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
      1934For
      the quarterly period ended September 30,
2008


or


o
            Transition
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934For
      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)
              
              (I.R.S.
      Employer Identification No.)





14522
      NE North Woodinville Way, Suite 202BWoodinville,
      Washington
              
              98072(Address
      of principal executive offices)
              
              (Zip
      Code)





(425)
806-7300


(Registrant’s
telephone number, including area code)





Not
applicable.


(Former
name, former address and former fiscal year, if changed since last
report)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.


Yes x    No
o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.




Large
      accelerated filer  o
                  Accelerated
      filer  oNon-accelerated
      filer  o  (Do not
      check if a smaller reporting company)
                  Smaller
      reporting company o





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes o   No
x





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.





Class
            
            Outstanding
      as of November 11, 2008Common
      Stock, $0.0025 Par Value
            
            2,716,486




Eden Bioscience Corporation





Index
to Form 10-Q





PagePart
      I.
                      Financial
      InformationItem
      1.
                      Financial Statements
                      2Condensed Consolidated Balance Sheets as of
      September 30, 2008 and December 31, 2007
                      2Condensed Consolidated Statements of Operations for the
      Three Months and Nine Months Ended September 30, 2008 and
      2007
                      3Condensed Consolidated Statements of Cash Flows for the
      Nine Months Ended September 30, 2008 and 2007
                      4Notes to Unaudited Condensed Consolidated Financial
      Statements
                      5Item
      2.
                      Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                      11Item
      3.
                      Quantitative and Qualitative Disclosures About Market
      Risk
                      18Item
      4T.
                      Controls and Procedures
                      18Part
      II.
                      Other
      InformationItem
      6.
                      Exhibits
                      18Signature
                      
                      19


-1-
 Index




PART I -- FINANCIAL INFORMATION





Item
1. Financial Statements





EDEN
BIOSCIENCE CORPORATION AND SUBSIDIARIES





CONDENSED
CONSOLIDATED BALANCE SHEETS


(Unaudited)





ASSETSSeptember
      30,
                    2008
                  
                  
                  December
      31,
                    2007Current
      assets:Cash
      and cash equivalents
                  
                  $
                  5,196,126
                  
                  
                  $
                  5,668,239Inventory,
      current
                  
                  
                  40,150
                  
                  
                  
                  41,749Prepaid
      expenses and other current assets
                  
                  
                  56,473
                  
                  
                  
                  68,537Total
      current assets
                  
                  
                  5,292,749
                  
                  
                  
                  5,778,525Inventory,
      non-current
                  
                  
                  29,876
                  
                  
                  
                  60,035Property
      and equipment
                  
                  
                  99
                  
                  
                  
                  99Other
      assets
                  
                  
                  48,612
                  
                  
                  
                  59,027Total
      assets
                  
                  $
                  5,371,336
                  
                  
                  $
                  5,897,686LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                  
                  $
                  9,720
                  
                  
                  $
                  29,979Accrued
      liabilities
                  
                  
                  65,079
                  
                  
                  
                  232,631Total
      current liabilities
                  
                  
                  74,799
                  
                  
                  
                  262,610Commitments
      and contingenciesShareholders’
      equity:Preferred
      stock, $0.01 par value, 10,000,000 shares authorized; no sharesissued
      and outstanding at September 30, 2008 and December 31,
2007
                  
                  
                  -
                  
                  
                  
                  -Common
      stock, $0.0025 par value, 11,111,111 shares authorized;2,716,486
      issued and outstanding shares at September 30, 2008 andDecember
      31, 2007
                  
                  
                  6,791
                  
                  
                  
                  6,791Additional
      paid-in capital
                  
                  
                  132,887,336
                  
                  
                  
                  132,882,325Accumulated
      deficit
                  
                  
                  (127,597,590
                  )
                  
                  
                  (127,254,040
                  )Total
      shareholders’ equity
                  
                  
                  5,296,537
                  
                  
                  
                  5,635,076Total
      liabilities and shareholders’ equity
                  
                  $
                  5,371,336
                  
                  
                  $
                  5,897,686








The
accompanying notes are an integral part of these statements.


-2-
 Index





EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES





CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)





Three Months Ended September
      30,
                  
                  
                  Nine Months Ended September
    30,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Product
      sales
                  
                  $
                  19,674
                  
                  
                  $
                  55,845
                  
                  
                  $
                  166,682
                  
                  
                  $
                  327,744Operating
      expenses:Cost
      of goods sold
                  
                  
                  5,718
                  
                  
                  
                  32,908
                  
                  
                  
                  49,698
                  
                  
                  
                  171,243Research
      and development
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  136,442Selling,
      general and administrative
                  
                  
                  164,672
                  
                  
                  
                  617,028
                  
                  
                  
                  588,475
                  
                  
                  
                  1,250,528Total
      operating expenses
                  
                  
                  170,390
                  
                  
                  
                  649,936
                  
                  
                  
                  638,173
                  
                  
                  
                  1,558,213Loss
      from operations
                  
                  
                  (150,716
                  )
                  
                  
                  (594,091
                  )
                  
                  
                  (471,491
                  )
                  
                  
                  (1,230,469
                  )Other
      income:Gain
      on sale of Harpin Protein Technology
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  113,968Interest
      income
                  
                  
                  34,081
                  
                  
                  
                  79,469
                  
                  
                  
                  127,941
                  
                  
                  
                  227,533Total
      other income
                  
                  
                  34,081
                  
                  
                  
                  79,469
                  
                  
                  
                  127,941
                  
                  
                  
                  341,501Loss
      before income taxes
                  
                  
                  (116,635
                  )
                  
                  
                  (514,622
                  )
                  
                  
                  (343,550
                  )
                  
                  
                  (888,968
                  )Income
      taxes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Net
      loss
                  
                  $
                  (116,635
                  )
                  
                  $
                  (514,622
                  )
                  
                  $
                  (343,550
                  )
                  
                  $
                  (888,968
                  )Basic
      and diluted net loss per share
                  
                  $
                  (0.04
                  )
                  
                  $
                  (0.19
                  )
                  
                  $
                  (0.13
                  )
                  
                  $
                  (0.33
                  )Weighted
      average shares outstanding used to compute net loss per
    share
                  
                  
                  2,716,486
                  
                  
                  
                  2,716,486
                  
                  
                  
                  2,716,486
                  
                  
                  
                  2,716,486








The
accompanying notes are an integral part of these statements.


-3-
 Index





EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES





CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)








Nine Months Ended September
    30,2008
                  
                  
                  2007Cash
      flows from operating activities:Net loss
                  
                  $
                  (343,550
                  )
                  
                  $
                  (888,968
                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Stock
      compensation expense
                  
                  
                  5,011
                  
                  
                  
                  15,590Gain
      on sale of Harpin Protein Technology
                  
                  
                  -
                  
                  
                  
                  (113,968
                  )Accretion
      expense
                  
                  
                  -
                  
                  
                  
                  5,672Deferred
      rent payable
                  
                  
                  -
                  
                  
                  
                  (1,406
                  )Changes
      in assets and liabilities:Accounts
      receivable
                  
                  
                  -
                  
                  
                  
                  174,150Inventory
                  
                  
                  31,758
                  
                  
                  
                  351,168Prepaid
      expenses and other assets
                  
                  
                  22,479
                  
                  
                  
                  314,223Accounts
      payable
                  
                  
                  (20,230
                  )
                  
                  
                  (200,196
                  )Accrued
      liabilities
                  
                  
                  (166,732
                  )
                  
                  
                  (324,421
                  )Net
      cash from operating activities
                  
                  
                  (471,264
                  )
                  
                  
                  (668,156
                  )Cash
      flows from investing activities:Proceeds
      from sale of Harpin Protein Technology
                  
                  
                  -
                  
                  
                  
                  1,903,074Proceeds
      from sale of equipment
                  
                  
                  -
                  
                  
                  
                  50,000Net
      cash from investing activities
                  
                  
                  -
                  
                  
                  
                  1,953,074Effect
      of foreign currency exchange rates on cash and cash
      equivalents
                  
                  
                  (849
                  )
                  
                  
                  (7,029
                  )Net
      increase (decrease) in cash and cash equivalents
                  
                  
                  (472,113
                  )
                  
                  
                  1,277,889Cash
      and cash equivalents at beginning of period
                  
                  
                  5,668,239
                  
                  
                  
                  4,185,225Cash
      and cash equivalents at end of period
                  
                  $
                  5,196,126
                  
                  
                  $
                  5,463,114




The
accompanying notes are an integral part of these statements




-4-
 Index




EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
  NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




1.
            Organization and Summary of
      Significant Accounting
Policies




Organization
and Business




Eden
Bioscience Corporation (“Eden Bioscience” or the “Company”) was incorporated in
the State of Washington on July 18, 1994. On February 28, 2007, the Company sold
its proprietary harpin protein-based technology and substantially all of its
assets used in the manufacturing and distribution of harpin-based products used
in the worldwide agricultural and horticultural markets (“Harpin Protein
Technology”) to Plant Health Care, Inc. (“PHC”). From December 1, 2006 through
February 28, 2007, the Company operated under an Independent Distribution
Agreement whereby PHC served as the exclusive distributor of the Company’s
products for all channels of trade, other than to retail distributors and
consumers (the “Home and Garden Market”), in substantially all worldwide
territories. The Company’s business strategy after the sale is to sell harpin
protein-based products to the Home and Garden Market (the “Home and Garden
Business”) and use its available cash and any revenue generated from its Home
and Garden Business to explore whether there may be opportunities to realize
potential value from its remaining business assets, primarily its tax loss
carryforwards.




The
Company is subject to a number of risks including, among others: realizing
potential value from tax loss carryforwards is highly speculative and subject to
numerous material uncertainties; dependence on one manufacturer for the supply
of harpin protein-based products; dependence on a limited number of products and
the commercialization of those products, which may not be successful; reliance
on independent distributors and retailers to sell the Company’s products;
ability to retain existing employees; and competition from other companies with
greater financial, technical and marketing resources.




Basis
of Presentation




The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles for
interim financial information and pursuant to the instructions to Form 10-Q.
Accordingly, they do not include all of the information and notes required by
U.S. generally accepted accounting principles for complete financial statements.
The balance sheet at December 31, 2007 has been derived from the audited
financial statements at that date but does not include all of the information
and notes required by U.S. generally accepted accounting principles for complete
financial statements. These financial statements and notes should be read in
conjunction with the financial statements and notes as of and for the year ended
December 31, 2007 included in the Company’s Annual Report on Form 10-K, which
was filed with the Securities and Exchange Commission on March 28,
2008.




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 and nine months ended September 30, 2008 are not
necessarily indicative of the results expected for the full fiscal year or for
any future period.




On
February 22, 2008, the Company amended its Restated Articles of Incorporation,
as amended, to reduce the Company’s number of authorized shares of common stock
from 33,333,333 to 11,111,111 and to effect a 1-for-3 reverse stock split of the
Company’s outstanding common stock. The reverse stock split was effective at
5:00 p.m., Pacific time, on February 22, 2008 and the Company’s common stock
began trading as adjusted for the reverse stock split on February 25, 2008. As a
result of this reverse stock split, each three shares of common stock were
exchanged for one share of common stock, with cash being issued for any
fractional shares, and the total number of shares outstanding was reduced from
8.1 million shares to approximately 2.7 million shares. The Company has
retroactively adjusted all the share information to reflect this reverse stock
split in the accompanying condensed consolidated financial statements and
notes.




Liquidity




The
Company’s operating expenditures have been significant since its inception. The
Company currently anticipates that it’s operating expenses in 2008, although
less than its operating expenses in 2007, will significantly exceed sales of its
harpin protein-based home and garden products (“Home and Garden Products”) to
the Home and Garden Market and that net losses and working capital requirements
will consume a material amount of its cash resources in 2008. The Company’s
future capital requirements will depend on the success of its Home and Garden
Business and its ability to successfully implement its strategy of realizing
potential value from its remaining business assets, primarily its tax loss
carryforwards. The Company does not plan to make a substantial investment toward
the development of its Home and Garden Business. Management of the Company
believes that the balance of its cash and cash equivalents at September 30, 2008
will be sufficient to meet its anticipated cash needs for net losses, working
capital and capital expenditures for more than the next 12 months, although
there can be no assurance in that regard.




-5-
 Index




EDEN
BIOSCIENCE CORPORATION AND SUBSIDIARIES
  NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




Estimates
Used in Financial Statement Preparation




The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Examples include fair value of property and equipment; expense
accruals; warranty claims, inventory valuation and classification; fair value of
stock compensation arrangements. Such estimates and assumptions are based on
historical experience, where applicable, management’s plans, and other
assumptions. Estimates and assumptions are reviewed periodically and the effects
of revisions are reflected in the financial statements prospectively when they
are determined to be necessary. Actual results could differ from these
estimates.




Inventory




Inventory
is valued at the lower of average cost or market. Costs include material, labor
and overhead. The Company estimates inventory cost reductions based on expected
sales value and the amount and age of product in the Company’s
inventory.




Property
and Equipment




Property
and equipment are recorded at estimated fair value using an orderly liquidation
method. Property and equipment consist of assets used in our Home and Garden
Business. Improvements and replacements are capitalized. Maintenance and repairs
are expensed when incurred.




Other
Assets




As of
September 30, 2008 and December 31, 2007, other non-current assets consist
primarily of prepaid insurance.




Revenues




The
Company recognizes revenue from product sales when product is delivered to its
customers and all significant obligations of the Company have been satisfied,
unless acceptance provisions or other contingencies or arrangements exist. If
acceptance provisions or contingencies exist, revenue is deferred and recognized
later if such provisions or contingencies are satisfied. As part of the analysis
of whether all significant obligations of the Company have been satisfied or
situations where acceptance provisions or other contingencies or arrangements
exist, the Company considers the following elements, among
others:  sales terms and arrangements, historical experience and
current incentive programs. Customers do not have price protection or
product-return rights. The Company provides an allowance for warranty claims
based on historical experience and expectations. Shipping and handling costs
related to product sales that are paid by the Company are included in cost of
goods sold. Product sales by geographical region were:




Three Months Ended September
      30,
                
                
                Nine Months Ended September
    30,2008
                
                
                2007
                
                
                2008
                
                
                2007United
      States
                
                $
                19,674
                
                
                $
                28,245
                
                
                $
                166,682
                
                
                $
                280,312Spain
                
                
                -
                
                
                
                27,600
                
                
                
                -
                
                
                
                47,432Product
      sales
                
                $
                19,674
                
                
                $
                55,845
                
                
                $
                166,682
                
                
                $
                327,744





Income
Taxes




The
Company accounts for income taxes under the provisions of FASB Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes
(“SFAS No. 109”). SFAS No. 109 requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the differences between the
financial reporting and tax bases of assets and liabilities and operating loss
and tax credit carryforwards using enacted tax rates in effect for the year in
which the differences and carryforwards are expected to
reverse.


-6-
 Index




EDEN
BIOSCIENCE CORPORATION AND SUBSIDIARIES
  NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




Foreign
Currency Translation




The
Company conducts its operations in two primary functional currencies: the U.S.
dollar and the euro. Balance sheet accounts of the Company’s foreign operations
are translated from foreign currencies into U.S. dollars at period-end exchange
rates while income and expenses are translated at average exchange rates during
the period. Cumulative translation gains or losses related to net assets located
outside the U.S. are shown as a component of shareholders’ equity. Gains and
losses resulting from foreign currency transactions, which are denominated in a
currency other than the entity’s functional currency, are included in the
consolidated statements of operations. As of February 28, 2007, the cumulative
translation adjustment related to the Company’s European subsidiary totaling
$103,470 was reclassified from accumulated other comprehensive income and
reported as part of the gain on sale of Harpin Protein Technology as this
subsidiary was substantially liquidated as a result of the sale to PHC. There
were no significant gains or losses on foreign currency transactions in the nine
month periods ended September 30, 2008 and 2007.




Net
Loss per Share




Basic net
loss per share is the net loss divided by the average number of shares
outstanding during the period. Diluted net loss per share is the net loss
divided by the sum of the average number of shares outstanding during the period
plus the additional shares that would have been issued had all dilutive stock
options been exercised, less shares that would be repurchased with the proceeds
from such exercise using the treasury stock method. The effect of including
outstanding stock options is antidilutive for all periods presented. Therefore,
stock options totaling 133,437 and 148,229 as of September 30, 2008 and 2007,
respectively, have been excluded from the calculation of diluted net loss per
share.




2.
            Sale
      of Harpin Protein Technology




On
February 28, 2007, under the terms of an asset purchase agreement, the Company
sold the Harpin Protein Technology to PHC for $1,396,824 in cash, net of
transaction costs incurred after January 1, 2007 totaling $103,176, a promissory
note in the principal amount of $700,751 payable on December 31, 2007 and the
assumption by PHC of certain of the liabilities relating to or arising out of
the Company’s Harpin Protein Technology. The promissory note had an interest
rate of 5% per annum and was secured by equipment, certain intellectual property
and other assets acquired by PHC and unconditionally guaranteed by PHC’s
indirect parent, Plant Health Care plc. On June 6, 2007, PHC sold substantially
all of the equipment that secured the promissory note and, in accordance with
the terms of the promissory note, paid the Company 75% of the proceeds from the
sale which amounted to $506,250. The remaining principal and interest was paid
on December 31, 2007. The Company also sold $281,044 of finished goods to PHC
under the Independent Distribution Agreement. Harpin Protein Technology includes
substantially all of the Company’s assets used in the creation of plant health
technology incorporating harpin proteins and the manufacture of biopesticide,
plant health and nutrient products utilizing the Harpin Protein Technology.
These assets include all intellectual property, contracts (including the
Company’s license agreement with the Cornell Research Foundation (“CRF”) and
manufacturing and office facility lease), equipment and inventory related to the
Company’s worldwide agricultural and horticultural markets.


-7-
 Index




EDEN
BIOSCIENCE CORPORATION AND SUBSIDIARIES




NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




The sale
of Harpin Protein Technology to PHC resulted in a gain calculated as
follows:




Cash
      portion of purchase price
                
                $
                2,200,751Less
      transaction costs incurred after January 1, 2007
                
                
                (103,176
                )Assets
      sold to PHC:Inventory
                
                
                (1,895,978
                )Equipment
      held for sale
                
                
                (63,750
                )Property
      and equipment held and used
                
                
                (647,962
                )Liabilities
      assumed by PHC:Accrued
      liabilities
                
                
                59,625Other
      long-term liabilities
                
                
                460,988Recognition
      of cumulative translation adjustment
                
                
                103,470Gain
      on sale of assets to PHC
                
                $
                113,968





The
Company retained its cash, accounts receivable, tax attributes and assets
relating to its Home and Garden Business, consisting primarily of inventory
designated for the Home and Garden Market. In conjunction with the sale of its
Harpin Protein Technology, the Company entered into a license and supply
agreement with PHC, pursuant to which PHC granted the Company an exclusive
worldwide right and license to sell harpin protein-based products for the
protection of plants and seeds and the promotion of plant health in the Home and
Garden Market and a royalty free, exclusive worldwide license to use the
Messenger, MightyPlant and Harp-N-Tek trademarks in connection with the sale of
its Home and Garden Products. Under the license and supply agreement, PHC will
supply the Company harpin proteins and harpin-protein based products for its
Home and Garden Business. The license and supply agreement will continue until
the expiration of the last U.S. or foreign patent relating to the products held
or acquired by PHC in connection with the asset purchase agreement and,
thereafter, for automatic additional consecutive five year periods. The Company
retained all liabilities associated with the Home and Garden Business and all
liabilities associated with its Harpin Protein Technology that occurred or
existed prior to February 28, 2007 that were not specifically assumed by
PHC.




3.
            Stock
      Options




At
September 30, 2008, the Company had reserved 24,442 shares of common stock for
issuance under the 1995 Combined Incentive and Nonqualified Stock Option Plan,
all of which had been granted, and 396,466 shares for issuance under the 2000
Stock Incentive Plan. Options totaling 108,995 under the 2000 Stock Incentive
Plan had been granted at September 30, 2008, leaving 287,471 options available
for future grant.




The
following table summarizes stock option activity:




Number
      of
                  Shares
                
                
                Weighted
                  Average
      Exercise
                  Price Per ShareBalance
      at December 31, 2007
                
                
                146,776
                
                
                $
                30.06Expired
                
                
                (13,339
                )
                
                
                20.25Balance
      at September 30, 2008 (all exercisable)
                
                
                133,437
                
                
                
                31.05





4.
            Inventory




Inventory,
at the lower of average cost or market, consists of the following:




September
      30,
                
                
                December
      31,2008
                
                
                2007Raw
      materials
                
                $
                13,050
                
                
                $
                18,941Finished
      goods
                
                
                56,976
                
                
                
                82,843Total
      inventory
                
                
                70,026
                
                
                
                101,784Less
      non-current portion of inventory
                
                
                (29,876
                )
                
                
                (60,035
                )Current
      portion of inventory
                
                $
                40,150
                
                
                $
                41,749





The
non-current portion of inventory consists of raw materials and finished goods
that the Company does not expect to utilize in the next 12 months following the
balance sheet date.


-8-
 Index


EDEN
BIOSCIENCE CORPORATION AND SUBSIDIARIES
  NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


5.
            Accrued
      Liabilities




Accrued
liabilities consist of the following:




September30,
                  
                  
                  December31,2008
                  
                  
                  2007Compensationandbenefits
                  
                  $
                  -
                  
                  
                  $
                  142,878Legal
                  
                  
                  16,517
                  
                  
                  
                  -Promotions
                  
                  
                  -
                  
                  
                  
                  37,416Warranty
                  
                  
                  25,000
                  
                  
                  
                  25,000Other
                  
                  
                  23,562
                  
                  
                  
                  27,337Totalaccruedliabilities
                  
                  $
                  65,079
                  
                  
                  $
                  232,631


6.
            Commitments
      and Contingencies




Employment
Agreement




On July
25, 2007, the Company entered into an employment agreement with Bradley S.
Powell, its President and Chief Financial Officer. The employment agreement
extinguished Mr. Powell’s change-in-control agreement, dated August 16, 2000,
and severance agreement, dated January 28, 2002, in exchange for supplemental
payments totaling $356,145. The supplemental payments were paid in installments
as follows: one-half on July 25, 2007; one-quarter on September 30, 2007; and
one-quarter on January 15, 2008.




Legal
Proceedings




The
Company is subject to various claims and legal actions that arise in the
ordinary course of business and believes that the ultimate liability, if any,
with respect to these claims and legal actions will not have a material effect
on its condensed consolidated financial statements.




7.
            Major
      Customers




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




Three Months Ended September
      30,
                
                
                Nine Months Ended September
    30,2008
                
                
                2007
                
                
                2008
                
                
                2007Customer
      A
                
                $
                -
                
                
                $
                28,000
                
                
                $
                -
                
                
                $
                47,000Customer
      B
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                42,000Customer
      C
                
                
                -
                
                
                
                -
                
                
                
                29,000
                
                
                
                35,000Customer
      D
                
                
                2,500
                
                
                
                -
                
                
                
                **
                
                
                
                **





**Less than ten per
cent




8.
            Income
      Taxes




The
Company files a U.S. Federal and certain foreign and state tax returns and did
not record an income tax benefit for any of the periods presented because it has
experienced operating losses since inception. The Company’s total U.S. Federal
tax net operating loss carryforwards were approximately $118.2 million at
December 31, 2007 and expire between 2009 and 2027 and capital loss carryforward
of $1.4 million that expires in 2027. The Company’s total foreign tax net
operating loss carryforwards were approximately $5.2 million at December 31,
2007 of which $2.3 million expires between 2008 and 2017 and $2.9 million does
not expire. The Company has total net operating loss carryforwards in 18 states
that range between $12.5 million to $2,000 per state and expire between 2008 and
2027. The Company’s total general business credit carryforwards were
approximately $1.4 million at December 31, 2007 and expire between 2013 and
2026.  The estimated net operating loss and capital loss carryforwards
were revised during the quarter ended September 30, 2008.  The
revisions had no effect on the consolidated financial
statements.


-9-
 Index




EDEN
BIOSCIENCE CORPORATION AND SUBSIDIARIES
  NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


If the
Company were to undergo an ownership change as defined in Section 382 of the
U.S. Internal Revenue Code (the "Code"), its net tax loss and general business
credit carryforwards generated prior to the ownership change would be subject to
annual limitations, which could reduce, eliminate, or defer the utilization of
these losses. Based upon an analysis of past changes in the Company’s ownership,
the Company believes that it has experienced ownership changes (as defined under
Section 382) on March 20, 1996 and October 2, 2000 and absent any other
ownership changes in the future, there are no significant limitations on the
Company’s future ability to use tax loss carryforwards generated prior to those
dates. The Company does not believe that the sale to PHC resulted in another
ownership change that would further limit its future ability to use tax loss
carryforwards generated after October 2000 because it was a sale of assets.
However, the IRS or some other taxing authority may disagree with the Company’s
position and contend that the Company has already experienced other such
ownership changes or that the sale of assets resulted in an ownership change. In
such case, the Company’s ability to use its tax loss carryforwards to offset
future taxable income would be severely limited. If the sale of assets to PHC
results in an ownership change as defined in Section 382 of the Code, the
Company’s tax loss carryforwards available to offset future taxable income could
be severely limited and the tax loss carryforwards may expire as a result of the
limitation. If an ownership change does not occur as a result of the sale to
PHC, there is still the potential for an ownership change to occur under Section
382 as a result of future changes in stock ownership. Net operating loss
carryforwards may expire if the Company does not generate sufficient income to
utilize the losses before their normal expiration. In addition to Section 382,
certain other statutory provisions and common law doctrine could limit the
Company’s opportunities to realize potential value from, or otherwise adversely
affect the Company’s ability to preserve and utilize, the Company’s tax loss
carryforwards.


-10-
 Index


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




This
discussion and analysis should be read in conjunction with our unaudited
condensed consolidated financial statements and accompanying notes thereto
included in this report and with our 2007 audited financial statements and notes
thereto included in our most recent Annual Report on Form 10-K, which was filed
with the Securities and Exchange Commission on March 28, 2008.




This
Quarterly Report on Form 10-Q contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 that involve
risks and uncertainties, such as statements regarding our ability to preserve
and employ our tax loss carryforwards and our belief that our cash balance at
September 30, 2008 will be sufficient to meet anticipated cash needs for more
than the next 12 months.  We use words such as “anticipate,”
“believe,” “expect,” “future” and “intend,” the negative of these terms and
similar expressions to identify forward-looking statements.  However,
these words are not the exclusive means of identifying such
statements.  In addition, any statements that refer to expectations,
projections or other characterizations of future events or circumstances are
forward-looking statements.  Our actual results could differ
materially from those anticipated in these forward-looking statements for many
reasons, including the following factors.




●
            Our business objective of
      realizing potential value from our tax loss carryforwards is highly
      speculative and subject to numerous material
      uncertainties.




●
            Our inability to realize value
      from our tax loss
carryforwards.




●
            Our inability to use our tax
      loss carryforwards because we are unable to generate taxable
      income.




●
            IRS challenge of the amount of
      our tax loss carryforwards.




●
            Changes in legislation that
      could negatively affect our ability to use the tax benefits associated
      with our tax loss
carryforwards.




●
            Our inability to be successful
      in our Home and Garden Business, which has a limited operating history,
      has generated only limited revenue to date and in which we do not
      currently expect to substantially increase our
      investment.




●
            Our inability to reduce
      operating losses and negative cash flow and achieve profitability or
      sustain operations.




●
            The failure of PHC, on whom we
      are dependent for the manufacture and supply of harpin proteins and harpin
      protein-based products for our Home and Garden Business, to provide timely
      delivery of high-quality products, which could adversely affect our
      business and results of
operations.




●
            Our inability to be successful
      in building greater market awareness and increasing sales in our Home and
      Garden Business, which is relatively new and has limited market
      awareness.




●
            Our inability to establish or
      maintain successful relationships with independent distributors and
      retailers, which could adversely affect our sales and our ability to
      generate revenue from our Home and Garden
  Business.




●
            Our inability to compete
      successfully in the market for Home and Garden
      Products.




●
            Our inability to compete with
      PHC’s Harpin Protein Technology business until after February 28,
      2009.




●
            Our inability to achieve
      profitability or our inability to identify and acquire other businesses on
      favorable terms in order to increase our revenues and generate new
      income.




●
            Our inability to obtain
      regulatory approvals, or to comply with ongoing and changing regulatory
      requirements, which could delay or prevent sales of our current or any
      future Home and Garden
Products.




●
            Our inability to adequately
      distinguish our products from genetically modified plants and products,
      which could negatively impact market acceptance and regulatory approval of
      our products.




●
            The occurrence of product
      liability claims which could adversely affect our
      operations.


-11-
 Index




●
            Rapid changes in technology,
      which could render our current or any future products we may develop
      unmarketable or obsolete.




●
            Our inability to retain our
      existing personnel, which could impair our ability to successfully manage
      our business or achieve our
objectives.




●
            We may be delisted from the
      Nasdaq Capital Market if we do not satisfy continued listing
      requirements.




Information
about factors that potentially could affect our financial results and our
business include, but are not limited to, those discussed under Item 1A "Risk
Factors" in our most recent Annual Report on Form 10-K filed with the Securities
and Exchange Commission on March 28, 2008.  You should not place undue
reliance on our forward-looking statements, which apply only as of the date of
this report.  The cautionary statements made in this report apply to
all forward-looking statements wherever they appear in this
report.  Except as may be required by law, we undertake no obligation
to publicly release any revisions to these forward-looking statements that may
be made to reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events.




Overview




We have
incurred significant operating losses since our inception in 1994. As of
September 30, 2008, we had an accumulated deficit of $127,597,590. We incurred
net losses of $343,550 in the first nine months of 2008, $1,001,103 in 2007,
$9,445,185 in 2006 and $10,857,865 in 2005. On February 28, 2007, we sold our
proprietary harpin protein-based technology and substantially all of our assets
used in our worldwide agricultural and horticultural markets to Plant Health
Care, Inc. (“PHC”). From December 1, 2006 through February 28, 2007, we operated
under an Independent Distribution Agreement whereby PHC served as the exclusive
distributor of our products for all channels of trade, other than to retail
distributors and consumers (the “Home and Garden Market”), in substantially all
worldwide territories. Out business strategy after the sale is to sell harpin
protein-based products to the Home and Garden Market (the “Home and Garden
Business”) and use our available cash and any revenue generated from the Home
and Garden Business to explore whether there may be opportunities to realize
potential value from our remaining business assets, primarily our tax loss
carryforwards. This sale enabled us to significantly reduce our operating losses
and liabilities, generated cash for our Home and Garden Business and preserved
the potential future value of our remaining business assets, primarily our tax
loss carryforwards. As part of the closing, we entered into a license and supply
agreement with PHC, pursuant to which PHC granted us an exclusive worldwide
right and license to sell harpin protein-based products (“Home and Garden
Products”) for the protection of plants and seeds and the promotion of overall
plant health in the Home and Garden Market and a royalty free, exclusive
worldwide license to use the Messenger, MightyPlant and Harp-N-Tek trademarks in
connection with the sale of our Home and Garden Products. Under the license and
supply agreement, PHC agreed to supply us harpin proteins and harpin-protein
based products for our Home and Garden Business.




As a
result of the sale of our harpin protein-based technology, our Home and Garden
Business is the only continuing portion of our operations and will be our
primary source of revenue in 2008.  Our Home and Garden Business has a
limited operating history and has generated only limited revenue to
date.  For the three months ended September 30, 2008 and 2007, our
Home and Garden Business generated revenue of $19,674 and $55,845, respectively.
For the nine months ended September 30, 2008 and 2007, our Home and Garden
Business generated revenue of $166,682 and $327,744, respectively, while for the
years ended December 31, 2007 and 2006, our Home and Garden Business generated
revenue of $260,371 and $384,841, respectively.  We have no current
intention of making substantial additional investments in our Home and Garden
Business.  Our current business strategy is to use any revenue
generated by our Home and Garden Business to support our continued operations
while we explore whether there may be opportunities to realize potential value
from our remaining business assets, primarily our tax loss carryforwards. The
strategy is extremely speculative and subject to a large number of risks and
uncertainties including those set forth under Item 1A “Risk Factors” in our most
recent Annual Report on Form 10-K, which was filed on March 28, 2008, and
elsewhere in this report.  Strategies for realizing value from our tax
loss carryforwards and remaining business assets may include pursuing
acquisitions intended to increase revenues and generate net income. Although we
do not currently have specific plans to do so, we may in the future commit
resources to such acquisitions or other alternative opportunities.  We
expect to incur additional net losses as we proceed with our Home and Garden
Business and as we explore whether there may be opportunities to realize
potential value from our remaining business assets, primarily our tax loss
carryforwards.


-12-
 Index


On
February 22, 2008, we amended our Restated Articles of Incorporation, as
amended, to reduce the number of authorized shares of our common stock from
33,333,333 to 11,111,111 and to effect a 1-for-3 reverse stock split of our
outstanding common stock.  The reverse stock split was effective at
5:00 p.m., Pacific time, on February 22, 2008 and our common stock began trading
as adjusted for the reverse stock split on February 25, 2008.  As a
result of this reverse stock split, each three shares of common stock were
exchanged for one share of common stock, with cash being issued for any
fractional shares, and the total number of shares outstanding was reduced from
8.1 million shares to approximately 2.7 million shares.  We have
retroactively adjusted all the share information in this Form 10-Q to reflect
this reverse stock split.




Results
of Operations




Three
Months and Nine Months Ended September 30, 2008 and 2007




Product
Sales





Product
sales through February 28, 2007, prior to the sale of our Harpin Protein
Technology, resulted primarily from sales of Messenger STS, N-HibitTM,
ProActTM,
MightyPlantTM and
other related products primarily to distributors in the agricultural markets in
the United States and Spain. Product sales after the sale of our harpin
protein-based technology, resulted primarily from sales of Messenger, Messenger
Seed Treatment and MightyPlant with Messenger Gold primarily to distributors and
consumers in the Home and Garden Market in the United States. Product sales are
recognized when (a) the product is delivered to independent distributors, (b) we
have satisfied all of our significant obligations and (c) any acceptance
provisions or other contingencies or arrangements have been satisfied, including
whether collection is reasonably assured. As part of the analysis of whether all
of our significant obligations have been satisfied or situations where
acceptance provisions or other contingencies or arrangements exist, we consider
the following elements, among others: sales terms and arrangements, historical
experience and current incentive programs. Our distributor arrangements provide
no price protection or product-return rights. Product sales by geographical
region were:




Three Months Ended September
      30,
                
                
                Nine Months Ended September
    30,2008
                
                
                2007
                
                
                2008
                
                
                2007United
      States
                
                $
                19,674
                
                
                $
                28,245
                
                
                $
                166,682
                
                
                $
                280,312Spain
                
                
                -
                
                
                
                27,600
                
                
                
                -
                
                
                
                47,432Product
      sales
                
                $
                19,674
                
                
                $
                55,845
                
                
                $
                166,682
                
                
                $
                327,744





Product
sales for the third quarter of 2008 were $19,674, a decrease of $36,171 (65%)
from $55,845 in the same quarter of 2007. This decrease is a result of lower
sales in our Home and Garden Business and no recognition of sales of Messenger
STS in Spain, as described below. Product sales for the first nine months of
2008 were $166,682, a decrease of $161,062 (49%) from $327,744 in the first nine
months of 2007. This decrease is a result of the sale of our harpin protein
technology to PHC on February 28, 2007, no recognition of sales of Messenger STS
in Spain and lower sales in our Home and Garden Business.




Product
sales to consumers in the Home and Garden Market in the United States totaled
$19,674 and $28,245 in the three months ended September 30, 2008 and 2007,
respectively, and $166,682 and $237,303 in the nine months ended September 30,
2008 and 2007, respectively. We believe this decrease in sales volume is due to
lower spending on personnel, marketing and advertising following the sale of our
harpin protein-based technology to PHC.




In
February 2004, we received approval to sell Messenger in Spain. We initiated
marketing activities in March 2004, but the approval was not received in time to
meet initial sales activity. In order to ensure that an adequate supply of
Messenger STS was quickly disbursed in the new distribution channel and to limit
the amount of working capital required by our new distributors at this early
stage of introduction, we granted flexible and/or extended payment terms to
distributors in this new market. Because of this combination of factors,
revenues from product deliveries to certain distributors were deferred and are
recognized as payment is received. We recognized net revenue of $27,600 in the
third quarter of 2007 and $47,432 in the first nine months of 2007.




Due to
the growing seasons in the United States, we expect usage of our Home and Garden
Products to be highly seasonal. Based on the recommended application timing, we
expect the second quarter to be the most significant period of use. Our Home and
Garden Product sales to distributors are also expected to be seasonal. However,
actual timing of orders received from distributors will depend on many factors,
including the amounts of our products in distributors’
inventories.


-13-
 Index


Cost
of Goods Sold




Cost of
goods sold includes the cost of products sold and used for promotional purposes,
shipping and handling and other costs necessary to store and deliver products to
customers. Cost of goods sold was $5,718 in the third quarter of 2008, compared
to $32,908 in the third quarter of 2007. This decrease in cost of goods sold was
primarily due to lower sales volumes in our Home and Garden Business. Cost of
goods sold was $49,698 in the first nine months of 2008, compared to $171,243 in
the first nine months of 2007.  This decrease in cost of goods sold
was primarily due to lower sales volumes in our Home and Garden Business and
lower sales volumes, facility expenses, shipping and handling costs and products
used for promotional purposes as a result of the sale of our harpin
protein-based technology to PHC.




Research
and Development Expenses




Research
and development expenses consisted primarily of personnel, field trial,
laboratory, regulatory, patent and facility expenses. Research and development
expenses ceased as a result of the sale of our harpin protein-based technology
to PHC and we do not expect to incur any such expenses in 2008.




Selling,
General and Administrative Expenses




Selling,
general and administrative expenses consist of payroll and related expenses for
sales and marketing, executive and administrative personnel; advertising,
marketing and professional fees; and other corporate expenses. Selling, general
and administrative expenses were $164,672 in the third quarter of 2008, a
decrease of $452,356 from $617,028 in the third quarter of 2007. Selling,
general and administrative expenses were $588,475 in the first nine months of
2008, a decrease of $662,053 from $1,250,528 in the first nine months of 2007.
The decrease resulted primarily from reductions in personnel, advertising and
marketing expenses in our Home and Garden Business, 2007 payments made to
Bradley S. Powell, our President and Chief Financial Officer, totaling $267,109
and a $100,000 payment made to Stephens Inc. to act as our exclusive financial
advisor in our efforts to affect one or more business combinations, and a
reduction in facility and related costs resulting from the sale of our harpin
protein-based technology to PHC.




Our
business strategy moving forward is to use any revenues generated by our Home
and Garden Business to support our operations while we explore whether there may
be opportunities to realize potential value from our remaining business assets,
primarily our tax loss carryforwards. We engaged legal professionals to validate
the underlying assumptions related to our tax loss carryforwards and analyze and
provide advice on the options that may be available to preserve and maximize the
potential use of our deferred tax assets, as well as on potential limitations
and risks of such utilization strategy.  We expect this to be an
expensive and time consuming process, and we may not generate revenue from our
Home and Garden Business or otherwise attract capital to support the process for
its duration.





Gain
on Sale of Harpin Protein Technology




On
February 28, 2007, under the terms of an Asset Purchase Agreement, we sold our
harpin protein-based technology to PHC for $1,396,824 in cash, net of
transaction costs incurred after January 1, 2007 totaling $103,176, a promissory
note in the principal amount of $700,751 payable on December 31, 2007 and the
assumption by PHC of certain of the liabilities relating to or arising out of
our harpin protein-based technology totaling $520,613. The promissory note had
an interest rate of 5% per annum and was paid in full on December 31, 2007. Our
harpin protein-based technology includes substantially all of our assets used in
the creation of plant health technology incorporating harpin proteins and the
manufacture of biopesticide, plant health and nutrient products utilizing the
harpin protein-based technology. These assets included all intellectual
property, contracts (including our license agreement with the CRF and our office
and manufacturing facility lease), equipment and inventory related to our
worldwide agricultural and horticultural markets. The sale of our harpin
protein-based technology to PHC resulted in a gain of $113,968.




Interest
Income




Interest
income consists primarily of earnings on our cash and cash equivalents and,
during 2007, the PHC note receivable. Interest income decreased $45,388 from
$79,469 in the third quarter of 2007 to $34,081 in the same quarter of 2008.
Interest income decreased $99,592 from $227,533 in the first nine months of 2007
to $127,941 in the same period of this year. The decrease was primarily due to
lower interest rates and a lower average cash balance available for investment
in the three and nine month period ended September 30, 2008 compared to the same
period in 2007.


-14-
 Index




Income
Taxes




We have
generated a net loss from operations for each period since we began doing
business. As of December 31, 2007, we had accumulated approximately $118.2
million of net operating loss carryforwards for U.S. Federal income tax
purposes, which expire between 2009 and 2027, capital loss carryforward of $1.4
million that expires in 2027, and net operating loss carryforwards in 18 U.S.
States that range between $12.5 million to $2,000 per state and expire between
2008 and 2027. Our total U.S. general business credit carryforwards were
approximately $1.4 million and expire between 2013 and 2026. We have also
accumulated approximately $1.4 million of net operating loss carryforwards in
Mexico that expire between 2011 and 2017 and approximately $3.7 million in
France, of which $800,000 expires in 2008 and $2.9 million does not expire. We
have provided a valuation allowance against our net deferred tax assets because
of the significant uncertainty surrounding our ability to realize value on such
assets.  The estimated net operating loss and capital loss
carryforwards were revised during the quarter ended September 30,
2008.  The revisions had no effect on the consolidated financial
statements.




Our
business strategy is to use any revenue generated by our Home and Garden
Business to support our continued operations while we explore whether there may
be opportunities to realize potential value from our remaining business assets,
primarily our tax loss carryforwards. The strategy is extremely speculative and
subject to a large number of risks and uncertainties including those set forth
under Item 1A “Risk Factors” in our most recent Annual Report on Form 10-K,
which was filed on March 28, 2008, and elsewhere in our most recent Annual
Report on Form 10-K and in this report. We have conducted limited analysis of
our ability to utilize our tax loss carryforwards and have drawn no final
conclusions about the viability of this strategy. In order to confirm whether
there are opportunities to realize potential value from our tax loss
carryforwards, we engaged legal and investment banking professionals during 2007
to validate the underlying assumptions related to our tax loss carryforwards and
analyze and provide advice on the options that may be available to preserve and
maximize the potential use of our tax loss carryforwards, as well as on
potential limitations and risks of such utilization strategy. In September 2007,
we engaged Stephens Inc. to act as our exclusive financial advisor in connection
with our efforts to effect one or more business combinations. This will continue
to be an expensive and time consuming process, and we may not generate
sufficient revenue from our Home and Garden Business or otherwise attract
sufficient capital to support the process for its duration.




If we
were to undergo an ownership change as defined in Section 382 of the Internal
Revenue Code of 1986, as amended (the “Code”), our net tax loss and general
business credit carryforwards generated prior to the ownership change would be
subject to annual limitations, which could reduce, eliminate, or defer the
utilization of these losses. Based upon an analysis completed during the third
quarter of 2007 of past changes in our ownership, we believe we have experienced
ownership changes (as defined under Section 382 of the Code) on March 20, 1996
and October 2, 2000 and absent any other ownership changes in the future, there
are no significant limitations on our future ability to use tax loss
carryforwards generated prior to those dates. We do not believe that the sale to
PHC resulted in another ownership change that would further limit our future
ability to use tax loss carryforwards generated after October 2000 because it
was a sale of assets. However, the IRS or some other taxing authority may
disagree with our position and contend that we have already experienced other
such ownership changes or that the sale of assets resulted in an ownership
change. In such case, our ability to use our tax loss carryforwards to offset
future taxable income would be severely limited. If the sale of assets to PHC
results in an ownership change as defined in Section 382 of the Code, our tax
loss carryforwards available to offset future taxable income could be severely
limited and the tax loss carryforwards may expire as a result of the limitation.
If an ownership change does not occur as a result of the sale to PHC, there is
still the potential for an ownership change to occur under Section 382 of the
Code as a result of future changes in stock ownership. Net operating loss
carryforwards may expire if we do not generate sufficient income to utilize the
losses before their normal expiration.




Generally,
an ownership change occurs if one or more shareholders, each of whom owns 5% or
more in value of a corporation’s stock, increase their aggregate percentage
ownership by more than 50% over the lowest percentage of stock owned by such
shareholders at any time during the preceding three-year period. For example, if
a single shareholder owning 10% of our stock acquired an additional 50.1% of our
stock in a three-year period, a change of ownership would occur. Similarly, if
ten persons, none of whom owned our stock, each acquired slightly over 5% of our
stock within a three-year period (so that such persons own, in the aggregate,
more than 50%) an ownership change would occur. Ownership of stock is determined
by certain constructive ownership rules which can attribute ownership of stock
owned by entities (such as estates, trusts, corporations, and partnerships) to
the ultimate indirect owner.


-15-
 Index


For
purposes of this rule, all holders who each own less than 5% of a corporation’s
stock are generally treated together as one (or, in certain cases, more than
one) 5% shareholder. Transactions in the public markets among shareholders
owning less than 5% of the equity securities generally are not included in the
calculation. Special rules can result in the treatment of options (including
warrants) or other similar interests as having been exercised if such treatment
would result in an ownership change.




As we
explore whether there may be opportunities to utilize our tax loss
carryforwards, due to the importance of avoiding a future ownership change under
the tax laws, we will be limited in our ability to issue additional stock in the
future to provide capital for our business. We would only be able to issue such
additional stock in a manner that would not cause an ownership change, for
purposes of these rules, and thus our ability to access the equity markets could
be restricted.




Finally,
in addition to Section 382 of the Code, certain other statutory provisions and
common law doctrine could limit our opportunities to realize potential value
from, or otherwise adversely affect our ability to preserve and utilize, our tax
loss carryforwards.




The use
of our tax loss carryforwards is subject to uncertainty because it is dependent
upon the amount of taxable income we generate. We have no assurance that we will
have sufficient taxable income in future years to use the tax loss carryforwards
before they expire. We believe that our ability to achieve profitability may
depend in substantial part on our ability to identify and acquire suitable
acquisitions on favorable terms, so that we can increase our revenues and
generate new income. We may seek additional capital from time to time, including
through the sale of stock or other securities, which may result in dilution to
existing shareholders. In addition, as noted above, the provisions of the Code
and certain applicable IRS regulations will limit the number of shares of stock
we can sell from time to time without causing a limitation on our ability to use
our tax loss carryforwards to reduce our future tax obligations.




Liquidity
and Capital Resources




Our
operating expenditures have been significant since our inception. We currently
anticipate that our operating expenses in 2008 will significantly exceed Home
and Garden Product sales and that net losses and working capital requirements
will consume a material amount of our cash resources in 2008. Our future capital
requirements will depend on the success of our Home and Garden Business and our
ability to successfully implement our strategy of realizing potential value from
our remaining business assets, primarily our tax loss carryforwards. We have no
current intention to make substantial investments to grow our Home and Garden
Business. We believe that the balance of our cash and cash equivalents at
September 30, 2008 will be sufficient to meet our anticipated cash needs for net
losses, working capital and capital expenditures for more than the next 12
months, although there can be no assurance in this regard.




At
September 30, 2008, our cash and cash equivalents totaled $5,196,126, a decrease
of $472,113 from the balance of $5,668,239 at December 31, 2007. In 2007, we
received $2,097,575 in net proceeds (after transaction costs incurred after
January 1, 2007) from the sale of our harpin protein-based technology to PHC. We
plan to finance our operations in 2008 using existing cash and cash equivalents.
As discussed in detail above under “—Results of Operations—Income Taxes,” our
business strategy of exploring whether there may be opportunities to utilize our
remaining business assets, including our tax loss carryforwards, will, due to
the importance of avoiding a future ownership change under the tax laws, limit
us in our ability to issue additional stock to provide capital for our
business.




Net cash
used in operations decreased by $196,892 from $668,156 in the first nine months
of 2007 to $471,264 in the same period of 2008. Net cash used in operations in
the first nine months of 2008 resulted primarily from a net loss of $343,550 and
net fluctuations in various asset and liability balances totaling $132,725. Net
cash used in operations in the first nine months of 2007 resulted primarily from
a net loss of $888,968 offset by net fluctuations in various asset and liability
balances totaling $314,924 offset by the gain on the sale of our harpin
protein-based technology. We expect that net cash used in operations will
continue to be significant. We currently have no long-term contractual
obligations associated with capital and operating lease
obligations.


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Net cash provided by investing
activities was zero in the first nine months of 2008 compared to $1,953,074 in
the same period of 2007. The amount in 2007 resulted from the proceeds from the
sale of our harpin protein-based technology to PHC and the proceeds from a sale
of equipment.No such sales occurred in 2008.




We
conduct our operations in two primary functional currencies:  the U.S.
dollar and the euro. Historically, neither fluctuations in foreign exchange
rates nor changes in foreign economic conditions have had a significant impact
on our financial condition or results of operations. We currently do not hedge
our foreign currency exposures and are, therefore, subject to the risk of
exchange rate fluctuations. We invoice our international customers in euros. We
are exposed to foreign exchange rate fluctuations as the financial results of
foreign subsidiaries are translated into U.S. dollars in consolidation. As of
February 28, 2007, the cumulative translation adjustment related to our European
subsidiary totaling $103,470 was reclassified from accumulated other
comprehensive income and reported as part of the gain on the sale of our harpin
protein-based technology as this subsidiary was substantially liquidated as a
result of the sale to PHC. Foreign exchange rate fluctuations did not have a
material impact on our financial statements in the nine month periods ended
September 30, 2008 and 2007.




Employment
Agreement




On July
25, 2007, we entered into an employment agreement with Bradley S. Powell, our
President and Chief Financial Officer. The employment agreement extinguished Mr.
Powell’s change-in-control agreement, dated August 16, 2000, and severance
agreement, dated January 28, 2002, in exchange for supplemental payments
totaling $356,145. The supplemental payments were paid in installments as
follows: one-half on July 25, 2007; one-quarter on September 30, 2007; and
one-quarter on January 15, 2008.




Critical
Accounting Policies, Estimates and Judgments




Our
critical accounting policies are more fully described in Note 1 to this report
and in Note 1 to our audited consolidated financial statements included in our
most recent Annual Report on Form 10-K, which was filed with the Securities and
Exchange Commission on March 28, 2008. Certain of our accounting policies
require the application of significant judgment by management in selecting the
appropriate assumptions for calculating financial estimates. By their nature,
these judgments are subject to an inherent degree of uncertainty. These
judgments are based on historical experience, terms of existing contracts,
commonly accepted industry practices, information provided by our customers and
other assumptions that we believe are reasonable under the circumstances. Our
estimates and assumptions are reviewed periodically and the effects of revisions
are reflected in the condensed consolidated financial statements in the period
in which they are determined to be necessary. Actual results may differ from
these estimates under different assumptions or conditions. Our critical
accounting policies and estimates include:




Revenue
Recognition




Prior to
the sale of our harpin protein-based technology assets on February 28, 2007, we
sold the majority of our products to independent, third-party distributors in
the agricultural and horticultural markets. We sell the majority of our Home and
Garden Products to independent, third-party distributors and directly to
consumers over the internet in the Home and Garden Markets. Our arrangements
with those distributors provide no price protection or product-return rights. We
recognize revenue from product sales when product is delivered to our
distributors and all of our significant obligations have been satisfied, unless
acceptance provisions or other contingencies or arrangements exist, including
whether collection is reasonably assured. If acceptance provisions or
contingencies exist, revenue is recognized after such provisions or
contingencies have been satisfied. As part of the analysis of whether all of our
significant obligations have been satisfied or situations where acceptance
provisions or other contingencies or arrangements exist, we consider the
following elements, among others: sales terms and arrangements, including
customer payment terms, historical experience and current incentive
programs.




We also
record, at the time revenue is recognized, a liability for warranty claims based
on a percentage of sales. The warranty accrual percentage and warranty liability
are reviewed periodically and adjusted as necessary, based on historical
experience and future expectations. Changes in our estimate of the warranty
liability are recorded in cost of goods sold.


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Inventory
Valuation




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




Item3.
            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 interest rate debt and
currently do not enter into any material transactions denominated in foreign
currency. Because of the relatively short-term average maturity of our
investment funds, such investments are sensitive to interest rate movements.
Therefore, our future interest income may be adversely impacted by changes in
interest rates. However, our direct exposure to interest rate and foreign
exchange rate fluctuation is currently not material to our results of
operations. We believe that the market risk arising from the financial
instruments or cash equivalents we hold is not material.




Item4T.
            Controls and
Procedures




Our Chief
Executive Officer and Chief Financial Officer has evaluated the effectiveness
and design of our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)) as of the end of the fiscal quarter covered by this report. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the fiscal quarter covered by this report,  our
disclosure controls and procedures were effective in ensuring that the
information required to be disclosed by us in the reports we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms, and is accumulated and
communicated to our Chief Executive Officer and Chief Financial Officer to allow
timely decisions regarding required disclosure.




There
were no changes to our internal control over financial reporting that occurred
during the quarter ended September 30, 2008, which were identified in connection
with our management’s evaluation required by Rules 13a-15(d) and 15d-15(d) under
the Exchange Act, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.






PART
II -- OTHER INFORMATION




Item6.
            Exhibits




Exhibit
31.1 is being filed as part of this quarterly report on Form
10-Q.  Exhibit 32.1 is being furnished with this quarterly report on
Form 10-Q.




Exhibit
                    Number
                  Description10.1*+
                  Eden
      Bioscience Corporation Summary of Nonemployee Director Cash
      Compensation.31.1*
                  Rule
      13a-14(a) Certification (Chief Executive Officer and Chief Financial
      Officer).32.1*
                  Section
      1350 Certification (Chief Executive Officer and Chief Financial
      Officer).


* Filed
herewith.


+
Management contract or compensatory plan or arrangement.


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 Index




SIGNATURE




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 CORPORATIONDate:
      November 11, 2008By: /s/ Nathaniel T.
  BrownNathaniel
      T. BrownChief
      Executive Officer, Chief Financial Officer and
Secretary(Signing
      on behalf of the registrant and as PrincipalExecutive,
      Financial and Accounting
Officer)