounts advanced would be repayable in 36 monthly payments of principal and interest at the bank’s prime rate (currently 4.75%) plus .5%. On the working capital line of credit, interest would be payable monthly on any unpaid balances at the bank’s prime rate (currently 4.75%) plus .5%, with principal payable in full in two years from the date of the signing of the agreement. We have not drawn funds on either of these facilities to date.

     There can be no assurance that we will successfully complete loan documents and other steps necessary to finalize these credit facilities, or that we will be able to draw funds on either the term loan or on the working capital line of credit.

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

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

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

Results of Operations

Overview

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

Subsequent Event

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     In July 2002, we entered an agreement with Amersham Biosciences Corp., the life sciences business of Amersham plc, under which Amersham became the exclusive worldwide sales and marketing partner of our MGB Eclipse™ Probe Systems to the research field. Under the terms of the agreement, Amersham will promote and market MGB Eclipse products as part of its genomics product portfolio to researchers in the life sciences industry and to pharmaceutical companies conducting internal research. Amersham will need to meet certain milestones to retain its exclusive distributor status.

     Amersham’s sales force will offer MGB Eclipse catalogue and custom probe sets and will receive technical support and sales coordination from us in the initial stages of the relationship. We will also make our MGB Eclipse™ Design Software available from the Amersham Biosciences web site to enable customers to rapidly design and order MGB Eclipse probes and primers specifically for a sequence of interest. We will be the sole manufacturer of the MGB Eclipse product line.

Critical Accounting Policies

     Our accounting policies are more fully described in Note 1 to our annual financial statements for the year ended December 31, 2001. However, certain of our accounting policies are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by our management. As a result they are subject to an inherent degree of uncertainty. In applying those policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of the estimates. Those estimates are based on our historical experience, terms of existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. Our critical accounting policies, which have not changed significantly from December 31, 2001, are as follows:

	•		revenue recognition; and
	•		accounting for income taxes.

     Revenue recognition. We earn product revenues through sales of chemical products and reagents to manufacturers for incorporation into their products, from the sale of specialty oligonucleotides and value added reagents to end users in the research fields of genomics and molecular diagnostics, from license fees for the use of our proprietary technology and know-how, and by providing services to third parties for performing research and development on their behalf. We also have product royalty agreements that result in royalties to us upon ultimate sales of products by our partners.

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

     Up front license fees are recognized over the term of the agreement to which the license fees correspond, which may extend to the expiration of the underlying patents, and based on the terms and future performance obligations in the underlying agreements. Deferred revenue principally represents license fees received in advance and prepayments for product purchases.

     Contract research revenues are recognized as the research and development activities are performed under the terms of commercial collaboration and supply agreements and government grants. Direct costs related to these contracts and grants are reported as research and development expenses.

     Royalty revenues are recognized when earned under the terms of the related agreements, which is generally upon sale of products by our partner containing our component products.

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

     The gross deferred tax assets as of December 31, 2001 were approximately $26 million, and have been fully reserved based on our history of operating losses.

Revenues

     Product Sales. Product sales increased 50% to $1,700,000 in the quarter ended June 30, 2002 from $1,135,000 in the comparable quarter of the prior year. Growth in the company’s San Diego custom oligonucleotide operation and in chemical intermediate shipments to our collaborative partners drove this quarter’s increased product sales. Product sales similarly increased 50% to $3,225,000 for the six month period ended June 30, 2002 from $2,157,000 in the prior year period as a result of the same growth.

     The growth in the custom oligonucleotide business this quarter was primarily due to sales to one customer that increased to $371,000 in the quarter ended June 30, 2002 from $55,000 in comparable quarter of the prior year. Sales to this customer similarly increased to $408,000 for the six month period ended June 30, 2002 from $150,000 in the prior year period. There can be no assurance that revenue from this customer will continue at those levels.

     License Fees and Royalties. License fees and royalties increased to $256,000 in the quarter ended June 30, 2002 from $134,000 in the comparable quarter of the prior year, indicative of the growth in the product revenues of our corporate partners. License fees and royalties similarly increased to $433,000 for the six month period ended June 30, 2002 from $162,000 in the prior year period also reflecting the growth in the product revenues of our corporate partners.

     Contract Research. Contract research revenue increased to $532,000 in the quarter ended June 30, 2002 from $500,000 in the comparable period of the prior year, primarily as a result of a new SBIR grant which began in August 2001 and additional research activity for a commercial collaborator which began in April 2002, offset by reductions in other activities as one of our collaborative partners is not currently requiring contract research from us. We are currently in discussion with this partner regarding future research funding commitments. Similarly, contract research revenue increased to $1,112,000 for the six month period ended June 30, 2002 from $1,000,000 in the prior year period, as a result of the same changes.

Operating Expenses

     Cost of Product Sales. Cost of product sales increased to $1,195,000 in the quarter ended June 30, 2002 from $748,000 in the comparable quarter of the prior year primarily as a result of the increase in product sales. Costs as a percentage of product sales increased from 66% in second quarter 2001 to 70% this quarter.

     The cost of product sales increased to $2,294,000 in the six month period ended June 30, 2002 compared to $1,627,000 in the comparable period of the prior year. Costs as a percentage of product sales decreased from 75% for the six month period ended June 30, 2001 to 71% for the current year’s

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period.

     Increases in costs of product sales are generally tied to the increases in revenues, while the changes in costs as a percentage of product sales are generally impacted by the product mix. The selling prices of our chemical intermediates, for example, are determined by contracts and are tied to fully burdened manufacturing costs, which means our gross margin is fixed at levels below those generally found in the commercial marketplace. The costs of our specialty oligonucleotides are impacted by our San Diego manufacturing operations where we continue to invest in capital equipment and staff as we increase our capacity to support our expected revenue growth.

     Research and Development. Research and development expenses decreased to $1,119,000 in the quarter ended June 30, 2002 from $1,194,000 in the comparable quarter of the prior year due primarily to a higher level of personnel and other costs being involved in the manufacturing of chemical intermediates versus working on research and development activities, partially offset by higher personnel costs. A similar allocation of resources to the manufacture of chemical intermediates versus research and development activities resulted in a reduction of research and development expenses for the six months ended June 30, 2002 to $2,186,000 from $2,326,000 in the comparable period of 2001.

     Sales and Marketing. Sales and marketing expenses increased to $319,000 in the quarter ended June 30, 2002 from $106,000 in the comparable quarter of the prior year. The primary reason for the increase is effort on our part to market and sell our products, including an expanded direct sales group, the establishment of an internal product and corporate marketing function, and expanded print advertising activities. Similarly the sales and marketing expenses for the six month period increased to $702,000 from $174,000 in the prior year period.

     General and Administrative. General and administrative expenses increased to $1,081,000 in the quarter ended June 30, 2002 from $1,030,000 in the comparable quarter of the prior year due primarily to increased personnel costs, partially offset by decreased recruiting and relocation expenses and a reduction in amortization expense on goodwill in accordance with SFAS 142, in 2002. Similarly, the general and administrative expenses for the six month period increased to $2,069,000 from $1,964,000 in the prior year period, again primarily due to increased personnel costs partially offset by decreased recruiting and relocation expenses, and a reduction of amortization expense on goodwill in 2002.

     Interest Income, Net. Interest income, net, decreased to $25,000 in the second quarter of 2002 compared to $118,000 in the second quarter of 2001, and also decreased for the six month period ended June 30, 2002 to $62,000 from $276,000 in the comparable period of the prior year, as a result of lower average cash balances available for investment and lower realized interest rates.

Liquidity and Capital Resources

     Cash and cash equivalents amounted to $4,955,000 at June 30, 2002, a $2,535,000 decrease from December 31, 2001 balances.

     Cash used in operations during the six month period ended June 30, 2002 amounted to $2,361,000 as a result of our net loss of $2,418,000 adjusted for certain non-cash reconciling items and fluctuations in working capital accounts. The most significant working capital account changes that impacted cash used by operations were increases in accounts receivable of $207,000 and inventories of $144,000 to support our increased sales volumes, offset by an increase in accounts payable of $358,000, which is a normal fluctuation resulting from the increased activity. Also, approximately $406,000 in product sales and royalties recognized during the six months ended June 30, 2002, compared to $133,000

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in six month period of 2001, had been received in advance and recorded as deferred revenue and therefore didn’t generate cash in the current period. The amounts and timing of these offsets are based on contracts with our partners.

     Cash used in investing activities amounted to $170,000 in the six months ended June 30, 2002. Acquisition of property and equipment totaling $270,000 was offset by $100,000 in security deposits on our Bothell facility being returned to us for general use. We continue to invest in manufacturing equipment as we prepare for anticipated growth in demand for our products and we expect that we will have a higher level of capital expenditures in the second half of 2002 than we had in the first half of 2002. In addition to increased manufacturing capacity, we will also continue to make other investments to support our operational growth. We may also require a larger inventory of raw materials and products to provide better service to our customers. We may finance these purchases from our cash and cash equivalents on hand, cash generated from our operations, borrowings, equity offerings, or a combination thereof.

     Cash used in financing activities was minimal in the period and consisted of repayments on capital leases of $5,000 offset by $1,000 received from the exercise of stock options.

     We anticipate that existing cash balances and projected cash from operations, will be sufficient to meet our anticipated working capital and capital expenditure needs through at least the next 12 months. In addition to our existing cash balances and projected cash from operations, we anticipate borrowings under the bank financing commitment discussed in note (g) above may be used to fund our capital equipment expenditures and growth in our working capital requirements. However, it is possible that we may need to raise additional capital to fund our activities, to maintain our listing on Nasdaq, and/or to consummate acquisitions of other businesses, products or technologies. We may be able to raise such funds by selling more stock to the public or to selected investors, or by borrowing money. In addition, even though we may not need additional funds, we may still elect to sell additional equity securities or obtain credit facilities for other reasons. We may not be able to obtain additional funds on terms that would be favorable to our shareholders and us, or at all. If we raise additional funds by issuing additional equity or convertible debt securities, the ownership percentages of existing shareholders would be reduced. In addition, the equity or debt securities that we issue may have rights, preferences or privileges senior to those of the holders of our common stock.

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Certain Factors That May Affect Our Business And Future Results

Forward Looking Statements

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

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

     We have never been profitable. Since our formation in 1985, we have generated limited revenues. As of June 30, 2002, we had an accumulated deficit of approximately $73 million. While we are commercializing our products and technologies, and prior to adequate revenues being generated from these activities, we expect to incur additional losses as we expand our manufacturing capacity, continue our research and development activities and fund our product commercialization efforts. There is no assurance that we will ever become profitable or that we will sustain profitability if we do become profitable. Should we experience continued or unforeseen operating losses, our capital requirements would increase and our stock price would likely decline.

     Additionally, as of June 30, 2002 we had $4,955,000 in cash and cash equivalents and have a commitment from a bank for a secured term loan of $2,500,000 and also a working capital line of credit of $750,000. We currently anticipate that our current cash balances, cash from operations, and borrowing capacity will be sufficient to meet our cash needs through at least the next twelve months. However, we may need to seek additional equity and/or debt capital, and there can be no assurance that such capital will be available to us on favorable terms, or at all. If additional funds are not available, we would be required to delay, reduce, or eliminate expenditures for some of all of our programs or products.

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

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

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

     Our common stock is currently is listed on The Nasdaq National Market. To maintain the listing, we must continue to satisfy Nasdaq’s ongoing compliance requirements, including a current requirement that we have $4 million in net tangible assets, which means our total assets, excluding goodwill, minus our total liabilities. Effective November 1, 2002, that requirement will be replaced by a requirement that we maintain a minimum of $10 million in stockholders’ equity. At June 30, 2002, we had approximately $7.4 million in net tangible assets and $9.5 million in stockholders’ equity. On August 1, 2002, we received an initial warning letter from Nasdaq stating that based on our most recent public filings, we may not qualify under the minimum stockholders’ equity standard when it takes effect on November 1, 2002.

     Another Nasdaq continued listing requirement is that our common stock must have a minimum bid price of $1.00 per share. In July and August 2002, our stock traded below the $1 minimum, although it did not close below that level.

     If our common stock were to trade below the $1.00 minimum bid requirement for a period of 30 consecutive business days or more, or if we do not meet the new stockholders’ equity requirement when it goes into effect in November, Nasdaq could initiate delisting procedures, at which time we could apply for listing of our common stock on The Nasdaq Small Cap Market, or initiate an appeal with Nasdaq in order to remain qualified to be listed on The Nasdaq National Market pending the final disposition of the appeal. If our common stock is delisted for any reason, and any appeal we might file receives an unfavorable determination by Nasdaq, our common stock would be removed from listing on The Nasdaq National Market, and to be relisted we would need to meet listing standards that are more difficult to satisfy than the continued listing standards described above.

     If our common stock is delisted from trading on The Nasdaq National Market and is neither relisted thereon nor listed for trading on The Nasdaq SmallCap Market, we would likely seek listing of our common stock in the over-the-counter market, which is viewed by many investors as a less liquid marketplace. Delisting of our common stock would result in limited release of the market price of the common stock and limited news coverage of our activities and could reduce investors’ interest in the common stock. Also, a delisting could cause our stock price to decrease materially, as well as materially and adversely affect the trading market for our common stock, our ability to issue additional securities and our ability to secure additional financing. In addition, if our common stock is not listed on The Nasdaq National Market or Nasdaq SmallCap Market, and the trading price of our common stock is less than $5 per share, our common stock could be deemed to be a “penny stock” under the Securities Enforcement and Penny Stock Reform Act of 1990, which would require additional disclosure and procedures in connection with trades in the common stock, including the delivery of a disclosure schedule explaining the nature and risks of the penny stock market. Such requirements could severely limit the liquidity of our common stock.

We have limited manufacturing experience

     While we have experience in researching and developing unique, proprietary technologies to enhance the study of genes, and in manufacturing oligonucleotides, our experience in manufacturing other chemical reagent products is relatively limited. While we are producing and supplying products to customers for commercial use, we do not currently have the capacity for high-volume production of our reagents, nor do we currently have the capacity to meet our projected sales of specialty oligonucleotides. We will need to expand our reagent and oligonucleotide manufacturing capacity in connection with the

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continued development and commercialization of our products. Any delay or inability to expand our manufacturing capacity could materially adversely affect our manufacturing ability.

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

     We attempt to protect our proprietary technology by relying on several methods, including United States patents. We also have international patent applications that correspond to many of the U.S. patents and patent applications. The issued patents and pending patent applications cover inventions relating to the components of our core technologies. The expiration dates of these patents range from January 2010 to November 2019. We make no guarantee that any issued patents will provide us with significant proprietary protection, that pending patents will be issued, or that products incorporating the technology from our issued patents or pending applications will be free from challenges by competitors. Further, third parties may hold proprietary rights, which precede our claims and, therefore, could prohibit us from marketing the proposed products.

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

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

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

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

We will be dependent upon our Agreement with Applied Biosystems for a significant portion of our revenues for 2002, and a reduction of sales under or early termination of this Agreement would seriously harm our revenues and operating results and would likely cause our stock price to decline

     In January 1999, Epoch and Applied Biosystems entered into a License and Supply Agreement pursuant to which we licensed some of our technology to Applied Biosystems for use in its TaqMan® 5’-nuclease real-time PCR assays, or tests (TaqMan® is a registered trademark of Roche Molecular Systems, Inc.). In July 1999, we licensed our proprietary software, which speeds the design of chemical tools used in the study of genes, to Applied Biosystems. In August 2000, the agreement was amended to include Epoch manufacturing product for Applied Biosystems. In October 2001, we further amended our agreement with Applied Biosystems. Under the terms of this amendment, Applied Biosystems will either purchase a specified minimum number of probes from us each quarter at a specified price, or pay us a lesser amount per probe for any probes not ordered below the minimum. This agreement is effective from

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October 2001 through December 2002. In July 2002 this agreement was further amended to remove the manufacturing minimums from the contract effective October 2002, redefine product categories, increase the minimum royalties and royalty rates, and establish that minimum royalties are measured and paid quarterly. We will depend upon product sales and royalties from Applied Biosystems’ sales of its TaqMan® assays under this agreement for a significant portion of our revenues for 2002 and future periods. In addition, we have incurred significant expenditures to date to equip our facilities for the development of the assays we are developing under this agreement.

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

Credit

     Some of our customers may experience financial difficulties, which could adversely impact our collection of accounts receivable. Although historically we have experienced limited credit losses from our trade receivables, our experience is limited. At June 30, 2002, our allowance for doubtful accounts was approximately $31,000. We regularly review the collectibility and credit worthiness of our customers and the receivables to determine an appropriate allowance for doubtful accounts, however future uncollectable accounts could exceed our current or future allowances.

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

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

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

     The market price of our common stock may fluctuate significantly. For example, in the year 2001 our stock traded as high as $6.31, and recently traded at $0.90. The rapid price changes Epoch has experienced recently, and throughout our history, place your investment in our common stock at risk of total loss over a short period of time. We are in the biotechnology industry and the market price of securities of biotechnology companies have fluctuated significantly and these fluctuations have often been unrelated to the companies’ operating performance. Announcements by us or our competitors concerning technological innovations, new products, proposed governmental regulations or actions, developments or disputes relating to patents or proprietary rights, and other factors that affect the market generally could significantly impact our business and the market price of our securities.

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

     Public opinion regarding ethical issues related to the confidentiality and appropriate use of genetic testing results may influence governmental authorities to call for limits on, or regulation of the use

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of, genetic testing. In addition, these authorities could prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. Furthermore, adverse publicity of public opinion relating to genetic research and testing, even in the absence of any governmental regulation, could harm our business. Any of these scenarios could reduce the potential markets for our products and technologies, which could materially and adversely affect our revenues.

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

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

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

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

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Part II.  Other Information

Item 1.  Legal Proceedings

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

     The Harbor Trust (formerly the Edward Blech Trust) filed a complaint against us on May 16, 2001, alleging the breach of a March 29, 1996 letter agreement between us and David Blech. Pursuant to the letter agreement, upon payment of a pre-existing debt owed to us by Blech (the “Ribonetics Debt”), we were to release to Blech from escrow warrants to purchase 500,000 shares of our stock. Blech assigned all of his rights under the letter agreement to the Harbor Trust. The Harbor Trust’s claim is based on our alleged failure to timely register the common stock underlying the warrants, allegedly resulting in damages to Blech and/or the Trust of at least $10 million, based on the peak trading value of our stock.

     We filed a motions to dismiss the complaint based on, among other things, the positions that: (1) Blech and the Harbor Trust have never had rights to receive or exercise the warrants because Blech failed to perform a condition precedent, i.e., payment of the Ribonetics Debt; and (2) we had no obligation to register the stock unless and until Blech was entitled to the warrants. Further, the warrants expired pursuant to the letter agreement in June 2000. In July 2002, the Court decided in our favor and granted our motion to dismiss without leave to file an amended complaint.

     In August 2002 the Harbor Trust appealed the Court’s dismissal of its case to the United States Court of Appeal for the Second Circuit. While we believe we have a strong position, it is not possible at this time to state the likelihood of an unfavorable outcome because of the inherent uncertainties of litigation.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

     Our financial instruments include cash and short-term investment grade debt securities. At June 30, 2002 the carrying values of our financial instruments approximated their fair values based on current market prices and rates. It is our policy not to enter into derivative financial instruments. We do not currently have material foreign currency exposure as the majority of its international transactions are denominated in U.S. currency. Accordingly, we do not have a significant currency exposure at June 30, 2002.

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Item 4.  Submission of Matters to a Vote of Security Holders

	(a)		An Annual Meeting of Stockholders was held on May 23, 2002.
	(b)		The following persons were duly elected to serve as directors of the Company.

Frederick B. Craves, Ph.D. Richard L. Dunning William G. Gerber, M.D. Herbert L. Heyneker, Ph.D. Michael Y. Lucero Riccardo Pigliucci Sanford S. Zweifach

(c)

Purpose of the Annual Stockholders Meeting:

(2)

To ratify the appointment of KPMG LLP as independent auditors of the company for the fiscal year ending December 31, 2002. The following is the tabulation of the votes.

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PART II.  Other Information

Item 6.  Exhibits and Reports on Form 8K

(a)

Exhibits

	(b)		Reports on Form 8K
			None

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Signatures

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

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EXHIBIT INDEX