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U.S. SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2003.

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 o

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

YES o      NO x

As of June 30, 2003, the aggregate market value of voting stock held by non-affiliates, computed by reference to the price at which the stock was sold on such date, was approximately $60,348,673.

26,053,011 shares of Common Stock were outstanding at August 1, 2003.

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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)

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, 2003
(unaudited)

1. Summary of Significant Accounting Policies

(a) Nature of Business

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

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

(b) Basis of Presentation

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

     The financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the

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audited financial statements and the related notes included in Epoch’s 2002 Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

(c) Sale of San Diego Operations

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

(d) Stock-Based Compensation

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

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

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(e) Loss Per Share

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

(f) Concentration of Credit Risk

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

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

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(g) Legal Proceedings

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

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

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

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

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

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

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

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Results of Operations

Overview

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

     We earn revenues through a variety of sources. We license our technology and sell chemical intermediates to companies, thereby allowing them to incorporate our technology into their products and we generate product revenue and earn license fees and royalties from those companies. We also sell our products to end-users through our direct sales force and through distributors that provide worldwide reach. We also earn revenues through contract research activities, whereby third parties pay for specific research and development activities carried out by our scientists, and through research grants.

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

Critical Accounting Policies

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

     Revenue recognition. We earn revenues from product sales of chemical products and reagents to manufacturers for incorporation into their products, from the sale of specialty oligonucleotides and value added reagents to end users and distributors 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 receive royalties upon ultimate sales of products that incorporate our technology by our partners.

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

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products. To the extent our partners no longer use our component products or sales of their products are less than expected, our royalty revenues could decrease in the future.

Revenues

     Revenues for the second quarter ended June 30, 2003, decreased 1% from the comparable period of 2002 to $2,452,000 primarily due to reductions in product sales and contract research, offset by a significant increase in royalties. Revenues for the six month period ended June 30, 2003, increased 2% over the comparable period of 2002 to $4,868,000 again primarily due to a significant increase in royalties offset by reductions in product sales and contract research revenue.

     Product Sales. Product sales include sales of specialty oligonucleotides to end users and distribution partners in the research market and sales of chemical intermediates and dyes, quencher, and modified bases to collaborative partners and distributors. Product sales decreased 60% to $689,000 in the second quarter of 2003 from $1,700,000 in the comparable period of 2002, and for the six month period ended June 30, 2003, decreased 55% to $1,437,000 from $3,225,000 in the comparable period of 2002. The decrease in product revenues was the result of decreased revenues from Applied Biosystems for MGB TaqMan probe manufacturing, a decrease in the sales of non-proprietary specialty oligonucleotides from our San Diego operations, and a decrease in revenues from the sale of chemical intermediates.

     In October 2002 payments received from Applied Biosystems (in return for manufacturing rights) which had previously been characterized as product sales were recharacterized as royalties in accordance with the most recent amendment to the Licensing and Supply Agreement between the companies. Accordingly, product sales decreased and royalty revenue increased when comparing the current periods with the comparable periods of 2002. The reduction of 73% in the current quarter and 57% for the six month period in sales of our non-proprietary specialty oligonucleotides reflects: 1) a general reduction of sales and marketing resources directed towards the non-proprietary oligonucleotide product line in 2003, 2) a reduction in shipments to one customer that were unusually high in the second quarter of 2002, and 3) the fact that the current year periods had one less month of shipments due to the sale of the San Diego operations on May 30, 2003. See note (c) Sale of San Diego Operations.

     Chemical intermediate revenues represent component chemistries that we supply on cost-plus terms for incorporation in our partners’ products and sales of dyes, quencher, and modified bases through distributors. These revenues decreased 72% in the quarter and similarly decreased 79% in the six month period ended June 30, 2003 from the comparable periods of 2002 as a result of reduced shipments to Applied Biosystems. In the first half of 2002 Applied Biosystems was actively building an initial inventory of finished goods as well as inventory of component materials in support of their Assays-on-Demand™ and Assays-by-Design™ product launches. The inventory levels have been established, the products launched, and shipments to Applied Biosystems in 2003 were lower than in 2002, as expected.

     License Fees and Royalty Income. License fees reflect the amortization of initial payments for transfers of technology and know-how. These amounts are amortized over the life of the contract. Royalty income represents amounts due under license agreements for sales of other companies’ products that include our technologies and/or for contractual minimum amounts. License fees and royalty income increased to $1,372,000 in the second quarter of 2003 from $256,000 in the comparable period of 2002 and similarly increased to $2,690,000 in the six month period ended June 30, 2003 from $433,000 in the comparable period of 2002. These increases are the result of higher contractual minimums due to an amended agreement with Applied Biosystems that, among other things, provides for quarterly rather than annual minimum royalties and to a lesser extent technology access fees from new collaborations with

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QIAGEN and Amersham Biosciences. In 2003, Amersham Biosciences paid us technology access fees for a specified period that expired in June 2003. We are in discussions with Amersham whether that term will be extended and additional technology access fees will be paid. It is not currently possible to predict the outcome of these discussions.

     Contract Research Revenue. Contract research revenue primarily reflects payments for contract research and development performed for our corporate partners. Contract research revenues decreased from $532,000 in the second quarter of 2002 to $392,000 in the second quarter of 2003 and similarly decreased from $1,112,000 in the six month period ended June 30, 2002 to $741,000 in the comparable period of 2003. These decreases were primarily due to completion of the Applied Biosystems research contract in August 2002 and termination of contract research by Third Wave Technologies.

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

Operating Expenses

     Cost of Product Sales. The cost of product sales represents the costs of material, labor and overhead allocations associated with product sales. Also included is the cost of outside manufacturers that we use to produce some of our chemical intermediates. The cost of product sales decreased to $643,000 in the second quarter of 2003 compared to $1,195,000 in the comparable period of the prior year. The cost of product sales also decreased in the six month period ended June 30 from $2,294,000 in the 2002 period to $1,383,000 in the current year period. Costs as a percentage of product sales increased from 70% in the second quarter of 2002 to 93% in the second quarter of the current year. Similarly, costs as a percentage of product sales increased from 71% in the six month period ended June 30, 2002 to 96% in the comparable period of 2003.

     Generally, decreases in costs of product sales are tied to the decreases in revenues, while the changes in costs as a percentage of product sales are generally impacted by the product mix and economies of scale resulting from changes in volume. 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 increases in costs as a percentage of product sales experienced in the 2003 periods are primarily the result of the loss of economies of scale driven by the decrease in product sales. Many of

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the costs of our non-proprietary specialty oligonucleotide manufacturing operations in San Diego were fixed within a wide range of capacity output. As a result, significant decreases in volume like we experienced in 2003 did not result in a proportional decrease in costs and can have a significant impact on our costs as a percentage of product sales. While we reduced our manufacturing staff in San Diego early in 2003, we retained the core staff competencies and all of the equipment until we sold the assets and customer base in May 2003. As a result, we experienced very poor gross margins on our non-proprietary specialty oligonucleotide sales. Additionally payments received from Applied Biosystems which had been recognized as product sales in 2002 were reclassified as royalties beginning in October 2002.

     Research and Development. Research and development costs of $1,086,000 in the second quarter of 2003 decreased $33,000, or 3%, compared to the comparable period of 2002. For the six month period ended June 30, research and development costs of $2,343,000 increased $158,000, or 7%, over the comparable period of 2002. Significant changes in research and development costs were:

	•		Lower utilization of our research and development personnel in manufacturing due primarily to lower chemical intermediate revenues. The use of research and development personnel in manufacturing was $307,000 lower in the second quarter of 2003, and $662,000 lower for the six month period ended June 30, 2003, compared to the comparable periods of 2002, causing an increase in reported R&D costs. The use of research and development personnel in manufacturing will fluctuate depending on the time and availability of personnel to conduct such activities.
	•		Reductions in professional fees of $43,000 for the quarter, and $110,000 for the six month period of the current year compared to the prior year periods.
	•		Reductions in facility charges of $55,000 in the quarter and $111,000 in the six month period of 2003, compared to comparable periods of 2002 as a result of lower research and development headcount.
	•		Reduced payroll expenses in the quarter and for the six month period, as the result of fewer personnel in the 2003 periods compared to the comparable periods of 2002 as we continue to focus on controlling costs.

     Selling, General and Administrative. Selling, general and administrative expenses of $982,000 in the second quarter of 2003 decreased $419,000, or 30%, compared to the comparable period of 2002 and decreased $488,000, or 18%, for the six month period ended June 30, 2003 to $2,282,000 compared to the comparable period of 2002. The decreases in 2003 were primarily the result of:

	•		Decreases in selling and marketing expenses of $189,000 and $435,000 in the second quarter of 2003 and the six month period ended June 30, 2003, respectively, compared to the comparable period of 2002. These decreases were primarily the result of reduced expenditures on print advertising and a decision on our part to reduce sales efforts on our specialty oligonucleotide business.
	•		The sale of our specialty oligonucleotide assets in May 2003 resulted in the elimination of our administrative functions which supported those operations and reduced administrative expenses by approximately $94,000 and $76,000 in the second quarter and the six months ended June 30, 2003, respectively, compared to the similar periods of 2002.
	•		Recovery of $175,000 in arbitration expenses incurred by us in our dispute with Third Wave which was formally settled in the second quarter of 2003 and was applied against legal expenses recognized in earlier periods.

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

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

Liquidity and Capital Resources

     Cash and cash equivalents amounted to $4,608,000 at June 30, 2003, a $1,101,000 increase from December 31, 2002 balances, primarily as a result of net cash proceeds from the sale of our non-proprietary specialty oligonucleotide operations located in San Diego.

     Cash used in operations during the six month period ended June 30, 2003 amounted to $27,000 primarily as a result of our net loss of $3,934,000 adjusted for the loss on the sale of our San Diego operations of $2,805,000 and for certain non-cash reconciling items and fluctuations in working capital accounts. The most significant changes in working capital accounts that impacted cash used in operations were decreases in accounts receivable of $714,000 and inventories of $159,000 reflecting our decreased product sales, offset by a net decrease in accounts payable and accrued liabilities of $386,000, due primarily to payment of 2002 incentive compensation amounts. Changes in deferred revenue, representing up front license and technology access payments subject to recognition over the terms of the underlying agreements, also impacts cash flow from operations. During 2003, we received a portion of the technology access fee from QIAGEN as part of our license and distribution agreement. No such fees were received in the six months ended June 30, 2002.

     Cash provided by investing activities of $697,000 in the six months ended June 30, 2003 consisted of $1,082,000 received from the sale of our San Diego operations offset by the purchase of $384,000 of equipment required for manufacturing operations in Bothell. Future capital expenditures will likely include increased manufacturing capacity for our Bothell facility and other investments to support our operational growth. We may also require a larger inventory of raw materials and products to provide better service to our customers. We may finance these purchases from our cash and cash equivalents on hand, cash generated from our operations, borrowings, equity offerings, or a combination thereof.

     Cash provided by financing activities in the six months ended June 30, 2003 of $430,000 was the result of $408,000 in proceeds from the term loans, and $277,000 received from the exercise of stock options and warrants, offset by repayments on term loans of $256,000. Included in the repayment of term loans is the early repayment of $108,000 which was secured by assets sold with our San Diego operations.

     As of June 30, 2003, we had $750,000 of available financing under a working capital line of credit which may be used through August 2004. Our ability to draw additional funds against our term loan facility expired June 30, 2003. We have had preliminary discussions with the commercial lender about renewal of the term loan facility. There can be no assurance that such discussion will lead to a

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renewal of that facility on acceptable terms, or at all.

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

Certain Factors That May Affect Our Business And Future Results

Forward Looking Statements

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

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

     Since our formation in 1985, we have generated limited revenues and realized only one profitable quarter, which was the quarter ended December 31, 2002. As of June 30, 2003, we had an accumulated deficit of approximately $78 million. While we are commercializing our products and technologies, and prior to adequate revenues being generated from these activities, we expect to incur additional losses as we 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.

     As of June 30, 2003 we had approximately $4.6 million in cash and cash equivalents and have a working capital line of credit of $750,000 available through August 2004. We currently anticipate that our current cash balances, cash from operations, and unused borrowing capacity will be sufficient to meet our cash needs through at least the next twelve months. However, we may need to seek additional equity and/or debt capital, and there can be no assurance that such capital will be available to us on favorable terms, or at all. If additional funds are not available, we would be required to delay, reduce, or eliminate expenditures for some or all of our programs or products.

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

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

We have limited manufacturing experience

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

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

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

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

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

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

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

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

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

     Many companies do research and development and market products designed to analyze genes and diagnose conditions based on a number of technologies and are developing additional products. Many of these companies have substantially greater capital resources, larger 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 2003, and a reduction of sales under or early termination of this agreement would seriously harm our revenues and operating results and would likely cause our stock price to decline

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

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

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

     In July 2002, Epoch and Amersham Biosciences entered into an agreement under which Amersham became the exclusive worldwide sales, marketing and distribution partner to the research field

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of our MGB Eclipse Probe Systems for SNPs, and the co-exclusive worldwide sales and marketing partner to the research field for gene expression. End-user sales of custom and catalog MGB Eclipse Probe Systems through Amersham Biosciences have not grown as rapidly as was expected. Our agreement with Amersham provides for a minimum level of end-user sales which, at the current rate of sales, are not likely to be achieved. We are in discussions with Amersham about the rate of end-user sales growth and the related contractual terms. It is not currently possible to predict the outcome of those discussions.

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

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

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

     Although historically we have experienced limited credit losses from our trade receivables, our experience is limited. At June 30, 2003, our allowance for doubtful accounts was $58,000. We regularly review the collectibility and credit worthiness of our customers and the receivables to determine an appropriate allowance for doubtful accounts, however future uncollectible accounts could exceed our current or future allowances.

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

     Our performance is greatly dependent upon our key management, including our 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 last year 2003 our stock traded as high as $3.30 in July 2003, and as low as $0.70 in October 2002. The rapid price changes Epoch has experienced recently, and throughout our history, place your investment in our common stock at risk of substantial loss over a short period of time. We are in the biotechnology industry and the market price of securities of biotechnology companies have fluctuated significantly and these fluctuations have often been unrelated to the companies’ operating performance. Announcements by us or our competitors concerning technological innovations, new products, proposed governmental regulations or actions, developments or disputes relating to patents or proprietary rights, and other factors that affect the market generally could significantly impact our business and the market price of our securities.

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

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

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

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

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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Item 4. Disclosure Controls and Procedures

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

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

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 in 2001, alleging the breach of a 1996 letter agreement between us and David Blech, allegedly resulting in damages to Blech and/or the Harbor Trust of at least $10 million.

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

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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 22, 2003.
	(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:

(1)

Election of Directors. To elect the following seven nominees to serve as directors until the next annual meeting to stockholders or until their successors are elected and have qualified. The following is a tabulation of votes for each of the proposed seven nominees for election as directors of the company.

(2)

To approve the 2003 Stock Incentive Plan whereby the Company is initially authorized to grant options and/or rights to purchase up to an aggregate of 1,000,000 shares of the Common Stock of Epoch. Additionally, on the first day of each fiscal year of the Company for a period of nine (9) years, the aggregate number of shares available for issuance by the Company may be increased by a number of shares determined by the Board of Directors, such number being no greater than the lesser of (1) 2.5% of the Company’s outstanding stock on such date, or (2) 750,000 shares of common stock. The following is the tabulation of the votes.

(3)

To ratify the appointment of KPMG LLP as independent auditors of the company for the fiscal year ending December 31, 2003. The following is the tabulation of the votes.

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Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits

	(b)		Reports on Form 8-K
			On June 16, 2003, Epoch filed a report on Form 8-K regarding Epoch’s sale of the assets and customer base of its non-proprietary specialty oligonucleotide operation located in San Diego, California to Eurogentec North America, Inc.
			On May 6, 2003, Epoch filed a report on Form 8-K regarding a press release issued by Epoch to announce Epoch’s first quarter 2003 results.

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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