EPOCH PHARMACEUTICALS INC, 424B3, 1996-12-19

EPOCH PHARMACEUTICALS INC
424B3, 1996-12-19
IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES

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<PAGE> 1
PROSPECTUS
This filing is made pursuant
to Rule 424(b)(3) under
the Securities Act of
1933 in connection with
Registration No. 333-12601

EPOCH PHARMACEUTICALS, INC.

10,428,365 Shares of Common Stock

This Prospectus relates to the sale of up to 10,428,365 shares
(the "Shares") of the common stock, par value $.01 per share, (the "Common
Stock") of Epoch Pharmaceuticals, Inc. ("Epoch" or the "Company") (formerly
"MicroProbe Corporation") by certain stockholders of the Company (the "Selling
Stockholders"), including up to 3,515,865 shares issuable upon the exercise of
outstanding warrants. The Selling Stockholders may sell the Shares from time to
time in transactions in the over-the-counter market, in negotiated transactions,
or otherwise, or by a combination of these methods, at fixed prices that may be
changed, at market prices prevailing at the time of the sale, at prices related
to such market prices or at negotiated prices. The Selling Stockholders may
effect these transactions by selling the Shares to or through broker-dealers,
who may receive compensation in the form of discounts or commissions from the
Selling Stockholders or from the purchasers of the Shares for whom the
broker-dealers may act as an agent or to whom they may sell as a principal, or
both. See "Selling Stockholders."

The Company will not receive any part of the proceeds from the
sale of the Shares. The Selling Stockholders and such brokers-dealers may be
deemed to be "underwriters" within the meaning of the Securities Act of 1933, in
connection with such sales. The Company has agreed to bear all of the expenses
in connection with the registration and sale of the Shares (other than selling
commissions and the fees and expenses of counsel or other advisors to the
Selling Stockholders) estimated to be $88,000.

The Common Stock of the Company trades on the OTC Bulletin
Board under the symbol EPPH. On November 27, 1996, as reported by the OTC
Bulletin Board, the closing bid price of a share of Common Stock of the Company
was $0.94.

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" ON PAGE 6.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

The date of this Prospectus is December 9, 1996.

<PAGE> 2
AVAILABLE INFORMATION

The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street N.W., Room 1024, Washington, D.C. 20549, and at the following Regional
Offices of the Commission: 7 World Trade Center, 13th Floor, New York, New York
10048; 500 West Madison Street, Suite 1400, Chicago, Illinois 60606-2511.
Reports and other information on the Company may be obtained from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site
at http:www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, such as the Company, that file
electronically with the Commission.

This Prospectus constitutes part of a Registration Statement on Form
SB-2 under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the securities offered hereby. For further information about the
Company and the securities offered hereby, reference is made to the Registration
Statement and to the consolidated financial statements and exhibits filed as a
part thereof. The statements contained in this Prospectus as to the contents of
any contract or any other document are not necessarily complete, and in each
instance reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. The Registration Statement, including exhibits
thereto, may be inspected without charge at the public reference facilities
maintained by the Commission as provided in the preceding paragraph, and copies
of all or any part thereof may be obtained from the Commission's Public
Reference Section at the same address after the payment of the fees prescribed
by the Commission.

2
<PAGE> 3
PROSPECTUS SUMMARY

This Prospectus contains certain forward-looking statements which
are based on current expectations that involve a number of risks and
uncertainties. These forward-looking statements are based on assumptions that
the Company will be able to obtain sufficient financing to continue operations,
that the Company's technology will continue to be developed, and will not be
replaced by new technology, that the Company will retain key technical and
management personnel, and that there will be no material adverse change in the
Company's operations or business. Assumptions relating to the foregoing involve
judgments with respect to, among other things, future technology, economic,
competitive and market conditions, and future business decisions, all of which
are difficult or impossible to predict accurately and many of which are beyond
the control of the Company. Although the Company believes that the assumptions
underlying the forward- looking statements are reasonable, any of the
assumptions could prove inaccurate and, therefore, there can be no assurance
that the results contemplated in the forward-looking statements will be
realized. In addition, the business and operations of the Company are subject to
substantial risks which increase the uncertainty inherent in such
forward-looking statements. In light of the significant uncertainties inherent
in the forward-looking information included herein, the inclusion of such
information should not be regarded as a representation of the Company or any
other person that the objectives or plans of the Company will be achieved. The
following summary is qualified in its entirety by the more detailed information
and the Consolidated Financial Statements and the Notes thereto appearing
elsewhere in this Prospectus.

THE COMPANY

Epoch Pharmaceuticals, Inc. is a biomedical company focused on the
development of oligonucleotides (short chains of nucleotides which are the
building blocks of DNA and RNA) as new therapeutic compounds. Utilizing unique
and proprietary technology in the rational design, synthesis and chemical
modification of oligonucleotides, the Company is developing a gene-therapy
approach to inactivate or reverse mutate disease associated genes.

The Company's current therapeutic research and development program
is focused on the modification of gene expression by altering cellular genomic
DNA using oligonucleotide targeting technology combined with chemical
reactivity. The Company's technology is based on its expertise in designing and
synthesizing oligonucleotides bearing modifications that selectively bind to and
interact with the target genes. The Company is currently applying this novel
method of gene therapy to the treatment of certain autoimmune diseases, viral
infections and cancers.

The development of gene modifying oligonucleotides (GMO's) as
pharmaceuticals has been limited by two factors. First, DNA-targeted
oligonucleotides under development by others are, the Company believes, capable
of recognizing and binding to only two of the four bases of the genetic code.
The target sequence therefore must contain only G or A in one of its two
strands, which greatly limits the number of potential target sites. Second, the
triple-stranded complex ("triplex") formed by those oligonucleotides with DNA
lacks the required stability to affect DNA function for the length of time
necessary for therapeutic effectiveness.

The Company's oligonucleotide technology has led to proprietary
advances which it believes can overcome these limitations. By incorporating
these technological advances in the Company's GMO approach, oligonucleotides can
form highly stable three-stranded complexes with DNA base pair sequences
containing any of the four bases of the genetic code. This enables selectively
targeting regions of genomic DNA known to be disease related.
At September 30, 1996, the Company had cash and cash equivalents
of $4,907,000. In addition, on October 1, 1996, the Company and VIMRx
Pharmaceuticals, Inc., a Delaware corporation ("VIMRx"), entered into an
alliance pursuant to which, among other things, VIMRx invested $800,000 in
exchange for 457,143 shares of the Company's common stock at $1.75 per share.
The Company anticipates that the combined funds of $5,707,000 will provide
sufficient working capital to operate approximately fifteen months from
September 30, 1996. The Company's continuing operations are research and
development, which will not generate cash in the near term to fund future
operations.

<PAGE> 4
The Company was incorporated in Delaware on August 14, 1985, under
the name MicroProbe Corporation and changed its name in December 1995 to Epoch
Pharmaceuticals, Inc. Its principal office is located at 1725 220th Street,
S.E., No. 104, Bothell, Washington 98021. Its telephone number is (206)
485-8566.

<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Securities Offered ........................... Up to 10,428,365 shares of Common Stock, par value
$.01 per share (the "Common Stock"), including up
to 3,515,865 shares issuable upon exercise of
warrants, to be sold by the Selling Stockholders.

Common Stock Outstanding Prior to
this Offering(1) ....................... 14,723,856 shares

Common Stock to be Outstanding
After Completion of this
Offering(1) ............................ 14,723,856 shares

Risk Factors ................................. This offering involves a high degree of risk. See "Risk Factors."

Use of Proceeds .............................. The Company will realize no proceeds from this offering.

OTC Bulletin Board Symbol
Common Stock ........................... EPPH
</TABLE>
- ------------------------------------
(1) Based upon the number of outstanding shares at November 4, 1996.
Excludes (i) 1,305,139 shares reserved for issuance under the Company's
stock option plans, and (ii) 8,600,023 shares reserved for issuance upon
exercise of warrants.
4
<PAGE> 5
Summary Financial Information
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Nine Months
Years Ended December 31, Ended September 30,
------------------------------------------- ---------------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue $ 176 $ 101 $ 93 $ -- $ --

Loss from continuing operations (18,040) (3,745) (2,571) (2,465) (2,461)

Net income (loss) (18,669) (10,093) 6,658 (1,732) (2,695)

Net income (loss) per common share (3.84) (1.44) 0.93 (0.25) (0.28)

Weighted average common and
common equivalent shares 4,856,620 6,988,319 7,155,322 7,014,394 9,700,692

Balance Sheet Data:

Working capital (deficit) $ 5,832 $ (5,893) $ 1,769 $ (6,586) $ 4,543

Total assets 13,072 1,263 4,329 1,626 5,278

Shareholders' equity (deficit) 4,840 (5,026) 2,158 (6,246) 4,817
</TABLE>

5
<PAGE> 6
RISK FACTORS

In addition to the other information in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing the Shares offered hereby. An investment in
the Shares offered hereby is speculative in nature and involves a high degree of
risk. No investment in the Shares should be made by any person who is not in a
position to lose the entire amount of such investment.

The statements contained in this Prospectus that are not purely
historical are forward looking statements, including statements regarding the
Company's expectations or intentions regarding the future. Actual results could
differ materially from those discussed in the forward-looking statements. Among
the factors that could cause actual results to differ materially are those
discussed below.

LIMITED OPERATING HISTORY, EXPECTATION OF FUTURE LOSSES AND WORKING CAPITAL
DEFICIT

The Company was organized in 1985 and to date has generated limited
revenues from the sale of diagnostic products and from research and development
grants and has realized no revenues from sales of therapeutic products. The
Company has sold substantially all of its diagnostic products assets. From its
inception through September 30, 1996, the Company has incurred a cumulative
deficit of approximately $47.4 million. The Company expects to incur
substantial operating losses as it expands its research and development efforts,
and there can be no assurance that the Company will ever achieve profitability.
As of September 30, 1996, the Company had working capital of $4.5 million and
will need additional funding to continue its research and development
activities. See "Future Capital Needs and Uncertainty of Additional Funding."
There also can be no assurance that the Company will not encounter substantial
delays and unexpected expenses related to research, development, production and
marketing or other unforeseen difficulties.

FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FUNDING

The Company has expended, and will continue to expend in the future,
substantial funds to complete the research and development of its therapeutic
products, all of which are in the discovery or early development stage. Based on
its currently planned programs, the Company anticipates that its financial
resources should be adequate to satisfy its capital and operating requirements
for 15 months from September 30, 1996. The Company anticipates that it will seek
additional funding through public or private sales of its securities, including
equity securities, and through collaborative or other arrangements with
corporate partners. Adequate funds, whether through financial markets or
collaborative or other arrangements with corporate partners or from other
sources, may not be available when needed or on terms acceptable to the Company.
Insufficient funds may require the Company to delay, scale back or eliminate
certain or all of its research and development programs or to license third
parties to commercialize products or technologies that the Company would
otherwise seek to develop itself. The Company's continuing operations consist
of research and development, and such operations will not generate cash in the
near term to fund future operations. To continue operations, the Company will
be required to sell additional equity securities, borrow additional funds, or
obtain additional financing through licensing, joint venture, or other
collaborative arrangements. The Company has no commitments for such financing
and there can be no assurance that such financing will be available on
satisfactory terms, if at all.

The financial statements of Epoch Pharmaceuticals, Inc. as of
December 31, 1995 and for each of the years in the two-year period ended
December 31, 1995 have been included herein and in the registration statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accounts, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing. The report of KPMG Peat Marwick LLP dated
February 29, 1996 contains an explanatory paragraph that states that the Company
has suffered recurring losses from continuing operations which raises
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of that uncertainty.

TECHNOLOGICAL UNCERTAINTY AND EARLY STAGE OF PRODUCT DEVELOPMENT

The science and technology of oligonucleotide-based products is
rapidly evolving. The Company's proposed therapeutic products are in the
discovery or early development stage. The proposed therapeutic products will
require significant further research, development, testing and regulatory
clearances and are subject to the risks of failure inherent in the development
of products based on innovative technologies. These risks include the
possibility that any or all of the proposed products are found to be ineffective
or unsafe, or otherwise fail to receive necessary regulatory clearances, that
the proposed products, although effective, are uneconomical to market, that
third parties hold proprietary

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<PAGE> 7
rights that preclude the Company from marketing them, or that third parties
market a superior or equivalent product. Accordingly, the Company is unable to
predict whether its research and development activities will result in any
additional commercially viable products.

DEPENDENCE ON THIRD PARTIES FOR CLINICAL TESTING, MANUFACTURING AND MARKETING

The Company does not have the resources, and does not presently
intend, to conduct human clinical trials or manufacture any of its proposed
products. The Company is seeking corporate partners to conduct such activities
for its proposed products. There is no assurance that the Company will be able
to enter into any such arrangements on this or any other basis. In the event the
Company is unable to arrange third party clinical testing, manufacturing and
distribution for proposed products, it may not be able to commercialize it
products.

PATENT AND PROPRIETARY TECHNOLOGY DISPUTES

The patent position of a biomedical company may involve complex
legal and factual issues. As of September 30, 1996, the Company has three issued
U.S. patents, one allowed U.S. patent and ten pending U.S. patent applications.
There are international patent applications corresponding to many of the U.S.
patents and patent applications. The Company also has an exclusive worldwide
license from Yale University for one application owned jointly by the Company
and Yale University. The Company has an exclusive, worldwide license for one
issued U.S. patent owned by Virginia Mason Research Center, Seattle, Washington
("VMRC"). There can be no assurance that issued patents will provide significant
proprietary protection, that pending patents will be issued, or that products
incorporating the technology in issued patents or pending applications will be
free of challenge from competitors.

The biomedical industry has been characterized by extensive
litigation regarding patents and other intellectual property rights. The Company
was a defendant in one such action which has been settled. Although patent and
intellectual property disputes in the biomedical area have often been settled
through licensing or similar arrangements, costs associated with such
arrangements may be substantial and there can be no assurance that necessary
licenses would be available to the Company on satisfactory terms or at all.
Accordingly, an adverse determination in a judicial or administrative proceeding
or failure to obtain necessary licenses could prevent the Company from
manufacturing and selling its products, which would have a material adverse
effect on the Company's business, financial condition and results of operations.

COMPETITION AND TECHNOLOGICAL CHANGE

Many companies are engaged in research and development on gene
therapy and oligonucleotide-based therapeutic products, including many which are
substantially more advanced in their development activities. Many of these
companies have substantially greater capital resources, larger research and
development and marketing staffs and facilities and greater experience in
developing products, conducting clinical trials and obtaining regulatory
approval than the Company. Furthermore, the field in which the Company operates
is subject to significant and rapid technological change. Accordingly, even if
the Company's products or proposed products can be successfully introduced,
there can be no assurance that the Company's technologies will not be replaced
by new technologies or that products or proposed products of the Company will
not be rendered obsolete or non-competitive.

7
<PAGE> 8
LIMITED MANUFACTURING AND MARKETING CAPABILITY

The Company has no experience in manufacturing and marketing
therapeutic products and expects that it will require one or more corporate
partners with significantly greater resources and experience to market such
therapeutic products. There is no assurance that the Company will be able to
enter into such arrangements on favorable terms or at all.

UNCERTAIN MARKET ACCEPTANCE

The Company's therapeutics research program is in a very early stage
and is not expected to develop commercial products for many years, if at all.
There can be no assurance that the Company's therapeutic products will be
accepted by the market at that time.

GOVERNMENT REGULATION

The development, testing, manufacturing and marketing of the
Company's products in the United States are regulated by the U.S. Food and Drug
Administration ("FDA"), which generally requires governmental clearance of such
products before they are marketed. The process of obtaining FDA and other
required regulatory approvals is lengthy, expensive and uncertain. Moreover,
regulatory approval, if granted, may include significant limitations on the
indicated uses for which a product may be marketed. Failure to comply with
applicable regulatory requirements can result in, among other things, fines,
suspensions of approvals, product seizures, injunctions, recalls of products,
operating restrictions and criminal prosecutions. The Company's proposed
therapeutic products will be subject to a lengthy regulatory process, including
pre-clinical studies, clinical trials and extensive FDA review, which generally
takes many years and requires the expenditure of substantial resources. Delays
in receipt of or failure to receive clearances to commence clinical studies or
to market products, or loss of previously received clearances, would adversely
affect the marketing of the Company's proposed products and the results of
future operations. Commercial distribution in most foreign countries also is
subject to varying government regulations. In addition, federal, state and
international government regulations regarding the manufacture and sale of
health care products and are subject to future change, and additional
regulations may be adopted which may prevent the Company from obtaining, or
affect the timing of, future regulatory clearances and may adversely affect the
Company.

TERMINABLE LICENSE AND COLLABORATIVE AGREEMENTS

Certain of the Company's licenses are terminable if the Company does
not make certain minimum annual payments, meet certain milestones or diligently
seek to commercialize the underlying technology. In addition, the Company's
related collaborative and consulting agreements are generally terminable upon 30
to 60 days written notice.

8
<PAGE> 9
LACK OF FULL-TIME CHIEF EXECUTIVE OFFICER, CHIEF FINANCIAL OFFICER

Fred Craves currently serves as the Company's Chief Executive
Officer, and Sanford S. Zweifach currently serves as the Company's President and
Chief Financial Officer. Such officers, however, currently serve in their
respective positions on a part-time basis. Although they devote a substantial
portion of their time to the Company, they also devote substantial portions of
their time to their positions at other entities.

DEPENDENCE ON KEY PERSONNEL

The Company is dependent upon its key management and technical
personnel and consultants, and its future success will depend partially upon its
ability to retain these persons and to recruit additional qualified personnel.
The Company must compete with other companies, universities, research entities
and other organizations in order to attract and retain highly qualified
personnel. Although the Company has entered into employment agreements with its
key executive officers, there can be no assurance that the Company will be able
to retain such highly qualified personnel or hire additional qualified
personnel. The Company currently does not maintain key man insurance on any of
its management or technical personnel.

NO EXCHANGE OR NASDAQ LISTING; PENNY STOCK RESTRICTIONS

The Company's Common Stock is not listed on any exchange or Nasdaq
System. The Company's Common Stock is reported on the OTC Bulletin Board.
Because the Company's shares are not listed on the Nasdaq System, they are
subject to the regulations regarding trading in penny stocks (i.e. those
securities trading for less than $5.00 per share). The following is a list of
the restrictions on the sale of penny stocks.

1. Prior to the sale of a penny stock by a broker-dealer to a
new purchaser, the broker-dealer must make a determination
as to whether the purchaser is suitable to invest in penny
stocks. To make that determination, a broker-dealer must
obtain, from a prospective investor, information regarding
the purchaser's financial condition and investment
experience and objectives. Subsequently, the broker-dealer
must furnish the purchaser with a written statement setting
forth the basis of the suitability finding.

2. A broker-dealer must obtain from the purchaser a written
agreement to purchase the security. This agreement must be
obtained for every purchase until the purchaser becomes an
"established customer."

3. The Securities Exchange Act requires that prior to effecting
any transaction in any penny stock, a broker-dealer must
provide the purchaser with a "risk disclosure document" that
contains, among other things, a description of the penny
stock market and how it functions and the risks associated
with such investments. These disclosure rules are applicable
to both purchases and sales by investors.

4. A dealer that has sold a customer a penny stock security
must send that customer within ten days after the end of
each calendar month a written account statement including
prescribed information relating to the security.

As a result of the lack of listing of the Company's securities on an
exchange or the Nasdaq System and the rules regarding transactions in penny
stocks, the liquidity and salability of the Company's

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<PAGE> 10
securities may be substantially impaired. There is no assurance that the
Company's current market-makers will continue to make a market in the Company's
securities, or that any market for the Company's securities will continue.

NO DIVIDENDS AND NONE ANTICIPATED

The Company has not paid any dividends on its Common Stock since its
inception and does not contemplate or anticipate paying any dividends upon its
Common Stock in the foreseeable future. It is currently anticipated that
earnings, if any, will be used to finance the development and expansion of the
Company's business.

MARKET VOLATILITY

The market price of the Company's Common Stock may be highly
volatile. The securities of biotechnology companies have experienced extreme
price and volume fluctuations, which have often been unrelated to the companies'
operating performance. Announcements of technological innovations for new
commercial products by the Company or its competitors, developments concerning
proprietary rights or governmental regulation or general conditions in the
biotechnology industry may have a significant effect on the Company's business
and on the market price of the Company's securities. Sales of a substantial
number of shares of Common Stock by existing security holders could also have an
adverse effect on the market price of the Company's securities.

SHARES AVAILABLE FOR RESALE; POSSIBLE DILUTIVE EFFECT OF OUTSTANDING OPTIONS AND
WARRANTS

Sales of substantial numbers of the Company's Common Stock in the
public market could adversely effect the market price of the Common Stock. As of
November 4, 1996, the Company had 14,723,856 shares of Common Stock outstanding,
8,600,023 shares of stock issuable upon exercise of outstanding warrants and an
additional 1,305,139 shares of stock issuable upon exercise of outstanding
options. Of the outstanding shares and shares issuable upon exercise of warrants
and options, substantially all are freely tradable without restriction under the
Securities Act of 1933, as amended (the "Securities Act"), or registered for
resale under the Registration Statement of which this Prospectus is a part. As a
result, substantially all of the Company's Common Stock outstanding and issuable
upon the exercise of warrants and options will be freely tradable by the holders
thereof. If holders cause a large number of shares to be sold in the public
market, such sales may have a material adverse effect on the market price of the
Common Stock. To the extent the trading price of Common Stock at the time of
exercise of any such options or warrants exceeds the exercise price, such
exercise will have a dilutive effect on the Company's stockholders.

USE OF PROCEEDS

The proceeds from the sale of each Selling Stockholder's Common
Stock will belong to the Selling Stockholders. The Company will not receive any
proceeds from such sales of the Common Stock. The Company will receive proceeds
from the exercise of Warrants; however, the amount of such exercises and the
proceeds to the Company cannot be predicted.

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<PAGE> 11
PRICE RANGE OF COMMON STOCK

From September 29, 1993 until September 30, 1994, the Company's
Common Stock traded on the Nasdaq National Market and since September 30, 1994
has traded on the OTC Bulletin Board. The following table presents quarterly
information on the high and low sale prices of the Common Stock, as reported on
the Nasdaq National Market, and the high and low bid prices on the OTC Bulletin
Board.

<TABLE>
<CAPTION>
High Low
---- -----
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1996
Third Quarter $1.56 $ .95
Second Quarter 2.03 1.50
First Quarter 1.04 0.50

FISCAL YEAR ENDED DECEMBER 31, 1995
Fourth Quarter $0.69 $0.28
Third Quarter 0.63 0.31
Second Quarter 0.72 0.38
First Quarter 0.69 0.19

FISCAL YEAR ENDED DECEMBER 31, 1994
Fourth Quarter $0.50 $0.06
Third Quarter 3.57 0.13
Second Quarter 6.00 3.50
First Quarter 5.25 4.00
</TABLE>

As of November 4, 1996, there were 224 stockholders of record
of the Company's Common Stock. The Company has not paid any dividends on its
Common Stock since its inception and does not contemplate or anticipate paying
any dividends upon its Common Stock in the foreseeable future. It is currently
anticipated that earnings, if any, will be used to finance the development and
expansion of the Company's business.

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<PAGE> 12
CAPITALIZATION

The following table sets forth the capitalization of the Company at
September 30, 1996 (in thousands).

<TABLE>
<CAPTION>
<S> <C>
Stockholders' equity:
Common Stock, $.01 par value: 30,000,000 shares
authorized; 14,266,713 shares issued and
outstanding(1).............................................. $ 143
Additional paid in capital.................................... 52,097
Accumulated deficit........................................... (47,368)
Deferred compensation......................................... (55)
--------
Total stockholders' equity........................ 4,817
--------
Total capitalization.............................. $ 4,817
========
</TABLE>

- -------------
(1) Excludes 7,700,023 shares of Common Stock issuable upon exercise of
outstanding warrants at September 30, 1996, and 1,305,139 shares of Common
Stock issuable upon exercise of outstanding options at September 30, 1996.

DIVIDEND POLICY

The Company has not paid cash dividends in the past and does not
intend to pay cash dividends in the foreseeable future.

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<PAGE> 13
SELECTED FINANCIAL DATA

The following selected financial and operating data should be read
in conjunction with the accompanying financial statements and related notes
thereto included elsewhere in this Prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operation." The selected
financial data set forth below as of and for the fiscal years ended December 31,
1993, 1994 and 1995 have been derived from audited financial statements of the
Company. Certain balances have been restated to reflect the sales of Source
Scientific Systems, Inc. ("Source") and the Company's diagnostic division as
discontinued operations. The selected financial data for the nine months ended
September 30, 1995 and 1996 are derived from unaudited financial statements and
include all adjustments, consisting of only normal recurring adjustments, that
the Company considers necessary for a fair presentation of the financial
position and the results of operations for these periods. The results for the
nine months ended September 30, 1996 are not necessarily indicative of any
future results of operations of the Company.

NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ ---------------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ------------ ----------
(In thousands, except for per share data) (UNAUDITED)

<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Research contract revenue..... $ 177 $ 101 $ 93 $ -- $ --
Operating expenses:
Research and development...... 2,055 4,475 1,443 840 1,511
Purchase of in-process
research and development..... 4,200 (2,321) -- -- --
Selling, general
and administrative........... 2,516 1,692 1,221 1,260 911
Cost of litigation............ 100 -- -- -- --
-------- -------- ------- -------- -------
Total operating expenses...... 8,771 3,946 2,664 2,100 2,422
-------- -------- ------- -------- -------
Loss from continuing
operations.................. (8,484) (3,745) (2,714) (2,465) $(2,461)
-------- -------- ------- --------- -------
Net loss...................... $(18,669) $(10,093) $ 6,658 $ (1,732) $(2,695)
======== ======== ======= ======== =======
Net loss per common share..... (3.84) (1.44) (0.93) (0.25) (0.28)
Weighted average common and
common equivalent shares...... 4,857 6,988 7,155 7,014 9,701
</TABLE>

DECEMBER 31, SEPTEMBER 30,
------------------------------ ----------------------
1993 1994 1995 1995 1996
--------- --------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and marketable securities $ 9,461 $ 10 $ 3,739 $ 818 $ 4,907
Working capital (deficit)..... 5,832 (5,893) 1,769 (6,856) 4,543
Total assets.................. 13,072 1,263 4,329 1,626 5,278
Accumulated deficit........... (41,238) (51,331) (44,673) (53,063) (47,369)
Total stockholders' equity
(deficit).................... 4,840 (5,026) 2,158 (6,246) 4,817
</TABLE>

13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Since its inception in 1985, the Company has devoted its principal
efforts toward research and development. The Company has been unprofitable from
continuing operations for the past six fiscal years and has incurred an
accumulated deficit of $47.4 million as of September 30, 1996. The Company
expects to incur substantial operating losses for the next few years as the
Company continues research and development spending in applying its
oligonucleotide-based technology for therapeutic applications.

In July 1991, the Company acquired Source, a manufacturer of
automated medical diagnostic instrumentation. In addition to providing system
know-how for automating the Company's DNA probe diagnostic tests, Source sells
instruments to other medical product companies on an original equipment
manufacturing ("OEM") basis. The Company recognized that the OEM business of
Source was not aligned with the Company's strategic direction and disposed of
Source in January 1994. See "Business Disposition of Source."

In November 1993, pursuant to an agreement (the "November
Agreement") entered into among the Company, Ribonetics GmbH ("Ribonetics") and
Animal Biotechnology Cambridge, Ltd. ("ABC"), a shareholder of Ribonetics,
the Company agreed to acquire Ribonetics and certain assets of ABC (the "ABC
Assets"), in order to add complementary oligonucleotide technology for
therapeutic applications.

During the period between December 1993 and September 1994, the
Company advanced amounts totalling approximately $1.63 million to both ABC and
Ribonetics to fund the operating expenses of Ribonetics and ABC's Scion Health
division and for the purchase of certain capital equipment necessary for the
continued operations of such entities. Although the Company was not obligated to
advance such sums under the November Agreement, it determined to do so to
preserve its initial investment in the entities while the Company conducted its
due diligence and the definitive agreements were being negotiated.

On September 9, 1994, ABC provided the Company with notice of
termination of the November Agreement. The Company refused to accept such
termination on the grounds that the November Agreement did not provide ABC with
the right to terminate the November Agreement. At such time, the Company also
ceased advancing funds to cover the operating expenses of ABC's Scion Health
division and Ribonetics. On September 27, 1994, the Company announced that it
exercised its put right by providing Mr. David Blech with written notice, under
a December 1, 1993 agreement with Mr. Blech, a principal stockholder of the
Company at the time such agreement was entered into (the "Blech Agreement"),
that the Company intended to sell Epoch's interests in Ribonetics and the ABC
Assets to Mr. Blech for the amount paid by Epoch for such interests. Mr. Blech
failed to respond to the Company's notice and, following the expiration of the
90-day period specified in the Blech Agreement as the period in which a closing
under the Blech Agreement was to occur, the Company deemed Mr. Blech to be in
default of his obligations.

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<PAGE> 15
to repayment to the Company of the cash portion of the purchase price and the
amounts advanced by the Company from December 1993 through September 1994 to
fund the operating expenses of Ribonetics and ABC's Scion Health division.
VIMRx, a biotechnology company located in Wilmington, Delaware, subsequently
obtained an interest in Ribonetics. On October 1, 1996, the Company and VIMRx
entered into a Stock and Warrant Purchase Agreement (the "VIMRx Agreement")
pursuant to which the Company and VIMRx settled any and all disputes concerning
Ribonetics, and the Company and VIMRx established an alliance to attempt to
exploit the synergies between their respective technologies and markets. Under
the VIMRx Agreement, VIMRx invested approximately $800,000 in exchange for
457,143 shares of the Company's Common Stock at $1.75 per share. In addition,
VIMRx received warrants to purchase 900,000 shares of the Company's Common
Stock, 450,000 of which are exercisable at $2.00 per share and expire in October
1997, and 450,000 of which are exercisable at $3.00 per share and expire
in October 1998. Additionally, pursuant to the VIMRx Agreement, the Board of
Directors of the Company appointed Richard L. Dunning, the President and Chief
Executive Officer of VIMRx, to fill a vacancy on Company's Board of Directors.
Mr. Dunning accepted such appointment effective as of October 30, 1996.

In November 1995, pursuant to the terms of an Asset Purchase
Agreement, dated as of September 29, 1995 (the "Asset Purchase Agreement"), the
Company sold the Company's assets and technology associated with its diagnostics
division (the "Assets") to Becton, Dickinson and Company, a New Jersey
corporation, through its Becton Dickinson Diagnostic Instrument Systems Division
(collectively, "Becton"). The Assets related to the Company's development,
marketing and sale of diagnostic products which involve the use of nucleic acid
probes to detect and identify microorganisms in biological samples under the
names "Affirm(R) VP," "Affirm(R) VPIII," "Affirm(R) DP," "Hybriquick(R)" and
"Isoquick(R)". The Assets included: tangible personal property, interests in
certain contracts and other instruments, rights in permits and licenses, raw
materials and inventory, technology, trade secrets, patents, other intellectual
property (including the name "MicroProbe"), rights in customer lists, records
and data, computer software programs, goodwill and causes of action held by the
Company against third parties. The aggregate purchase price paid by Becton for
the Assets and for the Company's covenant not to compete with Becton for a
period of five years was $8,510,000. The Purchase Price is subject to an upward
adjustment of $1,500,000 contingent on the occurrence of certain events. See
"Business - Disposition of Diagnostic Assets."

In June 1996, the Company successfully completed a private
placement (the "Private Placement") of Units, each Unit consisting of one share
of the Company's Common Stock and one warrant to purchase 0.5 shares of the
Company's Common Stock. The Company sold a total of 5 million Units, for an
aggregate purchase price of $5 million to institutional and accredited
individual investors. The term of the warrants is five years, and they are
exercisable at $2.50 per share (or $1.25 per 0.5 shares). Each warrant is
redeemable by the Company at any time after eighteen months from the date that
they are issued at $0.05 per warrant, provided that the closing trading price
per share of Common Stock is at least $3.75 for twenty (20) consecutive trading
days.

In connection with the Private Placement, pursuant to an agreement
with its financial advisor, David Blech, the Company paid fees of $350,000 to
Mr. Blech. In addition, the Company cancelled fifty percent (50%) of the
obligations of Mr. Blech arising in connection with the transactions involving
Ribonetics, including the "put" rights contained in an agreement dated
December 1, 1993 between the Company and Mr. Blech. The aggregate amount
cancelled was $1,635,588. The balance is accruing interest at the minimum
applicable federal rate. As the obligation had been fully reserved, and the
remaining balance is fully reserved, neither the cancellation nor the remaining
obligation is reflected in the Company's financial statements. The Company also
issued to Mr. Blech five year warrants to purchase 500,000 shares of Common
Stock at $1.00 per share. The warrants are not exercisable for one year and are
held in escrow by the Company until the balance of the Ribonetics debt is
satisfied.
15
<PAGE> 16
In addition to completion of the Private Placement, major
stockholders of the Company elected to exercise previously existing warrants to
purchase 2,200,000 shares of the Company's Common Stock at $0.30 per share
generating an additional $660,000 of cash to the Company.

Also in June 1996, the Company announced that it intends to exchange
for every two warrants which were issued in conjunction with the Company's
public offering in September 1993 at $6.50 per share, one new warrant to
purchase one share of the Company's Common Stock with a term of five
years that is exercisable at $2.50 per share. Each new warrant would be
redeemable by the Company at any time after eighteen months from the date that
they are issued at $0.05 per warrant, provided that the closing trading price
per share of Common Stock is at least $3.50 for twenty (20) consecutive
trading days.

In October 1996, The National Institute of Arthritis and
Musculoskeletal and Skin Disease of the National Institute of Health (the
"Institute") awarded a four-year contract to develop and test a compound
designed to inactivate a gene which causes rheumatoid arthritis. The federal
research award is for $1.2 million of which the Company will receive $584,000
over the four year period.

This Prospectus contains certain forward-looking statements that are
based on current expectations. In light of the important factors that can
materially affect results, including those set forth below and elsewhere in this
Prospectus, the inclusion of forward-looking information herein should not be
regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved. The Company may encounter
competitive, technological, financial and business challenges making it more
difficult than expected to continue to develop and market therapeutic
technologies and products; the market may not accept the Company's therapeutic
products; the Company may be unable to retain existing key management personnel;
and there may be other material adverse changes in the Company's operations or
business. Certain important factors affecting the forward-looking statements
made herein include, but are not limited to (i) the successful development of
viable therapeutic technologies and products, (ii) accurately forecasting
capital expenditures, and (iii) obtaining new sources of external financing.
Assumptions relating to budgeting, marketing, product development and other
management decisions are subjective in many respects and thus susceptible to
interpretations and periodic revisions based on actual experience and business
developments, the impact of which may cause the Company to alter its marketing,
capital expenditure or other budgets, which may in turn affect the Company's
financial position and results of operations.

Future operating results may be impacted by a number of factors that
could cause actual results to differ materially from those stated herein, which
reflect management's current expectations. These factors include industry
specific factors, the Company's ability to maintain access to external financing
sources and its financial liquidity, the Company's ability to timely develop and
produce commercially viable therapeutic products and the Company's ability to
manage expense levels.

RESULTS OF OPERATIONS

The following discussion of results of operations reflects the
Company's diagnostics division as discontinued operations.

Nine Months Ended September 30, 1995 and 1996.

Research and development expenses for the nine months ended
September 30, 1996 increased $671,000 over the same period in the prior year.
This increase in the year-to-date expense is reflective of the increased
research activity which is being funded with the proceeds from the sale of the
Assets to Becton and from the Private Placement. Additionally, for the nine
months ended September 30, 1995, research and development expense was reduced by
$404,000 for a research contract which had been accrued but was subsequently
cancelled. Additional increases in expenditures for

16
<PAGE> 17
research and development throughout 1996 are anticipated as the Company devotes
additional resources to these efforts.

General and administrative expenses decreased in the nine month
period ended September 30, 1996, compared to the corresponding period in 1995.
Contributing to these reductions are the elimination of activities associated
with selling the diagnostic division and patent litigation, both of which caused
increased legal and travel expenses in the 1995 periods. Additionally, in July
1996 the In Re Blech Securities Litigation suit was dismissed. Accordingly,
$250,000 of estimated costs which had been accrued for this matter were reversed
as a reduction of expenses in the nine month period ended September 30, 1996.

Interest income in the nine month period ended September 30, 1996
increased compared with the respective period in the prior year due to higher
investable funds. Interest expense in the nine month period ended September 30,
1996, is significantly reduced from the comparable period in 1995 as the
majority of debt was repaid in the second quarter of 1996 with funds received
in the Private Placement.

In addition to the interest on the principle amounts of the loans,
interest expense in the nine months ended September 30, 1996 includes $122,000
of amortization of debt discount relating to a $480,000 warrant price adjustment
associated with the bridge refinancing. The price adjustment was credited to
additional paid-in capital and the debt discount was amortized over the
term of the notes. At March 31, 1996, the discount had been fully amortized.

Years Ended December 31, 1994 and 1995

Research contract revenue reflects revenue from U.S. government
grants and contracts.

Research and development expenses decreased in total by
approximately $3,032,000 for the year ended December 31, 1995 from the prior
year, excluding the acquired in-process research and development associated with
the acquisition of Ribonetics. This decrease was largely due to the elimination
of Ribonetics expenses in 1995 as well as cost reduction measures implemented in
late 1994 to conserve cash.

The decrease in selling, general and administrative expenses in 1995
as compared to 1994 of $471,000 is due the implementation of certain cost
reduction measures.

Interest income in the year ended December 31, 1995 decreased
compared with the prior year's results due to lower investable funds during the
1995 period. Interest expense increased in the comparable period because of the
increase in obligations incurred for bridge financing, including amortization of
$358,000 of discount on notes payable due to repricing of warrants associated
with the bridge financing.

Other income includes $300,000 which was received from Mr. Blech in
1994 and recorded as notes payable at December 31, 1994. In 1995, the Company
wrote off the note payable in partial settlement of Mr. Blech's obligations
under the Blech Agreement.

17
<PAGE> 18
The income (loss) from discontinued operations relates to the
operations and disposal in November 1995 of the operations of the diagnostics
division of the Company. See "Business - Disposition of Diagnostic Assets." The
Company realized a gain on the sale of the Assets to Becton in 1995 in the
amount of $8,786,000.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 1996, the Company had cash and cash equivalents of
$4,907,165 which the Company anticipates will provide sufficient working capital
to operate approximately fifteen months. The Company's continuing operations
consist of research and development, and will not generate cash in the near
term to fund future operations.

The net cash increase of $1,168,000 from December 31, 1995 to
September 30, 1996 was the result of the receipt of net proceeds of $4,633,000
from the Private Placement completed in June 1996, and the receipt of $660,000
from the exercise of warrants to purchase the Company's common stock by major
stockholders in June 1996. These receipts were offset by the repayment of notes
payable plus interest in the amount of $1,396,000, and cash used for operations.

On October 1, 1996, the Company received approximately $800,000 of
additional cash from VIMRx in connection with its investment under the VIMRx
Agreement.

Since inception, the Company has financed its operations primarily
through the sales of its equity securities. In addition, the Company received
$1,320,000 from the sale of Source in 1993 and $8,510,000 from the sale of the
Assets to Becton in 1995. To continue operations, the Company will be required
to sell additional equity securities, borrow additional funds, or obtain
additional financing through licensing, joint venture, or other collaborative
arrangements. The Company has no commitments for such financing and there can be
no assurance that such financing will be available on satisfactory terms, if at
all.

Plan of Operations and Capital Requirements

The Company's primary future needs for capital are for continued
research and development as described in "Business-Research and Development".
The Company's working capital requirements may vary depending upon numerous
factors including the progress of the Company's research and development,
competitive and technological advances and the FDA regulatory process.

The Company will require additional funds to continue its operations
and, over the longer term, will require substantial additional funds to maintain
and expand its research and development activities and to ultimately
commercialize, with or without the assistance of corporate partners, any of its
proposed products. The Company will seek collaborative or other arrangements
with pharmaceutical companies, under which such companies would provide
additional capital to the Company in exchange for exclusive or non-exclusive
license or other rights to certain of the technologies and products the Company
is developing. However, the competition for such arrangements with major
pharmaceutical companies is intense, with a large number of biopharmaceutical
companies attempting to satisfy their funding requirements through such
arrangements. There can be no assurance that an agreement or agreements will
arise from these discussions in a timely manner, or at all, or that revenues
that may be generated thereby will offset operating expenses sufficiently to
reduce the Company's short- or long-term funding requirements. Additional equity
or debt financings may be required, and there can be no assurance that funds
will be available from such financings on favorable terms, or at all.

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<PAGE> 19
BUSINESS

OVERVIEW

CORPORATE NAME CHANGE

The right to use the name "MicroProbe" was included in the assets
purchased by Becton Dickinson and Company. See "Disposition of Diagnostic
Assets." It is believed that the name "Epoch Pharmaceuticals, Inc."
appropriately identified the scope of the continuing business of the Company,
and the shareholders approved the name change at a special meeting on November
27, 1995, and it was effective on December 4, 1995.

BACKGROUND

Nucleic acids are found in all living organisms and are the sole
carriers of the genetic code that specifies an organism's makeup. There are two
types of closely related nucleic acids, deoxyribonucleic acid (DNA) and
ribonucleic acid (RNA). DNA carries the permanent genetic information for
construction of all proteins in higher living organisms, while RNA carries a
temporary copy of this information to direct protein synthesis. Proteins perform
most of the normal physiological functions of living organisms, and aberrant
production or activity of proteins may cause numerous diseases.

DNA is usually composed of two long chains, and each link in the
chain is a nucleotide or "base." There are four different bases: adenine (A),
guanine (G), thymine (T) and cytosine (C), which are linked together in DNA by a
sugar and phosphate backbone. Every gene contains unique sequences of these
bases and it is these unique sequences which constitute the genetic information
or code which guides all cellular processes. The two chains, or strands,
normally comprising DNA are held together by chemical attractions between
opposing paired bases according to certain rules: A always pairs with T, G
always pairs with C. This process of base pairing, called hybridization, can
occur between DNA strands of any size, as long as the segments hybridizing are
complementary.

Hybridization can also occur between a DNA strand and a
complementary RNA strand or two complementary RNA strands. RNA occurs in several
forms in cells, and each of these forms has a different function. Messenger RNA
(mRNA) is copied, or transcribed, from the DNA comprising a gene and carries the
genetic code which is translated into the proteins synthesized by the cell.
Transfer RNA (tRNA) transports the necessary building block amino acids to
ribosomes, complex intracellular structures where protein synthesis occurs
through the "translation" of the mRNA message. Ribosomal RNA (rRNA) functions to
bring mRNA and tRNA together so protein synthesis can occur. The process of
transcription and translation which results in protein synthesis is called gene
expression.

19
<PAGE> 20
Oligonucleotides are well suited for development as pharmaceuticals
because they can be designed to bind selectively to and inhibit or inactivate,
specific sequences in DNA and RNA, or to the proteins they produce. The
Company's expertise in the chemistry, design and synthesis of oligonucleotides
forms the basis of the Company's research and development activities for
therapeutic products.

RESEARCH AND DEVELOPMENT

Epoch's current therapeutic research and development program is
focused on the modification of gene expression by altering cellular genomic DNA
using oligonucleotide targeting technology combined with chemical reactivity.
The Company's technology is based on its expertise in designing and synthesizing
oligonucleotides bearing modifications that selectively bind to and interact
with the target genes. The Company is currently applying this novel method of
gene therapy to the treatment of certain autoimmune diseases, viral infections
and cancers.

Pharmaceutical compounds can be developed from oligonucleotides
designed to act at different points in the process of gene expression.
Oligonucleotides may regulate the expression of targeted genes in two ways, at
the mRNA or DNA level. Whereas "antisense" oligonucleotides act against
messenger RNA and are transient, the Company's gene modifying oligonucleotides
("GMOs") could act directly and lastingly on the genetic code itself at the DNA
level.

Epoch's GMOs form sequence-specific three-stranded complexes with
the genetic double-stranded DNA in order to alter its function. This alteration
of function is due to mutations in the gene at the targeted site induced by the
reactive function of the GMO. Because the DNA sequences of many
disease-associated genes are known, the Company believes that it may be able to
treat these diseases by rationally designing and synthesizing GMO's capable of
altering the chosen sequence of the targeted gene. Depending on the desired
effect, the mutation may be designed so as to eliminate the expression of a
disease-associated gene, or to correct a genetic defect.

Oligonucleotide-based gene modification technology potentially
represents a significant advance over other therapeutic approaches. While
traditional drugs generally act on the millions of proteins generated from mRNA
and antisense drugs are designed to act on the thousands of mRNA molecules
generated from a gene, GMOs act directly against the gene. In contrast to
certain antibiotics that also act directly on DNA, GMOs can be targeted by
design to act only on DNA sequences which are disease-related.

Technological Advances

The development of gene modifying oligonucleotides as
pharmaceuticals has been limited by two factors. First, DNA-targeted
oligonucleotides under development by others are, the Company believes, capable
of recognizing and binding to only two of the four bases of the genetic code.
The target sequence therefore must contain only G or A in one of its two
strands, which greatly limits the number of potential target sites. Second, the
triple-stranded complex ("triplex") formed by those oligonucleotides with DNA
lacks the required stability to affect DNA function for the length of time
necessary for therapeutic effectiveness.

The Company's oligonucleotide technology has led to proprietary
advances which it believes can overcome these limitations. By incorporating
these technological advances in the Company's GMO

20
<PAGE> 21
approach, oligonucleotides can form highly stable three-stranded complexes with
DNA base pair sequences containing any of the four bases of the genetic code.

The first of these advances is enzyme mediated complexing
(triplexing) of the oligonucleotide drug with both DNA strands. Under natural
cellular conditions, such as the process of repairing certain damaged DNA, an
enzyme (or a member of a family of enzymes) called recombinase promotes the
sequence-specific binding of single-stranded DNA with double-stranded DNA to
form a three-stranded complex. In the presence of this recombinase, a single
stranded GMO whose sequence can contain all DNA bases can recognize and bind to
its exact complement in the double stranded DNA of a gene, in a rapid and
sequence-specific fashion. Many of the oligonucleotide drugs under investigation
by others contain chemical modifications to the backbone of the oligonucleotide
which, the Company believes, results in the inability of such oligonucleotide to
take advantage of recombinase promoted association with double-stranded DNA. By
using its proprietary technology, Epoch is able to design and synthesize
sufficiently stable gene modifying oligonucleotides with non-modified backbones,
resulting, the Company believes, in the ability to interact with naturally
occurring recombinase to rapidly form triple-stranded complexes involving all
four DNA bases.

The second of these two advances is the crosslinking of the
oligonucleotide to the double-stranded DNA after the recombinase-promoted
sequence recognition and complexing has occurred. Crosslinking "freezes" this
complex and covalently modifies the targeted gene. By using its proprietary
technology, the Company adds a reactive site to its oligonucleotides which, when
properly aligned in a three-stranded DNA/oligonucleotide complex, forms a
chemically stable (covalent) linkage with a targeted reactive site on the target
DNA. The effect of this reaction will vary by design. Certain modifications will
induce the cell to make errors when it attempts to repair the lesion. The
Company believes that this will irreversibly inactivate the gene by mutation.
Alternatively, rational design of the chemical modification can, the Company
believes, give a targeted change of a single base pair in a gene at the site of
a genetic defect, providing correction of certain of those genetic defects.

Epoch Pharmaceuticals has refined these crosslinkers so that, in in
vitro studies, crosslinking occurs rapidly and efficiently in systems as complex
as the entire human genome. To enhance the effectiveness of this technology, the
Company believes that by using multiple crosslinkers on a single
oligonucleotide, both DNA strands of the target gene will be irreversibly bound
and the efficiency of inactivation by mutation, hence the therapeutic effect,
will be very high. Alternatively, this binding process may directly inactivate
the gene, halting the expression of disease-associated proteins. In addition to
the pivotal role that the Company's proprietary crosslinking chemistry plays in
the Company's 4-letter targeting technology, it is also applicable to 2-letter,
or triplex, DNA targeting.

The Company believes it was the first to demonstrate the successful
targeting and chemical reaction of an oligonucleotide with both strands of a
double-stranded DNA sequence. It believes that it was the first to show highly
specific targeting and chemical modification of a sequence containing all 4
genetic code letters on a double stranded DNA target, including genomic DNA. It
furthermore believes it has been the first to show covalent modification of a
targeted native gene in living cells.

The Company is currently developing the use of GMOs in a
collaborative drug development program with the Virginia Mason Research Center
("VMRC"), Seattle, WA. This program will apply GMO technology to type I diabetes
and other autoimmune diseases. VMRC has discovered a gene that indicates
predisposition to type I diabetes, and the Company and its collaborators believe
that inhibition

21
<PAGE> 22
or alteration of the expression of that gene will attenuate the immunologic
response causing the diabetes. Epoch Pharmaceuticals and its collaborators
believe that treatment of blood stem cells with this GMO treatment, followed by
reintroduction of those cells into the patient, will sufficiently alter the
patient's immune response to affect a treatment. If successful, as to which
there can be no assurance, the resultant technology may have broad application
in a wide number of diseases, especially chronic viral diseases, cancer, and
other autoimmune diseases, such as rheumatoid arthritis.

The Company is in the early development stages of its GMO technology
and substantial additional research and development efforts will be required to
develop effective therapeutics, including research and development in the area
of drug delivery. There can be no assurance, however, that the Company will be
able to successfully commercialize its GMO technology.

The Company had previously developed lead compounds in two classes
of protein blockers, one for inhibition of human immunodeficiency virus
replication, and the other for potential treatment of certain types of cancers.
Due to limited financial resources, the Company has deferred the substantial
additional research and development that these compounds require.

DISPOSITION OF DIAGNOSTIC ASSETS

In November 1995, pursuant to the terms of the Asset Purchase
Agreement, the Company sold the Company's Assets associated with its diagnostics
division to Becton. The Assets related to the Company's development, marketing
and sale of diagnostic products which involve the use of nucleic acid probes to
detect and identify microorganisms in biological samples under the names
"Affirm(R) VP," "Affirm(R) VPIII," "Affirm(R) DP," "Hybriquick(R)" and
"Isoquick(R)." The Assets included: tangible personal property, interests in
certain contracts and other instruments, rights in permits and licenses, raw
materials and inventory, technology, trade secrets, patents, other intellectual
property (including the name "MicroProbe"), rights in customer lists, records
and data, computer software, programs, goodwill and causes of action held by the
Company against third parties. The aggregate purchase price paid by Becton for
the Assets and for the Company's covenant not to compete with Becton for a
period of five years was $8,510,000. The purchase price is subject to an upward
adjustment of $1,500,000 contingent on the occurrence of certain events.

The Assets which the Company sold to Becton relate to the Company's
diagnostics division and products described below.

Epoch's Diagnostic Technology and Products

Oligonucleotides used as diagnostic tools for identification of RNA
and DNA sequences are called probes. The probe molecule is designed to be
complementary to a unique sequence of bases in the DNA or RNA of the target
microorganism. Recognition of and binding to that sequence indicates the
presence of the microorganism.

The Company had developed an inexpensive, rapid, automated DNA
probe-based system which is "user-friendly," enabling it to make available the
advantages of DNA probe-based testing in the physician's or dentist's office or
other alternate care site, in addition to the hospital or reference

22
<PAGE> 23
laboratory. This system, the inventory and equipment related thereto and the
underlying technology constitute substantially all of the assets transferred to
Becton pursuant to the Purchase Agreement. The Affirm System consists of a
small, easy-to-use instrument, and a reagent kit containing Probe Analysis Cards
("PAC"), which include the DNA probes, a sample-collection device and reagents.
Using microorganism-specific probes attached to beads in the PAC, the Affirm
System is used to detect and identify multiple microorganisms from a single
specimen. The beads embedded into the PAC include a negative (specificity)
control and positive (procedural) control bead.

The Company's first DNA probe diagnostic product, the Affirm VP
System, was introduced in September 1992 and was used to detect and identify
Trichomonas vaginalis and Gardnerella vaginalis in vaginal samples for use as an
adjunct to clinical evaluation for differentiating trichomoniasis and bacterial
vaginosis. In June 1993, the Company received a 510(k) FDA clearance for its
Affirm VP III System, which added a test for Candida species and replaced the
Affirm VP System. However, in May 1994, the Company announced its intentions to
withdraw its Affirm VP line of products from the market.

The Company also had developed an Affirm System (the "Affirm DP")
for the dental market. The Affirm DP is used for the detection and
identification of bacteria associated with periodontal (gum) disease. The test
is designed to identify bacteria from infected sites that may be in the early
stage of deterioration, as well as from sites that are far into the destructive
cycle. Currently, these diagnoses are made by clinical measurements including
subgingival pocket depth, bleeding on probing, attachment loss and bone loss as
indicated by X-ray examination.

In October 1993, the Company entered into an agreement with Procter
& Gamble ("P&G"). Under the agreement P&G paid a fee for an option to obtain an
exclusive, ten year license to sell the Company's dental diagnostic products in
the U.S. and Canada. With the Becton Sale consummated, all of the assets related
to the dental diagnostic products have been transferred to Becton, and on
November 28, 1995, by mutual consent of P&G and the Company, the October 1993
agreement was terminated and neither party, the Company or P&G, has any rights
or obligations thereunder. The Company returned to P&G $480,000 in November
1995, which had been held by the Company and recorded as deferred income.

Under the Asset Purchase Agreement, if P&G enters into a supply
agreement with Becton within seven years of the Closing and if P&G procures all
clearances from the United States Food and Drug Administration necessary for the
commercial sale of such products in the U.S., Becton will pay the Company an
additional $1,500,000.

The Company was awarded three Small Business Innovation research
("SBIR") grants, one of which is to be used to develop automated DNA probe tests
for HLA disease ("SBIR Grant 1"), one of which is to be used to develop a DNA
probe for the detection of oral spirochetes ("SBIR Grant 2") and one of which is
to be used to detect genetic and metabolic marking for antibiotic resistance
("SBIR Grant"). Pursuant to the terms of the Purchase Agreement, Becton has
granted exclusive, royalty-free licenses to the Company to enable the Company to
perform its obligations under SBIR Grant 1 and SBIR Grant 2, and the Company
shall transfer SBIR Grant 3 to Becton; provided, however, that if Becton
determines that Grant 3 cannot be transferred to Becton or that such a transfer
would render SBIR Grant 3 invalid or less valuable to Becton than it would be if
the Company retained SBIR Grant 3, Becton shall grant the Company an exclusive,
royalty-free license to enable the Company to fulfill its obligations

23
<PAGE> 24
under SBIR Grant 3 and the Company shall assign to Becton any and all
intellectual property which the Company owns or acquires as a result of
performing its obligations under SBIR Grant 3.

In connection with the sale of Assets to Becton, the Company
entered into a settlement of its patent litigation with Gen-Probe, Incorporated
("Gen-Probe") relating to the Company's Affirm(R) products. See "Legal
Proceedings." Under the settlement agreement, the Company agreed that Gen-
Probe's U.S. Patents Nos. 4,851,330 and 5,288,611 are valid and enforceable and
are infringed by the Company's Affirm(R) product line. The Company also
consented to an injunction against further infringement.

DISPOSITION OF SOURCE

In July 1991, the Company acquired Source, a manufacturer of
automated medical diagnostic equipment and the developer of the Affirm processor
instruments. Source manufactures and markets eight instrument product lines on
an OEM basis to a customer base of approximately 18 diagnostic companies. Source
utilizes proprietary optical detection, fluidics, robotics, mechanical,
electrical and software technologies in its instruments. The Company's strategy
in acquiring Source was to gain instrument system development and manufacturing
capabilities useful in automating Epoch's current diagnostic tests.

While the Company successfully utilized Source's capabilities in
developing and manufacturing the instrument component of the Affirm System, it
recognized that Source's OEM business was not aligned with the Company's
strategic objectives for potential growth rates and profitability.

On January 21, 1994 the Company sold all of the shares of Source to
The Alton Group, Inc. ("Alton"), a manufacturer of biomedical and laboratory
instruments. Under the terms of the agreement, Alton agreed to pay an aggregate
of $2.45 million, of which $600,000 was paid prior to the closing, $720,000 was
paid in cash along with $180,000 of prepaid inventory, under the supply
agreement, at the closing and the balance paid by delivery by Alton of a
noninterest bearing, subordinated, secured promissory note in the principal
amount of $950,000, due March 27, 1995. Because of the uncertainty of its
collectibility, due to the financial condition of the purchaser of Source, the
note was fully reserved. The Company and Alton also entered into a supply
agreement under which Alton agreed to continue to supply the Company with
instruments used in the Company's Affirm Systems and a license agreement under
which Source granted the Company a non-exclusive, worldwide, royalty-free
license to use certain of Source's patents.

As a result of the Company's withdrawal of the Affirm VP product
line, and the notice of cessation of orders for Affirm Processors from the
Company to Source, in mid-1994 Alton made claims totaling approximately $592,000
against the Company for past due invoices and the cost of cancellation of the
Company's firm purchase orders. Alton had also claimed that it suffered
additional damages from the loss of anticipated related service business and
from the loss of overhead absorption attributable to the anticipated manufacture
of Affirm Processors. Finally, Alton claimed that the amount it paid for Source
was based, in part, on forecasts by the Company, for the purchase of Affirm
Processors and, as a result, it overpaid for Source. Alton's claims aggregated
approximately $2.1 million.

On December 2, 1994 the Company entered into an agreement with
Alton, which was further modified on March 2, 1995, settling certain disputes
and restructuring certain financial arrangements

24
<PAGE> 25
between them. Under the agreement, Epoch cancelled the $950,000 promissory note
of Alton. In addition, the parties cancelled a non-exclusive license agreement
under which Epoch was entitled to use certain technology previously developed by
Source, none of which is used in any Epoch products currently in development. In
consideration of such cancellations, Alton has agreed to pay royalties on its
products utilizing the Source technology. Such royalties will equal 2% of net
sales from April 1, 1995 through March 31, 1996 and 2.5% of net sales thereafter
through March 31, 2000, subject to an aggregate limit of $375,000 in royalties.
No royalties were received in 1995. The initial payment is anticipated in 1996.
In addition, Alton agreed not to seek payment of amounts due for Affirm
Processors and Affirm Scanners previously ordered by Epoch from Alton, and
various other claims made by Alton with respect to the supply arrangement
between Epoch and Alton. However, Epoch was obligated to pay, and had accrued
and expensed as of December 31, 1994, an aggregate of $162,000, for 124 of such
units to be shipped to the Company. These units were received by the Company and
paid for in 1995. Finally, the parties released each other of all claims arising
out of the sale of Source to Alton and any other claims the parties may have had
against each other.

ACQUISITION OF RIBONETICS

In November 1993, the Company agreed to purchase all of the capital
stock of Ribonetics. Concurrently, the Company agreed to acquire from ABC, a
shareholder of Ribonetics located in Cambridge, England, the ABC Assets.
Ribonetics was organized in 1992 and has acquired rights in proprietary
technology related to the design, synthesis and use of ribozymes. The Company
believes that ribozymes may have therapeutic application due to their ability to
catalytically destroy mRNA molecules and therefore block the synthesis of
proteins that cause human diseases. Ribonetics was developing a novel class of
small synthetic ribozymes which have the properties of stability, enhanced
catalytic activity and target recognition specificity. Ribonetics currently is
assigned three patent applications which are pending in the USA, Europe and
Japan which relate to synthetic oligonucleotides with RNA cleaving activities.

Pursuant to the November Agreement, the purchase price for the
capital stock of Ribonetics and the ABC Assets was to be $1,502,000 in cash and
515,817 shares of Common Stock of the Company. The cash portion of the purchase
price was paid upon execution of the November Agreement; the Common Stock was to
be issued at the closing of the transactions contemplated by the November
Agreement. Simultaneously with the execution of the November Agreement, the
Company entered into the Blech Agreement under which Mr. Blech agreed that the
Company could, upon notice to Mr. Blech, sell its interests in Ribonetics and
the ABC Assets to Mr. Blech for the amount paid by the Company for such
interests.

During the period between December 1993 and September 1994, the
Company advanced amounts totalling approximately $1,634,000 to both ABC and
Ribonetics to fund the operating expenses of Ribonetics and ABC's Scion Health
division and for the purchase of certain capital equipment necessary for the
continued operations of such entities. Although the Company was not obligated to
advance such sums under the November Agreement, it determined to do so to
preserve its initial investment in the entities while the Company conducted its
due diligence and the definitive agreements were being negotiated.

25
<PAGE> 26
On September 9, 1994, ABC provided the Company with notice of
termination of the November Agreement. The Company refused to accept such
termination on the grounds that the November Agreement did not provide ABC with
such a right. At such time, the Company also ceased advancing funds to cover the
operating expenses of ABC's Scion Health division and Ribonetics. On September
27, 1994, the Company exercised its rights under the Blech Agreement by
providing Mr. Blech with written notice of the Company's intent to cause Mr.
Blech to purchase the capital stock of Ribonetics and the ABC Assets. Mr. Blech
failed to respond to the Company's notice and, following the expiration of the
90-day period specified in the Blech Agreement as the period in which a closing
under the Blech Agreement was to occur, the Company deemed Mr. Blech to be in
default of his obligations.

In October 1994, in light of ABC's purported termination of the
November Agreement and recognizing that neither ABC nor Mr. Herbert Stadler,
who, together with ABC, owned all of the capital stock of Ribonetics, intended
to close the transactions contemplated by the November Agreement, the Company
notified ABC and Mr. Stadler of the Company's desire to commence discussions
with regard to repayment to the Company of the cash portion of the purchase
price and the amounts advanced by the Company from December 1993 through
September 1994 to fund the operating expenses of Ribonetics and ABC's Scion
Health division. VIMRx subsequently obtained an interest in Ribonetics. On
October 1, 1996, the Company and VIMRx entered into the VIMRx Agreement pursuant
to which the Company and VIMRx settled any and all disputes concerning
Ribonetics, and the Company and VIMRx established an alliance to attempt to
exploit the synergies between their respective technologies and markets. In
addition, VIMRx invested $800,000 in exchange for 457,143 shares of the
Company's Common Stock at $1.75 per share, and received warrants to purchase an
additional 900,000 shares of the Company's Common Stock, 450,000 of which are
exercisable at $2.00 per share and expire in October 1997, and 450,000 of which
are exercisable at $3.00 per share and expire in October 1998. Additionally,
pursuant to the VIMRx Agreement, the Board of Directors of the Company appointed
Richard L. Dunning, the President and Chief Executive Officer of VIMRx, to fill
a vacancy on the Company's Board of Directors. Mr. Dunning accepted such
appointment effective as of October 30, 1996.

SALES AND MARKETING

In May 1994, the Company discontinued sales and marketing of its
diagnostic products. The Company has no experience in marketing therapeutic
products. The Company anticipates that it will seek to enter collaborative
arrangements with pharmaceutical companies to market its therapeutic products.
To date, the Company has not entered into any collaborative arrangements for any
of its proposed therapeutic products and there can be no assurance that the
Company will be able to enter into any such arrangements on favorable terms or
at all.

MANUFACTURING

In connection with the introduction of its Affirm VP System in 1992,
Epoch established a manufacturing and assembly operation in the Company's
facility located in Bothell, Washington. The Company eliminated all of the
staffing of this operation as a part of the restructuring of its diagnostics
division and many of the assets used in those operations were sold to Becton.
All instruments for the Affirm System were manufactured by Source. See
"Business - Disposition of Source."

RESEARCH AND DEVELOPMENT

The Company conducts the majority of its research and development
activities through its own staff and facilities. The Company has assembled a
scientific staff with a variety of complementary skills in a broad range of
advanced research technologies. As of November 30, 1996, the Company had 24
employees, including 12 with Ph.D.'s and/or M.D.'s. Of these 24 employees, 19
are engaged in research and development activities including regulatory and
clinical affairs.

26
<PAGE> 27
The Company's in-house research and development efforts are focused primarily on
the development of oligonucleotide therapeutics and reagent chemistries.
Additionally, the company has continued efforts on DNA probes, probe labeling
and detection techniques on behalf of Becton and under the SBIR grants.

In addition to its in-house research programs, the Company
collaborates with academic and research institutions to support research in
areas of interest to the Company.

Research and development expense related to therapeutics amounted to
approximately $4,475,000 and $1,443,000 for the years ended December 31, 1994,
and 1995, respectively. Research and development expenses related to the
discontinued diagnostics division amounted to $2,259,000 and $1,048,000,
respectively, for the corresponding periods.

In October 1996, the Institute awarded a four year contract to
Virginia Mason, and the Company as subcontractor, to develop and test a
compound designed to inactivate a gene which causes rheumatoid arthritis. The
federal research award is for $1.2 million of which the Company will receive
$584,000 over the four year period.

PATENTS AND PROPRIETARY TECHNOLOGY

The Company has pursued a patent portfolio to protect its
technology. As of September 30, 1996, the Company had three issued and [one]
allowed U.S. patent and has submitted ten additional U.S. patent applications.
There are international patent applications corresponding to many of the U.S.
patents and patent applications. The issued patents and pending patent
applications cover inventions relating to the components of Epoch's core
therapeutics technology. An additional 18 U.S. patents and patent applications
related exclusively to diagnostic technology were transferred to Becton pursuant
to the Asset Purchase Agreement.

The therapeutics technology covered includes solid support synthesis
of oligonucleotides, crosslinking oligonucleotides, and oligonucleotides having
antiviral and anticancer activity. The Company's policy is to file patent
applications to protect technology, inventions and improvements that are
important to the development of its business. The Company also relies upon trade
secrets, know-how, continuing technological innovation and licensing
opportunities to develop and maintain its competitive position.

The patent position of biomedical companies, including the Company,
is uncertain and may involve complex legal and factual issues. Consequently, the
Company does not know whether any of its patent applications will result in the
issuance of any further patents, or whether issued patents will provide
significant proprietary protection or will not be circumvented or invalidated.
Epoch cannot be certain that it was the first creator of inventions covered by
pending patent applications or that it was the first to file patent applications
for such inventions, largely because patent applications in the U.S. are
maintained in secrecy until patents issue, and because publications of
discoveries in the scientific or patent literature tend to lag behind actual
discoveries by several months. Moreover, the Company may have to participate in
interference proceedings declared by the U.S. Patent and Trademark Office to
determine the priority of inventions, which could result in substantial costs to
the Company. There can be no assurance that the Company's patent applications
will result in further issued patents or that such issued patents will offer
protection against competitors with similar technology. Additionally, there can
be no assurance that any manufacture, use or sale of the Company's technology or
products will not infringe on patents or proprietary rights of others, and the
Company may be unable to obtain licenses or other rights to these other
technologies that may be required for commercialization of the Company's
proposed products.

27
<PAGE> 28
Epoch requires its employees, consultants and advisors to execute
confidentiality agreements upon the commencement of an employment or consulting
relationship with the Company. Each agreement provides that all confidential
information developed or made known to the individual during the course of the
relationship will be kept confidential and not disclosed to third parties except
in specified circumstances. In the case of employees, the agreements provide
that all inventions conceived by an individual shall be the exclusive property
of the Company, other than inventions unrelated to the Company's business and
developed entirely on the employee's own time. There can be no assurance,
however, that these agreements will provide meaningful protection or adequate
remedies for misappropriation of the Company's trade secrets in the event of
unauthorized use or disclosure of such information.

COMPETITION

If successfully developed, the Company's therapeutic products will
compete with existing therapies for market share. In addition, a number of
companies are pursuing the development of gene therapy products, some of which
include oligonucleotide technology. The Company competes with fully integrated
pharmaceutical companies, most of which have more experience, financial and
other resources and superior expertise in research and development,
manufacturing, testing, obtaining regulatory approvals, marketing and
distribution. Smaller biotechnology companies may also prove to be significant
competitors, particularly through their collaborative arrangements with large
pharmaceutical companies or academic institutions. Many of the Company's
competitors are significantly more advanced in their research and development
activities. The Company currently does not have any collaborative arrangements
with large pharmaceutical companies. Furthermore, academic institutions,
governmental agencies and other public and private research organizations have
conducted and will continue to conduct research, seek patent protection and
establish arrangements for commercializing products. Such products may compete
directly with any products which may be offered by the Company.

The Company expects that competition among any products approved for
sale will be based, among other things, on product efficacy, safety,
reliability, availability, price, patent position and sales, marketing and
distribution capabilities.

GOVERNMENT REGULATION

Manufacturers of therapeutic products are governed by the Food and
Drug Administration ("FDA") regulations as well as regulations of state agencies
and foreign countries. The testing, preparation of necessary applications, and
subsequent FDA review of those applications is expensive and time-consuming.
Failure to comply with applicable requirements can result in FDA refusal to
approve products or in the revocation of approvals or clearances previously
granted.

The process of obtaining FDA approval for therapeutic products has
historically been costly and time consuming. To obtain such approval, a company
must first conduct pre-clinical studies in the laboratory and in animal models
to evaluate the potential efficacy and the safety of a product. The results of
these studies are submitted to the FDA as part of an Investigational New Drug
(IND) application, which must be approved before human clinical trials may
commence. This pre-clinical stage can take several years to complete and there
can be no assurance that such pre-clinical studies will be successful in
securing FDA approval of the IND so that proposed clinical trials can commence.
Following pre-clinical testing, clinical trials are conducted pursuant to the
FDA-approved clinical protocol, typically

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<PAGE> 29
in three sequential phases, although the phases may overlap. In Phase I,
clinical trials are conducted with a small number of human subjects to determine
the early safety profile, the pattern of drug distribution and metabolism. In
Phase II, clinical trials are conducted with groups of patients afflicted with a
specific disease in order to determine preliminary efficacy, optimal dosages and
expanded indices of safety. In Phase III, large scale, multi-center comparative
trials are conducted with patients afflicted with a target disease in order to
provide enough data to demonstrate the efficacy and safety required by the FDA.
The results of the clinical testing for a pharmaceutical product are submitted
to the FDA in the form of a New Drug Application (NDA) for approval to commence
commercial marketing. In addition, detailed manufacturing information is also
included with each submission. In responding to an NDA, the FDA may grant
marketing approval, request additional information or deny the application if
the FDA determines that the application does not satisfy its regulatory approval
criteria. The process of completing clinical testing usually takes a number of
years and requires the expenditure of substantial resources. Additionally, the
length of time it takes for the FDA to evaluate an application for marketing
approval varies considerably as does the amount of pre-clinical and clinical
data required to demonstrate the safety and efficacy of a specific product.
Historically, the FDA has taken a minimum of two to four years to review drug
applications after submission, although the length of the review period may vary
widely depending upon the nature and indications of the proposed product. Also,
the FDA will require post-market reporting, and may require surveillance
programs to monitor the side effects of the drug product. There can be no
assurance that any of the Company's potential products will be approved by the
FDA or approved on a timely basis or that any approvals received will not
subsequently be revoked. In addition, future regulations could affect the
Company's operations or impose additional requirements before products are
approved.

In addition to obtaining FDA approval for each product, each
manufacturing establishment for new drugs must be inspected and approved by the
FDA. Among the conditions for such approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to the FDA's Good Manufacturing Practices ("GMP") regulations, which must be
followed at all times. In complying with standards set forth in these
regulations, manufacturers must continue to expend time, money and effort in the
area of production and quality control to ensure full technical compliance.

Therapeutic products that may be developed and sold by the Company
outside the United States will be subject to regulation by the various countries
in which they are to be distributed. In addition, products manufactured in the
United States which have not yet been cleared for domestic distribution will
require FDA approval in order to be exported to foreign countries for
distribution there.

In late 1992, legislation was enacted which imposed user fees on
manufacturers of prescription drugs, antibiotic and biological products. Such
fees will now be required for each application submitted for FDA review, with
additional annual product and establishment fees being imposed as well. The
revenues raised by these fees are earmarked specifically to increase the
resources of the FDA, and by doing so to increase the speed with which the FDA
reviews and approves drug and biological product marketing applications. By
fiscal 1997, the user fee established by the legislation for an NDA will be
$233,000, while the annual establishment fee will be $138,000. In addition,
there are currently discussions about possibly raising the user fees to higher
levels. The legislation enacted in late 1992 provides small companies (i.e.,
companies with fewer than 500 employees which are not currently marketing a
prescription drug product) with a reduction in the initial application fee and
contains limited provisions for fee waivers. The Company is unable to predict
the impact of the current user fee

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<PAGE> 30
legislation, as well as those changes in the law which are presently under
discussion, upon its product development plans.

EMPLOYEES

As of November 30, 1996, the Company had 24 full-time employees, of
which 19 employees were devoted to research and development activities including
regulatory and clinical affairs, and 5 were devoted to general and
administrative activities. The Company believes it has been successful in
attracting skilled employees with experience in the biomedical industry,
although there can be no assurance that it will continue to do so in the future.
None of the employees is covered by a collective bargaining agreement, and
management considers relations with its employees to be good.

PROPERTIES

The Company's principal administrative offices, research
laboratories and reagent manufacturing facilities are located in Bothell,
Washington, where the Company leases and occupies approximately 21,500 square
feet, pursuant to a lease which expires in November 1997. The Company believes
its facilities are adequate for its current administrative and research and
development activities.

LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings.

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<PAGE> 31
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and nominees for election as a director and executive
officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Fred Craves, Ph.D. 51 Chairman of the Board of Directors and
Chief Executive Officer
Sanford S. Zweifach 40 President, Therapeutics, Chief Financial
Officer and a Director
Rich B. Meyer, Ph.D. 52 Vice President, Research and Development
Chief Scientific Officer
Kenneth L. Melmon, M.D. 62 Director
Gregory Sessler 43 Director
Richard C. Dunning 51 Director
</TABLE>

Dr. Craves joined the Company as Chairman of the Board of Directors
in July 1993 and became Chief Executive Officer in April 1994. Since January
1994, Dr. Craves has been a principal of the consulting firm, Burrill & Craves.
From January 1991 to May 1993, he was President and Chief Executive Officer of
Berlex Biosciences, a division of Schering A.G., and Vice President of Berlex
Laboratories, Inc., the U.S. subsidiary of Schering A.G. From 1981 to 1982, Dr.
Craves was Chief Executive Officer and, from 1982 to June 1990, was Chairman,
Chief Executive Officer and President of Codon, a biotechnology company.
Following Codon's acquisition by Schering A.G., Dr. Craves was President and
Chief Executive Officer of Codon from June 1990 to December 1990. From 1981 to
1983, Dr. Craves was also a co-founder and director of Creative Biomolecules.
From 1979 to 1981, he was a sales and marketing representative for Millipore
Corporation. Dr. Craves received his Ph.D. in Pharmacology and Experimental
Toxicology from the University of California, San Francisco. Dr. Craves is also
Chairman of the Board of Directors of NeoRx Corporation and a director of InCyte
Pharmaceuticals, Inc.

Mr. Zweifach joined the Company in January 1995 as
President-Therapeutics and Chief Financial Officer. Mr. Zweifach is a principal
of The Olmstead Group, L.L.C., a merchant banking firm. Mr. Zweifach served as a
director of the Company from July 1994 to September 1994. Mr. Zweifach was a
Managing Director of D. Blech & Co. from 1991 to September 1994, and prior to
1991, he was a Vice President of J.S. Frelinghuysen & Co., Inc., a risk capital
and merchant banking firm. He is a Certified Public Accountant and holds an M.S.
in Human Physiology from the University of California, Davis.

Dr. Meyer joined Epoch in October 1986 as Director of Nucleic Acid
Chemistry. He has been Vice President, Research and Development, Therapeutics of
the Company since August 1991 and was appointed Chief Scientific Officer in June
1993. From 1985 to 1986, Dr. Meyer was a group leader at the Nucleic Acid
Research Institute, a joint venture of ICN Pharmaceuticals, Inc. and Eastman
Kodak Company. From 1980 to 1985 he was Associate Professor of Medicinal
Chemistry and in 1985, Acting Associate Dean for Research of the Graduate School
at Washington State University. From 1975 to

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<PAGE> 32
1980, he was Assistant Professor in the Department of Pharmaceutical Chemistry
at the University of California, San Francisco. Dr. Meyer received his Ph.D. in
Chemistry from the University of California, Santa Barbara.

Dr. Melmon has been a Director of the Company since November 1991.
Dr. Melmon is Professor of Medicine at Stanford University School of Medicine,
where he joined the faculty in 1978. He was previously on the faculty at the
University of California, San Francisco, specializing in clinical pharmacology.
He is a member of the Institute of Medicine-National Academy of Sciences, and a
past president of the American Federation for Clinical Research and the American
Association of Clinical Investigation. He holds an M.D. from the University of
California Medical Center. He is also on the Board of Directors of ImmuLogic
Pharmaceutical Corporation.

Mr. Sessler became a Director in July 1994. Mr. Sessler is Chief
Financial Officer of Sonus Pharmaceuticals, Inc. From October 1990 until January
1995 he served as Vice President, Chief Financial Officer and Secretary of
Epoch. From 1986 to 1990, he was Chief Financial Officer and Secretary of
Molecular Devices Corporation and from 1981 to 1986 he was Vice President,
Finance for Monoclonal Antibodies, Inc. Before joining Monoclonal Antibodies,
Inc., Mr. Sessler was employed by Price Waterhouse & Co. Mr. Sessler received
his M.B.A. from Stanford University and is a Certified Public Accountant.

Mr. Dunning became a Director of the Company effective as of
October 30, 1996. Since April 1996, Mr. Dunning has served as the President and
Chief Executive Officer of VIMRx Pharmaceuticals, Inc. From 1991 to April 1996,
Mr. Dunning served as Executive Vice President and Chief Financial Officer of
the DuPont Merck Pharmaceutical Company.

Dr. Craves and Mr. Zweifach are also employed by other entities and,
although they devote a substantial portion of their time to the Company, they
also devote a portion of their time to their positions at the other entities.
Both Dr. Craves and Mr. Zweifach have been engaged by the Company pursuant to
Consulting Agreements.

EXECUTIVE COMPENSATION

The following table sets forth summary information concerning
compensation paid or accrued by the Company for services rendered during the
fiscal years ended December 31, 1995 and December 31, 1994 (the Company did not
become a reporting Company pursuant to Section 13(a) of the Securities Exchange
Act of 1934 until October 1993), to the Company's Chief Executive Officer as of
December 31, 1995, and the Company's three other most highly compensated
executive officers as of December 31, 1995:

32
<PAGE> 33
<TABLE>
<CAPTION>
Summary Compensation Table

Long Term
Compensation
Awards
Annual Compensation Securities
Name and Other Annual Underlying All Other
Principal Position Year Salary($)(1) Bonus($) Compensation($) Options(#) Compensation
------------------- ---- ------------------------ --------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Fred Craves 1995 $100,000 $ -- $ -- -- $ --
Chief Executive Officer(2) 1994 100,000(3) -- -- -- --
Sanford S. Zweifach 1995 126,750 21,871 -- -- --
President and
Chief Financial Officer

Allan G. Cochrane 1995 160,006 6,667 -- -- --
President, Chief Operating 1994 160,006 15,750 -- 120,000(5) --
Officer and President--
Diagnostics(4)

Rich B. Meyer, Jr. 1995 135,000 5,625 -- -- --
Vice President, Research 1994 135,000 -- -- 119,999(5) 4,765(6)
and Development
</TABLE>

(1) Includes amounts deferred during 1994 and 1995 under the Company's 401(k)
employee savings and retirement plan. To date, the Company has not made any
matching contributions under that plan.
(2) Dr. Craves became Chief Executive Officer in April 1994.
(3) Includes amounts deferred during 1994.
(4) Mr. Cochrane served as President and Chief Operating Officer from June 1993
until January 1995.
(5) The reported grant reflects the repricing of existing options to purchase
the number of shares of Common Stock indicated.
(6) Represents the cancellation of indebtedness owed by Dr. Meyer to the
Company.

OPTION MATTERS

Option Grants. No options were granted to any of the Company's
executive officers during the fiscal year ended December 31, 1995.

Option Exercises. None of the Company's executive officers exercised
options during the fiscal year ended December 31, 1995.

EMPLOYMENT AND SEVERANCE AGREEMENTS

Employment Agreements. Effective August 30, 1994, the Company
entered into one-year employment agreements with all of the executive officers
of the Company, except Dr. Craves and Mr.

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<PAGE> 34
Zweifach. Upon termination of an executive's services for reasons other than
cause during the one-year term, the executive will be entitled to either notice
or severance pay at the executive's then current salary, equal to the greater of
the balance of the one-year term or six months, subject to reduction in certain
circumstances. In the event of death or disability during the one-year term, the
executive will be entitled to six months salary (less any amounts received from
disability insurance). In addition, upon termination, the executives are subject
to a five-year non-disclosure obligation and a six-month non-competition
obligation. The contracts have been extended to December 31, 1996.

Consulting Agreements. In July 1993, the Company entered into a
one-year consulting agreement with Dr. Craves under which he received $100,000
per year for his services. This is the amount reflected as salary in the Summary
Compensation Table. The Company has extended the term of Dr. Craves' consulting
agreement for an additional term. The current extension runs to December 31,
1996.

In January 1995, the Company entered into a three-month consulting
agreement with Mr. Zweifach under which he received a monthly payment of
$11,250. This is the amount reflected as salary in the Summary Compensation
Table. The Company has extended the term of the contract to run through December
31, 1996.

Drs. Melmon and Page also serve as consultants to the Company and as
members of the Company's Scientific Advisory Board and receive compensation in
those capacities.

DIRECTORS' COMPENSATION

The Company pays all non-employee directors a fee of $1,000 for each
Board of Directors meeting attended in person. In July 1993, the Company adopted
a Non-Employee Directors Option Plan (the "Directors Plan") pursuant to which
the Company granted each non-employee director (except Dr. Craves) a
fully-vested 10-year option to purchase 10,000 shares of Common Stock at an
exercise price of $4.00 per share. In addition, upon each anniversary of the
inception of the Directors Plan each non-employee director will receive
fully-vested 10-year options to purchase 5,000 shares of Common Stock at the
then current fair market value. Non-employee directors who subsequently join the
Board of Directors will receive, upon each anniversary of joining the Board of
Directors, fully-vested 10-year options to purchase 5,000 shares of Common Stock
at the then current fair market value. In April 1995 Mr. Sessler's options were
extended from April 30, 1995 to July 31, 1995. None of these options were
exercised before their expiration.

CERTAIN TRANSACTIONS

In September 1993, the Company concluded its Initial Public Offering
of 2,500,000 shares of Common Stock and 2,875,000 Warrants. D. Blech & Company,
Incorporated acted as one of the two underwriters for the offering. In
connection with the offering, the Company sold to D. Blech & Company,
Incorporated and certain of its affiliates options to purchase up to 250,000
shares of Common Stock and/or 250,000 Warrants (the "Purchase Options") at a
price of $.001 per option. The Purchase Options are exercisable for shares of
Common Stock and/or warrants for a period of two years, commencing September 29,
1996, at an initial exercise price equal to 160% of the Initial Public Offering
price per share of Common Stock or Warrant, $10.40 and $.16, respectively. The
Warrants underlying the Purchase Options are identical in all respects to the
Warrants issued to the public, except that while the Warrants are held by the
initial issuers, or certain transferees of such issuers, they are not redeemable

34
<PAGE> 35
by the Company under any circumstances. On January 27, 1995, D. Blech & Company,
Incorporated and its principal, Mr. David Blech, transferred 789,900 shares of
Common Stock and Warrants to purchase 1,154,899 shares of Common Stock to
Biotechnology Investment Group, L.L.C., a Delaware limited liability company
("BIG"), in exchange for Class C Units in BIG. D. Blech & Company, Incorporated
and David Blech subsequently transferred such Class C Units in BIG. The Warrants
transferred to BIG have registration rights, which were also transferred to BIG,
with respect to the shares of Common Stock issuable upon exercise of such
warrants.

In October 1994, the Company raised $1,200,000 in gross proceeds
from a private placement of debt and warrants. In the private placement, Grace
Brothers, Ltd., and two other stockholders of the Company, received notes from
the Company, which bear interest at the rate of 10% per annum, as well as 5-year
warrants to purchase an aggregate of 2,400,000 shares of the Company's Common
Stock at an exercise price of $.50 per share. In May 1995, in connection with
the extension of these notes to March 31, 1996, the exercise price of such
warrants was reduced to $0.30 resulting in a discount on notes payable of
$480,000. In June 1996, the notes were paid in full. Warrants held by Grace
Brothers, Ltd., for 2,000,000 shares and warrants held by another holder for
200,000 shares were exercised in June 1996. The remaining warrants can be
exercised through October 1999 and have an exercise price of $0.30 per share.

In June 1994 the Company authorized the issuance of 5-year warrants
to purchase 150,000 shares of Common Stock at an exercise price of $3.875 per
share to Burrill & Craves, a consulting firm of which Dr. Craves is a principal.
Such warrants were issued in connection with Dr. Craves' acceptance of the
position of interim Chief Executive Officer for the Company. Pursuant to the
terms of these warrants, Burrill & Craves has registration rights with
respect to the shares of Common Stock issuable upon exercise of such warrants.

In December 1994, the Company authorized the issuance of 5-year
warrants to purchase 150,000 shares of Common Stock at an exercise price of
$0.50 per share to Burrill & Craves, a consulting firm of which Dr. Craves is a
principal. Such warrants are to be issued to Burrill & Craves in connection with
the renewal of Dr. Craves' Consulting Agreement with the Company. Pursuant to
the terms of these warrants, Burrill & Craves shall have registration rights
with respect to the shares of Common Stock issuable upon exercise of such
warrants.

On January 16, 1996 the Company issued five year warrants to
purchase 250,000 shares of Common Stock to Burrill & Craves and 345,000
shares of Common Stock to the Olmsted Group, L.L.C., a merchant banking firm of
which Mr. Zweifach is a principal, at an exercise price of $0.50 per share, in
consideration for the services performed by Burrill & Craves and The Olmsted
Group, L.L.C., respectively, in connection with the sale of the Corporation's
diagnostics division to Becton and other corporate matters. The warrants vest as
follows: (i) 33 1/3% at issuance; (ii) 33 1/3% upon the earlier of (1) June 30,
1997, or (2) the date on which the Corporation enters into an agreement with a
corporate partner; and (iii) 33 1/3% on January 1, 1999. All such warrants shall
vest, to the extent not already vested, upon a change of control.

In connection with the June 1996 Private Placement, pursuant to an
agreement with its financial advisor, David Blech, the Company paid fees of
$350,000 to Mr. Blech. In addition, the Company cancelled fifty percent (50%) of
the obligations of Mr. Blech arising in connection with the transactions
involving Ribonetics, including the "put" rights contained in an agreement dated
December 1,

35
<PAGE> 36
1993 between the Company and Mr. Blech. The aggregate amount cancelled was
$1,635,588. The balance is accruing interest at the minimum applicable federal
rate. As the obligation had been fully reserved, and the remaining balance is
fully reserved, neither the cancellation nor the remaining obligation is
reflected in the Company's financial statements. The Company also issued to Mr.
Blech five year warrants to purchase 500,000 shares of Common Stock at $1.00 per
share. The warrants are not exercisable for one year and are held in escrow by
the Company until the balance of the Ribonetics debt is satisfied.

The foregoing transactions were made on terms no less favorable to
the Company than those available from unaffiliated third parties. All future
transactions with affiliated persons, if any, will also be on terms no less
favorable to the Company than those available from unaffiliated parties, and
shall be approved by a majority of independent outside members of the Company's
board of directors who do not have an interest in the transactions.

LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS

The by-laws of the Company provide for indemnification of the
Company's directors and officers to the fullest extent permitted by law. Insofar
as indemnification for liabilities under the Securities Act may be permitted to
directors, officers or controlling persons of the Company pursuant to the
Company's Certificate of Incorporation, as amended, by-laws and the Delaware
General Corporation Law (the "DGCL"), the Company has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in such Act and is therefore unenforceable.

Section 102(b)(7) of the DGCL provides that a certificate of
incorporation may include a provision which eliminates or limits the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to the company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL,
relating to prohibited dividends or distributions or the repurchase or
redemption of stock or (iv) for any transaction from which the director derives
an improper personal benefit. The Company's Certificate of Incorporation
includes such a provision. As a result of this provision, the Company and its
stockholders may be unable to obtain monetary damages from a director for breach
of his or her duty of care.

36
<PAGE> 37
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth as of November 4, 1996 certain
information with respect to the beneficial ownership of the Company's Common
Stock by (i) each stockholder known by the Company to be the beneficial owner of
more than 5% of its Common Stock, (ii) each director, (iii) each of the
executive officers named in the Summary Compensation Table, and (iv) all
executive officers and directors as a group.

<TABLE>
<CAPTION> Number of Shares
Beneficially Percentage of
Name and Address Owned (1) Outstanding Shares
- ---------------- ---------------- ------------------
<S> <C> <C>
Grace Brothers Ltd. 3,695,193 25.1%
1000 W. Diversey Parkway
Chicago, Illinois 60614

Entities and Persons affiliated with
Biotechnology Investment Group, L.L.C.(2) 2,644,018 16.5%
c/o Schroeder Venture Advisers, Inc.
1055 Washington Boulevard
Stamford, Connecticut 06901

VIMRx Pharmaceuticals, Inc.(3) 1,357,143 8.7%
2751 Centerville Road, Suite 210
Little Falls II
Wilmington, Delaware 19808

The Edward Blech Trust(4) 1,050,000 7.0%
c/o Rabbi Mordechai Jofen
418 Avenue I
Brooklyn, New York 11230

United Equities Commodities Company(5) 750,000 5.0%
c/o Phillippe D. Katz
160 Broadway
New York, New York 10038

Fred Craves(6) 558,325 3.7%

Kenneth L. Melmon(7) 69,532 *

Rich B. Meyer, Jr., Ph.D.(8) 165,791 1.1%

Gregory Sessler 0 *

Sanford Zweifach(9) 0 *

Richard C. Dunning(10) 0 *

All executive officers and directors
as a group (6 persons) (11) 793,648 5.2%
</TABLE>

- ------------------
* Less than one percent

37
<PAGE> 38
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in this table have
sole voting and investment power with respect to all shares of Common
Stock.

(2) Biotechnology Investment Group, L.L.C. ("BIG") is a limited liability
company which invests in and otherwise deals with securities of
biotechnology and other companies. The members of BIG are (i) the managing
member, Collinson Howe Venture Partners, Inc. ("CHVP"), an investment
management firm of which Jeffrey J. Collinson is President, sole director
and majority stockholder and Timothy F. Howe is a Vice President and a
stockholder, (ii) The Edward Blech Trust ("EBT"), a trust for the benefit
of the minor child of David Blech, a financial advisor to the Company,
and (iii) Wilmington Trust Company ("WTC"), as voting trustee under a
voting trust agreement (the "Voting Trust Agreement"), among WTC, BIG and
BIO Holdings, L.L.C. ("Holdings"). The managing member of BIG is CHVP. Each
of Citibank, N.A. ("Citibank") and Holdings has the right pursuant to the
Voting Trust Agreement to direct the actions of WTC as a member of BIG.
WTC, as the member holding a majority interest in Holdings, has the right
to direct the actions of Holdings under the Voting Trust Agreement.
Citibank, pursuant to a separate voting trust agreement among WTC,
David Blech and Holdings, has the right to direct the actions of WTC as a
member of Holdings with respect to the rights of Holdings under the Voting
Trust Agreement. By virtue of their status as members of BIG, each of CHVP
and EBT may be deemed the beneficial owner of all shares held of record by
BIG (the "Biotechnology Group Shares"). By virtue of his status as the
majority owner and controlling person of CHVP, Jeffrey J. Collinson may
also be deemed the beneficial owner of the Biotechnology Group Shares. Each
of CHVP, EBT and Jeffrey J. Collinson disclaims beneficial ownership of any
Biotechnology Group Shares except to the extent, if any, of such person's
actual pecuniary interest therein. Such shares include 1,374,118 shares
subject to warrants exercisable within 60 days.

(3) Includes 900,000 shares subject to warrants exercisable within 60 days.

(4) Includes 350,000 shares subject to warrants exercisable within 60 days.

(5) Includes 250,000 shares subject to warrants exercisable within 60 days.

(6) Includes 504,462 shares subject to warrants and options exercisable within
60 days, including warrants to purchase 383,325 shares which are held by
Burrill & Craves, of which Fred Craves is a general partner. Fred Craves
disclaims beneficial ownership of such warrants and the shares underlying
such warrants except to the extent of his pecuniary interest in Burrill &
Craves.

(7) Includes 60,435 shares subject to warrants and options exercisable within
60 days.

(8) Includes 100,100 shares subject to options exercisable within 60 days.

(9) Excludes 115,000 shares subject to warrants exercisable within 60 days
which are held by The Olmstead Group, of which Mr. Zweifach is an
employee. Mr. Zweifach disclaims beneficial ownership of such warrants
and the shares underlying such warrants.

(10) Excludes 1,375,143 shares held by VIMRx Pharmaceuticals, Inc. Mr. Dunning
is the President and Chief Executive Officer of VIMRx Pharmaceuticals,
Inc. and disclaims beneficial ownership of all such shares.

(11) Includes directors' and executive officers' shares listed above, including
664,997 shares subject to warrants and options exercisable within 60 days.
Excludes 1,357,143 shares held by VIMRx Pharmaceuticals, Inc. and 115,000
shares held by The Olmstead Group - see footnotes (3), (9) and (10).

38
<PAGE> 39
DESCRIPTION OF SECURITIES

GENERAL

The Company's authorized capital stock consists of 30,000,000 shares
of Common Stock, $.01 par value per share, and 10,000,000 shares of Preferred
Stock, $.01 par value per share, with such rights as the Board may determine.
As of November 4, 1996, there were 14,723,856 shares of Common Stock
outstanding held of record by 224 stockholders, and 2,875,000 Public Warrants,
held of record by 23 Public Warrant holders. There are no shares of
Preferred Stock outstanding.

COMMON STOCK

The holders of outstanding shares of Common Stock are entitled to
receive dividends out of assets legally available therefor at such times and in
such amounts as the Board of Directors may, from time to time, determine. Each
stockholder is entitled to one vote for each share of Common Stock held and
there is no cumulative voting in the election of directors. The Common Stock is
not entitled to preemptive rights and is not subject to redemption or
conversion. Upon liquidation, dissolution or winding-up of the Company, the
assets legally available for distribution to stockholders are distributable
ratably among the holders of the Common Stock after payment of other claims of
creditors. All outstanding shares of Common Stock are, and the shares of Common
Stock to be issued pursuant to this offering will be, validly issued, fully paid
and nonassessable.

PREFERRED STOCK

The Board of Directors has the authority to issue up to 10,000,000
shares of Preferred Stock, $0.01 par value, and to fix the rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any future vote or action by the stockholders. The rights of the holders of the
Common Stock will be subject to, and may be adversely affected by, the rights of
the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock could have the effect of making it more difficult
for a third party to acquire a majority of the outstanding voting stock of the
Company, thereby delaying, deferring or preventing a change in control of the
Company. Furthermore, such Preferred Stock may have other rights, including
economic rights senior to the Common Stock, and, as a result, the issuance
thereof could have a material adverse effect on the market value of the Common
Stock. The Company has no present plans to issue shares of Preferred Stock.

PUBLIC WARRANTS

The public warrants (the "Public Warrants") were issued pursuant
to an agreement, dated as of September 29, 1993 and amended June 21, 1996 (the
"Warrant Agreement"), between the Company and American Stock Transfer & Trust
Company, as warrant agent (the "Warrant Agent"). The following discussion of the
material terms and provisions of the Public Warrants is qualified in its
entirety by reference to the detailed provisions of the Warrant Agreement, the
form of which has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part.
39

<PAGE> 40
Each Public Warrant entitles the holder to purchase at any time
until September 29, 1998, one share of Common Stock at an exercise price of
$6.50, subject to certain adjustments. In June 1996, the Company announced that
it intends to exchange for every two Public Warrants, one new warrant to
purchase one share of the Company's Common Stock with a term of five years that
is exercisable at $2.50 per share ("Exchange Warrant"). The exercise price of
the Public Warrants and the number of shares of Common Stock underlying such
Public Warrants are subject to adjustment for stock splits, stock dividends and
similar events. The Public Warrants do not contain anti-dilution provisions
relating to issuances or sales of Common Stock at prices below the exercise
price or the then prevailing market price of the Common Stock. The Public
Warrants may be exercised in whole or in part.

The Company may redeem the Public Warrants, in whole but not in
part, at the option of the Company upon not less than 30 days' nor more than 60
days' notice at a price of $.05 per warrant, providing the market price of the
Company's Common Stock has been at least 140% of the then effective exercise
price of the Public Warrants for 30 consecutive business days ending within 15
days of the date of the notice of redemption. For purposes of redemption of the
Public Warrants, the market price of a share of Common Stock on any date is
the last sale price (or highest reported bid price if the stock is not traded
on a national securities exchange or the Nasdaq National Market) on such date.

The Company presently anticipates that the Exchange Warrants would
be redeemable, in whole but not in part, at the option of the Company upon not
less than 30 days' nor more than 60 days' notice, at a price of $.05 per
warrant, providing the market price of the Company's Common Stock would have
been at least 140% of the then effective exercise price of the Exchange Warrants
for 20 consecutive business days ending within 15 days of the date of the notice
of redemption. For purposes of redemption of the Exchange Warrants, the market
price of a share of Common Stock on any date would be the last sale price (or
highest reported bid price if the stock is not traded on a national securities
exchange or the Nasdaq National Market) on such date.

The Company presently anticipates that, in the event the Company
exercises its right to redeem the Exchange Warrants, such Exchange Warrants
would be exercisable until the close of business on the date fixed for
redemption in such notice. If any Exchange Warrant called for redemption is not
exercised by such time, it would cease to be exercisable and the holder thereof
would be entitled only to the redemption price.

For a holder to exercise the Public Warrants, there must be a
current registration statement in effect with the Commission and qualification
with or approval from various state securities agencies with respect to the
shares or other securities underlying the Public Warrants, or an opinion of
counsel for the Company that there is an exemption from registration or
qualification. As long as the Public Warrants remain outstanding and
exercisable, the Company is required to maintain an effective registration
statement with respect to the shares issuable on exercise of the Public
Warrants. There can be no assurance, however, that such registration statement
can be kept current. If a registration statement covering such shares of Common
Stock is not kept current for any reason, or if the shares underlying the Public
Warrants are not registered in the state in which a holder resides, the Public
Warrants will not be exercisable and the value thereof will be impaired.

OTHER WARRANTS

As of September 30, 1996, there were other warrants outstanding to
purchase an aggregate of 4,825,023 shares of Common Stock at exercise prices
ranging from $0.30 to $10.40 per share.

<PAGE> 41
REGISTRATION RIGHTS

The Company is obligated to keep the Registration Statement, of
which this Prospectus is a part, effective until the earlier of June 21, 1999,
or the date on which all shares may be sold without volume limitations under
Rule 144. The Company is also obligated to maintain the effectiveness of its
Registration Statement covering the 2,875,000 shares of Common Stock issuable
upon exercise of the Public Warrants from September 29, 1994 to September 29,
1998, the period of their exercisability.

TRANSFER AGENT, REGISTRAR AND WARRANT AGENT

The stock transfer agent, registrar and warrant agent for the Common
Stock and the Company's Warrants is American Stock Transfer & Trust Company.

<PAGE> 42
SELLING STOCKHOLDERS

<TABLE>
<CAPTION>
Shares Owned Amount and
Before Offering Percentage
(Including Shares Shares Offered of Shares
Issuable Upon Pursuant to Beneficially Owned
Selling Stockholder Exercise of Warrants) this Prospectus (1) After Offering
- ------------------- --------------------- ------------------- ------------------
<S> <C> <C> <C>
& Capital Partners, L.P. 375,000 375,000 0
Laurie & Harold Alexander 37,500 37,500 0
Armore Perpetuo, Inc. 150,000 150,000 0
Michael Arnouse 150,000 150,000 0
Jeffrey Baron 79,500 79,500 0
Arnolda Barros 150,000 150,000 0
Edgar E. Barton, Jr. 37,500 37,500 0
Batterson, Johnson &
Wang Limited Partners 452,792 174,435 278,357
(1.9)%
Lamon Lynn Bennett 300,000 300,000 0
Biotechnology Investment Group L.L.C.(3) 2,664,018 907,718 1,756,300
(11.2)%
David Blech(2) 328,065 328,065 0
The Edward Blech Trust(3) 1,050,000 1,050,000 0
Francis F. Bodkin, Jr. 10,500 10,500 0
Burrill & Craves 383,325 383,325 0
Frederick Chassman 82,500 82,500 0
James F. Clark 75,000 75,000 0
James L. Comazzi 37,500 37,500 0
Concept Mining, Inc. 150,000 150,000 0
Cooley Godward Castro Huddleson & Tatum 25,000 25,000 0
John S. & Carol A. Dahne 37,500 37,500 0
Theodore H. Friedman 75,000 75,000 0
Frontier Charitable Remainder,
Nicolas Madonia (Trustee) 420,000 420,000 0
Corinna Fumazi 37,500 37,500 0
G & G Diagnostics L.P. III 4,313 4,313 0
Thomas L. Garell 37,500 37,500 0
John G. Garell 37,500 37,500 0
The Gerbsman Family Trust, DTD -
12-4-90, Steven R. or Marlene
Gerbsman, Trustees 37,500 37,500 0
Joseph Giamanco 150,000 150,000 0
The Sidney Leo Goldfischer Revocable Living Trust 410 410 0
Grace Brothers Ltd. 3,695,193 2,000,000 1,695,193
(11.5%)
John P. Green, Jr. 75,000 75,000
Helen Gurman 75,000 75,000
Jason C. Hackett 37,500 37,500
Herbert Helling 14,104 4,104 10,000*
Jerry Heymann 75,000 75,000 0
Billy B. & Lorraine S. Huff 37,500 37,500 0
Eli David Jacobson 52,500 52,500 0
Karfunkel Family Foundation 150,000 150,000 0
Gerald Korman 37,500 37,500 0
Paula Kramer 37,500 37,500 0
The Low Family Trust, U/T/A 3-21-82
Thomas B. Low, Trustee 112,500 112,500 0
Allan R. Lyons 37,500 37,500 0
Joseph D. McKeown 37,500 37,500 0
Kenneth L. Melmon(4) 69,532 1,001 68,531*
Eric Miller 37,500 37,500 0
Tolof O. Nasby 15,000 15,000 0
The Olmsted Group, L.L.C.(5) 115,000 115,000 0
Olympic Venture Partners II 6,684 6,684 0
OVP II Advisors Fund 125 125 0
Rainier Venture Partners 6,532 6,532 0
The Ridge Land Company 150,000 150,000 0
David Mark Rozen 337,500 337,500 0
RVP Advisors Fund 66 66 0
Frank J. Schultheis 75,000 75,000 0
Sanderling Ventures Limited, L.P. 100,000 100,000 0
Sanderling Ventures Partners II, L.P. 100,414 100,000 414*
Schroeder International Trust Company
Limited, as trustee of Schroder UK Venture
Fund III Trust 57,459 57,459 0
Smith Barney, New York 37,500 37,500 0
Glenn S. Stanley 37,500 37,500 0
Joseph L. Stanley 37,500 37,500 0
Stuart G. Stanley 37,500 37,500 0
Michael Stelfman 37,500 37,500 0
Richard B. Stone 78,053 78,053 0
Richard Sullivan 37,500 37,500 0
Robert N. Swetnick 75,000 75,000 0
United Equities Commodities Company 750,000 750,000 0
Susan Jane Walker 112,500 112,500 0
Raymond Zabel, Jr 37,500 37,500 0
Larry Zalk 75,000 75,000 0
L. David Engel, D.D.S., Ph.D 1,198 1,075 123*
---------- ---------- ---------
TOTAL: 14,237,283 10,428,365 3,808,918
========== ========== =========
</TABLE>
- ---------------
* Less than one percent

<PAGE> 43

(1) Includes up to 3,515,865 shares issuable upon exercise of warrants.

(2) David Blech acts as a financial advisor to the Company and acted as
placement agent for the Private Placement. See "Certain Transactions."

(3) See "Security Ownership of Certain Beneficial Owners and Management."

(4) See "Management" and "Security Ownership of Certain Beneficial Owners and
Management."

(5) Sanford Zweifach, President and Chief Financial Officer and a Director of
the Company, is an employee of the Olmsted Group, L.L.C.

<PAGE> 44
PLAN OF DISTRIBUTION

The Company has been advised by each Selling Stockholder that the
Selling Stockholder may sell its Shares from time to time in transactions on the
OTC Bulletin Board, in negotiated transactions, or otherwise, or by a
combination of these methods, at fixed prices which may be changed, at market
prices at the time of sale, at prices related to market prices or at negotiated
prices. The Selling Stockholders may effect these transactions by selling the
Shares to or through broker-dealers, who may receive compensation in the form of
discounts, concessions or commissions from the Selling Stockholders or the
purchasers of the Shares for whom the broker-dealer may act as an agent or to
whom they may sell the Shares as a principal, or both. The compensation to a
particular broker-dealer may be in excess of customary commissions.

The Selling Stockholders and broker-dealers who act in connection
with the sale of the Shares may be deemed to be "underwriters" within the
meaning of the Securities Act, and any commissions received by such
broker-dealers and profits on any resale of the Shares as a principal may be
deemed to be underwriting discounts and commissions under the Securities Act.

LEGAL MATTERS

The validity of the Shares offered hereby will be passed upon for
the Company by Stradling, Yocca, Carlson & Rauth, a Professional Corporation,
Newport Beach, California.

EXPERTS

The report of KPMG Peat Marwick LLP refers to a change in the method
of accounting for marketable debt and equity securities effective January 1,
1994.

The report of KPMG Peat Marwick LLP dated February 29, 1996 contains
an explanatory paragraph that states that the Company has suffered recurring
losses from continuing operations which raises substantial doubt about its
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of that uncertainty.

<PAGE> 45
EPOCH PHARMACEUTICALS, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Independent Auditors' Report...................................................................... F-2

Item 1. Financial Statements

Balance Sheets as of December 31, 1995
and September 30, 1996 (unaudited)............................................ F-3

Statements of Operations for the years ended December 31, 1994
and 1995 and for the nine months ended
September 30, 1995 (unaudited) and 1996 (unaudited)........................... F-4

Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1994 and 1995................................ F-5

Statements of Cash Flows for the years ended December 31, 1994
and 1995 and for the nine months ended
September 30, 1995 (unaudited) and 1996 (unaudited) .......................... F-6

Notes to Financial Statements................................................. F-7
</TABLE>

F - 1
<PAGE> 46
INDEPENDENT AUDITORS' REPORT

- -------------------------------------------------------------------------------

The Board of Directors and Stockholders
Epoch Pharmaceuticals, Inc.

We have audited the accompanying balance sheet of Epoch Pharmaceuticals, Inc.
(formerly MicroProbe Corporation) as of December 31, 1995, and the related
statements of operations, stockholders' equity (deficit), and cash flows for
each of the years in the two-year period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects the financial position of Epoch Pharmaceuticals, Inc. as
of December 31, 1995, and the results of its operations and its cash flows for
each of the years in the two-year period ended December 31, 1995 in conformity
with generally accepted accounting principles.

As discussed in note 1 to the financial statements, the Company changed its
method of accounting for marketable debt and equity securities effective January
1, 1994.

The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in note 13 to the financial
statements, the Company has suffered recurring losses from continuing operations
which raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 13. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

KPMG Peat Marwick LLP
Seattle, Washington
February 29, 1996

F - 2
<PAGE> 47
EPOCH PHARMACEUTICALS, INC.

BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................. $ 3,739,144 $ 4,907,165
Receivables ............................................... 147,975 37,900
Prepaid expenses .......................................... 52,968 58,767
------------ ------------

Total current assets ......................... 3,940,087 5,003,832

Equipment and leasehold improvements, net ................... 350,045 253,403

Other assets ................................................ 39,363 21,150
------------ ------------

Total assets ................................. $ 4,329,495 $ 5,278,385
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Notes payable ............................................. $ 1,217,994 $ 13,783
Accounts payable .......................................... 341,899 209,512
Accrued liabilities ....................................... 361,664 237,916
Accrued litigation costs .................................. 250,000 --
------------ ------------

Total current liabilities .................... 2,171,557 461,211
------------ ------------

Stockholders' equity:
Common stock, par value $.01; authorized 20,000,000 shares,
issued and outstanding 7,023,400 and 14,246,713 shares 70,234 142,667
Additional paid-in capital ................................ 46,860,059 52,097,120
Deferred compensation ..................................... (99,512) (54,870)
Accumulated deficit ....................................... (44,672,843) (47,367,743)
------------ ------------

Total stockholders' equity ................... 2,157,938 4,817,714
------------ ------------

Total liabilities and stockholders' equity ... $ 4,329,495 $ 5,278,385
============ ============
</TABLE>

See accompanying notes to financial statements.

F - 3
<PAGE> 48
EPOCH PHARMACEUTICALS, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -------------------------
1994 1995 1995 1996
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Research contract revenue ................... $ 101,162 $ 93,197 $ -- $ --

Operating expenses:
Research and development ............... 4,475,062 1,442,957 840,036 1,511,262
Purchase of in-process research
and development ................... (2,321,267) -- -- --
Selling, general and administrative .... 1,691,847 1,220,843 1,260,323 910,363
Cost of litigation ..................... 100,000 -- -- --
------------ ----------- ----------- -----------
Total operating expenses .......... 3,945,642 2,663,800 2,100,359 2,421,625
------------ ----------- ----------- -----------

Operating loss .................... (3,844,480) (2,570,603) (2,100,359) (2,421,625)

Other income (expense):
Interest income ........................ 120,219 15,609 10,398 126,546
Interest and financing expense ......... (99,242) (488,191) (385,183) (181,787)
Other income ........................... 79,000 329,600 9,800 15,601
------------ ----------- ----------- -----------
Loss from continuing operations ... (3,744,503) (2,713,585) (2,465,344) (2,461,265)

Discontinued operations:
Income (loss) from operations of
Diagnostics Division .............. (6,348,342) 586,372 733,783 (233,635)

Gain on disposal of Diagnostics Division -- 8,785,712 -- --
------------ ----------- ----------- -----------

Net income (loss) .................. $(10,092,845) $ 6,658,499 $(1,731,561) $(2,694,900)
============ =========== =========== ===========

Loss per share from continuing operations ... $ (0.53) $ (0.38) $ (0.35) $ (0.26)

Income (loss) per share from discontinued
operations ............................ $ (0.91) $ 1.31 $ 0.10 $ (0.02)
------------ ----------- ----------- -----------

Net income (loss) per share ................. $ (1.44) $ 0.93 $ (0.25) $ (0.28)
============ =========== =========== ===========

Weighted average common and common
equivalent shares outstanding ......... 6,988,319 7,155,322 7,014,394 9,700,692
</TABLE>

F - 4
<PAGE> 49
EPOCH PHARMACEUTICALS, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
Common Stock
-------------------------- Additional Deferred
Shares Amount Paid-In Capital Compensation
------ ------ --------------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993....................... 6,931,882 $69,319 $46,312,964 $(304,055)

Private issuance of warrants for cash............. 220

Exercise of stock options......................... 73,005 730 168,631

Exercise of warrants.............................. 374 4

Forfeiture of compensatory stock options.......... (57,000) 24,667

Amortization of deferred compensation............. 89,750

Net loss for the year ended December 31, 1994.....
--------- ------- ----------- ---------
Balance at December 31, 1994...................... 7,005,261 $70,053 $46,424,815 $(189,638)
========= ======= =========== =========

Exercise of stock options......................... 18,139 181 5,244

Warrant price adjustment.......................... 480,000

Forfeiture of compensatory stock options.......... (50,000) 38,281

Amortization of deferred compensation............. 51,845

Net income for the year ended December 31, 1995...
--------- ------- ----------- ---------
Balance at December 31, 1995...................... 7,023,400 $70,234 $46,860,059 $ (99,512)
========= ======= =========== =========
</TABLE>

<TABLE>
<CAPTION>
Accumulated Total Stockholders
Deficit Equity (Deficit)
-------- ---------------
<S> <C> <C>
Balance at December 31, 1993...................... $(41,238,497) $ 4,839,731

Private issuance of warrants for cash............. 220

Exercise of stock options......................... 169,361

Exercise of warrants.............................. 4

Forfeiture of compensatory stock options.......... (32,333)

Amortization of deferred compensation............. 89,750

Net loss for the year ended December 31, 1994..... (10,092,845) (10,092,845)
------------ ------------
Balance at December 31, 1994...................... $(51,331,342) $ (5,026,112)
============ ============

Exercise of stock options......................... 5,425

Warrant price adjustment.......................... 480,000

Forfeiture of compensatory stock options.......... (11,719)

Amortization of deferred compensation............. 51,845

Net income for the year ended December 31, 1995... 6,658,499 6,658,499
------------ ------------
Balance at December 31, 1995...................... $(44,672,843) $ 2,157,938
============ ============
</TABLE>

See accompanying notes to financial statements.

F - 5
<PAGE> 50
EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------------- ---------------------------
1994 1995 1995 1996
------------ ----------- ----------- -----------

<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ......................................... $(10,092,845) $ 6,658,499 $(1,731,561) $(2,694,900)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Continuing operations:
Depreciation and amortization ......................... 254,493 290,032 192,985 148,871
Amortization of discount on notes payable ............. -- 357,674 219,685 122,326
Other ................................................. -- -- 29,315 --
(Gain) loss on disposal of assets ..................... 138,074 (53,260) -- --
Note payable forgiven in settlement of obligation ..... -- (300,000) -- --
Interest capitalized to notes payable ................. -- 119,201 -- --
Acquired in-process research and development .......... (2,321,267) -- -- --
Net liabilities of Ribonetics credited to R&D ......... (285,825) -- -- --
Changes in operating assets and liabilities:
Accounts receivable ............................ -- -- (5,000) 1,627
Inventories .................................... 577,427 -- -- --
Other assets ................................... 101,537 39,144 20,355 12,414
Accounts payable and accrued liabilities ....... 883,748 (1,108,657) (613,341) (447,990)
Other current liabilities ...................... 120,814 -- -- (625)
Discontinued operations:
Gain on sale of discontinued operations ............... -- (8,785,712) -- --
Changes in current assets and current liabilities ..... (205,054) (1,902,723) 553,922 95,577
Decrease in net noncurrent assets
in excess of noncurrent liabilities ............ 104,274 77,931 63,762 --
------------ ----------- ----------- -----------
Net cash used in operating activities ................. (10,724,624) (4,607,871) (1,269,878) (2,762,700)
------------ ----------- ----------- -----------
Cash flows from investing activities:
Acquisition of equipment & leasehold improvements ..... (964,785) (5,972) (4,472) (52,229)
Proceeds from disposal of assets ...................... 32,725 1,585 -- --
Purchases of marketable securities .................... (6,606,807) -- -- --
Proceeds from sales of marketable securities .......... 15,472,889 -- -- --
Proceeds from sale of net assets
of discontinued operations ..................... 977,091 8,510,000 -- --
------------ ----------- ----------- -----------
Net cash provided by investing activities ............. 8,911,113 8,505,613 (4,472) (52,229)
------------ ----------- ----------- -----------
Cash flows from financing activities:
Net loan payments to bank ............................. (414,000) -- -- --
Proceeds from notes payable ........................... 1,640,000 -- 2,250,000 --
Principal payments on notes payable ................... (16,120) (160,553) (158,251) (1,326,537)
Proceeds from sale of common stock .................... -- -- -- 4,632,500
Principal payments on capital leases .................. (93,433) (13,454) (13,454) --
Exercise of warrants and stock options ................ 112,586 5,425 4,403 676,994
------------ ----------- ----------- -----------
Net cash provided by (used in) financing activities ... 1,229,033 (168,582) 2,082,698 3,982,957
------------ ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ...... (584,478) 3,729,160 808,348 1,168,021
Cash and cash equivalents at beginning of year ............ 594,462 9,984 9,984 3,739,144
------------ ----------- ----------- -----------
Cash and cash equivalents at end of year .................. $ 9,984 $ 3,739,144 $ 818,332 $ 4,907,165
============ =========== =========== ===========
Supplemental disclosure of cash flow information
- cash payments made during the year for interest ..... $ 22,645 $ 26,542 $ 16,502 $ 80,665
============ =========== =========== ===========
Supplemental disclosure of non-cash
financing activity-discount on notes payable
incurred on repricing of stock warrants ............... $ -- $ 480,000 $ 480,000 $ --
============ =========== =========== ===========
</TABLE>

See accompanying notes to financial statements.

F - 6
<PAGE> 51

EPOCH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1995

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Epoch Pharmaceuticals, Inc. ("Epoch" or "the Company"), formerly
MicroProbe Corporation, was organized to develop, manufacture and market
therapeutic and diagnostic products utilizing oligonucleotide technology. In
November 1995, the Company sold its diagnostics assets to Becton, Dickinson and
Company (see note 12). The Company's continuing activities are focused on the
development of therapeutic technologies and products. The Company's revenues
from continuing operations to date are primarily from Federal government and
other research grants and contracts.

Principles of Consolidation

The statements of operations include the accounts of Ribonetics,
GmbH ("Ribonetics") and Animal Biotechnology Cambridge, Ltd. ("ABC") through
September 30, 1994 at which time the Company discontinued consolidating the
accounts of Ribonetics and ABC (see note 2). As of December 31, 1994 the Company
had no subsidiaries.

In 1995, the Company disposed of its diagnostics division (see
note 11). Accordingly, amounts related to the diagnostics division have been
reported as a discontinued operation in all years presented.

Equipment and Leasehold Improvements

Equipment and leasehold improvements are stated at cost.
Depreciation and amortization are provided on a straight-line basis over the
shorter of the assets' estimated useful lives, generally three to five years, or
the lease term.

Revenue Recognition

Research contract revenue is recognized as research and
development activities are performed under the terms of related agreements.

Income Taxes

Deferred income taxes are provided based on the estimated future
tax effects of temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.

F - 7
<PAGE> 52
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on the
deferred tax assets and liabilities of a change in tax rates is recognized in
the period that includes the enactment date. A valuation allowance is recorded
for deferred tax assets when it is more likely than not that such deferred tax
assets will not be realized.

Marketable Securities

The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS No. 115), which the Company adopted on January
1, 1994. Under SFAS No. 115, the accounting methodology is based on the
classification of marketable debt and equity securities into three categories:
held to maturity, trading securities and available-for-sale. The realized loss
in 1994 from sales of available-for-sale securities, using specific
identification to determine the securities' cost, was $99,167.

Per Share Data

Income (loss) per share is calculated by dividing net income
(loss) by the weighted average number of common shares and dilutive common share
equivalents outstanding. Common share equivalents include unexercised stock
options and warrants. Common share equivalents are excluded from the calculation
of net income (loss) per share in loss periods as such equivalents would be
antidilutive.

Cash Equivalents

All highly liquid investments with a maturity of three months or
less at date of purchase are considered to be cash equivalents.

Use of Estimates

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

Unaudited Interim Financial Statements

In the opinion of the Company's management, the September 30,
1996 and 1995 unaudited interim financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation.

F - 8
<PAGE> 53
EPOCH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1995

(2) PURCHASE OF RIBONETICS

In November 1993, pursuant to an agreement entered into among the
Company, ABC and Ribonetics, (the "November Agreement") the Company agreed to
acquire Ribonetics and certain assets of ABC (the "ABC Assets"), a shareholder
of Ribonetics, in order to add complementary oligonucleotide technology for
therapeutic applications. The aggregate amount payable for Ribonetics stock and
the ABC Assets was $1,502,000 in cash and 515,817 shares of the Company's common
stock. The cash portion of the purchase price was paid on execution of a
preliminary agreement in December 1993. The shares of the Company's common stock
valued at $2,321,267, and accrued as of December 31, 1993, was to be delivered
at closing.

The business combination was accounted for in 1993 as a purchase
transaction, wherein the total cost of the purchase was allocated to the
underlying net assets acquired on the basis of the relative fair market values
on the date of acquisition. Based on the stage of Ribonetics' development, the
nature of its business and absence of other identifiable intangible assets, the
cost in excess of net assets acquired of $4,200,000 was considered acquired
in-process research and development and, accordingly, was charged to research
and development expense in 1993.

During the period between December 1993 and September 1994, the
Company advanced amounts totalling approximately $1,634,000 to both ABC and
Ribonetics to fund the operating expenses of Ribonetics and ABC's Scion Health
division and for the approved purchase of certain capital equipment necessary
for the continued operations of such entities. Although the Company was not
obligated to advance such sums under the November Agreement, it determined to do
so to preserve its initial investment in the entities while the Company
conducted its due diligence and the definitive agreements were being negotiated.

On September 9, 1994, ABC provided the Company with notice of
termination of the November Agreement. The Company refused to accept such
termination on the grounds that the November Agreement did not provide ABC with
the right to terminate the November Agreement. At such time, the Company also
ceased advancing funds to cover the operating expenses of ABC's Scion Health
division and Ribonetics. On September 27, 1994, the Company announced it
exercised its put right by providing Mr. David Blech with written notice, under
a December 1, 1993 agreement with Mr. Blech, a principal stockholder of the
Company at the time such agreement was entered into (the "Blech Agreement"),
that the Company intended to sell Epoch's interests in Ribonetics and the ABC
Assets to Mr. Blech for the amount paid by Epoch for such interests. Mr. Blech
failed to respond to the Company's notice and, following the expiration of the
90-day period specified in the Blech Agreement as the period in which a closing
under the Blech Agreement was to occur, the Company deemed Mr. Blech to be in
default of his obligations.

F - 9
<PAGE> 54
EPOCH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1995

Because of the foregoing events, the Company discontinued
including the accounts of Ribonetics and ABC in its financial statements in the
fourth quarter of 1994. Accordingly, the Company reported the $285,825 of net
liabilities of Ribonetics and ABC as a reduction of research and development
expense and adjusted the acquired in-process research and development expense by
$2,321,267, which represented the remaining purchase obligation accrued as of
December 31, 1993.

The Company has commenced discussions with VIMRx Pharmaceuticals,
Inc. relating to the potential acquisition of the Company's previous equity
interest in Ribonetics and with all other parties involved regarding the
Ribonetics technology and is evaluating various alternatives to recover all
funds provided by the Company in connection with these transactions, but has not
reached any resolution to date.

The Company received $300,000 from Mr. Blech which was recorded
as notes payable at December 31, 1994. In 1995 the Company determined the note
payable to be a partial settlement of Mr. Blech's obligations under the Blech
Agreement and included the write-off of the note payable in other income.

(3) EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements consist of the following:

<TABLE>
<S> <C>
Machinery and equipment......................... $ 1,555,686
Furniture and fixtures.......................... 329,422
Leasehold improvements.......................... 145,723
------------
$ 2,030,831
Less accumulated depreciation and amortization.. (1,680,786)
------------
Equipment and leasehold improvements, net....... $ 350,045
============
</TABLE>

F - 10
<PAGE> 55
EPOCH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1995

(4) NOTES PAYABLE

Notes payable consist of the following:

<TABLE>
<S> <C>
Note payable to stockholder due March 31, 1996,
interest of 10%; secured by all therapeutic assets ....... $1,099,047

Note payable to stockholder due March 31, 1996,
interest of 10%; secured by all therapeutic assets........ 109,906

Note payable to stockholder due March 31, 1996,
interest of 10%; secured by all therapeutic assets........ 110,250

Other notes payable....................................... 21,117

Discount on notes payable to stockholders................. (122,326)
----------

$1,217,994
==========
</TABLE>

Stock Warrant Price Adjustment

In connection with the notes payable to stockholders of the
Company due March 31, 1996, the Company issued for $220, 5-year warrants to
purchase 2,400,000 shares of the Company's common stock. The warrants can be
exercised through October 1999 and had an exercise price of $0.50 per share. In
May 1995, in connection with the extension of these notes to March 31, 1996, the
exercise price of such warrants was reduced to $0.30 resulting in a discount on
notes payable of $480,000. The discount is being amortized over the remaining
term of the notes. At December 31, 1995, no warrants had been exercised.

(5) LEASES

The Company leases its facilities and certain equipment under
noncancelable operating leases. Future minimum payments under noncancelable
operating leases at December 31, 1995, are as follows:

F - 11
<PAGE> 56
EPOCH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1995

During 1994 and 1995, the Company incurred rent expense on
operating leases of $623,000 and $436,000, respectively.

(6) RETIREMENT SAVINGS PLAN

The Company has a profit sharing plan, which is qualified under
Section 401(k) of the United States Internal Revenue Code. The plan allows
eligible employees to contribute up to 25% of their salary. The Company, at its
discretion, makes matching contributions to the plan. No matching contributions
were made to the plan in 1994 or 1995.

(7) STOCKHOLDERS' EQUITY

Stock Option Plans

The 1991 Plan

In August 1991, the Company established the 1991 Incentive Stock
Option Plan, Nonqualified Stock Option and Restricted Stock Purchase Plan (the
"1991 Plan"). The 1991 Plan provided for the grant of options or rights to
purchase up to 1,436,470 shares of common stock, all of which have been granted.
Incentive stock options were granted at the fair market value on the date of
grant and nonqualified options were granted at not less than 85% of the fair
market value on the date of the grant. All options generally expire 10 years
from the date of grant.

The 1993 Plan

In July 1993, the Company established the 1993 Incentive Stock
Option, Nonqualified Stock Option and Restricted Stock Purchase Plan (the "1993
Plan"). The 1993 Plan provides for the grant of options or rights to purchase up
to 500,000 shares of Common Stock to employees, officers, directors and
consultants of the Company. Under the 1993 Plan, incentive stock options must
have an exercise price at least equal to the fair market value of the Common
Stock on the date of grant. Nonqualified stock options and rights to purchase
restricted stock must have an exercise price at least equal to 85% of the fair
market value of the Common Stock on the date of grant. Options are exercisable
over a period of ten years and vest over a period of three years after the date
of grant.

The Directors Plan

In July 1993, the Company adopted a Non-Employee Directors Option
Plan (the "Directors Plan") pursuant to which the Company granted each
non-employee director who was a director prior to July 27, 1993, a fully-vested
10-year option to purchase 10,000 shares of Common Stock at an exercise price of
$4.00 per share for a total of 60,000 shares. In addition, upon each anniversary

F - 12
<PAGE> 57
EPOCH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1995

of the inception of the Directors Plan, each non-employee director will receive
fully-vested 10-year options to purchase 5,000 shares of Common Stock at the
then current fair market value. Non-employee directors who subsequently join the
Board of Directors will receive, upon each anniversary of joining the Board of
Directors, fully-vested 10-year options to purchase 5,000 shares of Common Stock
at the then current fair market value.

Activity under the stock option plans is as follows:

<TABLE>
<CAPTION>
STOCK OPTIONS
-------------
NUMBER PRICE
OF SHARES PER SHARE
--------- ---------

<S> <C> <C>
Outstanding at December 31, 1993.................. 1,615,174 2.045 - 10.00
=========
Granted......................................... 155,380 .30 - 5.00
Exercised....................................... (73,005) .30 - 4.00
Canceled........................................ (313,856) .30 - 10.00
---------
Outstanding at December 31, 1994.................. 1,383,693 .30 - 10.00
=========
Granted......................................... 10,000 .375
Exercised....................................... (18,139) .30
Canceled........................................ (548,789) .30 - 5.875
---------
Outstanding at December 31, 1995.................. 826,765 .30 - 10.00
========
</TABLE>

Options to purchase 626,820 shares were exercisable as of December 31, 1995 at
an average price of $2.31 per share.

Warrants to Purchase Common Stock

As of December 31, 1995, warrants were outstanding to purchase an
aggregate of 5,940,556 shares of common stock at exercise prices ranging from
$0.30 to $9.21 per share. These warrants have expiration dates that range from
December 1996 to December 2000, with most of the warrants expiring in 1998 and
1999. Commencing September 29, 1994, 2,875,000 warrants are redeemable, in whole
but not in part, for $.05 per warrant, at the option of the Company, upon 30
days written notice at any time after the last sale price of the Company's
common stock has been at least $9.10 for at least 30 consecutive business days
ending within 15 days of the date of the notice of redemption.

On January 16, 1996 the Company issued five year warrants to
purchase 250,000 shares of Common Stock to Burrill & Craves and 345,000 shares
of Common Stock to the Olmsted Group, L.L.C., at an exercise price of $0.50 per
share, in consideration for the services performed by Burrill & Craves and The
Olmsted Group, L.L.C., respectively, in connection with the sale of the

F - 13
<PAGE> 58
EPOCH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1995

Corporation's diagnostics division and other corporate matters. The warrants
vest as follows: (i) 33 1/3% at issuance; (ii) 33 1/3% upon the earlier of (1)
June 30, 1997, or (2) the date on which the Corporation enters into an agreement
with a corporate partner; and (iii) 33 1/3% on January 1, 1999. All such
warrants shall vest, to the extent not already vested upon a change of control.

Underwriters Option

The underwriters of the Company's initial public offering were
issued an option to purchase up to 250,000 shares of Common Stock and/or 250,000
warrants with an exercise price of $10.40 and $0.16, respectively. The
underwriters options are exercisable from September 29, 1996 through September
29, 1998.

Adoption of Accounting Standard

In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, Accounting for Stock-Based Compensation. This pronouncement
establishes the accounting and reporting standards for stock-based employee
compensation plans, including stock purchase plans, stock options and stock
appreciation rights. This new standard defines a fair value-based method of
accounting for these equity instruments. This method measures compensation cost
based on the value of the award and recognizes that cost over the service
period. Companies may elect to adopt this standard or to continue accounting for
these types of equity instruments under current guidance, APB Opinion No. 25,
Accounting for Stock Issued to Employees. Companies which elect to continue
using the rules of Opinion 25 must make proforma disclosures of net income and
earnings per share as if this new statement had been applied. This new standard
is required for fiscal years beginning after December 15, 1995. The Company
anticipates that it will continue to use the rules of APB Opinion No. 25 and
make the proforma disclosures required under the new standard.

(8) INCOME TAXES

There was no income tax expense or benefit attributable to net
income or loss for the years ended December 31, 1994 and 1995. The difference
between taxes computed by applying the U.S. Federal corporate tax rate of 34%
and the actual income tax provision in 1994 and 1995 is primarily the result of
limitations on utilizing net operating losses and the utilization of net
operating losses, respectively.

F - 14
<PAGE> 59
EPOCH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1995

The tax effects of temporary difference that give rise to
significant portions of the deferred tax assets at December 31, 1995 are
presented below:

<TABLE>
<S> <C>
Net operating loss carryforwards........................... $ 7,502,000
Research and development credit carryforward............... 1,600,000
Capitalized research and development....................... 1,365,000
Accrued expenses........................................... 132,000
Other...................................................... 45,000
-----------
Total gross deferred tax assets............................ 10,644,000
Less deferred tax asset valuation allowance................ (10,644,000)
-----------
Net deferred tax assets.................................... $ - 0 -
===========
</TABLE>

The net change in the total valuation allowance for 1994 and 1995
was an increase of approximately $4,338,000 and a decrease of $2,461,000,
respectively, which were primarily due to changes in the amount of net operating
loss carryforwards that could not be utilized and the utilization of net
operating losses, respectively.

At December 31, 1995, the Company had net operating loss
carryforwards for income tax purposes of approximately $22,100,000 and unused
research and development tax credits of approximately $1,600,000 available to
offset future taxable income and income taxes, respectively, expiring through
2010. The Company's net operating loss and credit carryforwards have been
reduced to reflect the limitations pursuant to the Tax Reform Act of 1986, due
to cumulative changes in stock ownership in excess of 50%.

(9) LITIGATION

In May 1993, Gen-Probe, Incorporated (Gen-Probe) filed an action
in the U.S. District Court, Southern District of California alleging the
Company's DNA probe-based diagnostic products infringe on Gen-Probe's U.S.
Letters Patents Nos. 4,851,330 and 5,288,611. These patents claim methods for
identification of organisms by detecting ribosomal RNA. The complaint sought
unspecified damages and injunctive relief. The Company filed a counterclaim
against Gen-Probe seeking judgments of invalidity, unenforceability and
non-infringement of the two patents. In addition, the Company opposed the
equivalent patent applications in Europe (Europe Patent No. 0131052) and Japan
(Japanese Patent No. 5-78319). On September 29, 1995, the Company settled this
action with Gen-Probe in connection with the sale of its diagnostics division to
Becton, Dickinson and Company (see note 11).

Under the settlement agreement, the Company agreed that
Gen-Probe's U.S. Patents Nos. 4,851,330 and 5,288,611 are valid and enforceable
and are infringed by the Company's Affirm(R) product line. The Company also
consented to an injunction against further infringement.

F - 15
<PAGE> 60
EPOCH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1995

In August 1995, Cooley, Godward, Castro, Huddleson & Tatum
("Cooley") filed a complaint in United States District Court, Northern District
of California, seeking $1,121,704 in legal fees and costs incurred in connection
with Cooley's representation of the Company in the Gen-Probe matter. The Company
entered into a settlement agreement with Cooley in November 1995 and remitted
$600,000 cash and warrants to purchase 25,000 shares of common stock with an
exercise price of $0.50 per share as full settlement.

The Company has also received from time to time written notices
from other parties alleging that the Company's products and proposed products
infringe the proprietary rights of such parties. The Company believes that such
notices are common in its industry and believes it is not infringing the
proprietary rights of such parties. However, there can be no assurance that such
parties will not ultimately bring legal proceedings against the Company.

The Company was named as an additional defendant in In Re Blech
Securities Litigation, 94 Civ. 7696 (RWS) pursuant to an Amended Consolidated
Class Action Complaint (the "Amended Complaint") filed on March 28, 1995 in the
United States District Court for the Southern District of New York (the
"Court"). The plaintiffs bring this action as a purported class action on behalf
of persons who purchased, during the period from July 1, 1991 through September
21, 1994, securities of 24 companies, including securities issued by the
Company. The Amended Complaint names as defendants David Blech, D. Blech & Co.,
Mark S. Germain, Nicholas Madonia as trustee for various trusts, Mordechai Jofen
as trustee for The Edward Blech Trust, Chancellor Capital Management, Inc.,
Parag Saxena, Bear, Stearns & Company, Inc., Baird Patrick & Co., and eleven of
the foregoing 24 issuing companies. The Company is one of those eleven named
defendant companies.

The Amended Complaint seeks to allege against the Company
violations of antifraud provisions of the federal securities law and common law
fraud and deceit in connection with a purported scheme to, inter alia,
artificially inflate and maintain prices of the securities issued by the 24
companies referenced above. In that regard, the Amended Complaint purports to
allege fraudulent activities involving the foregoing securities, including
without limitation unlawful "sham" transactions and the providing of undisclosed
"incentives" to investment fund managers and others to purchase such securities.
The Amended Complaint seeks the following relief: (a) certification of this
action as a class action; (b) damages in an unspecified amount and interest; (c)
costs and expenses of this action, including reasonable fees of attorneys,
accountants and experts and other disbursements; and (d) such other and further
relief as may be proper.

The Company has moved to dismiss the Amended Complaint as it
applies to the Company on the grounds that the Amended Complaint fails to plead
the purported fraud with the requisite particularity and fails to state a claim.
Plaintiffs have opposed the motion. Oral argument of the motion occurred on
November 9, 1995 and the motion is pending before the Court. In view of the
pending motion to dismiss, the Company has not answered the Amended Complaint.
Should the

F - 16
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EPOCH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1995

Company's motion to dismiss be denied, management intends to contest the
litigation vigorously.

The Company also moved for a protective order to stay pretrial
discovery against it, pending a decision of its motion to dismiss the Amended
Complaint. The stay motion was granted in part and denied in part. By an order
dated August 23, 1995, the Court directed certain limited document discovery by
defendants to be completed within thirty days of the order and stayed other
discovery only until the limited document discovery was completed. The Company
responded to such limited document discovery and thus, such discovery is
complete as to it; since then no further discovery has been sought from the
Company. In the opinion of management the outcome will not have a material
effect on the financial condition of the Company.

(10) SALE OF SUBSIDIARY

On January 21, 1994 the Company sold all of the shares of Source
Scientific Systems, Inc., a wholly owned subsidiary, to The Alton Group, Inc.
("Alton"), a manufacturer of biomedical and laboratory instruments. Under the
terms of the agreement, Alton agreed to pay an aggregate of $2.45 million, of
which $600,000 was paid prior to the closing, $720,000 was paid in cash along
with $180,000 of prepaid inventory, under a supply agreement, at the closing and
the balance paid by delivery by Alton of a noninterest bearing, subordinated,
secured promissory note in the principal amount of $950,000, due March 27, 1995.
Because of the uncertainty of its collectibility, due to the financial condition
of the purchaser of Source, the note was fully reserved. The Company and Alton
also entered into a supply agreement under which Alton agreed to continue to
supply the Company with instruments used in the Company's Affirm Systems and a
license agreement under which Source granted the Company a nonexclusive,
worldwide, royalty-free license to use certain of Source's patents.

As a result of the Company's withdrawal of the Affirm VP product
line, and the notice of cessation of orders for Affirm Processors from the
Company to Source, in mid-1994 Alton made claims totaling approximately $592,000
against the Company for past due invoices and the cost of cancellation of the
Company's firm purchase orders. Alton had also claimed that it has suffered
additional damages from the loss of anticipated related service business and
from the loss of overhead absorption attributable to the anticipated manufacture
of Affirm Processors. Finally, Alton claimed that the amount it paid for Source
was based, in part, on forecasts by the Company, for the purchase of Affirm
Processors and, as a result, it overpaid for Source. Alton's claims aggregated
approximately $2.1 million.

On December 2, 1994 the Company entered into an agreement with
Alton, which was further modified on March 2, 1995, settling certain disputes
and restructuring certain financial arrangements between them. Under the
agreement, the Company cancelled a $950,000 promissory note of Alton. In
addition, the parties cancelled a non-exclusive license agreement under which
the Company was

F - 17
<PAGE> 62
EPOCH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1995

entitled to use certain technology previously developed by Source, none of which
is used in any of the Company's products currently in development. In
consideration of such cancellations, Alton will pay royalties on its products
utilizing the Source technology. Such royalties will equal 2% of net sales from
April 1, 1995 through March 31, 1996 and 2.5% of net sales thereafter through
March 31, 2000, subject to an aggregate limit of $375,000 in royalties. In
addition, Alton agreed not to seek payment of amounts due for Affirm Processors
and Affirm Scanners previously ordered by the Company from Alton, and various
other claims made by Alton with respect to the supply arrangement between the
Company and Alton. However, the Company was obligated to pay, and had accrued
and expensed as of December 31, 1994, an aggregate of $162,000, for 124 of such
units to be shipped to the Company. These units were received by the Company and
paid for in 1995. Finally, the parties released each other of all claims
arising out of the sale of Source to Alton and any other claims the parties may
have had against each other.

(11) SALE OF DIAGNOSTIC DIVISION

In October 1993, the Company entered into an agreement with
Procter & Gamble ("P&G"). Under the agreement P&G paid a fee for an option to
obtain an exclusive, ten year license to sell the Company's dental diagnostic
products in the U.S. and Canada. With the Becton Sale consummated, all of the
assets related to the dental diagnostic products have been transferred to
Becton, and on November 28, 1995, by mutual consent of P&G and the Company, the
October 1993 agreement was terminated and neither party, the Company or P&G, has
any rights or obligations thereunder. The Company returned to P&G $480,000 in
November 1995, which had been held by the Company and recorded as deferred
income.

F - 18
<PAGE> 63
EPOCH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1995

(12) RESTRUCTURING

In the second quarter of 1994, the Company incurred restructuring
expenses of $1,250,000 related to restructuring of its diagnostics division.
Restructuring expenses included primarily employee severance and the write down
of the Affirm VP inventories, trade receivables and fixed assets. As of December
31, 1994 there was no remaining accrual related to the restructuring of the
diagnostic division and there were no adjustments made to the amounts accrued
subsequent to the restructuring.

(13) LIQUIDITY

At December 31, 1995, the Company had cash and cash equivalents of $3,739,000
which provides sufficient working capital to operate between 6 and 12 months
depending on the need to repay notes payable currently due on March 31, 1996.
The Company's continuing operations are research and development, and will not
generate working capital in the near term to fund future operations.

Since inception, the Company has financed its operations primarily through the
sales of its equity securities. In addition, the Company received $1,320,000
from the sale of Source Scientific Systems, Inc. and $8,510,000 from the sale of
the diagnostics division. To continue operations, the Company will be required
to sell additional equity securities, borrow additional funds, or obtain
additional financing through licensing, joint venture, or other collaborative
arrangements. The Company is pursuing such financing arrangements but has no
commitments for such financing and there can be no assurance that such financing
will be available on satisfactory terms, if at all.

(14) SUBSEQUENT EVENTS (UNAUDITED)

EQUITY

In June 1996, the Company completed a private offering of Units,
each Unit consisting of one share of the Company's Common Stock and one warrant
to purchase 0.5 shares of the Company's Common Stock. The Company sold a total
of 5 million Units, for an aggregate purchase price of $5 million to
institutional and accredited individual investors. The term of the warrants is
five years, and they are exercisable at $2.50 per share (or $1.25 per 0.5
shares). Each warrant is redeemable by the Company at any time after eighteen
months from the date that they are issued at $0.05 per warrant, provided that
the closing trading price per share of Common Stock is at least $3.75 for twenty
(20) consecutive trading days.

F - 19
<PAGE> 64
EPOCH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1995

In connection with the private placement, pursuant to an
agreement with its financial advisor, David Blech, the Company paid fees of
$350,000 to Mr. Blech. In addition, the Company cancelled fifty percent (50%) of
the obligations of Mr. Blech arising in connection with the transactions
involving Ribonetics GmbH, including the "put" rights contained in an agreement
dated December 1, 1993 between the Company and Mr. Blech. The aggregate amount
cancelled was $1,635,588. The balance is accruing interest at the minimum
applicable federal rate. As the obligation had been fully reserved, and the
remaining balance is fully reserved, neither the cancellation nor the remaining
obligation is reflected on the Company's balance sheet. The Company also issued
to Mr. Blech five year warrants to purchase 500,000 shares of Common Stock at
$1.00 per share. The warrants are not exercisable for one year and are held in
escrow by the Company until the balance of the Ribonetics debt is satisfied.

In addition to completion of the private placement, in June
1996, the Company repaid $1,396,000 of notes payable and accrued interest
payable to major shareholders. The major shareholders of the Company also
elected to exercise previously existing warrants to purchase 2,200,000 shares of
the Company's Common Stock at $0.30 per share generating an additional $660,000
of cash to the Company.

Also in June 1996, the Company announced that it intends to
exchange for every two (2) warrants which were issued in conjunction with the
Company's public offering in September 1993 at $6.50 per share, one (1) new
warrant to purchase one (1) share of the Company's Common Stock with a term of
five (5) years that is exercisable at $2.50 per share. Each warrant shall be
redeemable by the Company at any time after eighteen months from the date that
they are issued at $0.05 per warrant, provided that the closing trading price
per share of Common Stock is at least $3.75 for twenty (20) consecutive trading
days.

In September 1996, the stockholders of the Company approved
amendments to the Company's Restated Certificate of Incorporation to authorize
10,000,000 shares of Preferred Stock and to increase the number of shares of
Common Stock to 30,000,000.

LITIGATION

By decision dated June 6, 1996, the Court granted the Company's
motion to dismiss the In Re Blech Securities Litigation Amended Complaint for
failure to plead fraud with particularity and declined to exercise jurisdiction
over the pendent common law claims asserted against the Company under state law.
The Court granted plaintiffs leave to replead their purported claims within
twenty days of the date of the decision, which time the Court subsequently
extended to July 26, 1996. The Company was not named in the repleading and the
case is now closed.

OTHER

In October 1996, The National Institute of Arthritis and
Musculoskeletal and Skin Disease, of the National Institutes of Health, awarded
a four-year contract to Virginia Mason Research Center, and the Company as
subcontractor, to develop and test a compound designed to inactivate a gene
which causes rheumatoid arthritis. The federal research award is for $1.2
million of which Epoch will receive $584,000 over the four year period.

Virginia Mason, with its expertise in arthritis, will partner
with Epoch, with its expertise in gene-modification, to develop novel
therapeutic compounds for the treatment of arthritis. Such compounds are
expected to search the DNA structure to locate and attach to the affected gene.
Researchers then hope to turn off the genetic element which causes the
patient's immune system to attack cells in patient's joints, resulting in
rheumatoid arthritis.

In September 1996, the Company signed a letter of intent with
Saigene Corporation, (Saigene), whereby Epoch would transfer its remaining
diagnostic technologies to Saigene for $1,100,000.

In October 1996, the Company and VIMRx Pharmaceuticals, Inc.,
Wilmington, Delaware ("VIMRx") announced the establishment of an alliance
between the two companies to attempt to exploit the synergies between their
respective technologies and markets, and a settlement of the outstanding dispute
between Epoch and VIMRx's German subsidiary, formerly known as Ribonetics. VIMRx
invested $800,000 in exchange for 457,143 shares of Epoch common stock at $1.75
per share. In addition, VIMRx received 450,000 warrants to purchase common stock
exercisable at $2.00 and 450,000 warrants to purchase common stock exercisable
at $3.00 which expire in October 1997 and 1998, respectively.

F - 20
<PAGE> 65
10,428,365 SHARES

EPOCH PHARMACEUTICALS, INC.

COMMON STOCK

PROSPECTUS

December 9, 1996

<PAGE> 66
TABLE OF CONTENTS
PAGE
----
Available Information ..................................................... 2
Prospectus Summary ........................................................ 3
Risk Factors .............................................................. 6
Use of Proceeds ........................................................... 10
Price Range of Common Stock ............................................... 11
Capitalization ............................................................ 12
Dividend Policy ........................................................... 12
Selected Financial Data ................................................... 13
Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................... 14
Business .................................................................. 19
Management ................................................................ 31
Certain Transactions ...................................................... 34
Security Ownership of Certain Beneficial Owners and Management ............ 37
Description of Securities ................................................. 39
Selling Stockholders ...................................................... 42
Plan of Distribution ...................................................... 44
Legal Matters ............................................................. 44
Experts ................................................................... 44
Index to Consolidated Financial Statements ................................ F-1

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR, ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY THOSE
TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE
SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT
IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO ITS
DATE.