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UNITED STATES SECURITIES AND
EXCHANGE COMMISSIONWashington,
D.C. 20549

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FORM 10-Q

|(Mark One)
|----------
|x         
|          
|          
|or        
|          
|o         
|          

Commission File Number 0-31499

|Eden Bioscience Corporation                             
|--------------------------------------------------------
|(Exact
  name of registrant as specified in its charter)

|Washington                                                           |  | 91-1649604                       
|-------------------------------------------------------------------- |  | ---------------------------------
|(State
  or other jurisdiction of incorporation
  or organization)   |  | (IRS Employer Identification No.)
|                                                                     |  |                                  
|3830 Monte Villa Parkway, Suite 100
  Bothell, Washington 98021-7266
|(Address
  of principal executive offices, including zip code)      
|                                                                    
|(425) 806-7300                                                      
|(Registrants
  telephone number, including area code)              

Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing requirements for the
past 90 days. Yes x     No o

Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Securities Exchange Act of 1934). Yes o      No x

State
the number of shares outstanding of each of the registrants classes of common
equity, as of the latest practicable date:

|Class                            |  | Outstanding as of November 5, 2004
|-------------------------------- |  | ----------------------------------
|Common
  Stock, $.0025 Par Value |  | 24,381,870                        

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Eden Bioscience Corporation

Index to Form 10-Q

|           |                                                                                                                            | Page
|---------- | -------------------------------------------------------------------------------------------------------------------------- | ----
|           |                                                                                                                            |     
|Part I.    | Financial Information                                                                                                      |     
|           |                                                                                                                            |     
|Item 1.    | Unaudited
  Financial Statements                                                                                           | 2   
|           |                                                                                                                            |     
|           | Condensed
  Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003                                     | 2   
|           |                                                                                                                            |     
|           | Condensed
  Consolidated Statements of Operations for the Three Months and Nine Months
  Ended September 30, 2004 and 2003 | 3   
|           |                                                                                                                            |     
|           | Condensed
  Consolidated Statements of Cash Flows for the Nine Months Ended September 30,
  2004 and 2003                  | 4   
|           |                                                                                                                            |     
|           | Notes to
  Unaudited Condensed Consolidated Financial Statements                                                           | 5   
|           |                                                                                                                            |     
|Item 2.    | Managements
  Discussion and Analysis of Financial Condition and Results of Operations                                    | 10  
|           |                                                                                                                            |     
|           | Factors
  That May Affect Our Business, Future Operating Results and Financial
  Condition                                 | 16  
|           |                                                                                                                            |     
|Item 3.    | Quantitative
  and Qualitative Disclosures About Market Risk                                                               | 24  
|           |                                                                                                                            |     
|Item 4.    | Controls
  and Procedures                                                                                                  | 24  
|           |                                                                                                                            |     
|Part II.   | Other Information                                                                                                          |     
|           |                                                                                                                            |     
|Item 2.    | Unregistered
  Sales of Equity Securities and Use of Proceeds                                                              | 25  
|           |                                                                                                                            |     
|Item 6.    | Exhibits                                                                                                                   | 25  
|           |                                                                                                                            |     
|Signatures | 25                                                                                                                         |     

- 1 -

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PART I -- FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements.

EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

|                                                                                                                                                                                                          |  | September 30,
  2004 |              | December 31,
  2003 |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ------------ | ------------------- | -
|                                                                                                                                                                                                          |  |                      |              |                     |  
|ASSETS                                                                                                                                                                                                    | 
|Current assets:                                                                                                                                                                                           |  |                      |              |                     |  
|Cash
  and cash equivalents                                                                                                                                                                               |  | $                    | 14,049,189   |                     | $
|Accounts
  receivable, net of sales allowances                                                                                                                                                            |  |                      | 234,317      |                     |  
|Inventory                                                                                                                                                                                                 |  |                      | 3,366,393    |                     |  
|Prepaid
  expenses and other current assets                                                                                                                                                               |  |                      | 362,926      |                     |  
|                                                                                                                                                                                                          |  |                      |              |                     |  
|Total
  current assets                                                                                                                                                                                    |  |                      | 18,012,825   |                     |  
|Property and equipment,
  net                                                                                                                                                                             |  |                      | 14,726,763   |                     |  
|Other assets                                                                                                                                                                                              |  |                      | 1,571,801    |                     |  
|                                                                                                                                                                                                          |  |                      |              |                     |  
|Total
  assets                                                                                                                                                                                            |  | $                    | 34,311,389   |                     | $
|                                                                                                                                                                                                          |  |                      |              |                     |  
|                                                                                                                                                                                                          |  |                      |              |                     |  
|LIABILITIES
  AND SHAREHOLDERS EQUITY                                                                                                                                                                    | 
|Current liabilities:                                                                                                                                                                                      |  |                      |              |                     |  
|Accounts
  payable                                                                                                                                                                                        |  | $                    | 159,373      |                     | $
|Accrued
  liabilities                                                                                                                                                                                     |  |                      | 1,503,045    |                     |  
|Current
  portion of accrued loss on facility subleases                                                                                                                                                   |  |                      | 515,662      |                     |  
|Current
  portion of capital lease obligations                                                                                                                                                            |  |                      | 14,278       |                     |  
|                                                                                                                                                                                                          |  |                      |              |                     |  
|Total
  current liabilities                                                                                                                                                                               |  |                      | 2,192,358    |                     |  
|Accrued loss on facility
  subleases, net of current portion                                                                                                                                              |  |                      | 2,165,884    |                     |  
|Capital lease obligations,
  net of current portion                                                                                                                                                       |  |                      | 1,880        |                     |  
|Other long-term
  liabilities                                                                                                                                                                             |  |                      | 773,437      |                     |  
|                                                                                                                                                                                                          |  |                      |              |                     |  
|Total
  liabilities                                                                                                                                                                                       |  |                      | 5,133,559    |                     |  
|                                                                                                                                                                                                          |  |                      |              |                     |  
|                                                                                                                                                                                                          |  |                      |              |                     |  
|Commitments and
  contingencies                                                                                                                                                                           |  |                      |              |                     |  
|                                                                                                                                                                                                          |  |                      |              |                     |  
|Shareholders equity:                                                                                                                                                                                     |  |                      |              |                     |  
|Preferred
  stock, $.01 par value, 10,000,000 shares authorized; no shares 
          issued and outstanding at
  September 30, 2004 and December 31, 2003                                                |  |                      | -            |                     |  
|Common
  stock, $.0025 par value, 100,000,000 shares authorized; issued 
          and outstanding shares 
  24,372,261 shares at September 30, 2004;
          24,361,990 shares at December
  31, 2003 |  |                      | 60,931       |                     |  
|Additional
  paid-in capital                                                                                                                                                                              |  |                      | 132,532,066  |                     |  
|Accumulated
  other comprehensive loss                                                                                                                                                                    |  |                      | (71,753      | )                   |  
|Accumulated
  deficit                                                                                                                                                                                     |  |                      | (103,343,414 | )                   |  
|                                                                                                                                                                                                          |  |                      |              |                     |  
|Total
  shareholders equity                                                                                                                                                                              |  |                      | 29,177,830   |                     |  
|                                                                                                                                                                                                          |  |                      |              |                     |  
|Total
  liabilities and shareholders equity                                                                                                                                                              |  | $                    | 34,311,389   |                     | $
|                                                                                                                                                                                                          |  |                      |              |                     |  

The accompanying notes are an integral part of these
statements.

- 2 -

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EDEN BIOSCIENCE CORPORATION AND
SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

|                                                                                                               |  | Three Months Ended September 30, |   | Nine Months Ended September 30, |  
|-------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | - | ------------------------------- | -
|                                                                                                               |  |                                  |   |                                 |  
|                                                                                                               |  | 2004                             |   | 2003                            |  
|                                                                                                               |  |                                  |   |                                 |  
|                                                                                                               |  |                                  |   |                                 |  
|Product sales, net of
  sales allowances                                                                       |  |                                  | $ | 368,383                         |  
|                                                                                                               |  |                                  |   |                                 |  
|Operating expenses:                                                                                            |  |                                  |   |                                 |  
|Cost
  of goods sold                                                                                           |  |                                  |   | 331,436                         |  
|Research
  and development                                                                                     |  |                                  |   | 863,334                         |  
|Selling,
  general and administrative                                                                          |  |                                  |   | 1,170,213                       |  
|                                                                                                               |  |                                  |   |                                 |  
|Total
  operating expenses                                                                                     |  |                                  |   | 2,364,983                       |  
|                                                                                                               |  |                                  |   |                                 |  
|                                                                                                               |  |                                  |   |                                 |  
|Loss
  from operations                                                                                         |  |                                  |   | (1,996,600                      | )
|                                                                                                               |  |                                  |   |                                 |  
|                                                                                                               |  |                                  |   |                                 |  
|Other income (expense):                                                                                        |  |                                  |   |                                 |  
|Interest
  income                                                                                              |  |                                  |   | 59,887                          |  
|Interest
  expense                                                                                             |  |                                  |   | (1,086                          | )
|                                                                                                               |  |                                  |   |                                 |  
|Total
  other income                                                                                           |  |                                  |   | 58,801                          |  
|                                                                                                               |  |                                  |   |                                 |  
|                                                                                                               |  |                                  |   |                                 |  
|Loss
  before income taxes and
               cumulative
  effect of adoption
               of
  SFAS No. 143 |  |                                  |   | (1,937,799                      | )
|Income taxes                                                                                                   |  |                                  |   | -                               |  
|                                                                                                               |  |                                  |   |                                 |  
|Loss
  before cumulative effect of 
               adoption
  of SFAS No. 143                                  |  |                                  |   | (1,937,799                      | )
|Cumulative effect of
  adoption of
     SFAS No. 143                                                           |  |                                  |   | -                               |  
|                                                                                                               |  |                                  |   |                                 |  
|Net
  loss                                                                                                     |  |                                  | $ | (1,937,799                      | )
|                                                                                                               |  |                                  |   |                                 |  
|                                                                                                               |  |                                  |   |                                 |  
|Basic and diluted net loss
  per share:                                                                        |  |                                  |   |                                 |  
|Loss
  before cumulative effect of
          adoption of SFAS No. 143                                          |  |                                  | $ | (0.08                           | )
|Cumulative
  effect of adoption of
          SFAS No. 143                                                      |  |                                  |   | -                               |  
|                                                                                                               |  |                                  |   |                                 |  
|Net
  loss                                                                                                     |  |                                  | $ | (0.08                           | )
|                                                                                                               |  |                                  |   |                                 |  
|                                                                                                               |  |                                  |   |                                 |  
|Weighted average shares
  outstanding
     used to compute net loss per share                                  |  |                                  |   | 24,372,261                      |  
|                                                                                                               |  |                                  |   |                                 |  

The accompanying notes are an integral part of these
statements.

- 3 -

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EDEN BIOSCIENCE CORPORATION AND
SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

|                                                                          |  | Nine Months Ended September 30, |  
|------------------------------------------------------------------------- |  | ------------------------------- | -
|                                                                          |  |                                 |  
|                                                                          |  | 2004                            |  
|                                                                          |  |                                 |  
|Cash flows from operating
  activities:                                   |  |                                 |  
|Net
  loss                                                                |  |                                 | $
|Adjustments
  to reconcile net loss to cash used in operating activities: |  |                                 |  
|Depreciation
  and amortization                                           |  |                                 |  
|Accretion
  expense                                                       |  |                                 |  
|Deferred
  rent payable                                                   |  |                                 |  
|Loss
  on disposal of fixed assets                                        |  |                                 |  
|Loss
  on facility sublease                                               |  |                                 |  
|Cumulative
  effect of adoption of SFAS No. 143                           |  |                                 |  
|Changes
  in assets and liabilities:                                      |  |                                 |  
|Accounts
  receivable                                                     |  |                                 |  
|Inventory                                                                 |  |                                 |  
|Prepaid
  expenses and other assets                                       |  |                                 |  
|Accounts
  payable                                                        |  |                                 |  
|Accrued
  liabilities                                                     |  |                                 |  
|Accrued
  loss on facility subleases                                      |  |                                 |  
|                                                                          |  |                                 |  
|Net
  cash used in operating activities                                   |  |                                 |  
|                                                                          |  |                                 |  
|                                                                          |  |                                 |  
|Cash flows from investing
  activities:                                   |  |                                 |  
|Purchases
  of property and equipment                                     |  |                                 |  
|Proceeds
  from disposal of fixed assets                                  |  |                                 |  
|                                                                          |  |                                 |  
|Net
  cash provided by (used in) investing activities                     |  |                                 |  
|                                                                          |  |                                 |  
|                                                                          |  |                                 |  
|Cash flows from financing
  activities:                                   |  |                                 |  
|Payment
  of capital lease obligations                                    |  |                                 |  
|Proceeds
  from issuance of common stock                                  |  |                                 |  
|                                                                          |  |                                 |  
|Net
  cash financing activities                                           |  |                                 |  
|                                                                          |  |                                 |  
|                                                                          |  |                                 |  
|Effect of foreign currency
  exchange rates on cash and cash equivalents  |  |                                 |  
|                                                                          |  |                                 |  
|                                                                          |  |                                 |  
|Net decrease in cash and
  cash equivalents                               |  |                                 |  
|Cash and cash equivalents
  at beginning of period                        |  |                                 |  
|                                                                          |  |                                 |  
|Cash and cash equivalents
  at end of period                              |  |                                 | $
|                                                                          |  |                                 |  
|                                                                          |  |                                 |  
|Supplemental disclosures:                                                 |  |                                 |  
|Depreciation
  and amortization charges capitalized into inventory        |  |                                 | $
|Cash
  paid for interest                                                  |  |                                 |  

The accompanying notes are an integral part of these
statements.

- 4 -

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EDEN BIOSCIENCE CORPORATION AND
SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

1.     Organization and Summary of
Significant Accounting Policies

Organization and Business

Eden
Bioscience Corporation (Eden Bioscience or the Company) was incorporated in
the State of Washington on July 18, 1994. Eden Bioscience is a plant health
technology company focused on developing, manufacturing and marketing
innovative natural protein-based products for agriculture. The Company began
selling its initial product, Messenger®, in August 2000.

The
Company is subject to a number of risks including, among others:  dependence on a limited number of products
and the development and commercialization of those products, which may not be
successful; the need to develop adequate sales and marketing capabilities to
commercialize the Companys products; reliance on independent distributors and
retailers to sell the Companys products; risks and uncertainties associated
with conducting operations internationally; competition from other companies
with greater financial, technical and marketing resources; and other risks
associated with commercializing a new technology.

Basis of Presentation

The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles for
interim financial information and pursuant to the instructions to Form 10-Q.
Accordingly, they do not include all of the information and notes required by
U.S. generally accepted accounting principles for complete financial statements.
The balance sheet at December 31, 2003 has been derived from the audited
financial statements at that date but does not include all of the information
and notes required by U.S. generally accepted accounting principles for
complete financial statements. These financial statements and notes should be
read in conjunction with the financial statements and notes for the year ended
December 31, 2003 included in the Companys Annual Report on Form 10-K, which
was filed with the Securities and Exchange Commission on March 26, 2004.

In
the opinion of management, the unaudited condensed consolidated financial
statements include all adjustments, consisting only of normal recurring
adjustments, necessary to state fairly the financial information set forth therein.
Results of operations for the three months and nine months ended September 30,
2004 are not necessarily indicative of the results expected for the full fiscal
year or for any future period.

Liquidity

The
Companys operating expenditures have been significant since its inception. The
Company currently anticipates that its operating expenses will significantly
exceed net product sales and that net losses and working capital requirements
will consume a material amount of its cash resources. If net product sales do
not significantly increase in the near term, the Company will have to further
reduce its operating expenses or cease operations. The Companys future capital
requirements will depend on the success of its operations. Management of the
Company believes that the balance of its cash and cash equivalents at September
30, 2004 will be sufficient to meet its anticipated cash needs for net losses,
working capital and capital expenditures for more than the next 12 months,
although there can be no assurance in that regard.

In
the future, the Company may require additional funds to support its working
capital requirements or for other purposes and may seek to raise such
additional funds through public or private equity financing or through other
sources, such as credit facilities. The Company may be unable to obtain
adequate or favorable financing at that time or at all. The sale of additional
equity securities could result in dilution to the Companys shareholders.

Estimates Used in Financial Statement
Preparation

The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the 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.
Examples include depreciable lives of property and equipment; expense accruals;
and provisions for sales allowances, warranty claims, inventory valuation,
asset impairments, losses on facility subleases and bad debts. Such estimates
and assumptions are based on historical experience, where applicable, and other
assumptions. Estimates and assumptions are reviewed periodically and the
effects of revisions are reflected in the consolidated financial statements in
the period they are determined to be necessary. Actual results could differ
from these estimates.

- 5 -

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EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

Property and Equipment

Equipment
and leasehold improvements are stated at historical cost. Improvements and
replacements are capitalized. Maintenance and repairs are expensed when
incurred. The provision for depreciation and amortization is determined using
straight-line, units-of-production and accelerated methods, which allocate
costs over their estimated useful lives of two to 20 years. Equipment leased
under capital leases is depreciated over the shorter of its estimated useful
life or lease term, which is five years. Leasehold improvements are amortized
over the shorter of their estimated useful lives or lease term, which range
between two to ten years.

On
January 1, 2003, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations,
which provides the accounting requirements for retirement obligations associated
with tangible long-lived assets. This statement requires companies to record
the fair value of a liability for an asset retirement obligation in the period
in which it is incurred.

Revenue

The
Company recognizes revenue from product sales, net of sales allowances, when
product is delivered to its distributors or customers and all significant
obligations of the Company have been satisfied, unless acceptance provisions or
other contingencies or arrangements exist. If acceptance provisions or other
contingencies or arrangements exist, revenue, sales allowances and cost of good
sold are deferred and recognized later if such acceptance provisions or other
contingencies or arrangements are satisfied. As part of the analysis of whether
all significant obligations of the Company have been satisfied or situations
where acceptance provisions or other contingencies or arrangements exist, the
Company considers the following elements, among others:  sales terms and arrangements, including
customer payment terms , historical experience and current incentive programs.
Distributors and customers do not have price protection or product-return
rights.

Sales
allowances represent allowances granted to independent distributors for sales
and marketing support, product warehousing and delivery and information
exchange and are estimated based on the terms of the distribution agreements or
other arrangements currently in place. Sales allowances are accrued when the
related product sales are recognized or when services are provided and are paid
in accordance with the terms of the then-current distributor program agreements
or other arrangements. Distributor program agreements expire annually,
generally on December 31. Prior to 2003, sales allowances were paid when the
distributors sold the product and reported the sales data to the Company,
generally on a quarterly basis. Sales allowances related to 2003 sales will be
paid upon submission by distributors of annual sales data. In January 2004, the
Company changed its distributor program to provide for sales allowances based
on marketing support and the total amount of products purchased during the
year. Marketing support and volume rebates are paid throughout the year as
distributors qualify to receive them.

Gross
product sales and sales allowances are as follows:

| |                                                                       |  | Three Months Ended September 30, |   | Nine Months Ended September 30, |  
| | --------------------------------------------------------------------- |  | -------------------------------- | - | ------------------------------- | -
| |                                                                       |  |                                  |   |                                 |  
| |                                                                       |  | 2004                             |   | 2003                            |  
| |                                                                       |  |                                  |   |                                 |  
| | Gross product sales                                                   |  |                                  | $ | 427,120                         |  
| | Sales allowances                                                      |  |                                  |   | (58,737                         | )
| | Elimination of previously
  recorded
     sales allowance liabilities |  |                                  |   | -                               |  
| |                                                                       |  |                                  |   |                                 |  
| | Product
  sales, net of sales allowances                              |  |                                  | $ | 368,383                         |  
| |                                                                       |  |                                  |   |                                 |  

Net
product sales for the nine months ended September 30, 2004 and 2003 include the
reduction by $95,237 and $126,301, respectively, of sales allowance liabilities
recognized in prior quarters that will not be paid because of changes in
distributor programs implemented in 2003 and actual amounts earned by
distributors being less than amounts previously estimated.

- 6 -

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EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

In
February 2004, the Company received approval to sell Messenger in Spain. The
Company initiated marketing activities in March, but the approval was not
received in time to meet initial sales activity. In order to ensure that an
adequate supply of Messenger was quickly disbursed in the new distribution
channel and to limit the amount of working capital required by new distributors
at this early stage of introduction, the Company granted flexible and/or
extended payment terms to distributors in this new market. Because of this
combination of factors, revenues from product deliveries are deferred and
recognized when payment is received. The Company recognized net revenue of
$226,000 and $316,000 from these deliveries when payment was received in the
quarter and nine months ended September 30, 2004, respectively. Gross revenues
of $159,000 and cost of goods sold of $73,000 were deferred at September 30, 2004
and will be recognized when payment is received.

The
Company provides an allowance for warranty claims based on historical
experience and expectations. Shipping and handling costs related to product
sales that are paid by the Company are included in cost of goods sold.

Sales Incentives

The
Company sometimes offers sales incentives, often in the form of free product,
to distributors and other customers. Costs associated with such incentives are
recognized as costs of sales in the later of the period in which (a) the
associated revenue is recognized by the Company or (b) the sales incentive is
offered to the customer.

In
September 2003, with the cooperation of its retailers, the Company instituted a
buy one, get one free promotion at the grower level that ran through the end
of 2003. Near the end of 2003, the Company announced a reduction of
approximately 50% in the price of Messenger and determined that Messenger® STS,
an improved formulation of Messenger introduced in January 2004, would sell for
approximately the same price as Messenger. At the same time, the Company
announced to distributors that it planned to send them additional products at
no charge in order to reduce the average cost of their existing inventories of
Messenger. In the first nine months of 2004, the Company delivered
approximately 400,000 ounces of Messenger STS and it estimates that
approximately 74,000 ounces of products remain to be given to distributors.
This has substantially increased channel inventory and negatively affected the
Companys sales. The Company does not expect distributors that hold significant
inventories of its products to place additional orders until their current
inventories are reduced.

Stock Compensation

The
Company has elected to apply the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure, an
Amendment of SFAS No. 123. Accordingly, the Company accounts for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations. The following table illustrates the effect on net
loss and loss per share as if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based compensation.

| |                                                                                                   |  | Three Months Ended September 30, |   | Nine Months Ended September 30, |  
| | ------------------------------------------------------------------------------------------------- |  | -------------------------------- | - | ------------------------------- | -
| |                                                                                                   |  |                                  |   |                                 |  
| |                                                                                                   |  | 2004                             |   | 2003                            |  
| |                                                                                                   |  |                                  |   |                                 |  
| | Net loss, as reported                                                                             |  |                                  | $ | (1,937,799                      | )
| | Deduct: Total stock-based
  employee
     compensation expense under fair
     value based method |  |                                  |   | (225,264                        | )
| |                                                                                                   |  |                                  |   |                                 |  
| | Pro forma net loss                                                                                |  |                                  | $ | (2,163,063                      | )
| |                                                                                                   |  |                                  |   |                                 |  
| |                                                                                                   |  |                                  |   |                                 |  
| | Loss per share:                                                                                   |  |                                  |   |                                 |  
| | Basic
  and diluted  as reported                                                                 |  |                                  | $ | (0.08                           | )
| |                                                                                                   |  |                                  |   |                                 |  
| | Basic
  and diluted  pro forma                                                                   |  |                                  | $ | (0.09                           | )
| |                                                                                                   |  |                                  |   |                                 |  

- 7 -

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EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

Comprehensive Loss

The
following table summarizes the Companys comprehensive loss for the three
months and nine months ended September 30, 2004 and 2003:

| |                                     |  | Three Months Ended September 30, |   | Nine Months Ended September 30, |  
| | ----------------------------------- |  | -------------------------------- | - | ------------------------------- | -
| |                                     |  |                                  |   |                                 |  
| |                                     |  | 2004                             |   | 2003                            |  
| |                                     |  |                                  |   |                                 |  
| | Net loss                            |  |                                  | $ | (1,937,799                      | )
| | Cumulative translation
  adjustment |  |                                  |   | 4,387                           |  
| |                                     |  |                                  |   |                                 |  
| | Total
  comprehensive loss          |  |                                  | $ | (1,933,412                      | )
| |                                     |  |                                  |   |                                 |  

Net Loss Per Share

Basic
net loss per share is calculated as the net loss divided by the weighted
average number of common shares outstanding during the period. Diluted net loss
per share is calculated as the net loss divided by the sum of the weighted
average number of common shares outstanding during the period plus the
additional common shares that would have been issued had all dilutive warrants
and options been exercised, less shares that would be repurchased with the
proceeds from such exercises using the treasury stock method. The effect of
including outstanding options and warrants is antidilutive for all periods
presented. Therefore, options and warrants have been excluded from the
calculation of diluted net loss per share and consist of the following:

| |                                     |  | As of
  September 30, | 
| | ----------------------------------- |  | --------------------- | 
| |                                     |  |                       | 
| |                                     |  | 2004                  | 
| |                                     |  |                       | 
| | Options to purchase common
  stock  |  | 2,476,751             | 
| | Warrants to purchase
  common stock |  | 200,000               | 

Reclassifications

Certain
reclassifications have been made in the condensed consolidated financial
statements of prior periods to conform to classifications used in the current
periods.

2.     Stock Options and Warrants

The
following table summarizes stock option activity since December 31, 2003:

| |                                 |  | Number of
  Options |          
| | ------------------------------- |  | ------------------- | ---------
| |                                 |  |                     |          
| | Balance at December 31,
  2003  |  |                     | 2,548,941
| | Options
  granted               |  |                     | 150,000  
| | Options
  cancelled             |  |                     | (222,190 
| |                                 |  |                     |          
| | Balance at September 30,
  2004 |  |                     | 2,476,751
| |                                 |  |                     |          

As
of September 30, 2004, the Company had warrants outstanding to purchase 200,000
shares of its common stock at $15.00 per share. The warrants are currently
exercisable and expire in August 2005. No warrants to purchase shares of the
Companys common stock were issued during the nine-month period ended  September 30, 2004.

3.Inventory

Inventory,
at average cost, consists of the following:

| |                                               |  | September 30,2004 |   | December 31,2003 | 
| | --------------------------------------------- |  | ----------------- | - | ---------------- | 
| |                                               |  |                   |   |                  | 
| | Raw materials                                 |  |                   | $ | 624,562          | 
| | Bulk manufactured goods
  and work in process |  |                   |   | 1,916,641        | 
| | Finished goods                                |  |                   |   | 825,190          | 
| |                                               |  |                   |   |                  | 
| | Total inventory                               |  |                   | $ | 3,366,393        | 
| |                                               |  |                   |   |                  | 

- 8 -

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EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

4.     Property and Equipment

Property
and equipment, at cost, consists of the following:

| |                                                  |  | September 30,2004 |   | December 31,2003 |  
| | ------------------------------------------------ |  | ----------------- | - | ---------------- | -
| |                                                  |  |                   |   |                  |  
| | Equipment                                        |  |                   | $ | 12,762,833       |  
| | Equipment under capital leases                   |  |                   |   | 66,645           |  
| | Leasehold improvements                           |  |                   |   | 11,578,034       |  
| |                                                  |  |                   |   |                  |  
| | Total
  property and equipment                   |  |                   |   | 24,407,512       |  
| | Less accumulated
  depreciation and amortization |  |                   |   | (9,680,749       | )
| |                                                  |  |                   |   |                  |  
| | Net
  property and equipment                     |  |                   | $ | 14,726,763       |  
| |                                                  |  |                   |   |                  |  

The
Company recorded depreciation and amortization of $528,288 and $495,966 for the
three months ended September 30, 2004 and 2003, respectively, and $1,573,425
and $1,656,035 for the nine months ended September 30, 2004 and 2003,
respectively.

The
Company periodically reviews the carrying values of our property and equipment
to determine whether such assets have been impaired. An impairment loss must be
recorded pursuant to SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, when the undiscounted net cash flows to be realized from
the use of such assets are less than their carrying value. The determination of
undiscounted net cash flows requires the Company to make many estimates,
projections and assumptions, including the lives of the assets, future sales
and expense levels, additional capital investments or expenditures necessary to
maintain the assets, industry market trends and general and industry economic
conditions. Based upon the analysis of net cash flows expected to be realized
from the remaining investments in property and equipment, no impairment loss
was recorded in any of the periods presented. The critical estimates in the
analysis are the Companys ability to significantly increase sales over the
next five years while controlling operating expenses at current levels over the
next four years. If net product sales do not significantly increase in the near
term or if expenses significantly increase over the current level, a
significant impairment loss may need to be recorded. Another critical
assumption is that the Company will continue its current facility leases. If
the Company does not continue its leases, it may incur a significant impairment
loss on leasehold improvements and equipment at these facilities and other
significant losses. Changes in the factors above or other factors could result
in significantly different estimates and a significant impairment charge.

5.     Accrued Liabilities

Accrued
liabilities consist of the following:

| |                                                        |  | September 30,
  2004 |   | December 31,
  2003 | 
| | ------------------------------------------------------ |  | -------------------- | - | ------------------- | 
| |                                                        |  |                      |   |                     | 
| | Compensation and benefits                              |  |                      | $ | 300,534             | 
| | Research and development
  field trials                |  |                      |   | 287,115             | 
| | Facility costs                                         |  |                      |   | 278,505             | 
| | Warranty                                               |  |                      |   | 228,021             | 
| | Patents                                                |  |                      |   | 118,772             | 
| | Deferred revenue, net of
  deferred cost of goods sold |  |                      |   | 102,342             | 
| | Sales allowances                                       |  |                      |   | 75,507              | 
| | Sales incentives                                       |  |                      |   | 62,843              | 
| | Other                                                  |  |                      |   | 49,406              | 
| |                                                        |  |                      |   |                     | 
| | Total
  accrued liabilities                            |  |                      | $ | 1,503,045           | 
| |                                                        |  |                      |   |                     | 

6.     Warranty Liability

The
warranty accrual percentage, which has ranged between zero and five percent, is
reviewed periodically and adjusted as necessary, based on historical
experience, the results of product quality testing and future expectations.
There were no changes to the Companys warranty liability during the nine
months ended September 30, 2004.

7.     Leases

In
April 2003, the Company subleased approximately 7,300 square feet of office
space to another company under a five year sublease agreement. The subtenant
was not in compliance with the sublease agreement at September 30, 2004 and the
agreement was terminated in October 2004. As a result, the Company recorded an
additional loss of $202,007 at September 30, 2004 based upon an estimate of the
time needed to re-sublease the space and expected future rents to be collected.

- 9 -

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EDEN BIOSCIENCE CORPORATION AND
SUBSIDIARIES

NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.     Major
Customers

Net
product sales to the following distributors accounted for more than ten percent
of net revenues for the periods indicated:

| |                           |  | Three Months Ended September 30, |   | Nine Months Ended September 30, | 
| | ------------------------- |  | -------------------------------- | - | ------------------------------- | 
| |                           |  |                                  |   |                                 | 
| |                           |  | 2004                             |   | 2003                            | 
| |                           |  |                                  |   |                                 | 
| | Customer A                |  |                                  | $ | 114,600                         | 
| | Customer B                |  |                                  |   | 66,500                          | 
| | Customer C                |  |                                  |   | 61,600                          | 
| | Customer D                |  |                                  |   | 41,700                          | 
| | Customer E                |  |                                  |   | -                               | 
| | Customer F                |  |                                  |   | -                               | 
| | Customer G                |  |                                  |   | -                               | 
| |                           |  |                                  |   |                                 | 
| | ** Less than ten percent. |  |                                  |   |                                 | 

9.     Asset
Retirement Obligation

As
of January 1, 2003, the Company adopted SFAS No. 143, Accounting for Asset
Retirement Obligations, by recording an asset and liability in the amount of
$129,093 related to asset retirement obligations the Company has at the
expiration or earlier termination of its manufacturing facility lease. The
lease expires on December 31, 2006, at which time the Company may extend the
lease for three additional years. The Company has not restricted any assets for
purposes of settling this asset retirement obligation. As of January 1, 2003,
the Company also recorded a $63,508 charge for the cumulative effect of
adopting SFAS No. 143, which consists of cumulative accretion of $34,821 and
depreciation of $28,687 related to periods prior to January 1, 2003. Following
is a reconciliation of the beginning and ending aggregate carrying value of the
asset retirement obligation liability, which is included in other long-term
liabilities:

|Balance
  at December 31, 2003                                   |  | $ | 185,070 | 
|---------------------------------------------------------------- |  | - | ------- | 
|Accretion
  expense for the nine months ended September 30, 2004 |  |   | 18,479  | 
|                                                                 |  |   |         | 
|Balance at September 30, 2004                                    |  | $ | 203,549 | 
|                                                                 |  |   |         | 

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

This
discussion and analysis should be read in conjunction with our unaudited
condensed consolidated financial statements and accompanying notes thereto
included in this report and with our 2003 audited financial statements and
notes thereto included in our Annual Report on Form 10-K, which was filed with
the Securities and Exchange Commission on March 26, 2004.

This
Quarterly Report on Form 10-Q contains forward-looking statements that involve
risks and uncertainties, such as statements of our plans, objectives,
expectations and intentions. We use words such as anticipate, believe,
expect, future and intend, the negative of these terms and similar
expressions to identify forward-looking statements. However, these words are
not the exclusive means of identifying such statements. In addition, any
statements that refer to expectations, projections or other characterizations
of future events or circumstances are forward-looking statements. Our actual results
could differ materially from those anticipated in these forward-looking
statements for many reasons, including the factors described below and under
the caption Factors That May Affect Our Business, Future Operating Results and
Financial Condition set forth at the end of this Item 2. You should not place
undue reliance on these forward-looking statements, which apply only as of the
date of this report. The cautionary statements made in this report apply to all
forward-looking statements wherever they appear in this report. We undertake no
obligation to publicly release any revisions to these forward-looking
statements that may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.

Overview

We
are a plant health technology company focused on developing, manufacturing and
marketing innovative products for agriculture using our natural protein-based
harpin technology. We have a fundamentally new, patented and proprietary
technology that we believe enhances plant health and improves overall crop
production and quality. We believe our technology provides growers with
valuable benefits by increasing crop yields, quality and shelf-life; by
improving the plants ability to suppress certain diseases and other
environmental stresses; and by enhancing the uptake of nutrients.

- 10 -

---

---

We
have incurred significant operating losses since inception. At September 30,
2004, we had an accumulated deficit of $103.3 million. We incurred net losses
of $6.3 million and $8.7 million for the nine months ended September 30, 2004
and 2003, respectively, and annual losses of $11.2 million in 2003, $23.5
million in 2002 and $23.7 million in 2001. We expect to incur significant
additional net losses as we proceed with the commercialization of our current
products and the development of new products and technologies. These expected
net losses and working capital requirements will consume a material amount of
our cash resources. If net product sales do not significantly increase in the
near term, we will have to further reduce our operating expenses or cease
operations.

Results
of Operations

Three
months and nine months ended September 30, 2004 and 2003

Revenues

We
generated our first product sales revenue in August 2000. Product sales revenue
to date has resulted primarily from sales of Messenger, our initial product,
and Messenger STS, an improved formulation of Messenger introduced in January
2004, as well as employ, MightyPlant and other related products (hereafter
referred to collectively as Messenger Products) primarily to distributors in
the United States and, recently, in Europe. Revenues from product sales are
recognized when (a) the product is delivered to independent distributors, (b)
we have satisfied all of our significant obligations and (c) any acceptance
provisions or other contingencies or arrangements have been satisfied. As part
of the analysis of whether all of our significant obligations have been
satisfied or situations where acceptance provisions or other contingencies or
arrangements exist, we consider the following elements, among others:  sales terms and arrangements, including
customer payment terms, historical experience and current sales incentive
programs. Our distributor contracts provide no price protection or
product-return rights. Product sales revenue is reported net of applicable
sales allowances, as follows:

| |                                                                        |  | Three Months Ended September 30 , |   | Nine Months Ended September 30 , |  
| | ---------------------------------------------------------------------- |  | --------------------------------- | - | -------------------------------- | -
| |                                                                        |  |                                   |   |                                  |  
| |                                                                        |  | 2004                              |   | 2003                             |  
| |                                                                        |  |                                   |   |                                  |  
| | Gross product sales                                                    |  |                                   | $ | 427,120                          |  
| | Sales allowances                                                       |  |                                   |   | (58,737                          | )
| | Elimination of previously recorded 
       sales allowance liabilities |  |                                   |   | -                                |  
| |                                                                        |  |                                   |   |                                  |  
| | Product sales, net of sales allowances                                 |  |                                   | $ | 368,383                          |  
| |                                                                        |  |                                   |   |                                  |  

Gross
product sales revenue for the third quarter of 2004 was $427,000, an increase
of $322,000, (307%) from $105,000 in the same quarter of 2003. The increase in
the third quarter was primarily the result of recognizing $226,000 of product
sales in Spain, as discussed in the next paragraph. Gross product sales for the
first nine months of 2004 totaled $907,000, a decrease of $528,000 (37%) from
$1.4 million for the same period of 2003. Sales in the first nine months of
2004 were made primarily to 41 distributors and customers, three of which
accounted for an aggregate of 44% of net product sales revenue. Sales in the
first nine months of 2003 were made primarily to 30 distributors, three of
which accounted for an aggregate of 48% of net product sales revenue. Sales in
the United States in the three and nine month periods ended September 30, 2004
and 2003 were significantly lower than expected and were negatively impacted by
high levels of inventory in the channel, free product provided under the price
reduction program and the continuing challenges of commercializing a
fundamentally new technology and products. We expect that high levels of
inventory in the channel, free product to be provided under the price reduction
program and the difficult economic conditions in certain sectors of agriculture
will continue to adversely impact our commercialization efforts and sales of
Messenger Products in the United States.

Net
product sales revenue from sales to foreign customers totaled $226,000 in the
three months ended September 30, 2004 and $316,000 and $28,000 in the nine
months ended September 30, 2004 and 2003, respectively. There were no sales to
foreign customers in the three months ended September 30, 2003. Foreign sales
were made primarily to distributors in Spain in 2004 and Central America in
2003. In February 2004, we received approval to sell Messenger in Spain. We
initiated marketing activities in March, but the approval was not received in
time to meet initial sales activity. In order to ensure that an adequate supply
of Messenger was quickly disbursed in the new distribution channel and to limit
the amount of working capital required by our new distributors at this early
stage of introduction, we granted flexible and/or extended payment terms to
distributors in this new market. Because of this combination of factors,
revenues from these product deliveries were deferred and are recognized when
payment is received. The Company recognized net revenue totaling $226,000 and
$316,000 in the three months and nine months ended September 30, 2004,
respectively, from these deliveries when payment was received. Gross revenue of
$159,000 and cost of goods sold of $73,000 have been deferred at September 30,
2004 and will be recognized when payment is received.

- 11 -

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---

Gross
sales of Messenger to consumers in the home and garden market in the United
States totaled $28,000 and $13,000 in the three months ended September 30, 2004
and 2003, respectively, and $181,000 and $50,000 in the nine months ended
September 30, 2004 and 2003, respectively. While we expect sales of our home
and garden products to increase as we continue to pursue this market, we do not
expect revenues from this market to be significant in 2004.

In
the first nine months of 2004, we recognized revenue on the shipment of
approximately 283,000 ounces of Messenger and Messenger STS to distributors,
compared to approximately 377,000 ounces in the first nine months of 2003, a
decrease of approximately 94,000 ounces (25%). Based on information received
from distributors, we estimate that distributors sold approximately 730,000
ounces to growers in the first nine months of 2004, an increase of
approximately 47% from approximately 497,000 ounces in the first nine months of
2003. Based on information received from distributors, we estimate that
Messenger and Messenger STS inventory held by distributors at September 30,
2004 was approximately 456,000 ounces in the aggregate.

In
December 2003, we announced a reduction of approximately 50% in the price of
Messenger and determined that Messenger STS would sell for approximately the
same price as Messenger. We also announced to distributors that we planned to
send them Messenger Products at no charge in order to reduce the average cost
of their existing inventories of Messenger. In the first nine months of 2004,
we delivered approximately 400,000 ounces of free Messenger STS and we estimate
that approximately 74,000 ounces of Messenger Products remain to be given to
distributors. This free product will substantially increase channel inventory
and negatively affect our sales to distributors in the immediate term but will,
we believe, improve our growth rate and sales to distributors over the medium
term. We do not expect distributors that hold significant inventories of
Messenger STS to place additional orders until their current inventories are
reduced.

Due
to the growing seasons of our targeted crops, we expect grower usage of
Messenger Products to be highly seasonal. Based on the recommended application
timing in our targeted crops and information received from our distributors, we
expect the second quarter of each year to be the most significant period of use
in the United States. The growing seasons of targeted crops in other regions
are different than in the United States. For example, in Spain, we expect
grower usage to be most significant in the first and fourth quarters. Our
product sales to distributors are also expected to be seasonal. However, actual
timing of orders received from distributors will depend on many factors,
including the amount of Messenger Products in distributors inventories.

Sales Allowances

Sales
allowances represent allowances granted to independent distributors for sales
and marketing support, product warehousing and delivery and information
exchange and are estimated based on the terms of the distribution agreements or
other arrangements. Sales allowances are estimated and accrued when the related
product sales revenue is recognized or services are provided and are paid in
accordance with the terms of the then-current distributor program agreement or
other arrangements. Distributor program agreements expire annually, generally
on December 31. Prior to 2003, sales allowances were generally based on a
percentage of sales and were required to be paid when the distributors sold the
product and reported the sales data to us. We expect that sales allowances
related to 2003 sales will be paid upon submission by distributors of annual sales
data. In January 2004, we changed our distributor program to provide for sales
allowances based on marketing support and the total amount of products
purchased during the year. Marketing support and volume rebates are paid
throughout the year as distributors qualify to receive them.

Sales
allowances during the three months ended September 30, 2004 totaled $59,000
(14% of gross product sales) compared to $3,000 (3% of gross product sales) in
the comparable period of 2003. Sales allowances for the nine months ended
September 30, 2004 and 2003 include the reduction by $95,237 and $126,301,
respectively, of sales allowance liabilities recognized in prior quarters that
will not be paid because of changes in distribution programs implemented in 2003
and actual amounts earned by distributors being less than amounts previously
estimated. Excluding these sales allowance reductions, sales allowances during
the nine months ended September 30, 2004 totaled $131,000 (14% of gross product
sales) compared to $64,000 (4% of gross product sales) in the comparable period
of 2003. The increase in sales allowances is the result of marketing support
programs in Spain.

- 12 -

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Cost of Goods Sold

Cost
of goods sold consists primarily of the cost of Messenger Products sold to
distributors, shipping and handling costs, idle capacity charges and the cost
of Messenger used for promotional purposes. Cost of goods sold was $331,000 in
the third quarter of 2004, compared to $308,000 in the third quarter of 2003. Cost
of goods sold for the first nine months of 2004 and 2003 was $1.5 million. The
increase in the third quarter was due primarily to higher sales in the period
offset by lower idle capacity charges due to the resumption of limited
manufacturing operations early in 2004 and by a reduction in the estimated
warranty liability recorded in the third quarter of 2003. We expect to continue
limited manufacturing operations into 2005 and to incur idle capacity charges.

Research and Development Expenses

Research
and development expenses consist primarily of personnel, facilities, field
trials, regulatory compliance and patents. Research and development expenses
decreased $120,000 (12%) from $983,000 in the third quarter of 2003 to $863,000
in the same quarter of this year. For the first nine months of 2004, research
and development costs were $2.3 million, a decrease of $1.7 million (43%) from
$4.0 million in the same period last year. These decreases were primarily due
to staff reductions announced in May 2003 and lower spending on patents and
facilities in 2004.

Selling, General and Administrative
Expenses

Selling,
general and administrative expenses consist of payroll and related expenses for
sales and marketing, executive and administrative personnel; advertising,
marketing and professional fees; and other corporate expenses. Selling, general
and administrative expenses decreased $200,000 (14%) from $1.4 million in the
third quarter of 2003 to $1.2 million in the same quarter of 2004. For the first
nine months of 2004, selling, general and administrative costs were $3.6
million, a decrease of $1.3 million (27%) from $4.9 million in the same period
last year. The majority of these decreases occurred in the United States and
resulted primarily from reductions in personnel and facilities costs.

In
April 2003, the Company subleased approximately 7,300 square feet of office
space to another company under a five year sublease agreement. Due to declines
in the real estate market, the rent we pay on the subleased space exceeded the
initial rent to be collected under the sublease and we recorded a loss of
$213,000. Due to the subtenants financial difficulties, the subtenant later
reduced the rental payment and an additional loss of $159,000 was recorded in
the quarter ended September 30, 2003. The subtenant vacated the space in
October 2004. As a result, the Company recorded an additional loss of $202,000
at September 30, 2004 based upon an estimate of the time needed to re-sublease
the space and expected future rents to be collected.

Interest Income

Interest
income consists of earnings on our cash and cash equivalents. Interest income
decreased $75,000 (32%) from $234,000 in the first nine months of 2003 to
$159,000 in the same period of this year. This decrease was due primarily to
significantly lower average cash balances available for investment in the
current year.

Income Taxes

We
have generated a net loss from operations in each period since we began doing
business. As of December 31, 2003, we had accumulated approximately $91.6 million of U.S. net
operating loss carryforwards for federal income tax purposes. These
carryforwards expire between 2009 and 2023. Our foreign tax net operating loss
carryforwards totaled $7.9 million at December 31, 2003 and expire between 2006
and 2008. We have provided a valuation allowance against our net deferred tax
assets because of the significant uncertainty surrounding our ability to
realize them. The annual use of these net operating loss carryforwards may be
limited in the event of a cumulative change in ownership of more than 50%.

Liquidity
and Capital Resources

Our
operating expenditures have been significant since our inception. We currently
anticipate that our operating expenses will significantly exceed net product
sales and that net losses and working capital requirements will consume a
material amount of our cash resources. If net product sales do not
significantly increase in the near term, we will have to further reduce our
operating expenses and/or raise additional funds to support operations. Our
future capital requirements will depend on the success of our operations. We
believe that the balance of our cash and cash equivalents at September 30, 2004
will be sufficient to meet our anticipated cash needs for net losses, working
capital and capital expenditures for more than the next 12 months, although
there can be no assurance in that regard.

- 13 -

---

---

In
the future, we may require additional funds to support our working capital
requirements or for other purposes and may seek to raise such additional funds
through public or private equity financing or through other sources, such as
credit facilities. We may be unable to obtain adequate or favorable financing
at that time or at all. In this regard, we received in August 2004 a
delisting warning letter from the Nasdaq Stock Market notifying us that the
closing price per share for our common stock was below the $1.00 minimum bid
price for 30 consecutive trading days and that, as a result, we no longer meet
Nasdaqs continued listing criteria. Nasdaq provided us with 180 calendar days,
or until January 26, 2005, to regain compliance.  To regain compliance with the minimum bid price requirement, the
closing bid price of our common stock must remain above $1.00 for a minimum of
ten consecutive trading days.  If we do
not regain compliance by January 26, 2005, which, as of the date of this
report, we have been unable to do, and are not eligible for an additional
compliance period, our common stock will be delisted from The Nasdaq National
Market. 
Nasdaq delisting could make it more difficult for us to raise capital.
The sale of additional equity securities could result in dilution to our
shareholders.

At
September 30, 2004, our cash and cash equivalents totaled $14.0 million, a
decrease of $5.8 million from the balance of $19.8 million at December 31,
2003. Prior to October 2000, we financed our operations primarily through the
private sale of our equity securities, resulting in net proceeds of
approximately $36.5 million through September 30, 2000. In October 2000,
we received approximately $91.5 million in net proceeds from the initial public
offering of 6,670,000 shares of our common stock. To a lesser extent, we have
financed our equipment purchases through lease financings.

Net
cash used in operations decreased $3.0 million (34%) from $8.8 million in the
first nine months of 2003 to $5.8 million in the same period of 2004. Net cash
used in operations in the first nine months of 2004 resulted primarily from a
net loss of $6.3 million, which includes depreciation and amortization expense
of $1.2 million, and fluctuations in various asset and liability balances
totaling $943,000. We expect that net cash used in operations will continue to
be significant.

We
conduct our operations in three primary functional currencies:  the U.S. dollar, the European Union euro and
the Mexican peso. Historically, neither fluctuations in foreign exchange rates
nor changes in foreign economic conditions have had a significant impact on our
financial condition or results of operations. We currently do not hedge our
foreign currency exposures and are therefore subject to the risk of exchange
rate fluctuations. We may invoice our international customers in U.S. dollars,
euros and Mexican pesos, as the case may be. We are exposed to foreign exchange
rate fluctuations as the financial results of foreign subsidiaries are
translated into U.S. dollars in consolidation. Foreign exchange rate
fluctuations did not have a material impact on our financial results in the
three-month or nine-month periods ended September 30, 2004 or 2003.

The
following are our contractual obligations as of September 30, 2004:

| |                                      |  | Payments Due
  by Period |       
| | ------------------------------------ |  | ------------------------ | ------
| |                                      |  |                          |       
| |                                      |  | (in
  thousands)         |       
| |                                      |  | Total                    |       
| |                                      |  |                          |       
| | Capital leases, including
  interest |  | $                        | 17    
| | Operating leases                     |  |                          | 10,282
| |                                      |  |                          |       
| | Total
  contractual cash obligations |  | $                        | 10,299
| |                                      |  |                          |       

Critical
Accounting Policies, Estimates and Judgments

Our
critical accounting policies are more fully described in Note 1 to our
consolidated financial statements included in our most recent Annual Report on
Form 10-K, which was filed with the Securities and Exchange Commission on March
26, 2004. Certain of our accounting policies require the application of
significant judgment by management in selecting the appropriate assumptions for
calculating financial estimates. By their nature, these judgments are subject
to an inherent degree of uncertainty. These judgments are based on historical
experience, terms of existing contracts, commonly accepted industry practices,
information provided by our customers and other assumptions that we believe are
reasonable under the circumstances. Our estimates and assumptions are reviewed
periodically and the effects of revisions are reflected in the consolidated
financial statements in the period in which they are determined to be
necessary. Actual results may differ from these estimates under different
assumptions or conditions. Our critical accounting policies and estimates
include:

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Revenue Recognition

We
sell the majority of our products to independent, third-party distributors. Our
contracts with those distributors provide no price protection or product-return
rights. We recognize revenue from product sales, net of sales allowances, when
product is delivered to our distributors and all of our significant obligations
have been satisfied, unless acceptance provisions or other contingencies or
arrangements exist. If acceptance provisions or contingencies exist, revenue is
recognized after such provisions or contingencies have been satisfied. As part
of the analysis of whether all of our significant obligations have been
satisfied or situations where acceptance provisions or other contingencies or
arrangements exist, we consider the following elements, among others:  sales terms and arrangements, including
customer payment terms, historical experience and current incentive programs.

Sales
allowances represent allowances granted to independent distributors for sales
and marketing support, product warehousing and delivery and information
exchange and are based on the terms of the distribution agreements or other
arrangements. Sales allowances are estimated and accrued when the related
product sales are recognized or when services are provided and are paid in
accordance with the terms of the then-current distributor program agreements or
other arrangements. Distributor program agreements expire annually, generally
on December 31. Prior to 2003, sales allowances were paid when the distributors
sold the product and reported the sales data to us, generally on a quarterly
basis. We expect that sales allowances related to 2003 sales will be paid upon
submission by distributors of annual sales data. In January 2004, we changed
our distributor program to provide for sales allowances based on marketing
support and the total amount of products purchased during the year. Marketing
support and volume rebates are paid throughout the year as distributors qualify
to receive them.

We
also record, at the time revenue is recognized, a liability for warranty claims
based on a percentage of sales. The warranty accrual percentage, which has
ranged between zero and five percent, and warranty liability are reviewed
periodically and adjusted as necessary, based on historical experience, the
results of product quality testing and future expectations. Changes in the
factors above or other factors could results in a significant charge.

Accounts Receivable and Allowance for
Doubtful Accounts

Accounts
receivable balances are reported net of customer-specific related sales
allowances. In determining the adequacy of the allowance for doubtful accounts,
we consider a number of factors, including the age of outstanding invoices,
customer payment trends, the financial condition of our customers, historical
bad debts and current economic trends. Based upon our analysis of outstanding
net accounts receivable at September 30, 2004, no allowance for doubtful
accounts was recorded. Changes in the factors above or other factors could
result in a significant charge.

Inventory

Our
inventory is valued at the lower of cost or market on an average cost basis. We
regularly review inventory balances to determine whether a write-down is
necessary. We consider various factors in making this determination, including
recent sales history and predicted trends, industry market conditions, general
economic conditions, the age of our inventory and recent quality control data.
Changes in the factors above or other factors could result in significant
additional inventory cost reductions and write-offs.

Valuation of Property and Equipment

We
periodically review the carrying values of our property and equipment to
determine whether such assets have been impaired. An impairment loss must be
recorded pursuant to SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, when the undiscounted net cash flows to be realized from
the use of such assets are less than their carrying value. The determination of
undiscounted net cash flows requires us to make many estimates, projections and
assumptions, including the lives of the assets, future sales and expense
levels, additional capital investments or expenditures necessary to maintain
the assets, industry market trends and general and industry economic
conditions. During 2002, we wrote off approximately $1.0 million of
leasehold improvements and equipment directly related to approximately 34,300
square feet of laboratory and office space subleased to another company. Based
upon our analysis of net cash flows expected to be realized from our remaining
investments in property and equipment, no additional impairment loss was
recorded. The critical estimates in the analysis are our ability to
significantly increase sales over the next five years while controlling
operating expenses at current levels over the next four years. If net product
sales do not significantly increase in the near term or if expenses
significantly increase over the current level, a significant impairment loss
may need to be recorded. Another critical assumption is that we will continue
our current facility leases. If we do not continue our leases, we may incur a
significant impairment loss on leasehold improvements and equipment at these
facilities and other significant losses. Changes in the factors above or other
factors could result in significantly different cash flow estimates and a
significant impairment charge.

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Loss on Facility Subleases

As
of September 30, 2004, we subleased approximately 41,600 square feet of
laboratory and office space to other companies. One subtenant vacated
approximately 7,300 square feet of office space in October 2004. As a result,
the Company recorded an additional loss of $202,000 at September 30, 2004. In
determining the loss on these facility subleases, we considered a number of
factors, including the financial condition of the subtenants, subtenants
investments in improvements, amounts of security deposits, estimated time
needed to sublease space and estimated rents to be collected. Based on our
analysis, we estimate that rents will be collected and that one subtenant will
exercise a three-year extension option. Changes in the factors above or other
factors could result in a significant increase in the loss.

Factors That May Affect Our Business, Future Operating Results and
Financial Condition

You
should carefully consider the risks described below, together with all of the
other information included in this Quarterly Report on Form 10-Q. The risks and
uncertainties described below are not the only ones facing our company. If any
of the following risks actually occurs, our business, financial condition or
operating results could be harmed.

We have a history of
losses since inception, we expect to continue to incur losses and we may not
achieve or sustain profitability.

We
have incurred operating losses in each quarter since inception and we expect to
continue to incur further operating losses for the foreseeable future. From our
inception in July 1994 to September 30, 2004, we have accumulated a deficit of
$103.3 million. For the years ended December 31, 2003, 2002, 2001 and 2000, we
had net losses of $11.2 million, $23.5 million, $23.7 million and $15.7
million, respectively. To date, our revenues have been limited. For example,
there were no sales of Messenger in the fourth quarter of 2001 and annual net
sales decreased from $3.5 million in 2001 to $1.9 million in 2002 and $1.8
million in 2003. Further, we expect domestic sales in 2004 to be minor. We
expect our future revenues to come primarily from the sale of Messenger,
Messenger STS, employ, MightyPlant, ProAct, N-Hibit and other products and
these sales are highly uncertain.

We
expect to continue to devote substantial resources to funding sales and
marketing activities in the United States and foreign countries, maintaining
and operating our manufacturing facility and funding our research and development
activities. As a result, we will need to generate significant revenues to
achieve and maintain profitability. We may never generate profits, and if we do
become profitable, we may be unable to sustain or increase profitability on a
quarterly or annual basis.

If
net product sales do not significantly increase in the near term, we will have
to reduce our operating expenses or cease operations. Our future capital
requirements will depend on the success of our operations. We believe that the
balance of our cash and cash equivalents at September 30, 2004 will be
sufficient to meet our anticipated cash needs for net losses, working capital
and capital expenditures for more than the next 12 months, although there can
be no assurance in this regard.

We may have to reduce
or cease operations if we are unable to meet our funding requirements.

We
will require substantial additional funding to continue our sales and marketing
and research and development activities in the United States and foreign
countries and to maintain and operate our manufacturing facilities. If we are
unable to generate sufficient cash flow from operations, or obtain funds
through additional financing, we may have to delay, curtail or eliminate some
or all of our research and development, field-testing, marketing or
manufacturing programs or cease all operations. For example, we reduced our
workforce by 34% in May 2003 and by 23% in May 2002, significantly curtailing
certain research and development activities and our European and Mexican
operations. Our future capital requirements will depend on the success of our
operations.

If
our capital requirements vary from our current plans, we may require additional
financing sooner than we anticipate. Financing may be unavailable to us when
needed or on acceptable terms.

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As of the date of this report, we do not
meet the $1.00 minimum bid requirement for continued listing on The Nasdaq
National Market and, as a result, our common stock may be delisted from The
Nasdaq National Market, which could further depress our stock price and make it
more difficult for us to raise capital.

Our
common stock is currently listed on The Nasdaq National Market. To maintain
this listing, we must satisfy ongoing listing requirements, including
consistently maintaining a minimum bid price for our common stock of $1.00 per
share or more. In August 2004, we received a delisting warning letter from the
Nasdaq Stock Market notifying us that the closing price per share for our common
stock was below the $1.00 minimum bid price for 30 consecutive trading days and
that, as a result, we no longer meet Nasdaqs continued listing criteria.
Nasdaq provided us with 180 calendar days, or until January 26, 2005, to regain
compliance. To regain compliance with the minimum bid price requirement, the
closing bid price of our common stock must remain above $1.00 for a minimum of
ten consecutive trading days. If we do not regain compliance by January 26,
2005, which, as of the date of this report, we have been unable to do, and are not eligible for an additional compliance
period, our common stock will be delisted from The Nasdaq National Market.
Nasdaq also notes in the delisting warning letter that the 180-day period
relates exclusively to the bid price deficiency and that we may be delisted
during the 180-day period for failure to maintain compliance during this period
with any other listing requirements. If we were to lose our Nasdaq National
Market status, we would likely seek listing of our common stock in the
over-the-counter market, which is viewed by many investors as a less liquid
marketplace. Among other things, our common stock may then constitute penny
stock, which would place increased regulatory burden upon brokers, making them
less likely to make a market in our stock. 
Loss of our Nasdaq National Market status could also make it more
difficult for us to raise capital or complete acquisitions and would also
complicate compliance with state blue sky laws.

We currently depend
on five products that are based on the same new technology, and our development
and commercialization of those products may not be successful.

For
the immediately foreseeable future we will be dependent on the successful
development and commercialization of five products (Messenger, Messenger STS,
ProAct, employ and MightyPlant) which are based on the same new technology. We
have had only limited sales of Messenger since its introduction in
August 2000 and we began marketing employ in November 2003, Messenger STS
in January 2004, MightyPlant in April 2004 and we plan to begin marketing
ProAct in early 2005. These five products could prove to be commercially
unsuccessful. Our products may not prove effective or economically viable for
all crops or markets. In addition, because our products have not been put to
widespread commercial use over significant periods of time, no assurance can be
given that adverse consequences might not result from their use, such as soil
or other environmental degradation, the development of negative effects on
animals or plants or reduced benefits in terms of crop yield or protection.

The
markets for our products and other harpin-based products we may develop are
unproven. Messenger has not gained, and may not gain, commercial acceptance or
success. Messenger STS, employ and MightyPlant may not gain commercial
acceptance or success. If we are unable to successfully achieve broad market
acceptance of our products, we may not be able to generate enough product
revenues in the future to achieve profitability. A variety of factors will
determine the success of our market development and commercialization efforts
and the rate and extent of market acceptance of our products, including our
ability to implement and maintain an appropriate pricing policy and general
economic conditions in agricultural markets, including commodity prices,
climatic conditions and the extent that growers, regulatory authorities and the
public accept new agricultural practices and products developed through
biotechnology.

We have experienced
limited grower usage of Messenger and Messenger STS, and independent
distributors hold significant inventories of Messenger STS and will be given
significantly more inventory for free in 2004.

Based
on information received from distributors, we estimate that distributors sold
66,000 ounces of Messenger in 2000, 596,000 ounces in 2001, 684,000 ounces in
2002 and 734,000 ounces in 2003. During the first nine months of 2004, we
estimate that distributors sold 730,000 ounces to growers, compared to 497,000
ounces in the same period of 2003, an increase of 47%. We estimate that
Messenger and Messenger STS inventory held by distributors at September 30,
2004 was approximately 456,000 ounces. We sent distributors approximately
400,000 ounces of additional Messenger STS for free in the nine months ended
September 30, 2004 as part of an effort to lower the average cost of their
year-end Messenger inventories by approximately 50%. We estimate that
approximately 74,000 ounces of Messenger Products remain to be given to
distributors, which will significantly increase channel inventory and
negatively affect our sales to distributors. We do not expect distributors that
hold significant inventories of Messenger Products to place additional orders
for our products until their current inventories are reduced, which will
adversely affect our sales and results of operations.

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Inability to develop
adequate sales and marketing capabilities could prevent us from successfully commercializing
our current products and other products we may develop.

We
currently have limited sales and marketing experience and capabilities. Our
internal sales and marketing staff consists primarily of sales and marketing
specialists who are trained to educate growers and independent distributors on
the uses and benefits of our products. We will need to further develop our
sales and marketing capabilities in order to enhance our commercialization
efforts, which will involve substantial costs. These specialists require a high
level of technical expertise and knowledge regarding our products capabilities
and other plant protection and yield enhancement products and techniques. We
cannot assure you that our specialists and other members of our sales and
marketing team will successfully compete against the sales and marketing
operations of our current and future competitors that may have more established
relationships with distributors, retailers and growers. Failure to recruit,
train and retain important sales and marketing personnel, such as our sales and
marketing specialists, or the inability of new sales and marketing personnel to
effectively market and sell our current products and other products we may
develop, could impair our ability to gain market acceptance of our products and
cause our sales to suffer.

We may be unable to
establish or maintain successful relationships with independent distributors
and retailers, which could adversely affect our sales.

We
intend to rely on independent distributors and retailers of agri-chemicals to
distribute and assist with the marketing and sale of our current products and
any other products we may develop. We have engaged several independent
distributors and retailers for the distribution and sale of our products. Our
future revenue growth will depend in large part on our success in establishing
and maintaining these sales and distribution channels. We are continuing to
develop our distribution network and we may be unable to establish or maintain
these relationships in a timely or cost-effective manner. Moreover, we cannot
assure you that the distributors and retailers on which we rely will focus
adequate resources on selling these products or will be successful in selling
them. Many of our potential distributors and retailers are in the business of
distributing and sometimes manufacturing other, possibly competing, plant
protection and yield enhancement products and may perceive our products as a
threat to various product lines currently being manufactured or distributed by
them. In addition, the distributors may earn higher margins by selling
competing products or combinations of competing products. If we are unable to
establish or maintain successful relationships with independent distributors
and retailers, we will need to further develop our own distribution and sales
and marketing capabilities, which would be expensive and time-consuming and the
success of which would be uncertain.

Three
distributors accounted for an aggregate of 44% of net product sales revenue in
the nine months ended September 30, 2004 and three distributors accounted for
an aggregate of 48% of our net sales revenue in the same period of 2003. If any
distributor that purchases a significant amount of our products were to
discontinue purchasing our products at any time, our sales would be adversely
affected. In addition, the failure of any of these distributors, or of any
other distributor to which we extend a significant amount of credit, to pay its
account, now or in the future, may harm our operating results.

If our ongoing or
future field trials are unsuccessful, we may be unable to achieve market
acceptance or obtain regulatory approval of our current products or any other
products we may develop.

The
successful completion of multiple field trials in domestic and foreign
locations on a wide variety of crops is critical to the success of our product
development and marketing efforts. If our ongoing or future field trials are
unsuccessful or produce inconsistent results or adverse side effects, or if we
are unable to collect reliable data, regulatory approval of our current
products or any other products we may develop could be delayed or withheld or
we may be unable to achieve market acceptance of these products. Although we
have conducted successful field trials on a broad range of crops, we cannot be
certain that additional field trials conducted on a greater number of acres, or
on crops for which we have not yet conducted field trials, will be successful.
Moreover, the results of our ongoing and future field trials are subject to a
number of conditions beyond our control, including weather-related events such
as droughts and floods, severe heat and frost, hail, tornadoes and hurricanes.
Generally, we pay third parties, such as growers, consultants and universities,
to conduct our field trials for us. Incompatible crop treatment practices or
misapplication of the product by third parties could interfere with the success
of our field trials.

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We are at an early
stage of development and are subject to the risks of a new enterprise and the
commercialization of a new technology.

We
began our operations in 1994 and began the marketing and sale of our first
product, Messenger, in the third quarter of 2000. Our early stage of
development, the newness of our technology and the uncertain nature of the
market in which we compete make it difficult to assess our prospects or predict
our future operating results. We are subject to risks and uncertainties
frequently encountered in the establishment of a new business enterprise,
particularly in the rapidly changing market for plant protection and yield
enhancement products. These risks include our inability to develop a company
capable of supporting commercial activities, including manufacturing, quality
control and assurance, regulatory approval and compliance, marketing, sales,
distribution and customer service. Our inability to adequately address these
risks could cause us to be unprofitable or to cease operations.

International
expansion will subject us to risks associated with international operations,
which could adversely affect both our domestic and international operations.

Our
success depends in part on our ability to expand internationally as we obtain
regulatory approvals to market and sell our current products, and any other
products we may develop, in other countries. We recently began selling our
products in Spain and China. We have been conducting field trials in several
international locations and we have personnel in Europe to develop operations
in that region. International expansion of our operations could impose
substantial burdens on our resources, divert managements attention from
domestic operations or otherwise adversely affect our business. Furthermore,
international operations are subject to several inherent risks, especially
different regulatory requirements and reduced protection of intellectual
property rights, that could adversely affect our ability to compete in international
markets and could have a negative effect on our operating results.

The high level of
competition in our market may result in price reductions, reduced margins or
the inability of our products to achieve market acceptance.

The
market for plant protection and yield enhancement products is intensely
competitive, rapidly changing and undergoing consolidation. We may be unable to
compete successfully against our current or future competitors, which may
result in price reductions, reduced margins or the inability to achieve market
acceptance of our current products or any other products we may develop. For
example, from September to December 2003 we offered growers a buy one, get one
free promotion and in January 2004 we introduced Messenger STS at a price that
is approximately 50% of the 2003 price of Messenger.

Many
companies are engaged in developing plant protection and yield enhancement
products. Our competitors include major international agri-chemical companies,
specialized biotechnology companies and research and academic institutions.
Many of these organizations have significantly more capital, research and
development, regulatory, manufacturing, distribution, sales, marketing, human
and other resources than we do. As a result, they may be able to devote greater
resources to the development, manufacture, promotion or sale of their products,
receive greater resources and support from independent distributors, initiate
or withstand substantial price competition or take advantage of acquisition or
other opportunities more readily. Furthermore, these large agri-chemical
companies have a more diversified product offering than we do, which may give
them an advantage in meeting customer needs by enabling them to offer
integrated solutions to plant protection and yield enhancement.

Age and actual
storage conditions of our products may cause them to degrade, which could
adversely affect market acceptance of our products or our results of
operations.

Messenger
is currently being stored in large quantities under various conditions by us
and by distributors. Most of this material was manufactured in 2000, 2001, 2002
and 2004. We have conducted laboratory studies that indicate Messenger is
stable for at least two years under our recommended storage conditions and the
results of recently completed re-testing of Messenger manufactured in 2000
indicate that it is stable for more than four years. No assurance can be given,
however, that actual storage conditions will not cause our products quality to
degrade over a shorter time period.

The inventory of
Messenger held by us and by distributors is aging and may not meet our quality
standards, which could adversely affect market acceptance of our products or
our results of operations.

Our
inventory at September 30, 2004 includes approximately 2.9 million ounces of
Messenger and Messenger STS that was manufactured in 2000, 2001, 2002 and 2004.
In addition, we estimate that distributors own approximately 456,000 ounces of
Messenger and Messenger STS that was manufactured between 2000 and 2004. Due to
the age of this inventory, we conducted limited re-testing of Messenger samples
produced in 2000 and 2001. In 2003, we voluntarily recalled and replaced
approximately 10,000 ounces of Messenger owned by distributors that our limited
re-testing indicated had degraded below our quality control standards.

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Although
results of our limited re-testing indicate that a portion of inventory
manufactured in 2000, 2001 and 2002 continues to meet our quality standards, no
assurance can be given that this material will continue to meet our quality
standards, nor can we predict if or when this material might fail to meet our
quality standards. If our limited re-testing program indicates that additional
material has degraded below our quality standards, we may have to record
additional inventory write-downs and may choose to replace any such product
owned by distributors or growers, which could adversely affect the market
acceptance of our products or our results of operations.

Inability to obtain
regulatory approvals, or to comply with ongoing and changing regulatory
requirements, could delay or prevent sales of our current products or any other
products we may develop.

The
field testing, manufacture, sale and use of plant health products, including
Messenger, Messenger STS, ProAct, N-Hibit, employ, MightyPlant and other
products we may develop, are extensively regulated by the EPA and/or state,
local and foreign governmental authorities. These regulations substantially
increase the cost and time associated with bringing our current products and
any other products we may develop to market. If we do not receive the necessary
governmental approvals to test, manufacture and market these products, or if
the regulatory authorities revoke our approvals or grant them subject to
restrictions on their use, we may be unable to sell these products and our
business may fail.

We
are required to obtain regulatory approval from certain state and foreign
regulatory authorities before we market our products in those jurisdictions.
Some of these jurisdictions may apply different criteria than the EPA in
connection with their approval processes. Although we are authorized to sell
Messenger and Messenger STS in 48 states for use on virtually all crops for
crop production and disease management, and in California for use on citrus for
yield enhancement and on strawberries, citrus, grapes and fruiting vegetables,
such as tomatoes and peppers, for disease management, we have not received
approval for use on other crops in California. In Colorado, Messenger is
approved for use on virtually all crops for home and garden use. We have also
received authorization to sell Messenger, or are exempt from formal
authorization requirements, in at least 26 foreign countries, including China,
Spain, Germany, Mexico and six Central American countries. Our registration in
China is temporary and limited to the sale of Messenger for use on tomatoes,
peppers, tobacco, and rapeseed. Our registration in Spain is limited to the
sale of Messenger for use on tomatoes, peppers, cucumbers, melons,
strawberries, lettuce, citrus and olives. The EPA has approved the use of
Messenger STS and we are currently in the process of obtaining foreign
registrations for this product, but there can be no assurance that such
registrations will be obtained on acceptable terms.

Neither
employ nor MightyPlant are pesticides and they are not regulated by the EPA.
However, several states and foreign governments regulate both products. Many
states regulate employ as a plant amendment or soil conditioner and some of
these states and foreign regulatory authorities require the submission and
review of performance data and other information prior to granting their
approval. We are authorized to sell employ in 33 states and no foreign
countries. MightyPlant is classified by most states as a fertilizer and we are
now in the process of obtaining state approvals for its sale. We are authorized
to sell MightyPlant in 46 states and no foreign countries. However, there can
be no assurance that we will obtain approval to sell employ or MightyPlant in
other states or foreign countries.

If
we significantly modify our current products designs as a result of our
ongoing research and development projects, additional EPA and other regulatory
approvals may be required. Moreover, we cannot assure you that we will be able
to obtain approval for marketing additional harpin-based products or product
extensions that we may develop. For example, while the EPA has in place a
registration procedure for products such as Messenger that is streamlined in
comparison to the registration procedure for chemical pesticides, there can be
no assurance that all of our products or product extensions will be eligible
for the streamlined procedure or that the EPA will not impose additional requirements
that could make the procedure more time-consuming and costly for any future
products we may develop.

Even
if we obtain all necessary regulatory approvals to market and sell our current
products and any other products we may develop, these products will be subject
to continuing review and extensive regulatory requirements. The EPA, as well as
state and foreign governmental authorities, could withdraw a previously
approved product from the market upon discovery of new information, including
an inability to comply with regulatory requirements or the occurrence of
unanticipated problems with the product, or for other reasons. In addition,
federal, state and foreign regulations relating to crop production and
protection products developed through biotechnology are subject to public
concerns and political circumstances and, as a result, regulations have changed
and may change substantially in the future. These changes may result in
limitations on the manufacturing, marketing or use of our current products or
any other products we may develop and commercialize.

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Inability to satisfy
the conditions of our California registration for citrus could limit or prevent
sales of Messenger STS in that state.

Our
California registration for use on citrus for yield enhancement, granted in
March 2003, is conditioned on the requirement that we submit data from several
additional studies within various required timeframes ending on
December 31, 2005. There are no conditions on our registration to
sell Messenger STS in California for use on citrus, strawberries, fruiting
vegetables and grapes for disease management. We expect to submit the results
of additional citrus field trials at various required timeframes through 2005,
in accordance with our registration. If we are unable to conduct the studies
required by the California Department of Pesticide Regulation (CDPR) in a
timely manner, or if the results of the studies are unacceptable to the CDPR,
they may not allow the continued use of Messenger STS in California on citrus
for yield enhancement, or they may impose limitations on this use of Messenger
STS, which could have a negative impact on our sales. Because EPA and state
approvals are required for commercial sales of our current products, the loss
of any of these approvals for any reason would prevent further sales of our
products in the affected state or nationwide.

Our product
development efforts, which are based on an innovative technology that is
commercially unproven, may not be successful.

Our
harpin and harpin-related technology is new and commercially unproven. It may
take years and significant capital investment to develop viable enhancements of
our current products or any new products we may develop based on our harpin and
harpin-related technology. Risks inherent in the development of products based
on innovative technologies include the possibility that:

| |  | new products or product
  enhancements will be uneconomical to market or will be difficult to produce
  on a large scale;
| | - | -------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                          
| |  | proprietary rights of third
  parties will prevent us from marketing products; and                                       
| |   |                                                                                                                          
| |  | third parties will market
  superior or equivalent products or will market their products first.                         

Our operating results are likely to
fluctuate, resulting in an unpredictable level of sales and earnings and
possibly in a decrease in our stock price.

Our
operating results for a particular quarter or year are likely to fluctuate,
which could result in uncertainty surrounding our level of sales and earnings
and possibly result in a decrease in our stock price. For example, there were
no sales of Messenger in the fourth quarter of 2001 and annual net product
sales decreased 49% from 2001 to 2003. Numerous other factors will contribute
to the unpredictability of our operating results. In particular, our sales are
expected to be highly seasonal. Sales of plant protection and yield enhancement
products depend on planting and growing seasons, climatic conditions and
economic and other variables, which we expect to result in substantial
fluctuations in our quarterly sales and earnings. For example, weather-related
events such as droughts and floods, severe heat and frost, hail, tornadoes and
hurricanes could decrease demand for our products and any future products we
may develop, and have an adverse impact on our operating results from quarter
to quarter. In addition, most of our expenses, such as employee compensation
and lease payments for facilities and equipment, are relatively fixed. Our
expense levels are based, in part, on our expectations regarding future sales.
As a result, any shortfall in sales relative to our expectations could cause
significant changes in our operating results from quarter to quarter. Other
factors may also contribute to the unpredictability of our operating results,
including the amount of our products carried in inventory by independent
distributors and retailers, the amount of free product to be given to
retailers, the size and timing of significant customer transactions, the delay or
deferral of customer use of our products and the fiscal or quarterly budget
cycles of our customers. For example, customers may purchase large quantities
of our products under a promotion such as buy one, get one free in a
particular quarter to store and use over long periods of time, or time their
purchases to coincide with the availability of capital, either of which may
cause significant fluctuations in our operating results for a particular
quarter or year.

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Inability to protect
our patents and proprietary rights in the United States and foreign countries
could limit our ability to compete effectively since our competitors may take
advantage of our patents or proprietary rights.

Our
success depends on our ability to obtain and maintain patent and other
proprietary-right protection for our technology and products in the United
States and other countries. If we are unable to obtain or maintain these
protections, we may not be able to prevent third parties from using our
proprietary rights. We also rely on trade secrets, proprietary know-how and
continuing technological innovation to remain competitive. We have taken
measures to protect our trade secrets and know-how, including the use of
confidentiality agreements with our employees, consultants and advisors. It is
possible that these agreements may be breached and that any remedies for breach
will not make us whole. We generally control and limit access to, and the
distribution of, our product documentation and other proprietary information.
Despite our efforts to protect these proprietary rights, unauthorized parties
may copy aspects of our products or obtain and use information that we regard
as proprietary. We also cannot guarantee that other parties will not
independently develop our know-how or otherwise obtain access to our
technology.

The
laws of some foreign countries do not protect proprietary rights to the same
extent as the laws of the United States, and many companies have encountered
significant problems and incurred significant costs in protecting their
proprietary rights in these foreign countries.

Patent
law is still evolving with respect to the scope and enforceability of claims in
the fields in which we operate. We are like many biotechnology companies in
that our patent protection is highly uncertain and involves complex legal and
technical questions for which legal principles are not firmly established. Our
patents and those patents for which we have license rights may be challenged,
narrowed, invalidated or circumvented. In addition, our issued patents may not
contain claims sufficiently broad to protect us against third parties with
similar technologies or products, or provide us with any competitive advantage.
We are not certain that our pending patent applications will be issued.
Moreover, our competitors could challenge or circumvent our patents or pending
patent applications.

The
U.S. Patent and Trademark Office and the courts have not established a
consistent policy regarding the breadth of claims allowed in biotechnology
patents. The allowance of broader claims may increase the incidence and cost of
patent interference proceedings and the risk of infringement litigation. On the
other hand, the allowance of narrower claims may limit the value of our
proprietary rights.

Other companies may
claim that we infringe their intellectual property or proprietary rights, which
could cause us to incur significant expenses or be prevented from selling our
current products or any other products we may develop in the future.

Our
success depends on our ability to operate without infringing the patents and
proprietary rights of third parties. Product development is inherently
uncertain in a rapidly evolving technological environment in which there may be
numerous patent applications pending, many of which are confidential when
filed, with regard to similar technologies. Future patents issued to third
parties may contain claims that conflict with our patents. Although we believe
that our current products do not infringe the proprietary rights of any third
parties, third parties could assert infringement claims against us in the
future. Any litigation or interference proceedings, regardless of their merit
or outcome, would probably be costly and require significant time and attention
of our key management and technical personnel. Litigation or interference
proceedings could also force us to:

| |  | stop or delay selling,
  manufacturing or using products that incorporate the challenged intellectual
  property;
| | - | -----------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                  
| |  | pay damages; or                                                                                                  
| |   |                                                                                                                  
| |  | enter into licensing or
  royalty agreements that may be unavailable on acceptable terms.                        

If we do not adequately distinguish our
products from genetically modified plants and products, public concerns over
those products could negatively impact market acceptance of our products.

Claims
that the output of genetically modified plants is unsafe for consumption or
that these plants pose a danger to the environment have led to public concerns
and negative attitudes about genetically modified crops, particularly in
Europe. We intend to distinguish our products and other topically applied
harpin technologies from genetically modified plants and products. Our products
are topically applied and do not modify the plants DNA. If the public or our
customers perceive our products as products that genetically modify plants,
market acceptance and registration of our products could be delayed, impaired
or limited in countries with strong political resistance to genetically modified
plants.

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We may be exposed to
product liability claims, which could adversely affect our operations.

We
may be held liable or incur costs to settle product liability claims if our
current products or any products we may develop, or any products that use or
incorporate any of our technologies, cause injury or are found unsuitable
during product testing, manufacturing, marketing, sale or use. These risks
exist even with respect to any products that have received, or may in the
future receive, regulatory approval, registration or clearance for commercial
use. We cannot guarantee that we will be able to avoid product liability
exposure.

We
currently maintain product liability insurance at levels we believe are
sufficient and consistent with industry standards for companies at our stage of
development. We cannot guarantee that our product liability insurance is
adequate, and, at any time, it is possible that such insurance coverage may not
be available on commercially reasonable terms or at all. A product liability
claim could result in liability to us greater than our assets and insurance
coverage. Moreover, even if we have adequate insurance coverage, product
liability claims or recalls could result in negative publicity or force us to
devote significant time and attention to matters other than those that arise in
the normal course of business.

Rapid changes in
technology could render our current products or any other products we may
develop unmarketable or obsolete.

We
are engaged in an industry characterized by extensive research efforts and
rapid technological development. Our competitors, many of which have
substantially greater technological and financial resources than we do, may
develop plant protection and yield enhancement technologies and products that
are more effective than ours or that render our technology and products
obsolete or uncompetitive. To be successful, we will need to continually
enhance our current products and any other products we may develop and to
design, develop and market new products that keep pace with new technological
and industry developments.

Inability to comply
with regulations applicable to our facilities and procedures could delay, limit
or prevent our research and development or manufacturing activities.

Our
research and development and manufacturing facilities and procedures are
subject to continual review and periodic inspection. To comply with the
regulations applicable to these facilities and procedures, we must spend funds,
time and effort in the areas of production, safety and quality control and
assurance to help ensure full technical compliance. If the EPA or another
regulator determines that we are not in compliance, regulatory approval of our
current products or any other products we may develop could be revoked, delayed
or withheld or we may be required to limit or cease our research and
development or manufacturing activities or pay a monetary fine. If we were
required to limit or cease our research and development activities, our ability
to develop new products would be impaired. In addition, if we were required to
limit or cease our manufacturing activities, our ability to produce our current
products in commercial quantities would be impaired or prohibited, which could
have an adverse effect on our sales.

Inability to produce
high quality products could impair our business.

To
be successful, we will have to manufacture our current products in large
quantities at acceptable costs while also preserving high product quality. If
we cannot maintain high product quality on a large scale, we may be unable to
achieve market acceptance of our products and our sales would likely suffer.
Moreover, we do not have back-up manufacturing systems and, as a result, the
failure of any component required in the manufacturing process could delay or
impair our ability to manufacture our products in the quantities that we may
require.

We
intend to continue to make changes to our manufacturing processes and
facilities in order to improve the efficiency and quality of our manufacturing
activities. We cannot guarantee that we will be successful in this regard or
that the changes we make will improve our manufacturing activities. We may
encounter difficulties in the production of our current products or any future
products we may develop, including problems involving manufacturing processes
or yields, packaging, distribution, storage, quality control and assurance,
shortages of qualified personnel or compliance with regulatory requirements.
Even if we are successful in developing our manufacturing capability and
processes, there can be no assurance that we will satisfy the requirements of
our distributors or customers.

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If third-party
manufacturers fail to perform adequately, we could be unable to meet demand and
our revenues could be impaired.

When
our manufacturing plant is operating, we depend on independent manufacturers
for large-scale fermentation services and to perform certain other portions of
our production process. We intend to engage additional third-party
manufacturers as necessary to perform these processes. Any failure or delay in
the ability of our current or any future manufacturers to provide us with
material they produce could adversely affect our ability to produce our current
products in the quantities necessary to satisfy the requirements of our
distributors or customers, or could increase our costs associated with
obtaining such materials. In addition, the time and resources that our current or
future third-party manufacturers devote to our business are not within our
control. We cannot ensure that our current or future third-party manufacturers
will perform their obligations to meet our quality standards, that we will
derive cost savings or other benefits from our relationships with them or that
we will be able to maintain a satisfactory relationship with them on terms
acceptable to us. Moreover, these manufacturers may support products that
compete directly or indirectly with ours, or offer similar or greater support
to our competitors. If any of these events were to occur, our business and
operations could be adversely affected.

Inability to address
strain on our resources caused by growth could result in ineffective management
of our business.

As
we add manufacturing, marketing, sales, field development or other personnel,
both domestically and internationally, during the commercialization of our
current products, we expect that our operating expenses and capital
requirements will increase. Our ability to manage growth effectively requires
us to continue to expend funds to improve our operational, financial and
management controls, reporting systems and procedures. In addition, we must
effectively expand, train and manage our employee base. We will be unable to
effectively manage our business if we are unable to timely and successfully
alleviate the strain on our resources caused by growth in our business, which
could adversely affect our operating results.

Inability to retain
our key employees or other skilled managerial or technical personnel could
impair our ability to maintain or expand our business.

We
are highly dependent on the efforts and abilities of our current key managerial
and technical personnel, particularly Dr. Rhett R. Atkins, our President and
Chief Executive Officer, and Dr. Zhongmin Wei, our Chief Scientific Officer and
Vice President of Research. Our success will depend in part on retaining the
services of Drs. Atkins and Wei and our other existing key management and
technical personnel and on attracting and retaining new, highly qualified
personnel.

Inability
to retain our existing key management or technical personnel or to attract
additional qualified personnel could, among other things, delay our sales,
marketing, manufacturing and research and development efforts. Moreover, in our
field, competition for qualified management and technical personnel is intense
and many of the companies with which we compete for experienced personnel have
greater financial and other resources than we do. As a result, we may be unable
to recruit, train and retain sufficient qualified personnel.

Item 3.     Quantitative and Qualitative
Disclosures About Market Risk.

Our
financial instruments include primarily cash and cash equivalents. We do not
use derivative financial instruments, nor do we engage in hedging activities.
Also, we do not have any outstanding variable rate debt. Because of the
relatively short-term average maturity of our investment funds, we do not
expect interest rate fluctuations to significantly affect the aggregate value
of our financial assets.

Our
operations are currently based primarily in the U.S. and Europe. Transactions
in the U.S. are denominated in U.S. dollars and transactions in our European
unit are generally denominated in foreign currencies, primarily Euros. The
balance of foreign currency-denominated assets and liabilities at September 30,
2004 was not significant.

Item 4.     Controls and Procedures.

Under
the supervision and with the participation of management, including our
President and Chief Executive Officer and our Chief Financial Officer, we have
carried out an evaluation of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934) as of the end of the fiscal quarter covered by this report. Based on that
evaluation, our President and Chief Executive Officer and our Chief Financial
Officer concluded that our disclosure controls and procedures are effective as
of the end of such quarter. There have been no changes in our internal control
over financial reporting during the quarter covered by this report that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.

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PART II -- OTHER INFORMATION

Item 2.     Unregistered Sales of Equity
Securities and Use of Proceeds.

(b)     Use of proceeds.

On
September 26, 2000, the SEC declared effective our Registration Statement on
Form S-1, as amended (Registration No. 333-41028), as filed with the SEC in
connection with our initial public offering. Proceeds to Eden Bioscience, after
accounting for $7.0 million in underwriting discounts and commissions and
approximately $1.6 million in other expenses of the offering, were
approximately $91.5 million.

To
date, of the net offering proceeds, we have used approximately $18.6 million to
expand and enhance our manufacturing, research and development and administration
facilities, and approximately $59.8 million for working capital and general
corporate purposes. The remaining portion of the net offering proceeds has been
invested in cash equivalent investments. Our use of the proceeds from the
offering does not represent a material change in the use of proceeds described
in the prospectus included as part of the Registration Statement.

Item 6.     Exhibits.

Exhibits
31.1 and 31.2 are being filed as part of this quarterly report on Form
10-Q.  Exhibits 32.1 and 32.2 are being
furnished with this quarterly report on Form 10-Q.

(a)     Exhibits.

| | Exhibit
  Number |  | Description                                               | 
| | ---------------- |  | --------------------------------------------------------- | 
| |                  |  |                                                           | 
| | 31.1             |  | Rule 13a-14(a) Certification (Chief Executive
  Officer). | 
| | 31.2             |  | Rule 13a-14(a) Certification (Chief Financial Officer).   | 
| | 32.1             |  | Section 1350 Certification
  (Chief Executive Officer).   | 
| | 32.2             |  | Section 1350 Certification
  (Chief Financial Officer).   | 

SIGNATURES

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

|                        | EDEN BIOSCIENCE CORPORATION |                                             
|----------------------- | --------------------------- | --------------------------------------------
|                        |                             |                                             
|Date:  November 8, 2004 |                             |                                             
|                        |                             |                                             
|                        |                             |                                             
|                        | By:                         | /s/ Rhett R. Atkins                         
|                        |                             |                                             
|                        |                             | Rhett R. Atkins                             
|                        |                             | President and Chief Executive Officer       
|                        |                             |                                             
|                        |                             |                                             
|                        | By:                         | /s/ Bradley S. Powell                       
|                        |                             |                                             
|                        |                             | Bradley S. Powell                           
|                        |                             | Vice President of Finance, Chief Financial  
|                        |                             | Officer and Secretary                       
|                        |                             | (principal financial and accounting officer)

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