U.S. SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2004.

Commission file number 0-22170

Epoch Biosciences, Inc.

21720 23^rd 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

28,730,030 shares of Common Stock were outstanding at November 5, 2004.

Epoch Biosciences, Inc.

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Part I. Financial Information

Item 1. Financial Statements

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.

4

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
September 30, 2004
(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, clinicians, and physicians 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. 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); they also want to know what the genetic differences among individuals 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.

     Our technologies are useful in genetic research, drug development, prenatal testing, molecular diagnostics, including infectious disease, oncology, genetic disease and population screening to assess our risk of disease or to predict our response to drugs. Our products also have application in forensics, food testing, and environmental testing, including bio-warfare and bioterrorism.

     We market our products directly to end-users and through distributors that provide worldwide reach, and license our technologies to other companies for incorporation into their products.

     In September 2004, we announced a definitive agreement to merge with a wholly-owned subsidiary of Nanogen, Inc. (“Nanogen”), pursuant to which each share of Epoch common stock outstanding at the effective time of the merger will be converted into the right to receive a fraction of a share of Nanogen common stock and Epoch will become a wholly-owned subsidiary of Nanogen. See “Merger Agreement with Nanogen” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(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.

     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 our 2003 Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

(c) Stock-Based Compensation

     We apply APB Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations in measuring compensation costs for our 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:

     In March 2004, the Financial Accounting Standards Board issued an Exposure Draft of a proposed Statement of Financial Accounting Standards entitled “Share-Based Payment.” This proposed Statement addresses accounting for stock-based compensation and would result in stock-based compensation costs, including employee options, being recognized as an expense in the financial statements. The proposed Statement would eliminate the ability to account for stock-based compensation

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transactions using the intrinsic value method under APB Opinion No. 25, and generally would require that such transactions be accounted for using a fair-value based method. If approved, the proposed statement would be applied to public entities, prospectively, for periods beginning after June 15, 2005.

(d) Net 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, of which the following have been excluded from the net loss per share calculation as they are antidilutive.

(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.

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

     The amounts due from Applied Biosystems in the above chart primarily represent quarterly royalties and have historically been paid in accordance with the terms of the underlying agreement.

(f) Private Equity Financing

     On February 23, 2004, we consummated the issuance of 2,470,000 newly-issued shares of our common stock, and warrants to purchase 741,000 newly-issued shares of our common stock, to a small number of institutional investors, resulting in our receipt of $6,175,000 in gross proceeds, prior to placement agent fees and other offering costs totaling $427,000 and the exercise of the warrants. Investors received a warrant to purchase 0.3 shares of common stock for each share of common stock purchased. The effective price in the private placement was $2.50 for each unit, consisting of one share of common stock and a warrant to purchase 0.3 shares of common stock. The warrants have an exercise period of five years and an exercise price of $3.89 per share. Our placement agent with respect to the transaction received a cash fee equal to 5.5% of the gross proceeds, and its affiliates received warrants to purchase an aggregate of 75,000 shares of our common stock, carrying the same terms as the warrants received by the investors. The registration statement covering the resale by the investors of these shares and the shares of common stock issuable upon exercise of the warrants was declared effective by the

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SEC on April 30, 2004. Accordingly, these shares and the shares issuable upon exercise of the warrants may be offered or re-sold in the United States, pursuant to the effective registration statement or an applicable exemption from the registration requirements of the Securities Act.

     The warrants issued in the private equity placement provide for cash redemption by the warrant holders upon the occurrence of a change in control that may be outside of the control of our Board of Directors, subject to certain exceptions. As a result, and in accordance with EITF 00-19, “Accounting for Derivative Financial Instruments Indexed To, and Potentially Settled In a Company’s Own Stock,” the fair value of the warrants, measured using the Black-Scholes valuation method, is recorded as a current liability on our balance sheet. The decrease in the market price of our common stock and other changes in the valuation assumptions from the closing of the equity placement on February 23, 2004 to June 30, 2004 resulted in a decrease in the value of the warrants between these dates of $941,000 and further changes in the valuation assumptions between July 1, 2004 and September 30, 2004 resulted in a decrease in the value of the warrants between these dates of $34,000. Therefore, we reported $34,000 and $975,000 as a warrant valuation adjustment in our statements of operations for the three and nine month periods, respectively, ending September 30, 2004.

     The assumptions used in the Black-Scholes pricing model were:

     Until the warrants are exercised or expire, the valuation of the warrants and the corresponding liability will be re-measured quarterly and the financial statements will reflect a non-cash valuation adjustment based on the change in the fair value of the warrants at the end of each reporting period.

(g) Bank Financing

     Our term loan facility expired on June 30, 2004 and our working capital line of credit expired August 2004. We have had discussions with the commercial lender about the renewal of the term loan facility. There can be no assurance that such discussions will lead to a renewal of that facility on acceptable terms, or at all.

(h) Amendment to Stock Option Plans

     In accordance with the terms of our stock option plans (the “Plans”), our Compensation Committee, as the administrator of the Plans, has resolved to extend the option exercise period for optionees whose services are terminated under certain circumstances following the closing of the proposed merger with Nanogen.

     Each of the outstanding options held by our officers has been amended in connection with the proposed merger with Nanogen so that in the event such individual’s employment is terminated without cause, or he resigns for good reason, within 12 months following the closing of the merger, such options shall remain exercisable for the vested shares subject to that option, including the shares which vest upon an accelerated basis at the time of such cessation of service, until the earliest to occur of (i) the end of the twelve-month period following such cessation of service, (ii) the expiration of the option term or (iii) a merger or acquisition of Nanogen in which that option is not assumed or otherwise continued.

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     Each of the outstanding stock options held by the non-employee members of the Epoch Board and non-officer employees has been amended in connection with the proposed merger with Nanogen so that in the event such individual’s service or employment, respectively, is terminated without cause, or he resigns for good reason, within six months following closing of the merger, such options shall remain exercisable for the vested shares subject to that option, including the shares which vest upon an accelerated basis at the time of the merger, until the earliest to occur of (i) the end of the 12-month period following such cessation of board service, (ii) the expiration of the option term or (iii) a merger or acquisition of Nanogen in which that option is not assumed or otherwise continued.

     The foregoing amendment shall only be effective if the proposed merger with Nanogen is consummated, and, with respect to options that have been designated as incentive stock options, if the optionee consents in writing, agreeing to the amendment of the option and its impact on the incentive stock option status of the option.

     All other terms and conditions of the Plans, and the Stock Option Agreements thereunder, shall remain in full force and affect.

(i) Termination of License Rights

     In the third quarter of 2004, we terminated a license agreement we had entered into in October 2001 with Incyte Corporation (“Incyte”) which provided us with access to the gene sequence content from Incyte’s LifeSeq Gold^® and ZooSeq^® databases for use in the design, manufacture, and sale of MGB Eclipse probe products. As a result of the termination, we recognized an $824,000 non-cash charge in the third quarter, representing the remaining book value of the consideration originally paid for the license. In our determination, the value of the databases content no longer justified the minimum cash royalty payments under the original license agreement and termination of this agreement eliminates the future payment of royalties that were required by this license.

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” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” describe some, but not all, of the factors, risks and uncertainties that could cause these differences, including but not limited to the fact that we have realized operating profitability in only one quarter and anticipate future losses, and that we may require additional capital; the fact that we will be dependent upon our agreement with Applied Biosystems for a significant portion of our revenues for 2004 and future periods; the possibility that potential products utilizing the Company’s technology may be ineffective or, although effective, may be uneconomical to market; that third parties may hold

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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.

Merger Agreement with Nanogen

     In September 2004 we announced the signing of a definitive agreement to merge Epoch with a wholly-owned subsidiary of Nanogen, a developer of advanced in vitro diagnostic products, in an all-stock transaction.

     Under the terms of the merger, Epoch shareholders will receive a number of Nanogen shares based on an exchange ratio determined by dividing the offer price of $2.00 per share by Nanogen’s issue price as calculated at closing. Nanogen’s issue price will be calculated based on the average closing price of Nanogen’s shares for the 20 trading days ending on and including the third trading day prior to the closing. The companies have agreed that the exchange ratio will not be less than 0.4673 nor exceed 0.6329 of one Nanogen share. The transaction is subject to approval by Nanogen and Epoch stockholders and other customary closing conditions. The merger is expected to close on December 9, 2004.

     In July 2004, we executed a term sheet with Nanogen for a collaborative research project regarding utilization of our proprietary chemistries on Nanogen’s Molecular Biology Workstation. Under the term sheet, we are providing contract research over an eight month period and supplying small amounts of test material for Nanogen’s use. During the three months ended September 30, 2004, we completed three months of the research activities and recognized $100,000 in contract research revenue and recognized product sales of $86,000 for shipments of test material pursuant to the term sheet.

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. Historically, the majority of our revenues have been generated in the research field, however we announced the commercial availability of our analyte specific reagents to sophisticated clinical testing laboratories for diagnostic testing in July 2004. 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

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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 financial statements included with Form 10-K. 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 certain 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 policy is revenue recognition.

     Revenue recognition. We earn revenues from sales of chemical intermediates 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 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 license agreements that result in royalties to us upon ultimate sales of products by our partners. Many of our arrangements contain multiple deliverables which require us to determine the fair value of the various deliverables. To the extent we are unable to determine the fair value of undelivered elements, we are required to defer all revenue and recognize it over the appropriate period or until such time that the fair value of remaining undelivered elements can be determined.

•

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 distributors and not sold through to end users our future sales could decline although distributors generally have no right of return.

•

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 upfront fees are generally nonrefundable regardless of future performance. Deferred revenue principally represents these license fees received in advance and prepayments for product purchases.

•

Contract research revenues are recognized as the applicable 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. 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.

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Revenues

     Revenues for the three month period ended September 30, 2004 increased 20% over the similar period of 2003 as a result of increased sales of MGB Eclipse products and increased royalties. Revenue for the nine month period ended September 30, 2004 decreased 9% over the similar period of 2003, primarily due to the reduction in product sales caused by the sale of the assets and customer base of our non-proprietary oligonucleotide business located in San Diego (San Diego Operations) in May 2003, and a reduction in contract research revenues, partially offset by increased sales of our MGB Eclipse products.

     Product Sales. Product sales include sales of specialty oligonucleotides to end users and to our distribution partners in the research and molecular diagnostic markets and sales of chemical intermediates and our dyes, quencher, and modified bases to collaborative partners and distributors. Product sales increased 13% in the third quarter of 2004 to $779,000 from $690,000 in the comparable quarter of 2003. The increase in product sales in the quarter was primarily the result of increased sales of our MGB Eclipse products in the research market, offset by reduced sales of our chemical intermediates. Product sales decreased 14% in the nine month period ended September 30, 2004 to $1,835,000 from $2,127,000 in the comparable period of 2003. The decrease in product sales in the nine month period was primarily due to the absence of sales from our San Diego Operations that were sold in May 2003 and a reduction in sales of chemical intermediates to Applied Biosystems. During the nine month period ended September 30, 2003, we recognized $451,000 in product sales from our San Diego Operations. Product sales other than from our San Diego Operations increased 9% for the nine month period ending September 30, 2004.

     In both periods, we realized increased sales of our MGB Eclipse™ Probe System products into the research field. These products are sold directly to end users, and also through QIAGEN, our worldwide distributor. Revenues from the sale of these products in the third quarter of 2004 were 39% higher than in the comparable quarter of 2003, and 41% higher for the nine month period ended September 30, 2004 compared to the comparable period of 2003, due to increased levels of direct selling activities by Epoch personnel and the introduction in late 2003 of MGB Eclipse By Design assays that we design, manufacture, and functionally validate. Further, initial shipments of MGB Eclipse Detection Reagents into the molecular diagnostic field occurred in the third quarter. We expect continued growth in our MGB Eclipse Probe System sales in the research and molecular diagnostic markets.

     Chemical intermediate revenues represent component chemistries that we generally supply on cost-plus terms for incorporation in our partners’ products, and sales of dyes, quencher, and modified bases through distributors. These revenues decreased 35% in the quarter ended September 30, 2004 and also decreased 40% in the nine month period ended September 30, 2004 from the comparable periods of 2003 primarily as a result of a continued decrease in shipments to Applied Biosystems. In 2002 Applied Biosystems actively built an initial inventory of finished goods as well as component materials in support of their Assays-on-Demand™ and Assays-by-Design™ product launches. In 2002, the initial inventory levels were established and the products launched, and in 2003 operating inventory levels were achieved. As a result, shipments to Applied Biosystems continued to decline in the first nine months of 2004 compared to 2003, and are expected to be lower throughout 2004 compared to 2003.

     License Fees and Royalty Income. License fees reflect the amortization of initial payments for technology and know-how. These amounts are amortized over the life of the contract. Royalty income represents amounts due under license agreements with other companies for their sales of products that include our technologies and/or for contractual minimum amounts. License fees and royalty income increased to $1,526,000 in the quarter ended September 30, 2004 from $1,219,000 in the comparable

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period of 2003 and also increased to $4,340,000 in the nine month period ended September 30, 2004 from $3,908,000 in the comparable period of 2003. These increases are the result of higher contractual minimums from Applied Biosystems and higher sales of products that incorporate our technologies by our partners, partially offset by a reduction in technology access fees from our collaboration with Amersham Biosciences. Amersham Biosciences paid us technology access fees for a specified period that expired in June 2003. In October 2003 we terminated our distribution agreement with Amersham that gave rise to such technology access fees.

     Contract Research Revenue. Contract research revenue reflects payments for contract research and development performed for our corporate partners and research grants from the National Institute of Health. We currently have a research collaboration agreement with Nanogen regarding utilization of our proprietary chemistries on Nanogen’s Molecular Biology Workstation which generated $100,000 in revenue in the quarter. See “Merger Agreement with Nanogen” for additional information on our relationship with Nanogen. We do not have any other contract research agreements at this time as a result of completion of work under grants from the National Institute of Health and the termination of contract programs with Amersham Biosciences. In 2003, Amersham Biosciences paid us for specified research activities related to application of our MGB Eclipse Probe Systems. Those programs terminated in June 2003, and in October 2003 we terminated our distribution agreement with Amersham that gave rise to such programs.

     Cost of Product Sales. The cost of product sales represents the cost of manufacturing products that we sell, including costs of material, labor and overhead allocations. The cost of product sales decreased to $420,000 in the third quarter of 2004 compared to $463,000 in the comparable quarter of the prior year and decreased to $1,159,000 for the nine month period ended September 30, 2004 compared to $1,845,000 in the comparable nine month period of 2003. Costs of product sales as a percentage of product sales decreased from 67% in the third quarter of 2003 to 54% in the third quarter of 2004, and decreased from 87% in the nine month period ended September 30, 2003 to 63% in the comparable nine month period of 2004.

     Generally, changes in costs of product sales are tied to changes in revenues, while the changes in costs as a percentage of product sales are impacted by the product mix and economies of scale resulting from changes in volume. Shipments of the majority of our chemical intermediates and certain other products, for example, are to larger volume customers and selling prices are determined by contract and tied to fully burdened manufacturing costs, which usually results in lower gross margins. Further, we manufacture MGB Eclipse Probe System products to various customer specifications - including custom orders, catalog orders, and functionally validated assays. The gross margin on these different products can vary significantly.

     The reductions in the dollar cost of product sales and such cost as a percentage of product sales in the third quarter of 2004 compared to the similar period of 2003 is primarily the result of increased sales of higher margin MGB Eclipse Probe Systems offset by lower sales of, and a change in mix within, our chemical intermediate products.

     The reduction in the dollar cost of product sales and in the percentage cost of product sales in the nine month period ended September 30, 2004 compared to the similar period of 2003 was impacted by the change in product mix which impacted the quarter and the result of the sale of our San Diego Operations on May 30, 2003. Many costs of our non-proprietary oligonucleotide manufacturing operations in San Diego were fixed within a wide range of capacity output. As a result, the low level of sales volume we experienced in our San Diego Operations in 2003 did not result in proportionally lower costs and we experienced very poor gross margins on those sales until we sold the assets and customer base in May 2003.

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     Research and Development. Research and development costs of $918,000 in the third quarter of 2004 decreased 4% compared to the comparable period of 2003. Research and development costs of $2,828,000 in the nine month period ended September 30, 2004 similarly decreased 14% compared to the comparable period of 2003. Research and development costs are impacted by our use of research and development personnel in our manufacturing operations to meet variations in customer demand. As such, the use of research and development personnel in manufacturing has, and will continue to fluctuate depending on volumes and mix of product sales and the availability of research and development personnel to conduct such activities. Significant changes in research and development costs were due to:

•

Transfer of personnel from research and development to manufacturing reduced research and development expenses by $66,000 in the third quarter of 2004, and by $383,000 in the nine month period ended September 30, 2004, compared to the similar periods of 2003.

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Costs of chemicals and supplies used in research activities in the first nine months of 2004 were $72,000 lower than in the comparable period of 2003.

•

Decreased consulting costs from those incurred in 2003, primarily related to our efforts to obtain a Department of Defense contract, which resulted in lower costs of $98,000 in nine month period ended September 30, 2004, compared to the similar period of 2003.

•

Increased patent expenses of $59,000 in the three month period ended and $115,000 in the nine month period ended September 30, 2004 compared to the similar periods of 2003.

     Selling, General and Administrative. Selling, general and administrative expenses of $1,514,000 in the third quarter of 2004 increased $582,000, or 62%, compared to the comparable period of 2003 and similarly increased $890,000, or 28%, to $4,105,000 in the nine month period ended September 30, 2004 compared to the comparable period of 2003. Selling, general and administrative expenses are expected to continue above 2003 levels due to significantly expanded direct sales and marketing activities and professional fees related to the proposed merger with Nanogen (see “Merger Agreement with Nanogen”). Significant changes in the 2004 periods compared to the 2003 periods were primarily the result of:

•

Increased selling and marketing expenses of $251,000 and $597,000 for the three and nine month periods ending September 30, 2004, respectively, as compared to the similar periods of 2003, due to overall increased sales and marketing efforts in the research market and in support of our launch of molecular diagnostic products in July 2004.

•

The sale of our San Diego Operations in May 2003 resulted in the elimination of our administrative functions which supported those operations and reduced administrative expenses and associated goodwill amortization by a total of $424,000 in the nine month period ended September 30, 2004, compared to the similar period of 2003.

•

Increased personnel and other expenses of $119,000 in the nine month period ended September 30, 2004, resulting from our implementation of the FDA’s quality systems regulation which began in June 2003.

•

Increased professional fees associated with business development efforts of $39,000 and $243,000 in the three and nine month periods ended September 30, 2004, respectively, compared to the similar periods of 2003.

•

Increased professional fees associated with our proposed merger with Nanogen, of $237,000 in both the three and nine month periods ended September 30, 2004. See “Merger Agreement with Nanogen.”

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Liquidity and Capital Resources

     Cash and cash equivalents amounted to $8,535,000 at September 30, 2004, a $4,119,000 increase from December 31, 2003 balances, primarily as a result of the private equity financing we completed in February 2004. Also impacting cash flow were our net losses in 2004, changes in working capital accounts, the purchase and financing of equipment, and the repayment of bank debt.

     Cash used in operations during the nine months ended September 30, 2004 amounted to $1,196,000 primarily as a result of our net loss of $1,610,000 adjusted by the non-cash change in fair value of common stock warrants of $975,000, the non-cash termination of license rights of $824,000, and for certain non-cash reconciling items and fluctuations in working capital accounts. The other significant reconciling items were depreciation and amortization of $528,000 and changes in working capital accounts that impacted cash used in operations, including increases in accounts receivable of $388,000 and in accounts payable and accrued liabilities of $397,000, all the result of normal business fluctuations.

     Cash used in investing activities represents the purchase of $326,000 of manufacturing and other equipment. Future capital expenditures may include increased manufacturing capacity for our Bothell facility and other investments to support our operational growth. We may also require a larger inventory of raw materials and products to provide better service to our customers or to meet our customers’ demands, particularly in light of our launch of molecular diagnostic products in July 2004. We may finance these purchases from our cash and cash equivalents on hand, cash generated from our operations, borrowings, equity offerings, or a combination thereof.

     Cash provided by financing activities in the nine months ended September 30, 2004 of $5,640,000 was the result of $5,748,000 received in a private equity transaction in February 2004, $271,000 in proceeds from bank loans, and $59,000 received from the exercise of stock options, offset by repayments on term loans of $438,000.

     Private Equity Financing. On February 23, 2004, we consummated the issuance of 2,470,000 newly-issued shares of our common stock, and warrants to purchase 741,000 newly-issued shares of our common stock, to a small number of institutional investors, resulting in our receipt of $6,175,000 in gross proceeds, prior to placement agent fees and other offering costs totaling $427,000 and the exercise of the warrants. Investors received a warrant to purchase 0.3 shares of common stock for each share of common stock purchased. The effective price in the private placement was $2.50 for each unit, consisting of one share of common stock and a warrant to purchase 0.3 shares of common stock. The warrants have an exercise period of five years and an exercise price of $3.89 per share. Our placement agent with respect to the transaction received a cash fee equal to 5.5% of the gross proceeds, and its affiliates received warrants to purchase an aggregate of 75,000 shares of our common stock, carrying the same terms as the warrants received by the investors.

     The warrants issued in the private equity placement provide for cash redemption by the warrant holders upon the occurrence of a change in control that may be outside of the control of our Board of Directors, subject to certain exceptions. As a result, and in accordance with EITF 00-19, “Accounting for Derivative Financial Instruments Indexed To, and Potentially Settled In a Company’s Own Stock,” the fair value of the warrants, measured using the Black-Scholes valuation method, is recorded as a current liability on our balance sheet. The decrease in the market price of our common stock and other changes in the valuation assumptions from the closing of the equity placement on February 23, 2004 to September 30, 2004 resulted in a decrease in the value of the warrants between these dates and the $975,000 warrant valuation adjustment reported in our statements of operations for the period ending September 30, 2004.

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     Until the warrants are exercised or expire, the valuation of the warrants and the corresponding liability will be re-measured quarterly and the financial statements will reflect a non-cash valuation adjustment based on the change in the fair value of the warrants at the end of each reporting period.

     Bank Financing. Our term loan facility expired on June 30, 2004 and our working capital line of credit expired August 2004. Advances under the term loan are secured by a first position security interest in our assets excluding intellectual property, and are repayable in 36 monthly payments of principal and interest at the bank’s prime rate plus 0.5%. We did not take any advances against the working capital line of credit. We have had discussions with the commercial lender about the renewal of the term loan facility. There can be no assurance that such discussions will lead to a renewal of that facility on acceptable terms, or at all.

     Summary. Based on cash and cash equivalents on hand at September 30, 2004, as well as on results of operations and cash flows for the quarter ended September 30, 2004, we currently 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 expenditures needs through the completion of the merger, or if the merger is not completed, then through at least 2005. However, our future capital requirements depend on numerous factors, including but not limited to:

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the magnitude of our future losses;

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the timing and terms of new technology licensing agreements or other strategic relationships that may provide up front license fees or other payments;

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resources that we devote to research and development and sales and marketing in support of our business strategy;

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technology licenses necessary to support our molecular diagnostic products that may require upfront license fees or other payments; and

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capital expenditures necessary to expand manufacturing capacity.

     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.

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Risks Relating to Our Proposed Merger With Nanogen

Failure to consummate the merger with Nanogen could have an adverse impact on us and our stock price could decline

     Since entering into the merger agreement in September 2004 we have made certain planning and operating decisions on the basis that the merger will be consummated. These planning and operating decisions may have been different had we not entered into the merger agreement. For example, we will have incurred a significant amount of legal and other expenses associated with the merger that we otherwise would not have incurred. In addition to the legal and other expenses that have been or will be incurred, we may be required to pay Nanogen a termination fee in the amount of $1.75 million if the merger is not consummated. Consequently, if the merger is not consummated, our financial condition likely will be worse than it would have been had we never entered into the merger agreement. Additionally, if the merger is not completed, out stock would no longer be influenced by the exchange ratio established by the merger agreement, which could negatively impact out current market valuation and stock price.

Satisfying closing conditions may delay completion of the merger

     There are many conditions to Nanogen’s and Epoch’s obligations to complete the merger, many of which are beyond Nanogen’s or our control. These conditions include obtaining requisite approvals from both our stockholders and Nanogen’s stockholders, and either of us may be unable to obtain these approvals on a timely basis, if at all.

     In response to the announcement of the merger, our customers or suppliers may delay or defer product purchase or other decisions. Any delay or deferral in product purchase or other decisions by customers or suppliers could adversely affect the business of the combined company, regardless of whether the merger is ultimately completed. Similarly, current and prospective employees may experience uncertainty about their future roles with Nanogen or Epoch until the merger is completed and until Nanogen’s strategies with regard to the integration of our operations are announced or executed. This may adversely affect our ability to attract and retain key management, sales and technical personnel.

The number of shares and value of the Nanogen common stock that our stockholders will receive in the merger will fluctuate

     The number of shares and precise value of the merger consideration to be received by our stockholders at the effective time of the merger cannot presently be determined. The exchange ratio, which determines the number of shares of Nanogen common stock that our stockholders will receive in the merger, will not be determined until the closing of the merger. Upon completion of the merger, each share of our common stock will be converted into the right to receive a fraction of a share of Nanogen common stock equal to the exchange ratio. Under the terms of the merger agreement, the exchange ratio is subject to a collar and will range from 0.4673 and 0.6329 of one share of Nanogen common stock. The exact exchange ratio will depend on the average closing price of Nanogen common stock for the 20 trading days ending on and including the third trading day prior to the closing of the merger. Accordingly, at the time of the special meeting, stockholders will not know the exact value of the consideration to be received under the merger agreement.

     The prices of our common stock and Nanogen common stock at the closing of the merger may vary from their respective prices on the date the merger agreement was executed, on the date of the joint proxy statement/prospectus and on the dates of the special meetings. Stock price changes may result

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from a variety of factors beyond our control or the control of Nanogen, including general market and economic conditions. In addition, there will be a time between the completion of the merger and the time at which our former stockholders actually receive stock certificates evidencing the Nanogen common stock. Until stock certificates are received, our former stockholders may not be able to sell their Nanogen shares in the open market, and, therefore, would not be able to avoid losses resulting from any decrease in the trading price of Nanogen common stock during this period.

Risks Relating to Epoch’s Business

We have realized operating profits 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 operating profit in only one quarter, which was the quarter ended December 31, 2002. As of September 30, 2004, we had an accumulated deficit of approximately $81 million. Prior to adequate revenues being generated from the commercialization of our products and technologies, we expect to incur additional operating 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 from operations or that we will sustain operational 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 September 30, 2004 we had approximately $8.5 million in cash and cash equivalents. We currently anticipate that our current cash balances and cash from operations will be sufficient to meet our cash needs through the completion of the merger, or if the merger is not completed, then at least through 2005. 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.

We will be dependent upon our agreement with Applied Biosystems for a significant portion of our revenues for 2004 and future periods, 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.). 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, the agreement was amended to, among other things, provide for Epoch manufacturing product for Applied Biosystems. In July 2002 this agreement was further amended to remove the manufacturing rights 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 in 2004 and future periods.

     The technology licenses and Applied Biosystem’s obligation to pay us royalties on their sale of products that incorporate our technologies continue until the expiration of the underlying patents. Since the July 2002 amendment that increased the minimum royalty levels, quarterly royalties earned based on actual sales by Applied Biosystems have been less than the contractual minimum royalty levels. As a

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result, we have received the specified quarterly minimum amounts. The current agreement calls for quarterly royalty minimums through September 2005. Thereafter, we will receive royalty payments based on actual sales. Based on experience to date, those payments may be significantly less than the minimum payments currently being made.

     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.

There is a risk that our technology may not be as effective as alternatives

     The science and technology of synthetic DNA-based products is rapidly evolving. While we believe that our technology is cost-effective and produces results equal or superior to other competing technologies, we face the risk that any or all of our products and proposed products could prove to be less effective or more costly than products currently marketed, or under development, by others. 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.

Our inability to implement effective marketing programs and build a successful direct sales force and other distribution channels would limit our revenue growth

     We have limited direct sales and marketing experience in general, little infrastructure, and no recent experience selling to the molecular diagnostics market. We believe that to market our products effectively, in particular our new analyte specific reagents, we must continue to expand our direct sales operations. This expansion will require significant management attention and financial resources to successfully develop direct and indirect U.S. and international sales and support channels, and there’s no assurance that we will be successful or that our expenditures in this effort will not exceed the amount of any resulting revenues. Competition for qualified sales personnel is intense and we may not be able to hire and train as many qualified individuals as we may require in the future. We will continue to incur the expenses for a sales and marketing infrastructure before we recognize significant revenue from sales of the products. If we are not able to successfully build a sales and marketing infrastructure or if our direct sales force is not successful we may not meet our revenue goals and our stock price would likely decline.

We introduced our initial menu of molecular diagnostic products in July 2004. There is a risk that these products may not be commercially viable or successful, which would limit our revenue growth

     We are currently developing and commercializing only a limited number of molecular diagnostic products based on our technologies. We plan to develop additional molecular diagnostic products. We cannot assure you that we will be able to complete development of our products that are currently under development or that we will be able to develop additional new products. In addition, some of the products we develop may not be useful or cost effective in molecular diagnostic applications. If our molecular diagnostic products are not commercially successful, we may not meet our revenue goals and our stock price would likely decline.

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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 and other chemical intermediates at relatively small scales, our experience in manufacturing at larger scales is relatively limited. We currently have sufficient manufacturing capacity to meet current customer needs. Anticipated increases in customer demand over the next year may require us to expand our manufacturing capacity in Bothell, acquire additional manufacturing capacity, or utilize costly third-party manufacturing vendors, as necessary. Any delay or inability to expand our manufacturing capacity could materially and adversely affect our manufacturing ability.

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 2012 to July 2020. Additionally, as sales of our MGB Eclipse products to parties other than Applied Biosystems have become a larger proportion of our revenues, we have become increasingly dependent upon certain patent rights that we licensed from Applied Biosystems covering certain technology necessary for the manufacture and use of our MGB Eclipse products. We make no guarantee that any licensed patents or our issued patents will provide us with significant proprietary protection, that pending patents will be issued, or that products incorporating the technology covered by licensed patents, our issued patents or pending applications will be free from challenges by competitors. Further, third parties may hold proprietary rights which precede our claims or claims made under licensed patents and could therefore prohibit us from marketing our current or 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 intellectual property litigation case, 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. In the molecular diagnostics market, we also potentially compete with several companies offering alternative technologies to our MGB Eclipse Detection Reagents. Many of these companies have substantially greater capital resources, larger research and development and marketing staffs and facilities and greater experience in developing and commercializing products than we have. Furthermore, the fields in which we operate are 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.

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

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

     We will depend upon product sales to QIAGEN under this agreement for a significant portion of our revenues in future periods. In the event that this agreement is terminated, or if QIAGEN 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 September 30, 2004, our allowance for doubtful accounts was $71,000. 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. The proposed merger with Nanogen may also have a negative impact on our ability to attract and retain employees. See “- Satisfying closing conditions may delay completion of the merger.” 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 52 weeks ended November 5, 2004 our stock traded as high as $3.45, and as low as $1.11. The rapid price changes that our stock 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.

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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 it. Health care cost containment initiatives focused 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 could be harmed.

We introduced products for the molecular diagnostics market in July 2004, and need to comply with FDA quality system regulations and other regulations relating to the manufacturing, marketing and sale of such products

     The manufacturing, labeling, distribution and marketing of our analyte specific reagents are subject to regulation in the United States and in certain other countries.

     In the United States, the Food and Drug Administration, or the FDA, regulates, as medical devices, most diagnostic tests and in vitro reagents that are marketed as finished test kits. Some clinical laboratories, however, purchase molecular diagnostic products which are marketed under FDA regulations as analyte specific reagents, or ASRs, and develop and prepare their own diagnostic tests generically referred to as “home brews.” The FDA regulates ASRs as medical devices that are exempt from premarket approval requirements.

     Unless otherwise exempt, medical devices require FDA approval or clearance prior to marketing in the United States. We believe our currently marketed products, as well as those ASRs we intend to market in the future, are exempt from 510(k) premarket notification and premarket approval

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requirements. To date, we have not applied for FDA or any other regulatory approvals or clearances with respect to any of our molecular diagnostic products. However, products that we may seek to introduce in the future may require FDA approvals or clearances prior to commercial sale in the United States and that process can be time-consuming, expensive, and uncertain. We may experience difficulties that could delay or prevent the successful development, introduction and marketing of new clinical products. There can be no assurance that the FDA will not require us to conduct clinical studies as a condition of approval or clearance. In addition, we cannot assure you that regulatory approval or clearance of any molecular diagnostic products for which we seek such approvals will be granted by the FDA or foreign regulatory authorities on a timely basis, if at all. If approval or clearance is obtained we will be subject to continuing FDA obligations.

     When manufacturing medical devices, including ASRs, we are required to adhere to Quality System Regulations, which require us to manufacture our products and maintain records in a prescribed manner. Our manufacturing facility for ASRs is subject to periodic and unannounced inspections by the FDA and state agencies for compliance with quality system regulations. We have never undergone an FDA Quality System inspection, and we cannot assure you that we can pass an FDA audit or maintain compliance in the future. Further, the FDA may place substantial restrictions on the indications for which our products may be marketed or to whom they may be marketed. Failure to comply with applicable FDA requirements can result in, among other things:

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administrative or judicially imposed sanctions;

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injunctions, civil penalties, recall or seizure of our products;

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total or partial suspension of production;

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failure of the government to grant premarket clearance or premarket approval for our products;

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withdrawal of marketing clearance or approvals; and

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criminal prosecution.

     Customers purchasing our products for molecular diagnostics use in the United States may be regulated under the Clinical Laboratory Improvement Amendments of 1998, known as CLIA. CLIA is intended to ensure the quality and reliability of clinical laboratories in the United States by mandating specific standards in the areas of personnel qualification, administration, participation in proficiency testing, patient test management, quality control, quality assurance and inspections. The regulations promulgated under CLIA establish three levels of clinical tests and the standards applicable to a clinical laboratory depend on the level of the tests it performs. CLIA requirements may prevent some clinical laboratories from using our products. The FDA restricts the sale of our current ASR products to clinical laboratories certified under CLIA to perform high complexity testing. CLIA regulations and future administrative interpretations of CLIA could harm our business by limiting the potential market for our current and future products.

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, 2003 and September 30, 2004 the carrying values of our financial instruments approximated their fair values based on current market prices and rates. We do not believe that fluctuations in interest rates would have a material impact on us. It is our policy not to enter into derivative financial instruments. We do not currently have material foreign currency exposure as our international transactions are minimal and the majority of our international transactions are denominated in U.S. currency. Accordingly, we do not have significant exposure to foreign currency exchange rate risk at September 30, 2004. In the future, under the terms of the QIAGEN agreement, we anticipate conducting increasing volumes of business in Euros for QIAGEN

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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.

Item 4. Controls and Procedures

     We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our “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, our Chief Executive Officer and Chief Financial Officer have concluded that our 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 us required to be included in our periodic SEC filings.

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

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Part II. Other Information

Item 6. Exhibits

*Schedules and similar attachments to the Agreement and Plan of Merger and Reorganization have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Registrant will furnish supplementally a copy of any omitted schedule or similar attachment to the Securities and Exchange Commission upon request.

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Signatures

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

	Epoch Biosciences, Inc.
Date: November 10, 2004	By:	/s/ Bert W. Hogue
		Bert W. Hogue
		Vice President and Chief Financial Officer

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EXHIBIT INDEX

*Schedules and similar attachments to the Agreement and Plan of Merger and Reorganization have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Registrant will furnish supplementally a copy of any omitted schedule or similar attachment to the Securities and Exchange Commission upon request.

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