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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION

Washington, D.C. 20549


___________________________________

FORM 10-Q

(Mark One)


[X]    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


For the quarterly period ended September 30, 2001


or

[   ]    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from
 to


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
Bothell, Washington 98021-6942
(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
during the past 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.

Yes [X] No [   ]

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

|                                     |  |                                              
|------------------------------------ |  | ---------------------------------------------
|Class
Common Stock, $.0025 Par Value |  | Outstanding as of November 1, 2001
24,008,415



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TABLE OF CONTENTS



|                               |                                                                                               |                                                                                        |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | Item 1. Financial Statements                                                                 
|                               |                                                                                               | Condensed Consolidated Balance Sheets                                                 
|                               |                                                                                               | Condensed Consolidated Statements of Operations                                       
|                               |                                                                                               | Condensed Consolidated Statements of Cash Flows                                       
|                               |                                                                                               | Notes to Condensed Consolidated Financial Statements                                  
|                               | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                               |                                                                                               | Factors That May Affect Our Business, Future Operating Results and Financial Condition
|                               | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|PART II  OTHER INFORMATION   
|                               | Item 2. Changes in Securities and Use of Proceeds                                            
|                               | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                    
|EXHIBIT 11.1                  



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EDEN Bioscience Corporation

Index to Form 10-Q

|           |                                                                                                                        |  |    |      |  | 
|---------- | ---------------------------------------------------------------------------------------------------------------------- |  | -- | ---- |  | 
|           |                                                                                                                        |  |    | Page
|           |                                                                                                                        |  |    |     
|Part I.    | Financial Information                                                                                                  |  |    |      | 
|          
|Item 1.    | Financial Statements                                                                                                   |  |    | 2    | 
|           | Condensed Consolidated Balance Sheets as of December 31, 2000 and
September 30, 2001                                   |  |    | 2    | 
|          
|           | Condensed Consolidated Statements of Operations for the Three Months and
Nine Months Ended September 30, 2000 and 2001 |  |    | 3    | 
|          
|           | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2000 and 2001                  |  |    | 4    | 
|          
|           | Notes to Unaudited Condensed Consolidated Financial Statements                                                         |  |    | 5    | 
|          
|Item 2.    | Managements Discussion and Analysis of Financial Condition and Results of Operations                                  |  |    | 7    | 
|          
|           | Factors That May Affect Our Business, Future Operating Results and Financial Condition                                 |  |    | 12   | 
|          
|Item 3.    | Quantitative and Qualitative Disclosures About Market Risk                                                             |  |    | 20   | 
|          
|Part II.   | Other Information                                                                                                      |  |    |      | 
|          
|Item 2.    | Changes in Securities and Use of Proceeds                                                                              |  |    | 20   | 
|          
|Item 6.    | Exhibits and Reports on Form 8-K                                                                                       |  |    | 21   | 
|          
|Signatures |                                                                                                                        |  | 21 |     

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PART I  FINANCIAL INFORMATION




Item 1. Financial Statements

EDEN Bioscience Corporation




Condensed Consolidated Balance Sheets

|                                                  |                                                                                                                                                                 |                                            |           |              |            |               |            |             |            | 
|------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ------------ | ---------- | ------------- | ---------- | ----------- | ---------- | 
|                                                  |                                                                                                                                                                 |                                            |           | December 31, |            | September 30,
|                                                  |                                                                                                                                                                 |                                            |           | 2000         |            | 2001         
|                                                  |                                                                                                                                                                 |                                            |           |              |            |              
|                                                  |                                                                                                                                                                 |                                            |           |              |            |               |            | (Unaudited)
|ASSETS                                           
|Current assets:                                   |                                                                                                                                                                 |                                            |           |              |            |               |            |            
|                                                  | Cash and cash equivalents                                                                                                                                       |                                            | $         | 86,556,865   |            |               | $          | 56,710,883  |           
|                                                  | Accounts receivable                                                                                                                                             |                                            |           | 595,470      |            |               |            | 418,300     |           
|                                                  | Inventory                                                                                                                                                       |                                            |           | 1,321,241    |            |               |            | 2,398,260   |           
|                                                  | Other current assets                                                                                                                                            |                                            |           | 236,458      |            |               |            | 1,020,224   |           
|                                                  |                                                                                                                                                                 |                                            |           |              |            |               |            |            
|                                                  |                                                                                                                                                                 | Total current assets                       |           |              | 88,710,034 |               |            |             | 60,547,667 | 
|Property and equipment, net                       |                                                                                                                                                                 |                                            | 9,479,872 |              |            |               | 23,130,318 |            
|Other assets                                      |                                                                                                                                                                 |                                            | 310,715   |              |            |               | 1,736,409  |            
|                                                  |                                                                                                                                                                 |                                            |           |              |            |               |            |            
|                                                  |                                                                                                                                                                 | Total assets                               |           | $            | 98,500,621 |               |            | $           | 85,414,394 | 
|                                                  |                                                                                                                                                                 |                                            |           |              |            |               |            |            
|LIABILITIES AND SHAREHOLDERS EQUITY             
|Current liabilities:                              |                                                                                                                                                                 |                                            |           |              |            |               |            |            
|                                                  | Accounts payable                                                                                                                                                |                                            | $         | 1,415,730    |            |               | $          | 2,132,889   |           
|                                                  | Accrued liabilities                                                                                                                                             |                                            |           | 3,238,398    |            |               |            | 5,364,507   |           
|                                                  | Current portion of capital lease obligations                                                                                                                    |                                            |           | 275,316      |            |               |            | 242,163     |           
|                                                  |                                                                                                                                                                 |                                            |           |              |            |               |            |            
|                                                  |                                                                                                                                                                 | Total current liabilities                  |           |              | 4,929,444  |               |            |             | 7,739,559  | 
|Capital lease obligations, net of current portion |                                                                                                                                                                 |                                            | 330,394   |              |            |               | 173,703    |            
|Other long-term liabilities                       |                                                                                                                                                                 |                                            |          |              |            |               | 238,551    |            
|                                                  |                                                                                                                                                                 |                                            |           |              |            |               |            |            
|                                                  |                                                                                                                                                                 | Total liabilities                          |           |              | 5,259,838  |               |            |             | 8,151,813  | 
|                                                  |                                                                                                                                                                 |                                            |           |              |            |               |            |            
|Commitments and contingencies                     |                                                                                                                                                                 |                                            |           |              |            |               |            |            
|Shareholders equity:                             |                                                                                                                                                                 |                                            |           |              |            |               |            |            
|                                                  | Convertible preferred stock, $.01 par value,
10,000,000 shares authorized; no shares designated
at December 31, 2000 and September 30, 2001                     |                                            |           |             |            |               |            |            |           
|                                                  | Common stock, $.0025 par value, 100,000,000 shares
authorized; issued and oustanding shares -
23,894,680 at December 31, 2000; 23,979,847 at
September 30, 2001 |                                            |           | 59,737       |            |               |            | 59,950      |           
|                                                  | Additional paid-in capital                                                                                                                                      |                                            |           | 131,844,183  |            |               |            | 132,134,312 |           
|                                                  | Deferred stock option compensation expense                                                                                                                      |                                            |           | (28,625      | )          |               |            | (14,765     | )         
|                                                  | Cumulative translation adjustment                                                                                                                               |                                            |           |             |            |               |            | (23,687     | )         
|                                                  | Accumulated deficit                                                                                                                                             |                                            |           | (38,634,512  | )          |               |            | (54,893,229 | )         
|                                                  |                                                                                                                                                                 |                                            |           |              |            |               |            |            
|                                                  |                                                                                                                                                                 | Total shareholders equity                 |           |              | 93,240,783 |               |            |             | 77,262,581 | 
|                                                  |                                                                                                                                                                 |                                            |           |              |            |               |            |            
|                                                  |                                                                                                                                                                 | Total liabilities and shareholders equity |           | $            | 98,500,621 |               |            | $           | 85,414,394 | 
|                                                  |                                                                                                                                                                 |                                            |           |              |            |               |            |            

The accompanying notes are an integral part of these financial statements.

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EDEN Bioscience Corporation




Condensed Consolidated Statements of Operations

(Unaudited)


|                                                                                  |                                                              |                          |                              |            |                                  |            |                                 |           |           |         |             |            |            |            |             |            |            |           | 
|--------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------------------------ | ---------------------------- | ---------- | -------------------------------- | ---------- | ------------------------------- | --------- | --------- | ------- | ----------- | ---------- | ---------- | ---------- | ----------- | ---------- | ---------- | --------- | 
|                                                                                  |                                                              |                          |                              |            | Three Months Ended September 30, |            | Nine Months Ended September 30,
|                                                                                  |                                                              |                          |                              |            |                                  |            |                                
|                                                                                  |                                                              |                          |                              |            | 2000                             |            | 2001                            |           | 2000      |         | 2001       
|                                                                                  |                                                              |                          |                              |            |                                  |            |                                 |           |           |         |            
|Revenues:                                                                         |                                                              |                          |                              |            |                                  |            |                                 |           |           |         |             |            |            |            |             |           
|                                                                                  | Product sales                                                |                          | $                            | 1,028,283  |                                  |            | $                               | 644,299   |           |         | $           | 1,028,283  |            |            | $           | 5,360,737  |           
|                                                                                  | Sales allowances                                             |                          |                              | (411,314   | )                                |            |                                 | (205,174  | )         |         |             | (411,314   | )          |            |             | (1,864,735 | )         
|                                                                                  |                                                              |                          |                              |            |                                  |            |                                 |           |           |         |             |            |            |            |             |           
|                                                                                  |                                                              | Net revenues             |                              |            | 616,969                          |            |                                 |           | 439,125   |         |             |            | 616,969    |            |             |            | 3,496,002  |          
|                                                                                  |                                                              |                          |                              |            |                                  |            |                                 |           |           |         |             |            |            |            |             |           
|Operating expenses:                                                               |                                                              |                          |                              |            |                                  |            |                                 |           |           |         |             |            |            |            |             |           
|                                                                                  | Cost of goods sold                                           |                          |                              | 352,683    |                                  |            |                                 | 782,351   |           |         |             | 352,683    |            |            |             | 3,959,416  |           
|                                                                                  | Research and development                                     |                          |                              | 2,128,210  |                                  |            |                                 | 3,645,357 |           |         |             | 7,244,368  |            |            |             | 9,329,530  |           
|                                                                                  | Selling, general and administrative                          |                          |                              | 1,774,241  |                                  |            |                                 | 2,495,848 |           |         |             | 3,685,167  |            |            |             | 8,955,061  |           
|                                                                                  |                                                              |                          |                              |            |                                  |            |                                 |           |           |         |             |            |            |            |             |           
|                                                                                  |                                                              | Total operating expenses |                              |            | 4,255,134                        |            |                                 |           | 6,923,556 |         |             |            | 11,282,218 |            |             |            | 22,244,007 |          
|                                                                                  |                                                              |                          |                              |            |                                  |            |                                 |           |           |         |             |            |            |            |             |           
|Loss from operations                                                              |                                                              |                          | (3,638,165                   | )          |                                  |            | (6,484,431                      | )         |           |         | (10,665,249 | )          |            |            | (18,748,005 | )         
|                                                                                  |                                                              |                          |                              |            |                                  |            |                                 |           |           |         |             |            |            |            |             |           
|Other income (expense):                                                           |                                                              |                          |                              |            |                                  |            |                                 |           |           |         |             |            |            |            |             |           
|                                                                                  | Interest income                                              |                          |                              | 61,402     |                                  |            |                                 | 585,341   |           |         |             | 339,852    |            |            |             | 2,556,004  |           
|                                                                                  | Interest expense                                             |                          |                              | (30,369    | )                                |            |                                 | (19,331   | )         |         |             | (103,945   | )          |            |             | (66,716    | )         
|                                                                                  | Fee and fair value of warrants
granted for credit facilities |                          |                              | (2,281,524 | )                                |            |                                 |          |           |         |             | (2,281,524 | )          |            |             |           |           
|                                                                                  |                                                              |                          |                              |            |                                  |            |                                 |           |           |         |             |            |            |            |             |           
|                                                                                  |                                                              |                          | Total other income (expense) |            |                                  | (2,250,491 | )                               |           |           | 566,010 |             |            |            | (2,045,617 | )           |            |            | 2,489,288 | 
|                                                                                  |                                                              |                          |                              |            |                                  |            |                                 |           |           |         |             |            |            |            |             |           
|Net loss                                                                          |                                                              | $                        | (5,888,656                   | )          |                                  | $          | (5,918,421                      | )         |           | $       | (12,710,866 | )          |            | $          | (16,258,717 | )         
|                                                                                  |                                                              |                          |                              |            |                                  |            |                                 |           |           |         |             |            |            |            |             |           
|Historical basic and diluted net
loss per share                                   |                                                              | $                        | (1.57                        | )          |                                  | $          | (0.25                           | )         |           | $       | (4.07       | )          |            | $          | (0.68       | )         
|                                                                                  |                                                              |                          |                              |            |                                  |            |                                 |           |           |         |             |            |            |            |             |           
|Historical weighted average
shares outstanding used to
compute net loss per share |                                                              |                          | 3,745,271                    |            |                                  |            | 23,978,189                      |           |           |         | 3,120,521   |            |            |            | 23,946,978  |           
|                                                                                  |                                                              |                          |                              |            |                                  |            |                                 |           |           |         |             |            |            |            |             |           
|Pro forma basic and diluted net
loss per share                                    |                                                              | $                        | (0.35                        | )          |                                  |            |                                 |           |           | $       | (0.76       | )          |            |            |             |           
|                                                                                  |                                                              |                          |                              |            |                                  |            |                                 |           |           |         |             |            |            |            |             |           
|Weighted average shares
outstanding used to compute
pro forma net loss per share  |                                                              |                          | 16,933,040                   |            |                                  |            |                                 |           |           |         | 16,713,251  |            |            |            |             |           
|                                                                                  |                                                              |                          |                              |            |                                  |            |                                 |           |           |         |             |            |            |            |             |           

The accompanying notes are an integral part of these financial statements.

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EDEN Bioscience Corporation




Condensed Consolidated Statements
of Cash Flows

(Unaudited)


|                                                                       |                                                                         |                                                      |                                           |             |                                 |            |             |             |            |             |  
|---------------------------------------------------------------------- | ----------------------------------------------------------------------- | ---------------------------------------------------- | ----------------------------------------- | ----------- | ------------------------------- | ---------- | ----------- | ----------- | ---------- | ----------- | -
|                                                                       |                                                                         |                                                      |                                           |             | Nine Months Ended September 30,
|                                                                       |                                                                         |                                                      |                                           |             |                                
|                                                                       |                                                                         |                                                      |                                           |             | 2000                            |            | 2001       
|                                                                       |                                                                         |                                                      |                                           |             |                                 |            |            
|Cash flows from operating activities:                                  |                                                                         |                                                      |                                           |             |                                 |            |             |            
|                                                                       | Net loss                                                                |                                                      | $                                         | (12,710,866 | )                               |            | $           | (16,258,717 | )         
|                                                                       | Adjustments to reconcile net loss
to cash used in operating activities: |                                                      |                                           |             |                                 |            |             |             |           
|                                                                       |                                                                         | Depreciation and amortization                        |                                           |             | 640,959                         |            |             |             | 843,763    |            
|                                                                       |                                                                         | Amortization of stock option compensation expense    |                                           |             | 69,651                          |            |             |             | 13,860     |            
|                                                                       |                                                                         | Interest income on subscriptions receivable          |                                           |             | (2,818                          | )          |             |             |           |            
|                                                                       |                                                                         | Loss (gain) on disposition of fixed assets           |                                           |             | 13,159                          |            |             |             | (765       | )          
|                                                                       |                                                                         | Increase in deferred rent payable                    |                                           |             |                                |            |             |             | 206,051    |            
|                                                                       |                                                                         | Fair value of warrants granted for credit facilities |                                           |             | 1,981,524                       |            |             |             |           |            
|                                                                       | Changes in assets and liabilities:                                      |                                                      |                                           |             |                                 |            |             |             |           
|                                                                       |                                                                         | Accounts receivable                                  |                                           |             | (622,070                        | )          |             |             | 178,926    |            
|                                                                       |                                                                         | Inventory                                            |                                           |             | (414,824                        | )          |             |             | (1,077,019 | )          
|                                                                       |                                                                         | Other assets                                         |                                           |             | (1,836,027                      | )          |             |             | (2,207,865 | )          
|                                                                       |                                                                         | Accounts payable                                     |                                           |             | 2,274,797                       |            |             |             | (979,661   | )          
|                                                                       |                                                                         | Accrued liabilities                                  |                                           |             | 1,379,738                       |            |             |             | 1,526,882  |            
|                                                                       |                                                                         | Other liabilities                                    |                                           |             |                                |            |             |             | 32,500     |            
|                                                                       |                                                                         |                                                      |                                           |             |                                 |            |             |            
|                                                                       |                                                                         |                                                      | Net cash used in operating activities     |             |                                 | (9,226,777 | )           |             |            | (17,722,045 | )
|                                                                       |                                                                         |                                                      |                                           |             |                                 |            |             |            
|Cash flows used in investing activities:                               |                                                                         |                                                      |                                           |             |                                 |            |             |            
|                                                                       | Purchases of property and equipment                                     |                                                      |                                           | (4,039,276  | )                               |            |             | (12,207,942 | )         
|                                                                       | Proceeds from disposal of equipment                                     |                                                      |                                           |            |                                 |            |             | 2,733       |           
|                                                                       | Repayment of note receivable from shareholder                           |                                                      |                                           | 35,432      |                                 |            |             |            |           
|                                                                       |                                                                         |                                                      |                                           |             |                                 |            |             |            
|                                                                       |                                                                         |                                                      | Net cash used in investing activities     |             |                                 | (4,003,844 | )           |             |            | (12,205,209 | )
|                                                                       |                                                                         |                                                      |                                           |             |                                 |            |             |            
|Cash flows from financing activities:                                  |                                                                         |                                                      |                                           |             |                                 |            |             |            
|                                                                       | Reduction in capital lease obligations                                  |                                                      |                                           | (257,576    | )                               |            |             | (189,844    | )         
|                                                                       | Offering costs                                                          |                                                      |                                           | (14,657     | )                               |            |             |            |           
|                                                                       | Proceeds from issuance of stock                                         |                                                      |                                           |            |                                 |            |             | 209,858     |           
|                                                                       | Proceeds from exercise of common stock options                          |                                                      |                                           | 427,733     |                                 |            |             | 43,465      |           
|                                                                       | Proceeds from exercise of common stock warrants                         |                                                      |                                           | 912,049     |                                 |            |             | 37,019      |           
|                                                                       |                                                                         |                                                      |                                           |             |                                 |            |             |            
|                                                                       |                                                                         |                                                      | Net cash provided by financing activities |             |                                 | 1,067,549  |             |             |            | 100,498     |  
|                                                                       |                                                                         |                                                      |                                           |             |                                 |            |             |            
|Effect of foreign currency exchange rates on cash
and cash equivalents |                                                                         |                                                      |                                          |             |                                 |            | (19,226     | )          
|                                                                       |                                                                         |                                                      |                                           |             |                                 |            |             |            
|Net decrease in cash and cash equivalents                              |                                                                         |                                                      | (12,163,072                               | )           |                                 |            | (29,845,982 | )          
|Cash and cash equivalents at beginning of period                       |                                                                         |                                                      | 13,107,250                                |             |                                 |            | 86,556,865  |            
|                                                                       |                                                                         |                                                      |                                           |             |                                 |            |             |            
|Cash and cash equivalents at end of period                             |                                                                         | $                                                    | 944,178                                   |             |                                 | $          | 56,710,883  |            
|                                                                       |                                                                         |                                                      |                                           |             |                                 |            |             |            
|Supplemental disclosures:                                              |                                                                         |                                                      |                                           |             |                                 |            |             |            
|                                                                       | Cash paid for interest                                                  |                                                      | $                                         | 103,945     |                                 |            | $           | 66,716      |           
|                                                                       | Current liabilities for construction in progress                        |                                                      |                                           |            |                                 |            |             | 2,287,540   |           

The accompanying notes are an integral part of these financial statements.

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EDEN Bioscience Corporation




Notes to Condensed Consolidated Financial Statements

(Information as of and for the three months and nine months ended September 30, 2000 and 2001 is unaudited)


1. Organization and Summary of Significant Accounting Policies

Organization and Business

EDEN Bioscience Corporation (EDEN® or the Company) was incorporated in
the State of Washington on July 18, 1994. EDEN is a plant technology company
focused on developing, manufacturing and marketing innovative natural products
for agriculture. Prior to August 2000, the Company was a development stage
company. In August 2000, the Company began sales of its initial product,
Messenger®.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with 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 footnotes
required by generally accepted accounting principles for complete financial
statements. The balance sheet at December 31, 2000 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by 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, 2000 included in the Companys Annual Report on Form 10-K,
which was filed with the Securities and Exchange Commission on
March 29, 2001.

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, 2001 are not necessarily indicative of the results expected for
the full fiscal year or for any future period.

Use of Estimates

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

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 and accelerated methods, which allocate costs
over estimated useful lives of two to 20 years. On January 1, 2001, the Company
adopted the units-of-production method of depreciation for manufacturing
equipment placed into service after that date. Equipment leased under capital
leases is depreciated over the shorter of the equipments estimated useful life
or lease term, which ranges between three to five years.

Revenue Recognition

The Company recognizes revenue from product sales, net of sales
allowances, when product is shipped to its distributors and all significant
obligations of the Company have been satisfied, unless

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EDEN Bioscience CorporationNotes to Condensed Consolidated Financial Statements
(Information as of and for the three months and nine months ended September 30, 2000 and 2001 is unaudited)

acceptance provisions or other contingencies exist. If acceptance
provisions or contingencies exist, revenue is recognized after such provisions
or contingencies have been satisfied. Distributors do not have price protection
or product return rights. Product sales revenue in the nine months ended
September 30, 2001 resulted from sales to seven distributors, one of which
accounted for $3.9 million (72.7%) of product sales revenue and $409,000
(92.3%) of accounts receivable at September 30, 2001. Sales to another
distributor accounted for $602,800 (11.2%) of product sales revenue for the
nine months ended September 30, 2001. There were no accounts receivable from
this distributor at September 30, 2001.

Net Loss Per Common 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 (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,
|                                  |  |                    
|                                  |  | 2000                |           | 2001
|                                  |  |                     |           |     
|Options to purchase common stock  |  |                     | 2,455,667 |      |  |  | 2,675,737 | 
|Warrants to purchase common stock |  |                     | 511,878   |      |  |  | 290,805   | 

Pro forma basic and diluted net loss per share is calculated assuming the
conversion of all convertible preferred stock at the beginning of the periods
presented. The actual conversion of the preferred stock occurred on September
26, 2000, the effective date of the registration statement filed in connection
with the Companys initial public offering.

2. Property and Equipment

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

|                                               |                            |   |              |           |               |   |            |            | 
|---------------------------------------------- | -------------------------- | - | ------------ | --------- | ------------- | - | ---------- | ---------- | 
|                                               |                            |   | December 31, |           | September 30,
|                                               |                            |   | 2000         |           | 2001         
|                                               |                            |   |              |           |              
|Equipment                                      |                            | $ | 4,246,033    |           |               | $ | 11,631,032 |           
|Equipment under capital leases                 |                            |   | 1,174,262    |           |               |   | 1,067,083  |           
|Leasehold improvements                         |                            |   | 1,291,927    |           |               |   | 4,799,063  |           
|Construction in progress                       |                            |   | 5,246,799    |           |               |   | 9,507,366  |           
|                                               |                            |   |              |           |               |   |            |           
|                                               |                            |   | 11,959,021   |           |               |   | 27,004,544 |           
|Less accumulated depreciation and amortization |                            |   | (2,479,149   | )         |               |   | (3,874,226 | )         
|                                               |                            |   |              |           |               |   |            |           
|                                               | Net property and equipment |   | $            | 9,479,872 |               |   | $          | 23,130,318 | 
|                                               |                            |   |              |           |               |   |            |           

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EDEN Bioscience CorporationNotes to Condensed Consolidated Financial Statements
(Information as of and for the three months and nine months ended September 30, 2000 and 2001 is unaudited)

3. Accrued Liabilities

Accrued liabilities consist of the following:

|                             |                           |   |              |           |               |   |           |           | 
|---------------------------- | ------------------------- | - | ------------ | --------- | ------------- | - | --------- | --------- | 
|                             |                           |   | December 31, |           | September 30,
|                             |                           |   | 2000         |           | 2001         
|                             |                           |   |              |           |              
|Compensation and benefits    |                           | $ | 1,542,700    |           |               | $ | 1,958,484 |          
|Field trial expenses         |                           |   | 550,013      |           |               |   | 892,996   |          
|Sales and marketing expenses |                           |   | 415,267      |           |               |   | 68,025    |          
|Construction costs           |                           |   |             |           |               |   | 595,769   |          
|Insurance premiums           |                           |   |             |           |               |   | 653,768   |          
|Distribution costs           |                           |   |             |           |               |   | 580,755   |          
|Other                        |                           |   | 730,418      |           |               |   | 614,710   |          
|                             |                           |   |              |           |               |   |           |          
|                             | Total accrued liabilities |   | $            | 3,238,398 |               |   | $         | 5,364,507 | 
|                             |                           |   |              |           |               |   |           |          

4. Credit Facilities

In August 2000, the Company established unsecured, multiple-advance,
committed credit facilities with Stephens Group, Inc. and the WBW Trust Number
One (the Credit Facilities). Under the terms of the Credit Facilities, the
Company had the ability to borrow up to a total of $15 million. The Credit
Facilities contained a requirement that any borrowings be repaid at the date
that the Company received any cash proceeds from the issuance of equity
securities after the date of the Credit Facilities. The Company did not borrow
any amounts pursuant to the Credit Facilities and, with the completion of the
initial public offering, the Company no longer has the ability to borrow any
amounts under the Credit Facilities.

One of the Companys directors, William T. Weyerhaeuser, is trustee for
the WBW Trust Number One. Stephens Group, Inc. beneficially owns approximately
10% the Companys common stock and Jon E.M. Jacoby, a director of the Company,
is also a director and an executive vice president of Stephens Group, Inc.

In connection with the Credit Facilities, the Company paid a loan
commitment fee of $300,000 and issued warrants to purchase 200,000 shares of
the Companys common stock at an exercise price of $15.00 per share. These
warrants became exercisable in March 2001 and expire in August 2005. The
Company recorded an expense of $2.3 million in the three-month period ended
September 30, 2000 for the loan commitment fee and fair value of the warrants
related to the Credit Facilities.




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
included in this document and with the 2000 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 29, 2001.

The following discussion of our financial condition and results of
operations 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 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.

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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 Form 10-Q. The cautionary statements made in
this document should be read as being applicable to all related forward-looking
statements wherever they appear in this document.

Overview

We are a plant technology company focused on developing, manufacturing and
marketing innovative natural products for agriculture. We have a fundamentally
new, patented and proprietary technology that we believe will significantly
improve plant protection and crop production worldwide. We believe our
technology and initial product offer innovative solutions versus traditional
plant protection and crop enhancement alternatives and, importantly, avoid the
substantial and growing public resistance to chemical pesticides and gene-based
biotechnology. Commercial sales of Messenger, our initial product, began in
August 2000.

We have incurred significant operating losses since inception. As of
September 30, 2001, we had an accumulated deficit of $54.9 million. We incurred
net losses of $5.9 million in each of the quarters ended September 30, 2001 and
2000. The net loss for the nine months ended September 30, 2001 was $16.3
million, or $3.6 million (28.3%) more than the $12.7 million loss for the nine
months ended September 30, 2000. We expect to incur additional losses as we
continue our research and development activities and expand sales and marketing
capabilities in the United States and in foreign countries.

In October 2001, we announced a reduction of approximately 20% of our
workforce, bringing our headcount to 99 employees. We expect these work force
reductions to reduce salaries and related expenses by approximately $2.9
million on an annualized basis. We expect to record a severance charge of
$300,000 in the fourth quarter of 2001 in connection with these reductions.

Results of Operations

Three Months and Nine Months Ended September 30, 2000 and 2001

Revenues

We generated our first revenue from product sales in August 2000, when we
began selling our first commercial product, Messenger. Product sales revenue
was $644,300 for the third quarter of 2001, a decrease of $355,700 (35.6%) from
$1.0 million in the comparable quarter of 2000. For the first nine months of
2001, product sales revenue was $5.4 million, an increase of $4.4 million
(440.0%) over
$1.0 million for the same period in 2000. Sales in the first nine months
of 2001 were made to seven distributors, of which two accounted for more than
83.9% of revenue during that period. Sales to United Agri Products, a
subsidiary of ConAgra Foods, Inc., accounted for $3.9 million (72.7%) of
product sales revenue for the nine months ended September 30, 2001 and $409,000
(92.3%) of accounts receivable at September 30, 2001. Sales to Western Farm
Service accounted for $602,800 (11.2%) of product sales revenue for the nine
months ended September 30, 2001. There were no accounts receivable from this
distributor at September 30, 2001. We believe sales for the first nine months
of 2001 were significantly lower than our expectations due primarily to the
severity of growers economic conditions in our initially targeted markets,
principally cotton and citrus. We expect the fourth quarter of 2001 to be
somewhat in line with third quarter 2001.

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Sales Allowances

Sales allowances represent allowances granted to independent distributors
for sales and marketing support, product warehousing and delivery and
information exchange. Sales allowances were $205,200 (31.8% of product sales
revenue) in the third quarter of 2001, compared to $411,300 (40% of product
sales revenue) in the same quarter of 2000. For the first nine months of 2001,
sales allowances were $1.9 million (34.8% of product sales revenue), compared
to $411,300 (40% of product sales revenue) for the same period in 2000. This
percentage has declined as we have increased the number of distributors. We
believe the sales allowance percentage will range between 30% and 35% in the
fourth quarter of this year.

Cost of Goods Sold

Cost of goods sold includes the cost of raw materials, labor and overhead
required to manufacture Messenger and idle capacity charges when our
manufacturing plant is not operating. Cost of goods sold was $782,400 (121.4%
of product sales revenue) for the third quarter of 2001, compared to $352,700
(34.3% of product sales revenue) in the same quarter of 2000. This increase was
due to idle capacity charges in 2001. For the first nine months of 2001, cost
of goods sold was $4.0 million (73.9% of product sales revenue), compared to
$352,700 (34.3% of product sales revenue) for the same period in 2000. This
increase was due to idle capacity charges and a $1.4 million write-down of
inventory in 2001. We expect to continue to incur idle-capacity costs for the
next several months and recently took steps to lower such charges by reducing
our staff and controlling other manufacturing costs.

During the quarter ended June 30, 2001, we recorded a charge to costs of
goods sold of
$1.4 million related to the write-down of inventory consisting primarily
of bulk Messenger product. The write-down was the result of the following
general factors. First, the demand for Messenger was significantly less than
our expectations, which we believe is primarily due to the severity of growers
economic conditions in our initially targeted markets. Although we scaled back
our manufacturing activities during the quarter, inventory levels still
exceeded our requirements based on our then-current nine-month revenue
forecasts. Second, we intend to replace our current formula for Messenger with
an improved formula that we expect will be approved by the EPA within the next
six months, at which time we expect to begin commercial production and sales of
the new formula. Last, we eliminated bulk material that did not meet our
highest standards as a result of a change, since rectified, in the
manufacturing process at our new facility. Based on these factors, we recorded
the charge in the second quarter of 2001.

Research and Development Expenses

Research and development expenses consist primarily of personnel and
related costs, field trials and laboratory, regulatory, patent, facility
and equipment expenses. Research and development expenses were $3.6 million for
the second quarter of 2001, an increase of $1.5 million (71.4%) from
$2.1 million in the comparable quarter of 2000. For the first nine months
of 2001, research and development expenses were $9.3 million, an increase of
$2.1 million (29.2%) over $7.2 million for the same period in 2000. These
increases were primarily due to an increase in the number of research and
development and international field development personnel and increased field
trial costs in the United States and in other countries. We expect that these
costs will decrease slightly in the fourth quarter of this year as a result of
recent workforce reductions.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily 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 were $2.5 million for
the

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third quarter of 2001, an increase of $700,000 (38.9%) from $1.8 million
in the comparable quarter of 2000. For the first nine months of 2001, selling,
general and administrative expenses were $9.0 million, an increase of $5.3
million (143.2%) over $3.7 million for the same period in 2000. These increases
were due primarily to costs associated with hiring additional sales, marketing
and administrative personnel and continuance of our 2001 sales and marketing
campaign to educate growers on the benefits of using Messenger. We expect
selling, general and administrative expenses to decrease slightly in the fourth
quarter of this year as the growing season ends and as a result of recent
workforce reductions.

Interest Income

Interest income consists of earnings on our cash and cash equivalents.
Interest income was
$585,300 for the third quarter of 2001, an increase of $523,900 (853.3%)
from $61,400 in the comparable quarter of 2000. For the first nine months of
2001, interest income was $2.6 million, an increase of $2.3 million (676.7%)
over $339,900 for the same period in 2000. The increased interest income
resulted from the investment of net proceeds received in our initial public
offering, which closed on October 2, 2000. Interest income is affected by
interest rate movements and will decline as we use cash in operations and
purchase property and equipment.

Interest Expense

Interest expense consists of interest we pay on capital leases used to
finance our equipment purchases. Interest expense was $19,300 for the quarter
ended September 30, 2001, a decrease of $11,100 (36.5%) from $30,400 in the
comparable quarter of 2000. For the nine months ended September 30, 2001,
interest expense was $66,700, a decrease of $37,200 (35.8%) from $103,900 for
the same period in 2000. These decreases resulted from lower average principal
balances as we paid down our capital lease obligations. We expect interest
expense to fluctuate as we pay off existing capital leases and enter into new
capital leases.

In August 2000, we established unsecured, multiple-advance, committed
credit facilities with Stephens Group, Inc. and the WBW Trust Number One to
borrow up to a total of $15 million. Under the terms of the facilities, we paid
commitment fees totaling $300,000 and issued warrants to purchase 200,000
shares of our common stock at an exercise price of $15.00 per share. The
commitment fee and fair value of these warrants totaled $2.3 million and is
included in other income (expense) for the three months and nine months ended
September 30, 2000. We did not borrow any amounts pursuant to these credit
facilities and, with the completion of our initial public offering, we no
longer have the ability to borrow any amounts under these credit facilities.

Income Taxes

We have realized a net loss from operations in each period since we began
doing business. As of December 31, 2000, we had accumulated approximately $38.0
million of net operating loss carryforwards for federal income tax purposes.
These carryforwards expire between 2009 and 2015. 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

Since our inception, we have financed our operations primarily through the
sale of equity securities. Prior to October 2000, the majority of our capital
was raised through private sales of our preferred stock, which resulted in net
proceeds of approximately $36.5 million. In October 2000, we received $91.5
million of net proceeds from the initial public offering of 6.67 million shares
of our common stock. To a lesser extent, we have financed our equipment
purchases through lease financings. As of September 30, 2001, we had cash and
cash equivalents of $56.7 million.

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Net cash used in operations for the nine months ended September 30, 2001
was $17.7 million, an increase of $8.5 million (92.4%) from $9.2 million in the
comparable period of 2000. These operating cash outflows resulted primarily
from losses from operations and an increase in working capital and other
assets.

Investing activities for the nine months ended September 30, 2001 used
cash of $12.2 million, an increase of $8.2 million (205.0%) over $4.0 million
in the comparable period of 2000. This increase is due primarily to property
and equipment purchased and leasehold improvements made in connection with a
major expansion of our manufacturing facilities, which was substantially
completed during the first quarter of this year, and construction of our
research and development and administration facility, which is expected to be
completed during the fourth quarter of this year. Capital expenditures for the
remainder of this year are expected to total $2.5 million to $3.0 million.

Financing activities for the nine months ended September 30, 2001 provided
cash of $100,500, a decrease of $1.0 million (90.9%) from the $1.1 million
provided in the comparable period of 2000. This decrease resulted primarily
from a reduction of approximately $1.0 million in proceeds from the exercise of
common stock options and warrants and the issuance of common stock. As of
September 30, 2001, our future minimum payments under capital lease obligations
totaled $483,700 and are payable over the next five years.

We anticipate that operating expenditures will decrease slightly in the
fourth quarter of 2001, and may increase in 2002 as we expand our sales and
marketing capabilities and research and development activities. In addition, we
expect to make capital expenditures during the remainder of this year of up to
approximately $2.5 to $3.0 million, primarily to complete construction of our
new research and development and administration facility. These operating and
capital expenditures will use a material amount of our cash resources. We
believe that our existing cash and cash equivalents of $56.7 million at
September 30, 2001 will be sufficient to meet our anticipated cash needs for
operating activities, working capital and capital expenditures for at least the
next 12 months. Our future capital requirements will depend on the success of
our operations.

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 financings or from other
sources. We may be unable to obtain adequate or favorable financing at that
time.

Recent Accounting Pronouncements

In June 2001, the
Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS)
No. 141, Business Combinations (effective July 1, 2001) and SFAS No. 142,
Goodwill and Other Intangible Assets (effective January 1, 2002). SFAS No.
141 prohibits pooling-of-interests accounting for acquisitions. SFAS No. 142
specifies that goodwill and some intangible assets will no longer be amortized
but instead will be subject to periodic impairment testing. We do not expect
the impact of adopting SFAS No. 142 to be material to our consolidated
financial position, consolidated results of operations or consolidated cash
flows.

On October 3,
2001, the FASB issued SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived
Assets, which addresses financial accounting and reporting for
the disposal of long-lived assets. SFAS No. 144 becomes effective for financial
statements issued for fiscal years beginning after December 15, 2001 and
interim periods within those fiscal years. The Company does not expect the
pronouncement to have a material impact on its consolidated financial position,
consolidated results of operations or consolidated cash flows.

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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 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 have recently initiated marketing
activities designed to promote the distribution and sale of our first product,
Messenger, in the United States. We have not proven our ability to
commercialize any products. 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 transition from a company with a research focus
to a company capable of supporting commercial activities, including
manufacturing, regulatory approval and compliance, marketing, sales,
distribution and quality control and assurance. Our inability to adequately
address these risks could cause us to be unprofitable or to cease operations.

We currently depend on a single product and our development and
commercialization of that product may not be successful.

For the immediately foreseeable future we will be dependent on the
successful development and commercialization of one product, Messenger, which
is based on a new technology. While Messenger has been subject to numerous
field tests on a wide variety of crops with favorable results, we have only
recently begun sales of Messenger, and Messenger could prove to be commercially
unsuccessful. Messenger may not prove effective or economically viable for all
crops or markets. In addition, because Messenger has not been put to widespread
commercial use over significant periods of time, no assurance can be given that
adverse consequences might not result from the use of Messenger, 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 Messenger and other harpin-based products we may develop
are unproven. Messenger may not gain commercial acceptance or success. If we
are unable to successfully achieve broad market acceptance of Messenger, 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 Messenger, including our ability to implement and maintain an
appropriate pricing policy for Messenger, 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.

Inability to develop adequate sales and marketing capabilities could prevent us
from successfully commercializing Messenger 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 and field development specialists who are trained to
educate growers and independent distributors on the uses and benefits of
Messenger. We will need to further develop our sales, marketing and field
development capabilities in order to enhance our commercialization efforts,
which will involve substantial costs. These specialists require a

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high level of technical expertise and knowledge regarding Messengers
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, retailer and growers. Failure to
recruit, train and retain important sales and marketing personnel, such as our
sales and marketing specialists and field development specialists, or the
inability of new sales and marketing personnel to effectively market and sell
Messenger and other products we may develop, could impair our ability to gain
market acceptance of our products and cause our sales to suffer.

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, in an early stage of
development and commercially unproven. It may take years and significant
capital investment to develop viable enhancements of Messenger or new products
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 difficult to produce on
a large scale or will be uneconomical to market;
|
| |   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.                       

Inability to produce a high quality product could impair our business.

To be successful, we will have to manufacture Messenger 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, any
failure of any component required in the manufacturing process could delay or
impair our ability to manufacture Messenger 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, and
specifically that the changes we make will improve our manufacturing
activities. We may encounter difficulties in the production of our current or
future products, including problems involving manufacturing yields, packaging,
quality control and assurance, shortages of qualified personnel and compliance
with regulatory requirements. Even if we are successful in developing our
manufacturing capability and processes, we do not know whether we will satisfy
the requirements of our distributors or customers.

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, 2001, we have
accumulated a deficit of approximately $54.9 million. For the nine-months ended
September 30, 2001, we had a net loss of $16.3 million and for the years ended
December 31, 2000 and 1999, we had net losses of $15.7 million and $9.4
million, respectively. To date, our revenues have been limited. We expect our
future revenues to come primarily from the sale of Messenger and other
products, and these sales are highly uncertain. We expect to continue to devote
substantial resources to maintain

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and operate our manufacturing facility and to fund our research and
development and sales and marketing 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 our ongoing or future field trials are unsuccessful, we may be unable to
achieve market acceptance or obtain regulatory approval of our products.

The successful completion of multiple field trials in domestic and foreign
locations on many 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 unanticipated adverse side effects, or if we
are unable to collect reliable data, regulatory approval of our products could
be delayed or withheld or we may be unable to achieve market acceptance of our
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 tests for us.
Incompatible crop treatment practices or misapplication of the product by third
parties could interfere with the success of our field trials.

Rapid changes in technology could render our products 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 products and to design, develop and market new products that keep
pace with new technological and industry developments.

We may be unable to establish and 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
Messenger and other products we may develop. We have engaged several
independent distributors and retailers for the distribution and sale of
Messenger. Our future revenue growth will depend in large part on our success
in establishing and maintaining these sales and distribution channels. We are
in the early stages of developing 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 with
which we partner will focus adequate resources on selling our 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
Messenger 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 capabilities, which would be expensive and time-consuming and the
success of which would be uncertain.

Two of our distributors accounted for an aggregate of approximately 83.9%
of our product sales for the nine months ended September 30, 2001 and 92.3% of
our trade accounts receivable balance as of September 30, 2001. One
distributor, United Agri Products, a subsidiary of ConAgra Foods, Inc.,
accounted for approximately 72.7% of our product sales revenue and 92.3% of our
trade accounts

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receivable balance, and Western Farm Service accounted for approximately 11.2%
of our product sales revenue. There were no accounts receivable from Western
Farm Service at September 30, 2001. We anticipate that we will continue to
extend credit to these distributors. If either of these distributors, or any
other distributor which 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 either 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.

Inability to obtain regulatory approvals, or to comply with ongoing and
changing regulatory requirements, could delay or prevent sales of Messenger and
other potential products.

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

In April 2000, we received conditional approval from the EPA to market and
sell our first product, Messenger, in the United States. We are required,
however, to obtain regulatory approval from certain state and foreign
regulatory authorities before we market Messenger in those jurisdictions.
Although we are authorized to sell Messenger in 48 states on virtually all
crops and in California on strawberry for disease management, we have not yet
received approval for Messenger in Colorado or for use on other crops in
California. We have also received authorization to sell Messenger in Ecuador
for use on all crops and temporary authorization to sell Messenger in the
Peoples Republic of China for use on tomatoes and peppers. Certain of these
jurisdictions may apply different criteria than the EPA in connection with
their approval processes.

If we make significant enhancements in Messengers design as a result of
our ongoing research and development projects, additional EPA 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 additional requirements will not be added by the
EPA that could make the procedure more time-consuming and costly for any future
products we may develop.

Even after we obtain all necessary regulatory approvals to market and sell
Messenger and other products we may develop, Messenger and other such 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 receipt of newly discovered
information, including an inability to comply with regulatory requirements, the
occurrence of unanticipated problems with the product or other reasons. In
addition, federal, state and foreign regulations relating to crop 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 Messenger or other products that we may
develop and commercialize.

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Inability to satisfy the conditions of our EPA and California registrations
could limit or prevent sales of Messenger.

In April 2000, the EPA granted conditional registration for the full
commercial use of Messenger. Our Messenger registration will automatically
expire two years from the date it was granted. Before the expiration date, the
EPA will reevaluate the registration and determine whether to convert the
product to a non-expiring registration. We will not be permitted to continue
sales of Messenger if we do not receive a non-expiring registration.

The EPA also conditioned its approval of our Messenger registration on the
requirement that we conduct four additional studies by April 19, 2001 that are
designed to further demonstrate the safety of our product. These studies were
completed and submitted to the EPA on April 16, 2001. In addition, our
registration to sell Messenger in California, which is limited to sales for use
on strawberry for disease management, is conditioned on the requirement that we
submit data from several additional studies within various required timeframes
over the next two years. If we are unable to conduct the studies required by
the California Department of Pesticide Regulation in a timely manner, or if the
results of the studies are unacceptable to the EPA or the CDPR, as applicable,
the EPA or the CDPR may revoke its approvals or impose limitations on the use
of Messenger that could have a negative impact on our sales. Because EPA and
state approvals are required for commercial sales of Messenger, the loss of
such approvals for any reason, including our inability to satisfy the
conditions of our EPA registration, would prevent further sales of Messenger.

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
products could be 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 Messenger in commercial quantities would be impaired or prohibited,
which would have an adverse effect on our sales.

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

We currently depend on independent manufacturers to perform certain
portions of our production process. We intend to engage additional third-party
manufacturers as necessary to perform this process. 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 Messenger 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 commercially
acceptable terms. 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.

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

Our success depends in part on our ability to expand internationally as we
obtain regulatory approvals to market and sell our products in other countries.
We have been conducting field trials in several international locations, and we
hired personnel in Europe and Mexico to develop operations in those regions.
International expansion of our operations could impose substantial burdens on
our resources, divert managements attention from domestic operations and
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 have a
negative effect on our operating results.

Inability to address strain on our resources caused by growth could result in
our inability to effectively manage our business.

As we add manufacturing, marketing, sales, field development and other
personnel, both domestically and internationally, during the commercialization
of Messenger, and expand our manufacturing and research and development
capabilities, 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.

The high level of competition in our market may result in pricing pressures,
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 and future competitors,
which may result in price reductions, reduced margins or the inability to
achieve market acceptance of our products.

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, many
of the large agri-chemical companies have a more diversified product offering
than we do, which may give these companies an advantage in meeting customer
needs by enabling them to offer integrated solutions to plant protection and
yield enhancement.

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 research and development efforts.

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

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possible that these agreements may be breached and that any remedies for a
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 relative 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 products.

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 product does 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 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 Messenger from genetically modified plants
and certain other products, public concerns over those products could
negatively impact market acceptance of Messenger.

Claims that genetically engineered products are unsafe for consumption or
pose a danger to the environment have led to public concerns and negative
public attitudes, particularly in Europe. We intend to distinguish Messenger
and harpin-related technologies from products that genetically modify plants.
While our technology does involve genetic modification in the process of
manufacturing Messenger,

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Messenger and harpin-related technologies are topically applied and do not
genetically modify the plants DNA. If the public or potential customers
perceive Messenger as a genetically modified product, Messenger may not gain
market acceptance. Similarly, countries that have imposed more restrictive
regulations on genetically modified plants, including Japan and certain members
of the European Union, may perceive Messenger as a genetically modified
product. If so, regulators in those countries may impose more restrictive
regulations on Messenger, which could delay, limit or impair our ability to
market and sell Messenger in those countries.

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
any products we 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
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 in the normal
course of business.

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

We are highly dependent on the efforts and abilities of our current key
managerial and technical personnel, particularly Jerry L. Butler, our Chief
Executive Officer and President, and Dr. Zhongmin Wei, our Vice President of
Research. Our success will depend in part on retaining the services of Mr.
Butler and Dr. 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 and technical personnel or to
attract additional qualified personnel could, among other things, delay our
product development and marketing and sales efforts. Although Mr. Butler and
Dr. Wei have signed agreements with us that limit their ability to compete
directly with us in the future, nothing prevents either of them from leaving
EDEN. Moreover, in our field, competition for qualified management and
technical personnel is intense. In addition, many of the companies with which
we compete for experienced personnel have greater financial and other resources
than we do. As a result of these factors, we may be unable to recruit, train
and retain sufficient qualified personnel.

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

We will require substantial additional funding to continue our research
and development activities, maintain and operate our manufacturing facilities
and commercialize products worldwide. 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 and manufacturing programs. We believe
that our existing capital resources will be sufficient to support our
operations for at least the next year. 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 may not be available to us on acceptable terms.

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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. Numerous 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 are dependent on planting and growing
seasons, climatic conditions, 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 product 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 Messenger carried in
inventory by independent distributors and 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 in a
particular quarter to store and use over long periods of time, or time their
purchases to coincide with the availability of capital, which may cause
significant fluctuations in our operating results for a particular quarter or
year.




Item 3. Quantitative and Qualitative Disclosures About Market Risk

We do not currently hold any derivative instruments, and we do not engage
in hedging activities. Also, we do not have any outstanding variable rate debt
and currently do not enter into any material transactions denominated in a
foreign currency. Therefore, our direct exposure to interest rate and foreign
exchange fluctuation is currently not material to our results of operations. We
believe that the market risk arising from holdings of our financial instruments
is not material.




PART II  OTHER INFORMATION




Item 2. Changes in Securities and Use of Proceeds



|(a) |  | 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, after accounting for $7.0 million in underwriting discounts and
commissions and approximately $1.6 million in other expenses of the
offering, were $91.5 million.                                                                                                                                                                  
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | To date, of the net offering proceeds, we have used approximately $15.6
million to expand and enhance our manufacturing and research and development
and administration facilities, and approximately $20.0 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.

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Item 6. Exhibits and Reports on Form 8-K

The following exhibits are being filed as part of this quarterly report on Form 10-Q.



|(a) |  | Exhibits.
|--- |  | ---------

|        |  |                                             |  |  |  | 
|------- |  | ------------------------------------------- |  |  |  | 
|Exhibit |  |                                             |  |  |  | 
|Number  |  | Description                                 |  |  |  | 
|        |  |                                             |  |  |  | 
|11.1    |  | Statement re computation of per share loss.



|(b) |  | Reports on Form 8-K.
|--- |  | --------------------

There were no reports on Form 8-K filed during the three months ended
September 30, 2001.




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 14, 2001 |  |     |  |                                                                                                                                
|                        |  | By: |  | /s/ Bradley S. Powell                                                                                                          
|                        |  |     |  |                                                                                                                                
|                        |  |     |  | Bradley S. Powell
Vice President of Finance, Secretary and
Chief Financial Officer (principal
financial and accounting officer)

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