---

UNITED
  STATES SECURITIES AND 
  EXCHANGE COMMISSION Washington, D.C. 20549

---

FORM 10-Q

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

Commission
File Number 0-31499

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

|Washington                                                                 |  | 91-1649604                             
|-------------------------------------------------------------------------- |  | ---------------------------------------
|(State or other jurisdiction
      of incorporation
      or organization) |  | (IRS Employer Identification
      No.)

11816 North Creek Parkway N. 
  Bothell, Washington 98011-8201
  (Address of principal executive offices, including zip code)

(425)
  806-7300
  (Registrants telephone number, including area code)

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

Indicate  by
check  mark  whether  the  registrant  is a large  accelerated  filer, an accelerated
filer, or  non-accelerated  filer.  See  definition  of  accelerated  filer  and
large  accelerated  filer in Rule 12b-2 of the Exchange Act.  (Check  one):

|Large accelerated filer
      o | Accelerated filer o | Non-accelerated filer
      þ
|------------------------------- | ------------------- | -----------------------------

Indicate  by check  mark  whether  the  registrant  is a shell
company (as defined in Rule 12b-2 of the Exchange Act). Yeso
  No þ

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

|Class                          |  | Outstanding as of May 2, 2006
|------------------------------ |  | -----------------------------
|Common Stock, $.0025 Par Value |  | 8,135,520                    

---



---

Eden
Bioscience Corporation

Index to Form
10-Q

|               |                                                                                             |    | Page | 
|-------------- | ------------------------------------------------------------------------------------------- | -- | ---- | 
|Part
      I.  | Financial
      Information                                                                 |    |      | 
|               |                                                                                             |    |      | 
|Item
      1.  | Unaudited
      Financial Statements                                                        |    | 2    | 
|               |                                                                                             |   
|               | Condensed
      Consolidated Balance Sheets as of March 31, 2006 and                        |   
|               | December
      31, 2005                                                                     |    | 2    | 
|               |                                                                                             |   
|               | Condensed
      Consolidated Statements of Operations for the Three Months                  |   
|               | Ended
      March 31, 2006 and 2005                                                         |    | 3    | 
|               |                                                                                             |   
|               | Condensed
      Consolidated Statements of Cash Flows for the Three Months                  |   
|               | Ended
      March 31, 2006 and 2005                                                         |    | 4    | 
|               |                                                                                             |    |      | 
|               | Notes
      to Unaudited Condensed Consolidated Financial Statements                        |    | 5    | 
|               |                                                                                             |    |      | 
|Item
      2.  | Managements
      Discussion and Analysis of Financial Condition and Results of Operations |    | 12   | 
|               |                                                                                             |    |      | 
|Item
      3.  | Quantitative
      and Qualitative Disclosures About Market Risk                            |    | 19   | 
|               |                                                                                             |    |      | 
|Item
      4.  | Controls
      and Procedures                                                               |    | 19   | 
|               |                                                                                             |   
|Part
      II. | Other
      Information                                                                     |   
|               |                                                                                             |    |      | 
|Item
      1A. | Risk
      Factors                                                                          |    | 19   | 
|               |                                                                                             |    |      | 
|Item 2.        | Unregistered Sales of Equity Securities and Use of Proceeds                                 |    | 19   | 
|               |                                                                                             |    |      | 
|Item
      5.  | Other Information                                                                           |    | 20   | 
|               |                                                                                             |    |      | 
|Item
      6.  | Exhibits                                                                                    |    | 20   | 
|               |                                                                                             |    |     
|Signatures     |                                                                                             | 20 |     

- 1 -



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PART I --
FINANCIAL INFORMATION

Item 1.
Unaudited Financial Statements.

EDEN
BIOSCIENCE CORPORATION AND SUBSIDIARIES

CONDENSED
CONSOLIDATED BALANCE SHEETS (Unaudited)

|ASSETS                                                                        | 
|----------------------------------------------------------------------------- | 
|                                                                              | 
|                                                                              | 
|Current
      assets:                                                         | 
|Cash
      and cash equivalents                                               | 
|Accounts
      receivable, net of sales allowances                            | 
|Inventory,
      current                                                      | 
|Prepaid
      expenses and other current assets                               | 
|                                                                              | 
|Total
      current assets                                                    | 
|Inventory,
      non-current                                                  | 
|Property
      and equipment, net                                             | 
|Other
      assets                                                            | 
|                                                                              | 
|Total
      assets                                                            | 
|                                                                              | 
|                                                                              | 
|LIABILITIES
        AND SHAREHOLDERS EQUITY                                  | 
|Current
      liabilities:                                                    | 
|Accounts payable                                                              | 
|Accrued
      liabilities                                                     | 
|                                                                              | 
|Total
      current liabilities                                               | 
|Other
      long-term liabilities                                             | 
|                                                                              | 
|Total
      liabilities                                                       | 
|                                                                              | 
|                                                                              | 
|Commitments and contingencies                                                 | 
|                                                                              | 
|Shareholders' equity:                                                         | 
|Preferred stock, $.01 par value, 10,000,000 shares authorized; no shares      | 
|issued
      and outstanding at March 31, 2006 and December 31, 2005          | 
|Common
      stock, $.0025 par value, 33,333,333 shares authorized;           | 
|8,135,520
      issued and outstanding shares at March 31, 2006 and 8,135,520 | 
|December
      31, 2005                                                       | 
|Additional
      paid-in capital                                              | 
|Accumulated
      other comprehensive loss                                    | 
|Accumulated
      deficit                                                     | 
|                                                                              | 
|Total
      shareholders equity                                              | 
|                                                                              | 
|Total
      liabilities and shareholders equity                              | 
|                                                                              | 

The
accompanying notes are an integral part of these statements.

- 2 -



---

EDEN
BIOSCIENCE CORPORATION AND SUBSIDIARIES

CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

|                                                                             |  |  | Three
        Months Ended March 31, |           
|---------------------------------------------------------------------------- |  |  | ------------------------------------ | ----------
|                                                                             |  |  |                                      |           
|                                                                             |  |  | 2006                                 |           
|                                                                             |  |  |                                      |           
|Product
      sales, net of sales allowances                                 |  |  | $                                    | 1,648,387 
|Operating expenses:                                                          |  |  |                                      |           
|Cost
      of goods sold                                                     |  |  |                                      | 1,015,480 
|Research
      and development                                               |  |  |                                      | 316,538   
|Selling,
      general and administrative                                    |  |  |                                      | 1,558,786 
|Gain
      on sale of equipment                                              |  |  |                                      | (17,578   
|                                                                             |  |  |                                      |           
|Total
      operating expenses                                               |  |  |                                      | 2,873,226 
|                                                                             |  |  |                                      |           
|Loss
      from operations                                                   |  |  |                                      | (1,224,839
|                                                                             |  |  |                                      |           
|Other income (expense):                                                      |  |  |                                      |           
|Gain
      on sale of investment                                             |  |  |                                      | 99,884    
|Interest
      income                                                        |  |  |                                      | 61,114    
|Interest
      expense                                                       |  |  |                                      | --        
|                                                                             |  |  |                                      |           
|Total
      other income                                                     |  |  |                                      | 160,998   
|                                                                             |  |  |                                      |           
|Loss
      before income taxes                                               |  |  |                                      | (1,063,841
|Income
      taxes                                                           |  |  |                                      | --        
|                                                                             |  |  |                                      |           
|Net
      loss                                                               |  |  | $                                    | (1,063,841
|                                                                             |  |  |                                      |           
|Basic
      and diluted net loss per share                                   |  |  | $                                    | (0.13     
|                                                                             |  |  |                                      |           
|Weighted
      average shares outstanding used to compute net loss per share |  |  |                                      | 8,135,520 
|                                                                             |  |  |                                      |           

The
accompanying notes are an integral part of these statements.

- 3 -



---

EDEN
BIOSCIENCE CORPORATION AND SUBSIDIARIES

CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

|                                                                              |  |  | Three
        Months Ended March 31, |           
|----------------------------------------------------------------------------- |  |  | ------------------------------------ | ----------
|                                                                              |  |  |                                      |           
|                                                                              |  |  | 2006                                 |           
|                                                                              |  |  |                                      |           
|Cash
      flows from operating activities:                                   |  |  |                                      |           
|Net
      loss                                                                |  |  | $                                    | (1,063,841
|Adjustments
      to reconcile net loss to cash used in operating activities: |  | 
|Depreciation
      and amortization                                           |  |  |                                      | 176,067   
|Stock
      compensation expense                                              |  |  |                                      | 125,129   
|Gain
      on sale of equipment                                               |  |  |                                      | (17,578   
|Gain
      on sale of investment                                              |  |  |                                      | (99,884   
|Accretion
      expense                                                       |  |  |                                      | 7,588     
|Deferred
      rent payable                                                   |  |  |                                      | 80,864    
|Changes
      in assets and liabilities:                                      |  | 
|Accounts
      receivable                                                     |  |  |                                      | (1,182,604
|Inventory                                                                     |  |  |                                      | 421,329   
|Prepaid
      expenses and other assets                                       |  |  |                                      | (3,536    
|Accounts
      payable                                                        |  |  |                                      | 91,403    
|Accrued
      liabilities                                                     |  |  |                                      | (283,951  
|Accrued
      loss on facility subleases                                      |  |  |                                      | --        
|                                                                              |  |  |                                      |           
|Net
      cash used in operating activities                                   |  |  |                                      | (1,749,014
|                                                                              |  |  |                                      |           
|Cash
      flows from investing activities:                                   |  |  |                                      |           
|Purchase
      of equipment                                                   |  |  |                                      | (16,377   
|Proceeds
      from sale of investment                                        |  |  |                                      | 100,000   
|Proceeds
      from sale of equipment                                         |  |  |                                      | 17,578    
|                                                                              |  |  |                                      |           
|Net
      cash provided by investing activities                               |  |  |                                      | 101,201   
|                                                                              |  |  |                                      |           
|Cash
      flows from financing activities:                                   |  |  |                                      |           
|Reduction
      in capital lease obligations                                  |  |  |                                      | --        
|                                                                              |  |  |                                      |           
|Net
      cash used in financing activities                                   |  |  |                                      | --        
|                                                                              |  |  |                                      |           
|                                                                              |  |  |                                      |           
|Effect
      of foreign currency exchange rates on cash and cash equivalents  |  |  |                                      | 18,787    
|                                                                              |  |  |                                      |           
|                                                                              |  |  |                                      |           
|Net decrease
      in cash and cash equivalents                               |  |  |                                      | (1,629,026
|Cash
      and cash equivalents at beginning of period                        |  |  |                                      | 6,825,652 
|                                                                              |  |  |                                      |           
|Cash
      and cash equivalents at end of period                              |  |  | $                                    | 5,196,626 
|                                                                              |  |  |                                      |           
|                                                                              |  |  |                                      |           
|Supplemental
      disclosures:                                               |  |  |                                      |           
|Cash
      paid for interest                                                  |  |  | $                                    | --        

The
accompanying notes are an integral part of these statements.

- 4 -



---

EDEN
BIOSCIENCE CORPORATION AND SUBSIDIARIES

NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL  STATEMENTS

1.
Organization and Summary of Significant Accounting  Policies

Organization
and Business

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

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

Basis of
Presentation

The
accompanying unaudited condensed consolidated  financial statements have been prepared in
accordance with  U.S. generally accepted accounting principles for interim  financial
information and pursuant to the instructions to  Form 10-Q. Accordingly, they do not
include all of the  information and notes required by U.S. generally accepted  accounting
principles for complete financial statements. The  balance sheet at December 31, 2005 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, 2005  included in the Companys Annual Report on Form 10-K,
which  was filed with the Securities and Exchange Commission on  March 15, 2006.

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 ended March 31,  2006 are not necessarily indicative of the results expected
for the full fiscal year or for any future period.

On
April 17, 2006, the Company amended its Restated  Articles of Incorporation to reduce the
Companys number of  authorized shares of common stock from 100,000,000 to
33,333,333 and to effect a 1-for-3 reverse stock split of  the Companys outstanding
common stock. The reverse stock  split was effective with respect to shareholders of
record  at 5:00p.m., Pacific daylight time, on April 18, 2006 and  the Companys
common stock began trading as adjusted for the  reverse stock split on April 19, 2006. As
a result of the  reverse stock split, each three shares of common stock were  exchanged
for one share of common stock and the total number  of shares outstanding were reduced
from approximately  24.4 million shares to approximately 8.1 million shares. The
Company has retroactively adjusted all the share information  to reflect the reverse
stock split in the accompanying  condensed consolidated financial statements and
footnotes.

In
the first quarter of 2006, we sold a minority stock  investment for $100,000 that
resulted in a gain of $99,884.

Liquidity

The
Companys operating expenditures have been  significant since its inception. The
Company currently  anticipates that its operating expenses will significantly  exceed net
product sales and that net losses and working  capital requirements will consume a
material amount of its  cash resources. If net product sales do not significantly
increase in the near term, the Company will have to further  reduce its operating
expenses. The Companys future capital  requirements will depend on the success of
its operations.  Management of the Company believes that the balance of its  cash and
cash equivalents at March 31, 2006 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. After the next 12 months, if
net product  sales do not significantly increase, the Company will have  to further
reduce operating expenses or secure additional  financing. The Company may be unable to
obtain adequate or  favorable financing at that time or at all and may cease  operations.
The sale of additional equity securities could  result in dilution of the Companys
shareholders.

- 5 -



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EDEN
BIOSCIENCE CORPORATION AND SUBSIDIARIES

NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL  STATEMENTS (Continued)

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
depreciable lives of property and  equipment; expense accruals; provisions for sales
allowances, the fair value of stock compensation  arrangements, warranty claims and
inventory valuation and  classification; cash flow projections used in evaluating
whether asset impairment loss is recorded; and bad debts.  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 consolidated financial statements prospectively when
they are determined to be necessary. Actual results could  differ from these estimates.

Accounts
Receivable

Accounts
receivable balances are reported net of  customer-specific related sales allowances of
$345,000 at  March 31, 2006 and $20,000 at December 31, 2005. In  determining the
adequacy of the allowance for doubtful  accounts, the Company considers a number of
factors,  including the aging of the accounts receivable portfolio,  customer payment
trends, the financial condition of its  customers, historical bad debts and current
economic trends.  Based upon an analysis of outstanding net accounts  receivable, no
allowance for doubtful accounts was recorded  at March 31, 2006 or December 31, 2005.

Inventory

Effective
January 1, 2006, the Company adopted Statement  of Financial Accounting Standards No.
151, Inventory Costs,  which clarifies the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted  material (spoilage).  Under this
Statement, such items will  be recognized as current-period charges.  In addition, the
Statement requires that allocation of fixed production  overheads to the costs of
conversion be based on normal  capacity of the production facilities. The adoption of
this  Statement did not have a significant effect on the Companys  financial
statements.

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 units-of-production,
which allocate costs over their estimated useful lives of  two to 20 years. Leasehold
improvements are amortized over  the shorter of their estimated useful lives or lease
term,  which range between two to ten years.

In
December 2005, the Company completed an efficiency  analysis of its manufacturing
processes, including an  assessment of all manufacturing equipment and its usefulness  in
future manufacturing operations. The lower of carrying  value or estimated fair value
less estimated costs to sell  of equipment to be sold totaled $314,000 at March 31, 2006
and $318,000 at December 31, 2005 and is included in other  current assets on the balance
sheet.

Revenues

The
Company recognizes revenue from product sales, net  of sales allowances, when product is
delivered to its  distributors 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. Distributors 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.

- 6 -



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EDEN
BIOSCIENCE CORPORATION AND SUBSIDIARIES

NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL  STATEMENTS (Continued)

Sales
allowances represent allowances granted to  independent distributors for sales and
marketing support and  are estimated based on the terms of the distribution  arrangements
or other arrangements. Sales allowances are  estimated and accrued when the related
product sales are  recognized or when services are provided and are paid in  accordance
with the terms of the then-current distributor  program arrangements or other
arrangements. Distributor  program arrangements expire annually, generally on December
31.

Gross
product sales and sales allowances are as follows:

|                                                   |  |  | Three Months Ended March 31, |          
|-------------------------------------------------- |  |  | ---------------------------- | ---------
|                                                   |  |  |                              |          
|                                                   |  |  | 2006                         |          
|                                                   |  |  |                              |          
|Gross product sales                                |  |  | $                            | 1,953,536
|Sales allowances                                   |  |  |                              | (347,178 
|Elimination of previously recorded sales allowance |  |  |                              | 42,029   
|                                                   |  |  |                              |          
|liabilities                                        |  |  |                              |          
|Product sales, net of sales allowances             |  |  | $                            | 1,648,387
|                                                   |  |  |                              |          

Net
product sales by geographical region were:

|                                       |  |  | Three Months Ended March 31, |          
|-------------------------------------- |  |  | ---------------------------- | ---------
|                                       |  |  |                              |          
|                                       |  |  | 2006                         |          
|                                       |  |  |                              |          
|United States                          |  |  | $                            | 1,624,750
|Spain                                  |  |  |                              | --       
|Other regions                          |  |  |                              | 23,637   
|                                       |  |  |                              |          
|Product sales, net of sales allowances |  |  | $                            | 1,648,387
|                                       |  |  |                              |          

Incentives

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

Accounting
for Stock Compensation

The
Company maintains a stock equity incentive plan  under which it may grant non-qualified
stock options,  incentive stock options or restricted stock to employees,  non-employee
directors and consultants. Prior to the January  1, 2006 adoption of the Financial
Accounting Standards Board  (FASB) Statement No. 123(R), Share-Based
Payment (SFAS  123R), the Company accounted for stock-based
compensation  using the intrinsic value method prescribed in Accounting  Principles Board
(APB) Opinion No. 25, Accounting for  Stock Issued to Employees, and
related interpretations.  Accordingly, because the stock option grant price equaled  the
market price on the date of grant, no compensation  expense was recognized by the Company
for stock-based  compensation. As permitted by SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123), stock-based  compensation was
included as a pro forma disclosure in the  notes to the consolidated financial statements.

Effective
January 1, 2006, the Company adopted the fair  value recognition provisions of SFAS 123R,
using the  modified-prospective transition method. Under this  transition method,
stock-based compensation expense was  recognized in the consolidated financial statements
for  granted stock options. Compensation expense recognized  included the estimated
expense for stock options granted  subsequent to January 1, 2006, based on the grant date
fair  value estimated in accordance with the provisions of SFAS  123R, and the estimated
expense for the portion vesting in  the period for options granted prior to, but not
vested as  of January 1, 2006, based on the grant date fair value  estimated in
accordance with the original provisions of SFAS  123. Results for prior periods have not
been restated, as  provided for under the modified-prospective method. Total  stock-based
compensation expense recognized in the  consolidated statement of operations for the
quarter ended  March 31, 2006 was $125,129.

- 7 -



---

EDEN
BIOSCIENCE CORPORATION AND SUBSIDIARIES

NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL  STATEMENTS (Continued)

The
following table shows the impact of adoption of SFAS  123R on net loss and loss per share
for the three months  ended March 31, 2006:

|                                |  |  | Three Months Ended March 31, 2006  |           
|------------------------------- |  |  | ---------------------------------- | ----------
|                                |  |  |                                    |           
|                                |  |  | As Reported 
  Following SFAS 123R |           
|                                |  |  |                                    |           
|Net loss, as reported           |  |  | $                                  | (1,063,841
|                                |  |  |                                    |           
|Loss per share:                 |  |  |                                    |           
|Basic and diluted - as reported |  |  | $                                  | (0.13     
|                                |  |  |                                    |           

The
following table shows the effect on net loss and  loss per share had compensation cost
been recognized based  upon the estimated fair value on the grant date of stock  options
in accordance with SFAS 123, as amended by SFAS No.  148 Accounting for Stock-Based
Compensation  Transition  and Disclosure:

|                                         |  |  | Three Months 
  Ended March 31,
  2005 |           
|---------------------------------------- |  |  | -------------------------------------- | ----------
|                                         |  |  |                                        |           
|Net loss, as reported                    |  |  | $                                      | (1,686,828
|Deduct: stock-based compensation expense |  |  |                                        |           
|under fair value based method            |  |  |                                        | (173,528  
|                                         |  |  |                                        |           
|Pro forma net loss                       |  |  | $                                      | (1,860,356
|                                         |  |  |                                        |           
|Loss per share:                          |  |  |                                        |           
|Basic and diluted - as reported          |  |  | $                                      | (0.21     
|                                         |  |  |                                        |           
|Basic and diluted - pro forma            |  |  | $                                      | (0.23     
|                                         |  |  |                                        |           

Disclosures for
the quarter ended March 31, 2006 are not  presented because the amounts are
recognized in the  consolidated financial statements.

The
fair value for stock awards was estimated at the  date of grant using the
Black-Scholes-Merton (BSM) option  valuation model with the following
weighted average  assumptions for the quarter ended March 31, 2006 and 2005:

|                                        |  |  | March 31, |     
|--------------------------------------- |  |  | --------- | ----
|                                        |  |  | 2006      |     
|                                        |  |  |           |     
|Expected term (in years)                |  |  |           | 6.25
|Expected stock price volatility         |  |  |           | 95  
|Risk-free interest rate                 |  |  |           | 4.29
|Expected dividend yield                 |  |  |           | --  
|Estimated fair value per option granted |  |  | $         | 0.57

For
the three months ended March 31, 2006, the expected  life of each award granted was
calculated using the  simplified method in accordance with Staff Accounting
Bulletin No. 107. Prior to January 1, 2006, the expected  term of the options
represents the estimated period of time  until exercise and is based on historical
experience of  similar awards, giving consideration to the contractual  terms, vesting
schedules and expectations of future employee  behavior. Expected stock price volatility
is based on  historical volatility of the Companys stock. The risk-free  interest
rate is based on the implied yield available on  U.S. Treasury zero-coupon issues with an
equivalent  remaining term. The Company has not paid dividends in the  past and does not
plan to pay any dividends in the near  future.

The
BSM option valuation model was developed for use in  estimating the fair value of traded
options, which have no  vesting restrictions and are fully transferable. In  addition,
option valuation models require the input of  highly subjective assumptions, particularly
for the expected  term and expected stock price volatility. The Companys  employee
stock options have characteristics significantly  different from those of traded options,
and changes in the  subjective input assumptions can materially affect the fair  value
estimate. Because Company stock options do not trade  on a secondary exchange, employees
do not derive a benefit  from holding stock options unless there is an increase,  above
the grant price, in the market price of the Companys  stock.

- 8 -



---

EDEN
BIOSCIENCE CORPORATION AND SUBSIDIARIES

NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL  STATEMENTS (Continued)

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 warrants and 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 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. Shares issuable pursuant to stock options and
warrants that have not been included in the above  calculations because they are
antidilutive totaled 885,953  and 918,166 as of March 31, 2006 and 2005, respectively.

Reclassifications

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

2. Stock
Compensation

During
2000, the shareholders and Board of Directors  approved the 2000 Stock Incentive Plan
(the 2000 Plan).  Upon completion of the Companys initial public
offering,  the 2000 Plan replaced the 1995 Combined Incentive and  Nonqualified Stock
Option Plan (the 1995 Plan and,  together with the 2000 Plan, the Stock
Option Plans) for  the purpose of all future stock incentive awards. All  reserved
but ungranted shares under the 1995 Plan and any  shares subject to outstanding options
under the 1995 Plan  that expire or are otherwise cancelled without being  exercised will
be added to the shares available under the  2000 Plan.

The
Board of Directors has the authority to determine  all matters relating to options to be
granted under the  Stock Option Plans, including designation as incentive or
nonqualified stock options, the selection of individuals to  be granted options, the
number of shares subject to each  grant, the exercise price, the term and vesting period,
if  any. Generally, options vest over periods ranging from three  to five years and
expire ten years from date of grant. The  Board of Directors reserved an initial total of
500,000  shares of common stock under the 2000 Plan, plus an  automatic annual increase
equal to the lesser of (a) 500,000  shares; (b) 5% of the outstanding shares of common
stock on  a fully diluted basis as of the end of the immediately  preceding year; and (c)
a lesser amount as may be determined  by the Board of Directors. No additional shares
were added  to the 2000 Plan on January 1, 2006, 2005 or 2004.

At
March 31, 2006, the Company had reserved 196,004  shares of common stock for issuance
under the 1995 Plan, all  of which had been granted, and 1,080,720 shares for issuance
under the 2000 Plan, including 580,720 shares transferred  from the 1995 Plan. Options
totaling 689,949 under the 2000  Plan had been granted at March 31, 2006, leaving
390,771  options available for future grant. Additionally, in the  first quarter of 2006,
the Board of Directors approved a  cash and equity incentive arrangements for certain employees
in  2006. If certain net revenue goals are achieved for 2006,  these employees would be
granted fully vested stock options  to purchase between 41,669 and 104,169 shares of the
Companys common stock, depending on actual annual net  revenues achieved. The
exercise price of any options issued  under this plan will be equal the market price of
the  Companys common stock at the date of grant. At March 31,  2006, management has
determined it is not probable that the  annual net revenue targets will be achieved and
no  compensation expense has been recorded under this incentive  plan during the first
quarter of 2006.

The
fair value of each stock option granted is estimated  on the date of grant using the BSM
option valuation model.  The assumptions used to calculate the fair value of options
granted are evaluated and revised, as necessary, to reflect  market conditions and the
Companys experience. Options  granted are valued using the single option valuation
approach, and the resulting expense is recognized over the  entire requisite service
period. Compensation expense is  recognized only for those options expected to vest, with
forfeitures estimated at the date of grant based on the  Companys historical
experience and future expectations.  Prior to the adoption of SFAS 123R, the effect of
forfeitures on the pro forma expense amounts was recognized  as the forfeitures occurred.

- 9 -



---

EDEN
BIOSCIENCE CORPORATION AND SUBSIDIARIES

NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL  STATEMENTS (Continued)

The
following table summarizes stock option activity:

|                              |  |  |  | Number of 
  Shares |   | Weighted 
  Average Exercise 
  Price Per Share |      |  | Weighted Average 
  Remaining 
  Contractual Life |     | Aggregate 
  Intrinsic 
  Value |  
|----------------------------- |  |  |  | ------------------- | - | ----------------------------------------------- | ---- |  | ------------------------------------------------- | --- | ------------------------------- | -
|                              |  |  |  |                     |   |                                                 |      |  |                                                   |     |                                 |  
|Balance at December 31, 2005  |  |  |  | 882,619             |   | $                                               | 8.02 |  |                                                   |     |                                 |  
|Granted                       |  |  |  | 10,002              |   |                                                 | 2.16 |  |                                                   |     |                                 |  
|Cancelled                     |  |  |  | (6,668              | ) |                                                 | 3.01 |  |                                                   |     |                                 |  
|                              |  |  |  |                     |   |                                                 |      |  |                                                   |     |                                 |  
|Balance at March 31, 2006     |  |  |  | 885,953             |   |                                                 | 8.00 |  |                                                   | 6.5 |                                 | $
|                              |  |  |  |                     |   |                                                 |      |  |                                                   |     |                                 |  
|Exercisable at March 31, 2006 |  |  |  | 658,768             |   | $                                               | 9.34 |  |                                                   | 6.2 |                                 | $

The
aggregate intrinsic value in the table above is  based on the Companys closing
stock price of $2.70 as of  March 31, 2006, which would have been received by the
optionees had all in-the-money options been exercised on  that date. As of March 31,
2006, total unrecognized  stock-based compensation expense related to nonvested stock
options was approximately $283,000 and expected to recognize  $168,000 in the remainder
of 2006, $81,000 in 2007, $29,000  in 2008 and $5,000 in 2009.

The
following table summarizes stock option information  at March 31, 2006:

|                               |  |  |  | Options Outstanding   |  |                                                                       | Options Exercisable |                                           
|------------------------------ |  |  |  | --------------------- |  | --------------------------------------------------------------------- | ------------------- | ------------------------------------------
|                               |  |  |  |                       |  |                                                                       |                     |                                           
|Range of 
  Exercise 
  Prices |  |  |  | Number 
  Outstanding |  | Weighted-Average 
    Remaining 
    Contractual 
    Life (in years) |                     | Weighted- 
    Average 
    Exercise Price
|                               |  |  |  |                       |  |                                                                       |                     |                                           
|$1.20 - 3.00                   |  |  |  | 198,037               |  | 7.40                                                                  |                     | $                                         
|4.20 - 5.55                    |  |  |  | 508,083               |  | 6.97                                                                  |                     |                                           
|6.00 - 18.00                   |  |  |  | 92,000                |  | 3.27                                                                  |                     |                                           
|21.00 - 42.00                  |  |  |  | 87,833                |  | 5.00                                                                  |                     |                                           
|                               |  |  |  |                       |  |                                                                       |                     |                                           
|                               |  |  |  | 885,953               |  | 6.48                                                                  |                     |                                           
|                               |  |  |  |                       |  |                                                                       |                     |                                           

3. Inventory

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

|                                      |  |  | March 31, 
  2006 |            | December 31, 
  2005 |  
|------------------------------------- |  |  | ----------------- | ---------- | -------------------- | -
|                                      |  |  |                   |            |                      |  
|Raw materials                         |  |  | $                 | 510,445    |                      | $
|Bulk manufactured goods               |  |  |                   | 464,911    |                      |  
|Finished goods                        |  |  |                   | 2,207,975  |                      |  
|                                      |  |  |                   |            |                      |  
|Total inventory                       |  |  |                   | 3,183,331  |                      |  
|Less non-current portion of inventory |  |  |                   | (1,661,718 | )                    |  
|                                      |  |  |                   |            |                      |  
|Current portion of inventory          |  |  | $                 | 1,521,613  |                      | $
|                                      |  |  |                   |            |                      |  

The non-current
portion of inventory consists of raw  materials, bulk manufactured goods and finished
goods that  the Company does not expect to utilize in the next twelve  months.

- 10 -



---

EDEN
BIOSCIENCE CORPORATION AND SUBSIDIARIES

NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL  STATEMENTS (Continued)

4. Property
and Equipment

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

|                                               |  |  | March 31,
  2006 |            | December 31,
  2005 |  
|---------------------------------------------- |  |  | ---------------- | ---------- | ------------------- | -
|                                               |  |  |                  |            |                     |  
|Equipment                                      |  |  | $                | 6,881,430  |                     | $
|Leasehold improvements                         |  |  |                  | 3,557,590  |                     |  
|                                               |  |  |                  |            |                     |  
|Total property and equipment                   |  |  |                  | 10,439,020 |                     |  
|Less accumulated depreciation and amortization |  |  |                  | (4,631,588 | )                   |  
|                                               |  |  |                  |            |                     |  
|Net property and equipment                     |  |  | $                | 5,807,432  |                     | $
|                                               |  |  |                  |            |                     |  

The
Company recorded depreciation and amortization of  $176,067 and $610,444 for the three
months ended March 31,  2006 and 2005, respectively.

5. Accrued
Liabilities

Accrued
liabilities consist of the following:

|                                              |  |  | March 31, 
  2006 |         | December 31, 
  2005 |  
|--------------------------------------------- |  |  | ----------------- | ------- | -------------------- | -
|                                              |  |  |                   |         |                      |  
|Compensation and benefits                     |  |  | $                 | 308,829 |                      | $
|Royalty                                       |  |  |                   | 206,458 |                      |  
|Facility costs                                |  |  |                   | 205,000 |                      |  
|Research and development field trial expenses |  |  |                   | 132,832 |                      |  
|Warranty                                      |  |  |                   | 74,871  |                      |  
|Promotions                                    |  |  |                   | 5,000   |                      |  
|Sales allowances                              |  |  |                   | --      |                      |  
|Other                                         |  |  |                   | 50,997  |                      |  
|                                              |  |  |                   |         |                      |  
|Total accrued liabilities                     |  |  | $                 | 983,987 |                      | $
|                                              |  |  |                   |         |                      |  

6. Warranty
Liability

The
Company provides a limited warranty to customers  that products, at the time of the first
sale, conform to the  chemical description on the label and under normal  conditions are
reasonably fit for the purpose referred to in  the directions for use, subject to certain
inherent risks.  The Company records, at time revenues are recognized, a  liability for
warranty claims based on a percentage of  sales. The warranty accrual percentage, which
has ranged  between zero and five percent, is reviewed periodically and  adjusted as
necessary, based on historical experience, the  results of product quality testing and
future expectations.  There were no changes to the Companys warranty liability
during the three months ended March 31, 2006.

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 March 31, |        
|---------- |  |  | ---------------------------- | -------
|           |  |  | 2006                         |        
|           |  |  |                              |        
|Customer A |  |  | $                            | 381,000
|Customer B |  |  |                              | 253,000
|Customer C |  |  |                              | 181,000
|Customer D |  |  |                              | --     

**
Less than ten percent.

- 11 -



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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 2005 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 15, 2006.

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 of our ability to  increase sales of our products, our
ability to improve  operations and reduce net losses, our ability to improve  operations
in Spain, our ability to sell unused  manufacturing equipment at estimated fair values;
our belief  that our cash balance at March 31, 2006 will be sufficient  to meet
anticipated cash needs for move than the next 12  months; and our ability to further
reduce operating  expenses.  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:

| | o |  | Our
inability to generate sufficient cash flow from  operations, or obtain funds through
additional  financing, which may force us to delay, curtail  or eliminate some or all of
our research and  development, field-testing, marketing or  manufacturing programs or
cease all operations;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | Our
inability to regain, or, if we regain, to  sustain, compliance with the continued listing
requirements of The Nasdaq Capital Market,  including the $1 minimum bid price
requirement,  which could result in delisting and adversely  affect the market price and
liquidity of our  common stock;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | Our
inability to successfully achieve broad market  acceptance of our products sufficient to
generate enough product revenues in the future  to achieve profitability;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | Our
inability to develop adequate sales and  marketing capabilities, which could prevent us
from successfully commercializing our current  products and other products we may develop;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | Our
inability to establish or maintain successful  relationships with independent
distributors and  retailers, which could adversely affect our  sales;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | The
results of our ongoing or future field trials,  which if unsuccessful could impair our
ability  to achieve market acceptance or obtain  regulatory approval of our current
products or  any other products we may develop;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | Our
inability to adequately address the risks of a  new enterprise and the commercialization
of a  new technology, including manufacturing, quality  control and assurance, regulatory
approval and  compliance, marketing, sales, distribution and  customer service;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | Our
inability to successfully expand  internationally as we obtain regulatory  approvals to
market and sell our products in  other countries, which expansion involves a  number of
risks, including different regulatory  requirements, reduced protection of intellectual
property rights and the diversion of management  attention from domestic operations;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | Our
inability to compete successfully against our  current or future competitors, which may
result  in price reductions, reduced margins or the  inability to achieve market
acceptance of our  current products or any other products we may  develop;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | Our
inability to obtain regulatory approvals, or to  comply with ongoing and changing
regulatory  requirements, which could delay or prevent sales  of our current products or
any other products we  may develop;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 12 -



---

| | o |  | Our
inability to protect our patents and  proprietary rights in the United States and
foreign countries, which could limit our ability  to compete effectively since our
competitors may  take advantage of our patents or proprietary  rights;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | Our
inability to operate without infringing the  intellectual property or proprietary rights
of  others, which could cause us to incur  significant expenses or be prevented from
selling our current products or any other  products we may develop in the future;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | Our
inability to adequately distinguish our  products from genetically modified plants and
products, which could negatively impact market  acceptance of our products;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | Exposure
to product liability claims, which could  adversely affect our operations;
| | - |  | -----------------------------------------------------------------------------------

| | o |  | Rapid
changes in technology, which could render our  current products or any other products we
may  develop unmarketable or obsolete;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------

| | o |  | Our inability to comply with regulations applicable  to our facilities and procedures,
which could  delay, limit or prevent our research and  development or manufacturing
activities;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | Our
inability to maintain high product quality on a  large scale, which could negatively
impact  market acceptance of our products;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------

| | o |  | The
failure of any component required in the  manufacturing process of our products, which,
because we do not have back-up manufacturing  systems, could delay or impair our ability
to  manufacture our products in the quantities that  we may require;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | The
failure of third-party manufacturers on whom we  rely for certain aspects of our
manufacturing  process to perform adequately; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------

| | o |  | Our
inability to retain our key employees or other  skilled managerial or technical
personnel, which  could impair our ability to maintain or expand  our business.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

More
information about factors that potentially could  affect our financial results and our
business is included  under Item 1A "Risk Factors" in our most recent Annual
Report on Form 10-K filed with the Securities and Exchange  Commission.  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
are a plant health technology company focused on  developing, manufacturing and marketing
innovative products  for agriculture using our natural-based protein harpin  technology.
We have a fundamentally new, patented and  proprietary technology that we believe
enhances plant health  and improves overall crop production and quality. We believe  our
technology provides growers with valuable benefits by  increasing crop yields, quality
and shelf-life; by improving  the plants ability to suppress certain diseases and
other  environmental stresses; and by enhancing the uptake of  nutrients.

We
have incurred significant operating losses since  inception. At March 31, 2006, we had an
accumulated deficit  of $117.9 million. We incurred net losses of $1.1 million  and $1.7
million for the quarters ended March 31, 2006 and  2005, respectively, and annual losses
of $10.9 million in  2005, $8.9 million in 2004 and $11.2 million in 2003. We  expect to
incur significant additional net losses as we  proceed with the commercialization of our
current products  and the development of new products and technologies.

- 13 -



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Results of
Operations

Three Months
Ended March 31, 2006 and 2005

Revenues

We
generated our first product sales revenue in August  2000. Product sales revenue to date
has resulted primarily  from sales of Messenger, our initial product, and Messenger  STS,
an improved formulation of Messenger introduced in  January 2004, as well as N-Hibit,
ProAct, MightyPlant and  other related products (hereafter referred to
collectively  as Harp-N-Tek products) primarily to distributors in the
United States and Spain. Revenues from product sales are  recognized when (a) the product
is delivered to independent  distributors, (b) we have satisfied all of our significant
obligations and (c) any acceptance provisions or other  contingencies or arrangements
have been satisfied, 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 revenue  is reported net of applicable
sales allowances, as follows:

|                                                             |  |  | Three Months Ended March 31, |          
|------------------------------------------------------------ |  |  | ---------------------------- | ---------
|                                                             |  |  |                              |          
|                                                             |  |  | 2006                         |          
|                                                             |  |  |                              |          
|Gross product sales                                          |  |  | $                            | 1,953,536
|Sales allowances                                             |  |  |                              | (347,178 
|Reduction of previously recorded sales allowance liabilities |  |  |                              | 42,029   
|                                                             |  |  |                              |          
|Product sales, net of sales allowances                       |  |  | $                            | 1,648,387
|                                                             |  |  |                              |          

Gross
product sales revenue for the first quarter of  2006 was $1,954,000, an increase of
$588,000 from $1,365,000  in the same quarter of 2005. The increase is a result of
higher sales volumes of N-Hibit, ProAct and MightyPlant in  the United States, which
offset the sales volume decline of  Messenger in Spain. Sales in the first quarter of
2006 were  made primarily to 26 distributors, three of which accounted  for an aggregate
of 49% of net product sales revenue. Sales  in the first quarter of 2005 were made
primarily to 30  distributors, three of which accounted for an aggregate of  43% of net
product sales revenue.

Net
product sales to foreign customers totaled $24,000  and $259,000 in the three months
ended March 31, 2006 and  2005, respectively. Recognized sales in Spain
decreased to  zero in the first quarter of 2006 from $210,000 in the same  quarter of
2005 because existing distributor-owned Messenger  inventory was adequate to meet growers orders.
In order to  improve our operations in Spain, we have reduced  expenditures and
consolidated the distribution channel to  one primary distributor. While we expect to
recognize sales  in the second quarter of 2006, it is not possible to predict  our future
sales in Spain due to our short sales history and  extreme weather conditions growers
encountered in 2005.

Net
sales of Messenger to consumers in the home and  garden market in the United States
totaled $231,000 and  $183,000 in the three months ended March 31, 2006 and 2005,
respectively. The increase is due to both higher sales  volumes to distributors and over
the internet.

Due
to the growing seasons of our targeted crops and our  current portfolio of Harp-N-Tek
products, we expect grower  usage of Harp-N-Tek products to be highly seasonal. Based on
the recommended application timing in our targeted crops and  information received from
our distributors, we expect the  second quarter to be the most significant period of use.
Our  product sales to distributors are also expected to be  seasonal. However, actual
timing of orders received from  distributors will depend on many factors, including the
amount of Harp-N-Tek products in distributors inventories.

Sales Allowances

Sales
allowances represent allowances granted to  independent distributors for sales and
marketing support and  are estimated based on the terms of the distribution
arrangements. Sales allowances are estimated and accrued when  the related product sales
revenue is recognized or when  services are provided and are paid in accordance with the
terms of the then-current distributor program arrangements.  Distributor program
arrangements expire annually, generally  on December 31.

Sales
allowances during the quarter ended March 31, 2006  totaled $347,000 (18% of gross
product sales) compared to  $302,000 (22% of gross product sales) in the comparable
quarter of 2005. The four percentage point

- 14 -



---

decrease was
primarily to discontinuance of certain marketing programs  and changes in mix of products
sold. We expect 2006 sales  allowances to average approximately 15-20% of total gross
product sales based on current product specific distributor  programs. Net revenue for
the quarters ended March 31, 2006  and 2005 include the reduction by $42,000 and $91,000,
respectively, of sales allowance recognized in prior  quarters that were not paid because
actual amounts earned by  distributors were less than amounts previously estimated.

Cost of Goods
Sold

Cost
of goods sold consists primarily of the cost of  products sold to distributors, idle
capacity charges and the  cost of products used for promotional purposes. Cost of  goods
sold was $1,015,000 in the first quarter of 2006,  compared to $528,000 in the first
quarter of 2005. The  increase in cost of goods sold was due to higher sales  volumes in
2006 and an increase in idle capacity charges  resulting from no manufacturing activities
in the first  quarter of 2006 compared to 46 days of production in the  same quarter of
2005.

Research and
Development Expenses

Research
and development expenses consist primarily of  personnel, field trial, laboratory,
regulatory, patent and  facility expenses. Research and development expenses  decreased
$626,000 (66%) from $943,000 in the first quarter  of 2005 to $317,000 in the same
quarter of this year. This  decrease was primarily due to terminating a facility lease in
September 2005 that significantly reduced rent and  depreciation and amortization expense
related to leasehold  improvements and certain equipment at the facility. Stock
compensation expense included in research and development  totaled $7,000 in the first
quarter of 2006.

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  increased $104,000 (7%) from $1.5 million in the first  quarter of 2005 to $1.6
million in the same quarter of 2006.  This increase resulted primarily from recording
stock  compensation expense of $118,000 in the first quarter of  2006.

Effective
January 1, 2006, the Company adopted the fair  value recognition provisions of SFAS 123R,
using the  modified-prospective transition method. Under this  transition method,
stock-based compensation expense was  recognized in the consolidated financial statements
for  granted stock options. Compensation expense recognized  included the estimated
expense for stock options granted  subsequent to January 1, 2006, based on the grant date
fair  value estimated in accordance with the provisions of SFAS  123R, and the estimated
expense for the portion vesting in  the period for options granted prior to, but not
vested as  of January 1, 2006, based on the grant date fair value  estimated in
accordance with the original provisions of SFAS  123. As of March 31, 2006, total
unrecognized stock-based  compensation expense related to nonvested stock options was
approximately $283,000 and expected to recognize $168,000 in  the remainder of 2006,
$81,000 in 2007, $29,000 in 2008 and  $5,000 in 2009. Total stock-based compensation
expense  recognized in the consolidated statement of operations for  the quarter ended
March 31, 2006 was $125,129. Prior to the  January 1, 2006 adoption of the SFAS 123R, the
Company  accounted for stock-based compensation using the intrinsic  value method
prescribed in APB 25, and related  interpretations. Accordingly, because the stock
option grant  price equaled the market price on the date of grant, no  compensation
expense was recognized by the Company for  stock-based compensation. Results for prior
periods have not  been restated, as provided for under the  modified-prospective method.

We
estimate the fair value of stock options granted  using the Black-Scholes-Merton
option-pricing formula and a  single option award approach. This fair value is then
amortized on a straight-line basis over the requisite  service periods of the awards,
which is generally the  vesting period. Options generally become exercisable over a
three or four-year period and, if not exercised, expire ten  years after the grant date.
The majority of our employees  participate in our stock option program. This
option-pricing  model requires the input of highly subjective assumptions,  including the
options expected term and the price  volatility of the Companys stock. For
the three months  ended March 31, 2006, the expected term of each award  granted was
calculated using the simplified method in  accordance with Staff Accounting
Bulletin No. 107. Prior to  January 1, 2006, the expected term of the options
represents  the estimated period of time until exercise and is based on  historical
experience of similar awards, giving  consideration to the contractual terms, vesting
schedules  and expectations of future employee behavior. Expected stock  price volatility
is based on historical volatility of the  Companys stock.

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Gain on sale of
investment

In
the first quarter of 2006, we sold a minority stock  investment for $100,000 that
resulted in a gain of $99,884.

Interest Income

Interest
income consists of earnings on our cash and  cash equivalents. Interest income decreased
$7,000 from  $68,000 in the first quarter of 2005 to $61,000 in the same  quarter of this
year. The change was due to higher interest  rates in 2006 offset by significantly lower
average cash  balances available for investment in the quarter ended March  31, 2006
compared to the same quarter in 2005.

Income Taxes

We
have generated a net loss from operations for each  period since we began doing business.
As of December 31,  2005, we had accumulated approximately $112.1 million of net
operating loss carryforwards for federal income tax  purposes, which expire between 2009
and 2025, and  approximately $10.4 million in foreign tax net operating  loss
carryforwards, which expire between 2006 and 2015. We  have provided a valuation
allowance against our net deferred  tax assets because of the significant uncertainty
surrounding our ability to realize them. The annual use of  these net operating loss
carryforwards may be limited in the  event of a cumulative change in ownership of more
than 50%.

Liquidity
and Capital Resources

Our
operating expenditures have been significant since  our inception. We currently
anticipate that our operating  expenses will significantly exceed net product sales and
that net losses and working capital requirements will  consume a material amount of our
cash resources. If net  product sales do not significantly increase in the near  term, we
will have to further reduce our operating expenses.  Our future capital requirements will
depend on the success  of our operations. We believe that the balance of our cash  and
cash equivalents at March 31, 2006 will be sufficient to  meet our anticipated cash needs
for net losses, working  capital and capital expenditures for more than the next 12
months, although there can be no assurance in that regard.  After the next 12 months, if
net product sales do not  significantly increase, we will have to further reduce
operating expenses or secure additional financing. We may be  unable to obtain adequate
or favorable financing at that  time or at all and may be forced to cease operations. The
sale of additional equity securities could result in  dilution of our shareholders.

The
Board of Directors of the Company approved the  reverse stock split to help the Company
regain compliance  with The Nasdaq Capital Market's $1 minimum bid price  continued
listing requirement.  As reported on the Company's  Current Report on Form 8-K filed on
April 4, 2006, the  Company received a Nasdaq Staff Determination Letter on  April 3, 2006
stating that the Company's common stock had not  regained compliance with the $1 minimum
bid price continued  listing requirement set forth in Marketplace Rule 4310(c)(4)  (the
"Bid Price Requirement") during the 180-day extension  period provided the
Company on October 10 2005.  Consequently, the Company's common stock is
subject to  delisting from The Nasdaq Capital Market. The Company  requested a hearing
before a Nasdaq Listing Qualifications  Panel to review the Staff Determination, which
stayed the  delisting action pending the issuance of a final decision by  the Panel.  The
hearing is scheduled for May 11, 2006.  The  Company can regain compliance with the Bid
Price Requirement  if the Company's stock closes at or above $1 for 10  consecutive
business days following the reverse stock split,  in which case the Company would expect
to receive  notification from Nasdaq that it has regained compliance and  that the
hearing process will be terminated. On May 3, 2006,  the Company received notification
from the Nasdaq Listing  Qualifications Staff that it had regained compliance with
Marketplace Rule 4450(a)(5) and that the Staff would give  this matter no further
consideration. As such, the hearing  before the Listing Qualifications Hearings Panel
scheduled  for May 11, 2006 to address the Companys compliance with  Marketplace
Rule 4450(a)(5) (which includes the $1 minimum  bid price listing standard) will not
be held.

At
March 31, 2006, our cash and cash equivalents totaled  $5.2 million, a decrease of $1.6
million from the balance of  $6.8 million at December 31, 2005. Prior to October 2000, we
financed our operations primarily through the private sale  of our equity securities,
resulting in net proceeds of  approximately $36.5 million through September 30,
2000. In  October 2000, we received approximately $91.5 million in net  proceeds from the
initial public offering of 2,223,333  shares of our common stock.

Net
cash used in operations decreased $217,000 from just  under $2.0 million in the first
three months of 2005 to $1.7  million in the same period of 2006. Net cash used in
operations in the first three months of 2006 resulted

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primarily from
a net loss of $1.1 million, which includes  depreciation and amortization expense of
$176,000 and stock  compensation expense of $125,000, and fluctuations in  various asset
and liability balances totaling $957,000. The  primary component of net cash used by
fluctuations in  various asset and liability balances was an increase in net  accounts
receivable of $1.2 million which resulted from an  increase in sales volume in the first
quarter of 2006 over  the fourth quarter of 2005. We expect that net cash used in
operations will continue to be significant.

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 may invoice our
international customers in  U.S. dollars and euros, as the case may be. We are exposed
to foreign exchange rate fluctuations as the financial  results of foreign subsidiaries
are translated into U.S.  dollars in consolidation. Foreign exchange rate fluctuations
did not have a material impact on our financial statements  in the three months ended
March 31, 2006 or 2005.

Critical
Accounting Policies, Estimates and Judgments

Our
critical accounting policies are more fully  described in Note 1 to our consolidated
financial statements  included in our most recent Annual Report on Form 10-K,  which was
filed with the Securities and Exchange Commission  on March 15, 2006. Certain of our
accounting policies  require the application of significant judgment by  management in
selecting the appropriate assumptions for  calculating financial estimates. By their
nature, these  judgments are subject to an inherent degree of uncertainty.  These
judgments are based on historical experience, terms of  existing contracts, commonly
accepted industry practices,  information provided by our customers and other assumptions
that we believe are reasonable under the circumstances. Our  estimates and assumptions
are reviewed periodically and the  effects of revisions are reflected in the consolidated
financial statements in the period in which they are  determined to be necessary. Actual
results may differ from  these estimates under different assumptions or conditions.  Our
critical accounting policies and estimates include:

Revenue
Recognition

We
sell the majority of our products to independent,  third-party distributors. Our
arrangements with those  distributors provide no price protection or product-return
rights. We recognize revenue from product sales, net of  sales allowances, when product
is delivered to our  distributors and all of our significant obligations have  been
satisfied, unless acceptance provisions or other  contingencies or arrangements exist,
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.

Sales
allowances represent allowances granted to  independent distributors for sales and
marketing support and  are based on the terms of the distribution agreements or  other
arrangements. Sales allowances are estimated and  accrued when the related product sales
are recognized or  when services are provided and are paid in accordance with  the terms
of the then-current distributor program agreements  or other arrangements.

We
also record, at the time revenue is recognized, a  liability for warranty claims based on
a percentage of  sales. The warranty accrual percentage, which has ranged  between zero
and five percent, and warranty liability are  reviewed periodically and adjusted as
necessary, based on  historical experience, the results of product quality  testing and
future expectations. Changes in our estimate of  the warranty liability are recorded in
cost of goods sold.

Accounts
Receivable and Allowance for Doubtful Accounts

Accounts
receivable balances are reported net of  customer-specific related sales allowances. In
determining  the adequacy of the allowance for doubtful accounts, we  consider a number
of factors, including the age of  outstanding invoices, customer payment trends, the
financial  condition of our customers, historical bad debts and current  economic trends.
Based upon our analysis of outstanding net  accounts receivable at March 31, 2006, no
allowance for  doubtful accounts was recorded. Changes in the factors above  or other
factors could result in a significant charge.

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Inventory
Valuation and Classification

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

We
also review our inventory to determine inventory  classification. Inventory expected to
be utilized in the  next twelve-month period is classified as current and  inventory
expected to be utilized beyond that period is  classified as non-current. In determining
the classification  of inventory, the Company considers a number of factors,  including
historical sales experience and trends, existing  distributor inventory, expansion into
new markets,  introduction of new products and estimates of future sales  growth. Changes
in the factors above or other factors could  result in significant changes in
classification of  inventory.

Valuation of
Property and Equipment

We
periodically review the carrying values of our  property and equipment to determine
whether such assets have  been impaired. An impairment loss must be recorded pursuant  to
SFAS No. 144, Accounting for the Impairment or Disposal  of Long-Lived Assets, when the
undiscounted net cash flows  expected to be realized from the use of such assets are less
than their carrying value. The determination of expected  undiscounted net cash flows
requires us to make many  estimates, projections and assumptions, including the lives  of
the assets, future sales and expense levels, additional  capital investments or
expenditures necessary to maintain  the assets, industry market trends and general and
industry  economic conditions. Our property and equipment consists  primarily of assets
used to manufacture and sell our  products and assets used in our research and
administration.  For the purpose of assessing asset impairment, we have  grouped all of
these assets together in one asset group  because our administration and research support
our  manufacturing and sales activities and do not have a  separate identifiable cash
flow.

In
December 2005, the Company completed an efficiency  analysis of its manufacturing
processes, including an  assessment of all manufacturing equipment and its usefulness  in
future manufacturing operations. As a result of this  analysis, the Company identified
equipment that will not be  used in future manufacturing operations and will be sold or
disposed. The lower of carrying value or estimated fair  value less estimated costs to
sell of equipment to be sold  totals $314,000 at March 31, 2006 and is included in other
current assets on the balance sheet. We expect to complete  the sale or disposal of this
equipment by the end of 2006.

Based
upon our most recently completed analysis of net  cash flows expected to be realized from
our remaining  investments in property and equipment, no additional  impairment loss was
recorded. The critical estimates in the  analysis are our ability to significantly
increase sales  over the next four years while controlling operating  expenses at about
current levels and ability to sell certain  equipment for our estimated fair value in
2006. If net  product sales do not significantly increase in the near term  or if
expenses significantly increase over the current  level, a significant impairment loss
may need to be recorded.

Stock-Based
Compensation

We
account for stock-based compensation in accordance  with the fair value recognition
provisions of SFAS 123R. We  use the Black-Scholes-Merton option-pricing model which
requires the input of highly subjective assumptions. These  assumptions include
estimating the length of time employees  will retain their vested stock options before
exercising  them (expected term), the estimated volatility of the  Companys
common stock price over the expected term and the  number of options that will ultimately
not complete their  vesting requirements (forfeitures). Changes in the
subjective assumptions can materially affect the estimate of  fair value of stock-based
compensation and consequently, the  related amount recognized on the consolidated
statements of  operations.

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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 foreign  currency. Because of the
relatively short-term average  maturity of our investment funds, such investments are
sensitive to interest rate movements. 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 we hold is not
material.

Item 4.
Controls and Procedures

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

PART II --
OTHER INFORMATION

Item 1A.
Risk Factors

Except
as described below, there have not been any  material changes during the quarter ended
March 31, 2006 to  the risk factors set forth in Part I, Item 1A in our Annual  Report on
Form 10-K for the year ended December 31, 2005  filed with the SEC on March 15, 2006 (Annual
Report).

Our
Annual Report includes a risk factor regarding the  transfer of our common stock listing
to The Nasdaq Capital  Market and compliance with The Nasdaq Capital Market's $1  minimum
bid price requirement (the "Bid Price Requirement").  As reported in our
Current Report on Form 8-K filed on April  4, 2006, we received a Nasdaq Staff
Determination Letter on  April 3, 2006 stating that our common stock had not
regained  compliance with the Bid Price Requirement during the 180-day  extension period
provided to us on October 10, 2005.  Consequently, our common stock was subject
to delisting from  The Nasdaq Capital Market. We requested a hearing before a  Nasdaq
Listing Qualifications Panel to review the Staff  Determination, which stayed the
delisting action pending the  issuance of a final decision by the Panel. The hearing was
scheduled for May 11, 2006. On April 18, 2006, we  implemented a 1-for-3 reverse stock
split to help us regain  compliance with the Bid Price Requirement and our common  stock
has traded above the $1 minimum bid price for each day  since then. As a result, on May
3, 2006, we received  notification from the Nasdaq Listing Qualifications Staff  that we
had regained compliance with the Bid Price  Requirement and that the Staff would give
this matter no  further consideration. As such, the hearing before the  Listing
Qualifications Hearings Panel scheduled for May 11,  2006 to address the Companys
compliance with the Bid Price  Requirement will not be held. Although we are, as of the
date of this report, in compliance with the continued  listing requirements of the Nasdaq
Capital Market, there can  be no assurance that we will be able to maintain such
compliance, including with respect to the Bid Price  Requirement.

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

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

To
date, of the net offering proceeds, we have used  approximately $18.6 million to expand
and enhance our  manufacturing, research and development and administration  facilities,
and approximately $67.7 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 5.
Other Information.

On
January 24, 2006, Eden Bioscience's Board of  Directors approved a 2006 cash and equity
incentive  compensation arrangement for Dr. Rhett A. Atkins, our  President and Chief
Executive Officer.  The arrangement  provides for cash and equity awards based on the
achievement  of specified annual net revenue goals for the year ending  December 31,
2006.  Under the arrangement, Dr. Atkins can  earn a cash bonus of between $54,000, if
the minimum revenue  goal is achieved, and $90,000, if the maximum revenue goal  is
achieved.  In addition, Dr. Aktkins will be granted fully  vested stock options to
purchase between 16,666 shares of  our common stock, if the minimum revenue goal is
achieved,  and 41,666 shares if the maximum revenue goal is achieved.  Stock options
granted under the arrangement will be granted  pursuant to our Amended and Restated 2000
Stock Incentive  Plan and will have an exercise price equal to the fair  market value of
our common stock on the date of grant.

On
March 14, 2006, the Board of Directors added Dr.  Zhongmin Wei, our Vice President and
Chief Science Officer,  and Bradley S. Powell, our Vice President and Chief  Financial
Officer, to the cash and equity incentive  compensation arrangement.  Under the
arrangement, Dr. Wei  and Mr. Powell will each be awarded 50% of the cash and  equity
awards, if any, granted to Dr. Atkins, based on  achievement of the same annual net
revenue goals for 2006.

Item 6.
Exhibits

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

| | Exhibit
        Number |  | Description                                                                                                                                                                                                                                                                                                                                                                                   
| | ---------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                        |  |                                                                                                                                                                                                                                                                                                                                                                                               
| | 10.1                   |  | First Amendment to Lease and Extension Agreement, dated February 16, 2006, with S/I North
      Creek I, LLC, which amends the Lease, dated November 4, 1996, between Koll Real Estate Group
      and Eden Bioscience (incorporated by reference to Exhibit 99.1 to Eden Bioscience's Current
    Report on Form 8-K (Commission File No. 0-31499), filed with the SEC on February 24, 2006).
| |                        |  |                                                                                                                                                                                                                                                                                                                                                                                               
| | 10.2*                  |  | Summary of 2006 Cash and Equity Incentive Compensation Arrangements                                                                                                                                                                                                                                                                                                                           
| |                        |  |                                                                                                                                                                                                                                                                                                                                                                                               
| | 31.1                   |  | Rule 13a-14(a) Certification (Chief Executive Officer).                                                                                                                                                                                                                                                                                                                                       
| |                        |  |                                                                                                                                                                                                                                                                                                                                                                                               
| | 31.2                   |  | Rule 13a-14(a) Certification (Chief Financial Officer).                                                                                                                                                                                                                                                                                                                                       
| |                        |  |                                                                                                                                                                                                                                                                                                                                                                                               
| | 32.1                   |  | Section 1350 Certification (Chief Executive Officer).                                                                                                                                                                                                                                                                                                                                         
| |                        |  |                                                                                                                                                                                                                                                                                                                                                                                               
| | 32.2                   |  | Section 1350 Certification (Chief Financial Officer).                                                                                                                                                                                                                                                                                                                                         

*Management
contract or compensatory plan.

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: May 4, 2006 |  |                            
|                  |  |                            
|                  |  | By:                        
|                  |  |                            
|                  |  |                            
|                  |  |                            
|                  |  |                            
|                  |  | By:                        
|                  |  |                            
|                  |  |                            
|                  |  |                            

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