# UNITED
STATES SECURITIES ANDEXCHANGE COMMISSIONWashington, D.C. 20549

_________________

# FORM 10-Q

_________________

|(Mark One) |                                                                                                                                                       
|---------- | ------------------------------------------------------------------------------------------------------------------------------------------------------
|[X]        | Quarterly Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the quarterly period ended September 30, 2003             
|           |                                                                                                                                                       
|           | or                                                                                                                                                    
|           |                                                                                                                                                       
|[   ]      | Transition Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the transition period from ____________ to ____________ .
|           |                                                                                                                                                       

Commission File Number
0-31499

EDEN Bioscience Corporation

(Exact name of
registrant as specified in its charter)


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

3830 Monte Villa Parkway, Suite 100
Bothell, Washington 98021-6942
(Address of principal executive offices, including zip code)

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

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

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

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

|                                     |  |                                              
|------------------------------------ |  | ---------------------------------------------
|Class
Common Stock, $.0025 Par Value |  | Outstanding as of November 5, 2003
24,361,990

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TABLE OF CONTENTS


|                               |                                                                                               |                                                                                        |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- |  |  |  |  |  | 
|Part I.  Financial Information
|                               | Item 1. Unaudited Financial Statements                                                       
|                               |                                                                                               | Condensed Consolidated Balance Sheets                                                 
|                               |                                                                                               | Condensed Consolidated Statements of Operations                                       
|                               |                                                                                               | Condensed Consolidated Statements of Cash Flows                                       
|                               |                                                                                               | Notes to Unaudited Condensed Consolidated Financial
Statements                        
|                               | Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
|                               |                                                                                               | Factors That May Affect Our Business, Future Operating
Results and Financial Condition
|                               | Item 3. Quantitative and Qualitative Disclosures About Market
Risk                           
|                               | Item 4. Controls and Procedures                                                              
|Part II.  Other Information   
|                               | Item 2. Changes in Securities and Use of Proceeds                                            
|                               | Item 6. Exhibits and Reports on Form 8-K                                                     
|Signatures                    
|Exhibit 31.1                  
|Exhibit 31.2                  
|Exhibit 32.1                  
|Exhibit 32.2                  

---

# EDEN Bioscience
Corporation

# Index to Form 10-Q

|           |  |                                                                                                                            |    |  |    |  |      |  | 
|---------- |  | -------------------------------------------------------------------------------------------------------------------------- | -- |  | -- |  | ---- |  | 
|           |  |                                                                                                                            |    |  |    |  | Page
|           |  |                                                                                                                            |    |  |    |  |     
|Part
I.    |  | Financial Information                                                                                                      |    |  |    | 
|Item 1.    |  | Unaudited Financial Statements                                                                                             |    |  | 2  | 
|           |  | Condensed
Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002                                       |    |  | 2  | 
|           |  | Condensed
Consolidated Statements of Operations for the Three Months and Nine Months Ended     September 30, 2003 and
2002 |    |  | 3  | 
|           |  | Condensed
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002                      |    |  | 4  | 
|           |  | Notes to Unaudited Condensed Consolidated Financial
Statements                                                             |    |  | 5  | 
|Item 2.    |  | Management's
Discussion and Analysis of Financial Condition and Results of Operations                                      |    |  | 10 | 
|           |  | Factors That May
Affect Our Business, Future Operating Results and Financial Condition                                     |    |  | 16 | 
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market
Risk                                                                 |    |  | 24 | 
|Item 4.    |  | Controls and Procedures                                                                                                    |    |  | 25 | 
|Part II.   |  | Other Information                                                                                                          |    |  |    | 
|Item 2.    |  | Changes in Securities and Use of Proceeds                                                                                  |    |  | 25 | 
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                                           |    |  | 25 | 
|Signatures |  |                                                                                                                            | 26 | 

- 1 -

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##### Table of Contents

# 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                                                     
|Inventory                                                               
|Other current assets                                                    
|                                                                        
|Total current assets                                                    
|Property and equipment, net                                             
|Other assets                                                            
|                                                                        
|Total assets                                                            
|                                                                        
|LIABILITIES AND SHAREHOLDERS' EQUITY                                    
|Current liabilities:                                                    
|Accounts payable                                                        
|Accrued liabilities                                                     
|Current portion of accrued loss on facility subleases                   
|Current portion of capital lease obligations                            
|                                                                        
|Total current liabilities                                               
|Accrued loss on facility subleases, net of current portion              
|Capital lease obligations, net of current portion                       
|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 September 30, 2003 and December 31, 2002      
|Common stock, $.0025 par value, 100,000,000 shares authorized; issued   
|and outstanding shares - 24,354,322 shares at September 30, 2003;       
|24,307,495 shares at December 31, 2002                                  
|Additional paid-in capital                                              
|Cumulative translation adjustment                                       
|Accumulated deficit                                                     
|                                                                        
|Total shareholders' equity                                              
|                                                                        
|Total liabilities and shareholders' equity                              
|                                                                        

The accompanying
notes are an integral part of these statements.

- 2 -

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##### Table of Contents

# EDEN BIOSCIENCE
CORPORATION AND SUBSIDIARIES

# CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited)

|                                         | Three Months Ended September 30, |  | Nine Months Ended September 30, |           
|---------------------------------------- | -------------------------------- |  | ------------------------------- | ----------
|
|Product sales, net of sales allowances   |                                  |  | $                               | 102,533   
|Operating expenses:                      |                                  | 
|Cost of goods sold                       |                                  |  |                                 | 307,766   
|Research and development                 |                                  |  |                                 | 982,983   
|Selling, general and administrative      |                                  |  |                                 | 1,406,321 
|                                         |                                  |  |                                 |           
|Total operating expenses                 |                                  |  |                                 | 2,697,070 
|                                         |                                  |  |                                 |           
|Loss from operations                     |                                  |  |                                 | (2,594,537
|                                         |                                  |  |                                 |           
|Other income (expense):                  |                                  | 
|Interest income                          |                                  |  |                                 | 62,411    
|Interest expense                         |                                  |  |                                 | (1,393    
|                                         |                                  |  |                                 |           
|Total other income                       |                                  |  |                                 | 61,018    
|                                         |                                  |  |                                 |           
|Loss before income taxes and             |                                  | 
|cumulative effect of adoption of         |                                  | 
|SFAS No. 143                             |                                  |  |                                 | (2,533,519
|Provision for income taxes               |                                  |  |                                 | --        
|                                         |                                  |  |                                 |           
|Loss before cumulative effect of         |                                  | 
|adoption of SFAS No. 143                 |                                  |  |                                 | (2,533,519
|Cumulative effect of adoption of SFAS    |                                  | 
|No. 143                                  |                                  |  |                                 | --        
|                                         |                                  |  |                                 |           
|Net Loss                                 |                                  |  | $                               | (2,533,519
|                                         |                                  |  |                                 |           
|Basic and diluted net loss per share:    |                                 
|Loss before cumulative effect of         |                                  | 
|adoption of SFAS No. 143                 |                                  |  | $                               | (0.10     
|Cumulative effect of adoption of SFAS    |                                 
|No. 143                                  |                                  |  |                                 | --        
|                                         |                                  |  |                                 |           
|Net loss                                 |                                  |  | $                               | (0.10     
|                                         |                                  |  |                                 |           
|Weighted average shares outstanding used |                                 
|to compute net loss per share            |                                  |  |                                 | 24,354,322
|                                         |                                  |  |                                 |           
|Pro forma amounts assuming retroactive   |                                  | 
|application of SFAS No. 143:             |                                  | 
|Net loss                                 |                                  |  | $                               | (2,533,519
|Basic and diluted net loss per share     |                                  |  | $                               | (0.10     

The accompanying
notes are an integral part of these statements.

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##### Table of Contents

# EDEN BIOSCIENCE
CORPORATION AND SUBSIDIARIES

# CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS Unaudited

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

The accompanying
notes are an integral part of these statements.

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##### Table of Contents

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

Basis of
Presentation

The
accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial information
and pursuant to the instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles for
complete financial statements. The balance sheet at December 31, 2002 has been derived
from the audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles for
complete financial statements. These financial statements and notes should be read in
conjunction with the financial statements and notes for the year ended December 31, 2002
included in the Companys Annual Report on Form 10-K, which was filed with the
Securities and Exchange Commission on March 27, 2003.

In
the opinion of management, the unaudited condensed consolidated financial statements
include all adjustments, consisting only of normal recurring adjustments, necessary to
state fairly the financial information set forth therein. Results of operations for the
three months and nine months ended September 30, 2003 are not necessarily indicative of the
results expected for the full fiscal year or for any future period.

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 and provisions for sales allowances, warranty
claims, inventory valuation, asset impairments, bad debts and asset retirement
obligations. Such estimates and assumptions are based on historical experience, where
applicable, and other assumptions. Estimates and assumptions are reviewed periodically and
the effects of revisions are reflected in the consolidated financial statements in the
period in which they are determined to be necessary. Actual results could differ from these
estimates.

Property and
Equipment

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

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

Revenue

The
Company recognizes revenue from product sales, net of sales allowances, when product is
shipped to its distributors and all significant obligations of the Company have been
satisfied, unless acceptance provisions or other contingencies exist. If acceptance
provisions or contingencies exist, revenue is deferred and recognized later if such
provisions or contingencies are satisfied. Distributors do not have price protection or
product-return rights. Accounts receivable are presented net of sales allowances. The
Company provides an allowance for warranty claims based on

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##### Table of Contents

# EDEN BIOSCIENCE
CORPORATION AND SUBSIDIARIES

# NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

historical experience, the results of product
quality testing and future expectations. Shipping and handling costs related to product
sales that are paid by the Company are included in cost of goods sold.

Sales
allowances represent allowances granted to independent distributors for sales and
marketing support, product warehousing and delivery and information exchange and are
estimated based on the terms of the distribution agreements currently in place. Sales
allowances are accrued when the related product sales are recognized and are paid in
accordance with the terms of the then-current distributor program agreements. Distributor
program agreements expire annually, generally on December 31. Prior to 2003, sales
allowances were paid when the distributors sold the product and reported the sales data to
the Company, generally on a quarterly basis. The Company expects that sales allowances
related to 2003 sales will be paid in 2003 and early 2004, upon submission by
distributors of annual sales data. Gross product sales and sales allowances are as
follows:

|                                       | Three Months Ended September 30, |  | Nine Months Ended September 30, |        
|-------------------------------------- | -------------------------------- |  | ------------------------------- | -------
|
|Gross product sales                    |                                  |  | $                               | 105,409
|Sales allowances                       |                                  |  |                                 | (2,876 
|Elimination of previously recorded     |                                 
|sales allowance liabilities            |                                  |  |                                 | --     
|                                       |                                  |  |                                 |        
|Product sales, net of sales allowances |                                  |  | $                               | 102,533
|                                       |                                  |  |                                 |        

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

Recent Accounting
Pronouncements

SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal Activities
(effective January 1, 2003), replaces Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (Including Certain Costs Incurred in a Restructuring). SFAS No. 146
requires that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred and states that an entitys commitment to
an exit plan, by itself, does not create a present obligation that meets the definition of
a liability. SFAS No. 146 also establishes that fair value is the objective for initial
measurement of the liability. The adoption of SFAS No. 146 is not expected to have a
material impact on the Companys consolidated results of operations, financial
position or cash flows.

In
November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45 (FIN 45), Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to
Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB
Interpretation No. 34. FIN 45 elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations under
guarantees issued. FIN 45 also clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of FIN 45 are applicable to guarantees
issued or modified after December 31, 2002. The disclosure requirements are effective
for financial statements of interim and annual periods ended after December 15, 2002. The
disclosure modifications required for interim and annual periods ended after December 15,
2002 are included in the notes to these unaudited condensed consolidated financial
statements.

In
December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation
 Transition and Disclosure, an Amendment of FASB Statement No. 123. SFAS No.
148 amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair value method
of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of Statement No. 123 to require more prominent disclosures in both
annual and interim financial statements. Certain of the disclosure modifications are
required for fiscal years ended after December 15, 2002 and are included in the
notes to these unaudited condensed consolidated financial statements.

Net Loss Per Share

Basic
net loss per share is calculated as the net loss divided by the weighted average number of
common shares outstanding during the period. Diluted net loss per share is calculated as
the net loss divided by the sum of the

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##### Table of Contents

# EDEN BIOSCIENCE
CORPORATION AND SUBSIDIARIES

# NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

|                                  | As of September 30, | 
|--------------------------------- | ------------------- | 
|
|Options to purchase common stock  |                     | 
|Warrants to purchase common stock |                     | 

Comprehensive Loss

The
following table summarizes the Companys comprehensive loss:

|                                  | Three Months Ended September 30, |  | Nine Months Ended September 30, |           
|--------------------------------- | -------------------------------- |  | ------------------------------- | ----------
|
|Net loss                          |                                  |  | $                               | (2,533,519
|Cumulative translation adjustment |                                  |  |                                 | (1,895    
|                                  |                                  |  |                                 |           
|Total comprehensive loss          |                                  |  | $                               | (2,535,414
|                                  |                                  |  |                                 |           

Stock Compensation

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

|                                      | Three Months Ended September 30, |  | Nine Months Ended September 30, |           
|------------------------------------- | -------------------------------- |  | ------------------------------- | ----------
|
|Net loss, as reported                 |                                  |  | $                               | (2,533,519
|Add: Amortization of stock option     |                                  | 
|compensation expense                  |                                  |  |                                 | --        
|Deduct: Total stock-based employee    |                                 
|compensation expense under fair value |                                 
|based method                          |                                  |  |                                 | (367,265  
|                                      |                                  |  |                                 |           
|Pro forma net loss                    |                                  |  | $                               | (2,900,784
|                                      |                                  |  |                                 |           
|Loss per share:                       |                                  | 
|Basic and diluted - as reported       |                                  |  | $                               | (0.10     
|                                      |                                  |  |                                 |           
|Basic and diluted - pro forma         |                                  |  | $                               | (0.12     
|                                      |                                  |  |                                 |           

Reclassifications

Certain
reclassifications have been made in prior years financial statements to conform to
classifications used in the current year.

2.     Inventory

Inventory,
at average cost, consists of the following:

|                | September 30,2003 |  | December 31,2002 |          
|--------------- | ----------------- |  | ---------------- | ---------
|Raw materials   |                   |  | $                | 870,587  
|Work in process |                   |  |                  | 238,292  
|Finished goods  |                   |  |                  | 1,014,868
|                |                   |  |                  |          
|Total inventory |                   |  | $                | 2,123,747
|                |                   |  |                  |          

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##### Table of Contents

# EDEN BIOSCIENCE
CORPORATION AND SUBSIDIARIES

# NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3.     Property and
Equipment

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

|                                               | September 30,2003 |  | December 31,2002 |           
|---------------------------------------------- | ----------------- |  | ---------------- | ----------
|Equipment                                      |                   |  | $                | 12,690,166
|Equipment under capital leases                 |                   |  |                  | 219,012   
|Leasehold improvements                         |                   |  |                  | 11,563,408
|                                               |                   |  |                  |           
|                                               |                   |  |                  | 24,472,586
|Less accumulated depreciation and amortization |                   |  |                  | (7,190,901
|                                               |                   |  |                  |           
|Net property and equipment                     |                   |  | $                | 17,281,685
|                                               |                   |  |                  |           

The
Company recorded depreciation and amortization of $495,966 and $676,862 for the three
months ended September 30, 2003 and 2002, respectively, and $1,656,035 and $2,189,714 for the
nine months ended September 30, 2003 and 2002, respectively.

4.     Accrued Liabilities

Accrued
liabilities consist of the following:

|                                              | September 30,
2003 |  | December 31,
2002 |          
|--------------------------------------------- | ------------------ |  | ----------------- | ---------
|Compensation and benefits                     |                    |  | $                 | 311,412  
|Warranty                                      |                    |  |                   | 228,021  
|Research and development field trial expenses |                    |  |                   | 202,201  
|Sales allowances and marketing expenses       |                    |  |                   | 193,462  
|Facility costs                                |                    |  |                   | 139,678  
|Other                                         |                    |  |                   | 80,030   
|                                              |                    |  |                   |          
|Total accrued liabilities                     |                    |  | $                 | 1,154,804
|                                              |                    |  |                   |          

5.     Warranty Liability

The
Company records, at the 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, and warranty liability are reviewed periodically and adjusted as
necessary, based on historical experience, the results of product quality testing and future
expectations. The following table summarizes changes to the Companys warranty liability during the nine
months ended September 30, 2003:

|                                                  | 
|------------------------------------------------- | 
|Balance at December 31, 2002                      | 
|Payments and other settlements                    | 
|Accruals, net of changes in estimate of liability | 
|                                                  | 
|Balance at September 30, 2003                     | 
|                                                  | 

6.     Stock Options and
Warrants

The
following table summarizes stock option activity since December 31, 2002:

|                              | Number of
Options | 
|----------------------------- | ----------------- | 
|Balance at December 31, 2002  |                   | 
|Options granted               |                   | 
|Options cancelled             |                   | 
|Options exercised             |                   | 
|                              |                   | 
|Balance at September 30, 2003 |                   | 
|                              |                   | 

On
June 17, 2002, the Company offered to exchange certain outstanding options to purchase
shares of its common stock granted to its then-current U.S. employees and officers (other
than its Chief Financial Officer and then-Interim President) for new options to be granted
under the 2000 Stock Incentive Plan on a date that was at least six months and one day
after the date on which the Company cancelled the tendered options. The offer was made
pursuant to a tender offer that expired on July 17, 2002. Employees who participated in
the offer were required to

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##### Table of Contents

# EDEN BIOSCIENCE
CORPORATION AND SUBSIDIARIES

# NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

tender all stock options granted to them in October and
November 2001, other than any options that may have been granted during that period
expressly in connection with a promotion, with an exercise price of $7.00 per share for
cancellation without replacement. On July 17, 2002, options to purchase 788,900 shares of
the Companys common stock (representing approximately 56% of the shares subject to
options eligible for participation in the offer) were tendered for cancellation, of which
options to purchase 584,200 shares were tendered for exchange and options to purchase
204,700 shares were tendered for cancellation without replacement. On January 21, 2003,
the Company granted new options to purchase 558,700 shares of its common stock. Each new
option has an exercise price of $1.64 per share (the fair market value of the
Companys common stock on the date of grant) and vests over four years at a rate of
25% on each anniversary of the vesting start date of the tendered option that it replaced.

As
of September 30, 2003, the Company had warrants outstanding to purchase 232,217 shares of its
common stock. No warrants to purchase shares of the Companys common stock were
issued during the nine-month period ended September 30, 2003.

7.     Major
Customers

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

|                           | Three Months Ended September 30, |  | Nine Months Ended September 30, |       
|-------------------------- | -------------------------------- |  | ------------------------------- | ------
|
|Customer A                 |                                  |  | $                               | 53,800
|Customer B                 |                                  |  |                                 | --    
|Customer C                 |                                  |  |                                 | --    
|Customer D                 |                                  |  |                                 | --    
|Customer E                 |                                  |  |                                 | --    
|Customer F                 |                                  |  |                                 | **    
|Customer G                 |                                  |  |                                 | --    
|Customer H                 |                                  |  |                                 | 20,500
|Customer I                 |                                  |  |                                 | --    
|Customer J                 |                                  |  |                                 | --    
|**  Less than ten percent. |                                  |  |                                 |       

8.     Restructuring
Charges and Other Costs

The
Company recorded aggregate restructuring costs of $160,082 in the nine
months ended September 30, 2003 and $534,769 in the year ended December 31, 2002 for severance
and other costs associated with workforce reductions that occurred during those periods.
The following table summarizes changes to the Companys restructuring charge liability
during the nine months ended September 30, 2003:

|                                             | 
|-------------------------------------------- | 
|Balance at December 31, 2002                 | 
|Accrual for additional restructuring charges | 
|Payments and other reductions                | 
|                                             | 
|Balance at September 30, 2003                | 
|                                             | 

9.     Asset Retirement
Obligation

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

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##### Table of Contents

# EDEN BIOSCIENCE
CORPORATION AND SUBSIDIARIES

# NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

|                                                               | 
|-------------------------------------------------------------- | 
|Initial measurement of obligation                              | 
|Accretion expense for periods prior to January 1, 2003         | 
|Accretion expense for the nine months ended September 30, 2003 | 
|                                                               | 
|Balance at September 30, 2003                                  | 
|                                                               | 

Pro
forma net losses for the years ended December 31, 2002 and 2001, assuming retroactive
application of SFAS No. 143, would be as follows:

|                                                                     | Year Ended December 31, | 
|-------------------------------------------------------------------- | ----------------------- | 
|
|Net loss, as reported                                                |                         | 
|Accretion and depreciation expense                                   |                         | 
|                                                                     |                         | 
|Pro forma net loss, assuming retroactive application of SFAS No. 143 |                         | 
|                                                                     |                         | 

The
pro forma balance of the asset retirement obligation liability, assuming that SFAS No. 143
had been adopted prior to the quarter ended September 30, 2002 (the earliest period presented),
would be $163,913 at December 31, 2002, $159,093 at September 30, 2002 and $145,465
at December 31, 2001.

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 2002 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
27, 2003.

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

# Overview

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

We
have incurred significant operating losses since inception. We incurred net losses of
$23.5 million in 2002 and $23.7 million in 2001. As of September 30, 2003, we had an
accumulated deficit of $94.6 million. We incurred net losses of $8.7 million and $14.9
million for the nine months ended September 30, 2003 and 2002, respectively. Total
operating expenses were $10.4 million for the nine months ended September 30, 2003, a
decrease of $6.7 million from $17.1 million in the nine months ended September
30, 2002. We expect to incur significant additional net losses as we proceed with the
commercialization of Messenger, Messenger STS and Employ and the development
of new products and technologies.

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# Results of Operations

Three Months and Nine
Months Ended September 30, 2003 and 2002

Revenues

We
generated our first product sales in August 2000. Product sales to date have resulted from
sales of Messenger, primarily to distributors in the United States. Revenues from product
sales are recognized when (a) the product is delivered to independent distributors or
other customers, (b) we have satisfied all of our significant obligations and (c) any
acceptance provisions or other contingencies have been satisfied. We do not offer
product-return rights. Product sales are reported net of applicable sales allowances, as
follows:

|                                       | Three Months Ended September 30, |  | Nine Months Ended September 30, |        
|-------------------------------------- | -------------------------------- |  | ------------------------------- | -------
|
|Gross product sales                    |                                  |  | $                               | 105,409
|Sales allowances                       |                                  |  |                                 | (2,876 
|Elimination of previously recorded     |                                 
|sales allowance liabilities            |                                  |  |                                 | --     
|                                       |                                  |  |                                 |        
|Product sales, net of sales allowances |                                  |  | $                               | 102,533
|                                       |                                  |  |                                 |        

Gross
product sales for the third quarter of 2003 totaled $105,000, an increase of $40,000 (62%)
from $65,000 in the comparable quarter of 2002. Gross product sales for the first nine
months of 2003 totaled $1.4 million, a decrease of $731,000 (33%) from $2.2 million
for the same period in 2002. Sales in the first nine months of 2003 were made to 30
distributors, three of which accounted for an aggregate of 48% of net product sales. Sales
in the first nine months of 2002 were made to 24 distributors, three of which accounted
for an aggregate of 33% of net product sales. Sales in the quarters ended September 30,
2003 and 2002 continued to be negatively impacted by high levels of inventory held by
distributors, the continuing challenges of commercializing a fundamentally new technology
and product and the lagging U.S. economy. We expect these conditions to continue at least
for the remainder of this year, which we expect will adversely impact our
commercialization efforts and sales of Messenger and our two new products.

Sales
to consumers in the home and garden market in the United States totaled $50,000 in the
nine months ended September 30, 2003, or 3% of net product sales for the period. No
sales to consumers in the home and garden market were recorded in the nine months ended
September 30, 2002. We do not expect sales in this market to be significant in the
remainder of 2003.

Foreign
sales to customers in Europe and Central America totaled $28,000 in the nine months ended
September 30, 2003, or 2% of net product sales for the period. No foreign sales
were recorded in the nine months ended September 30, 2002. We do not expect foreign sales
to be significant in the remainder of 2003.

In
the first nine months of 2003, we shipped 377,000 ounces of Messenger to our distributors,
compared to 477,000 ounces in the first nine months of 2002, a decrease of 100,000 ounces
(21%). Based on information received from distributors, we estimate that our distributors
sold approximately 75,000 ounces to growers in the third quarter of 2003, a decrease of
approximately 68,000 ounces (48%) from approximately 143,000 ounces in the third quarter
of 2002. For the first nine months of 2003, we estimate that our distributors sold
approximately 497,000 ounces to growers, a decrease of approximately 114,000 ounces (19%)
from approximately 611,000 ounces in the first nine months of 2002. We estimate that
inventory held by distributors at September 30, 2003 was approximately 515,000 ounces,
which we believe is high. We do not expect distributors that hold significant inventories
of Messenger to place additional orders for Messenger until their current inventories are
reduced and, therefore, we expect sales to distributors in the remainder of this year to
be minor. One of our primary objectives in 2003 and 2004 is to continue working with
distributors to significantly reduce their inventories of Messenger.

In
February 2003, we negotiated with one of our distributors a compromise settlement whereby
we paid $250,000 to settle unpaid accrued sales allowances and an uncollected account
receivable. As part of the settlement agreement and mutual release, we accepted
approximately 232,000 ounces of Messenger from that distributor. We do not anticipate
entering into any additional such agreements.

During
third quarter 2003, we conducted an in-depth analysis of Messengers pricing and
performance in comparison to that of other key products used by growers. This study
suggests that the most significant factor in explaining the slow adoption rate of
Messenger is the relationship of our price to other similarly priced chemical and

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non-chemical inputs. In September, with the cooperation of our retailers, we instituted a
buy one, get one free program at the grower level that runs through the end of
the year. This program provides us the opportunity to observe the effect of lower pricing
in certain target markets this fall. We plan to use the information obtained from our
pricing study, grower and distributor feedback, and the fall promotion to make final
pricing decisions for the 2004 season. We will be introducing a new and improved
formulation of Messenger early next year, trade named Messenger STS, and we expect that it
will be priced significantly below the current price of Messenger. This will allow us to
price toward the median crop input cost in our targeted crops and expand the
attractiveness of our offer in other crops. We will also be introducing a new product,
trade named Employ, for use in nutritional applications in the fourth quarter of this
year.

Once
we determine our 2004 pricing, we will work with our distributors to reduce the average
cost of their existing Messenger inventories. We expect to accomplish this through
delivery of our existing and future products to distributors in the first quarter of 2004.
We expect that some of this product will be delivered at no cost to distributors and we do
not, therefore, expect to recognize any revenues in relation to such product. This will
substantially increase channel inventory in the immediate term but will, we believe,
significantly improve our growth rate and our sales to distributors over the medium term.

Due
to the growing seasons of our targeted crops, we expect grower usage of our products to be
highly seasonal. Based on the recommended application timing in our targeted crops and
information received from our distributors, we expect the second quarter of each year to
be the most significant period of use. 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 our products in distributors inventories.

Sales Allowances

Sales
allowances represent allowances granted to independent distributors for sales and
marketing support, product warehousing and delivery and information exchange and are
estimated based on the terms of the distribution agreements. Sales allowances are accrued
when the related product sales are recognized and are paid in accordance with the terms of
the then-current distributor program agreements. Distributor program agreements expire
annually, generally on December 31. Prior to 2003, sales allowances were paid when the
distributors sold the product and reported the sales data to the Company, generally on a
quarterly basis. Previously accrued sales allowances totaling approximately $546,000
related to Messenger inventory held by distributors at December 31, 2002 were paid in the
first quarter of 2003. We expect that sales allowances related to 2003 sales will be paid
in 2003 and early 2004, upon submission by distributors of annual sales data.

Beginning
in 2003, we made several changes to our distributor program. We reduced both the cost of
Messenger to our distributors and the sales allowance they will receive, thereby lowering
the necessary working capital investment by distributors who maintain inventories of
Messenger. As a result of these changes, sales allowances related to gross sales during
the three months ended September 30, 2003 totaled $3,000 (3% of gross product sales),
compared to $5,000 (8% of gross product sales) in the comparable period of 2002. Sales
allowances related to gross sales during the nine months ended September 30, 2003 totaled
$64,000 (4% of gross product sales), compared to $479,000 (22% of gross product sales) in
the same period in 2002. We expect sales allowances to average between three and five
percent of gross product sales for the remainder of 2003. Estimated sales allowance
liabilities recognized in prior years totaling $126,000 will not be paid because of
changes in distributor programs implemented in 2003 and actual amounts earned by
distributors being less than amounts previously estimated.

Cost of Goods Sold

Cost
of goods sold consists primarily of the cost of Messenger sold to distributors, idle
capacity charges, inventory cost reductions and write-offs and the cost of Messenger used
for promotional purposes. Cost of goods sold was $308,000 in the third quarter of 2003,
compared to $374,000 in the third quarter of 2002. This decrease was primarily due to a
reduction in the estimated warranty liability. For the first nine months of 2003, cost of
goods sold was $1.5 million, compared to $2.1 million for the same period in 2002. This
decrease resulted primarily from lower product sales in 2003 compared to 2002, a reduction
in the estimated warranty liability and a reduction in Messenger used for promotional
purposes. We expect to continue incurring idle capacity charges in the future.

Our
inventory includes approximately 504,000 ounces of Messenger that was manufactured more
than two years ago. In addition, we estimate that distributors own approximately 515,000
ounces of Messenger that was manufactured more than two years ago. Due to the age of this
inventory, we are conducting limited re-testing of

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Messenger samples produced in 2000 and
2001. During the first nine months of 2003, we voluntarily recalled and replaced
approximately 10,000 ounces of Messenger owned by distributors that our limited re-testing
indicated had degraded below our quality control standards. If our limited re-testing
program indicates that additional material has degraded below our quality standards, we
may have to record inventory write-downs and replace any such product owned by
distributors or growers.

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 $1.5
million (60%) from $2.5 million in the third quarter of 2002 to $983,000 in the same
quarter of this year. For the first nine months of 2003, research and development costs
were $4.0 million, a decrease of $4.2 million (51%) from $8.2 million in the same period
last year. This decrease was primarily due to lower spending on personnel costs, field
trials, facility costs (including depreciation) and travel. Research and development costs
in the quarter ended September 30, 2003 were approximately 35% lower than average research
and development costs in the first and second quarters of 2003, primarily as a result of
the staff reduction that occurred during second quarter 2003.

Selling, General and
Administrative Expenses

Selling,
general and administrative expenses consist of payroll and related expenses for sales and
marketing, executive and administrative personnel; advertising, marketing and professional
fees; and other corporate expenses. Selling, general and administrative expenses decreased
$559,000 (28%) from $2.0 million in the third quarter of 2002 to $1.4 million in the same
quarter of 2003. For the first nine months of 2003, selling, general and administrative
expenses were $4.9 million, a decrease of $1.9 million (28%) from $6.8 million in the same
period last year. The majority of this decrease occurred in the United States and resulted
primarily from reductions in personnel, advertising and marketing costs. Compared to
average costs in the first and second quarters of 2003, company-wide selling, general and
administrative costs in the third quarter of this year were lower by approximately 18%.

In
April 2003, we subleased to a third party approximately 7,300 square feet of additional
office space in our headquarters in Bothell, Washington. Due to declines in the real
estate market, the rent we will receive is less than the rent we will pay on the subleased
space. As a result, we recorded in selling, general and administrative expenses a $235,000
loss on the sublease in April 2003. In September 2003, we recorded an additional loss of
approximately $134,000 on this sublease as a result of a reduction in the amount of rental
income expected to be received over the term of the sublease.

Interest Income

Interest
income consists of earnings on our cash and cash equivalents. Interest income decreased
$108,000 (64%) from $170,000 in the third quarter of 2002 to $62,000 in the same quarter
of this year. For the first nine months of 2003, interest income was $234,000, down
$349,000 (60%) from $583,000 in the same period last year. This decrease was due primarily
to significantly lower average cash balances available for investment in the current year
and interest rate reductions that occurred in the past year.

Interest Expense

Interest
expense consists of interest we pay on capital leases used to finance certain equipment
purchases. Interest expense decreased $7,000 from $8,000 in the third quarter of 2002 to
$1,000 in the same quarter of this year. For the first nine months of 2003, interest
expense was $8,000, down $23,000 from $31,000 in the same period last year. This decrease
was due to reduced leasing activity and lower average principal balances as we pay down
our existing capital lease obligations.

Income Taxes

We
have generated a net loss from operations in each period since we began doing business. As
of December 31, 2002, we had accumulated approximately $78.8 million of net operating loss
carryforwards for federal income tax purposes. These carryforwards expire between 2009 and
2022. Our foreign tax net operating loss carryforwards totaled $6.7 million at December
31, 2002 and expire in 2006 and 2007. 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%.

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##### Table of Contents

# Liquidity and Capital
Resources

At
September 30, 2003, our cash and cash equivalents totaled $21.9 million, a decrease of
$8.8 million from the $30.7 million balance at December 31, 2002. Prior to October
2000, we financed our operations primarily through the private sale of our equity
securities, which resulted in net proceeds of approximately $36.5 million through
September 30, 2000. In October 2000, we received approximately $91.5 million in net
proceeds from the initial public offering of 6,670,000 shares of our common stock. To a
lesser extent, we have financed our equipment purchases through lease financings.

Net
cash used in operations decreased $4.4 million (33%) from $13.2 million in the first nine
months of 2002 to $8.8 million in the same period of 2003. Net cash used in operations in
the first nine months of 2003 resulted primarily from a net loss of $7.0 million, after
adding back depreciation expense of $1.7 million, and fluctuations in various asset and
liability balances totaling $2.0 million. We expect that net cash used in operations will
continue to be significant.

Investing
activities used cash of $9,000 in the first nine months of 2003 and $180,000 in the first
nine months of 2002. This reduction is due primarily to proceeds from the disposal of
equipment in 2003. Net cash used in financing activities decreased $15,000 (26%) from
$57,000 in the first nine months of 2002 to $42,000 in the same period of 2003. The
primary use of funds in 2003 was to pay down principal on our outstanding capital leases,
offset by proceeds of $47,000 from the issuance of shares of our common stock.

We
conduct our operations in three primary functional currencies: the U.S. dollar, the
European Union euro and the Mexican peso. Historically, neither fluctuations in foreign
exchange rates nor changes in foreign economic conditions have had a significant impact on
our financial condition or results of operations. We currently do not hedge our foreign
currency exposures and are therefore subject to the risk of exchange rate fluctuations. We
may invoice our international customers in U.S. dollars, euros and Mexican pesos, as the
case may be. We are exposed to foreign exchange rate fluctuations as the financial results
of foreign subsidiaries are translated into U.S. dollars in consolidation. Foreign
exchange rate fluctuations did not have a material impact on our financial results in the
three-month or nine-month periods ended September 30, 2003 or 2002.

The
following are our contractual obligations as of September 30, 2003:

|                                              | Payments Due by Period | 
|--------------------------------------------- | ---------------------- | 
|
|
|
|                                              |                        | 
|Capital lease obligations, including interest |                        | 
|Operating lease obligations                   |                        | 
|                                              |                        | 
|Total                                         |                        | 
|                                              |                        | 

Our operating
expenditures have been significant since 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 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 September 30,
2003 will be sufficient to meet our anticipated cash needs for net losses, working capital
and capital expenditures for at least the next 24 months.

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

# 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 27, 2003. 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

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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 our product to independent, third-party distributors. Our contracts with those
distributors provide no price protection or product-return rights. We recognize revenue
from product sales, net of sales allowances, when product is received by our distributors
and all of our significant obligations have been satisfied, unless acceptance provisions
or other contingencies exist. If acceptance provisions or contingencies exist, revenue is
recognized after such provisions or contingencies have been satisfied.

Sales
allowances represent allowances granted to independent distributors for sales and
marketing support, product warehousing and delivery and information exchange and are based
on the terms of the distribution agreements. Sales allowances are accrued when the related
product sales are recognized and are paid in accordance with the terms of the then-current
distributor program agreements. Distributor program agreements expire annually, generally
on December 31. Prior to 2003, sales allowances were paid when the distributors sold the
product and reported the sales data to us, generally on a quarterly basis. Sales
allowances related to 2003 sales will be paid in 2003 and early 2004, upon submission by
distributors of annual sales data.

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.

Accounts Receivable
and Allowance for Doubtful Accounts

Accounts
receivable balances are reported net of related sales allowances. In determining the
adequacy of the allowance for doubtful accounts, we consider a number of factors,
including the aging of the accounts receivable portfolio, customer payment trends, the
financial condition of our customers, historical bad debts and current economic trends.
Based upon our analysis of outstanding net accounts receivable at September 30, 2003, no
allowance for doubtful accounts was recorded.

Inventory

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

Valuation of Property
and Equipment

We
periodically review the carrying values of our property and equipment to determine whether
such assets have been impaired. An impairment loss must be recorded pursuant to SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets, when the
undiscounted net cash flows to be realized from the use of such assets are less than their
carrying value. The determination of undiscounted net cash flows requires us to make many
estimates, projections and assumptions, including the lives of the assets, future sales
and expense levels, additional capital investments or expenditures necessary to maintain
the assets, industry market trends and general and industry economic conditions. During
2002, we wrote off $1.0 million of leasehold improvements and equipment directly
related to approximately 34,300 square feet of laboratory and office space subleased to
another company. Based upon our analysis of net cash flows to be realized from our
remaining investments in property and equipment, no additional impairment loss was
recorded. Changes in the factors listed above or other factors could result in
significantly different cash flow estimates and an impairment charge.

Loss on Facility
Subleases

We
have entered into agreements to sublease approximately 41,600 square feet of laboratory
and office space to other companies. In determining the loss on these facility subleases,
we considered a number of factors, including

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the financial condition of the subtenants,
the subtenants investments in improvements and the amounts of security deposits.
Based on our analysis, we estimate that rents will be collected and that one subtenant
will exercise a three-year extension option. Changes in the factors above or other factors
could result in a significant increase in the loss.

# Recent Accounting
Pronouncements

SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal Activities
(effective January 1, 2003), replaces Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (Including Certain Costs Incurred in a Restructuring). SFAS No. 146
requires that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred and states that a companys commitment to
an exit plan, by itself, does not create a present obligation that meets the definition of
a liability. SFAS No. 146 also establishes that fair value is the objective for initial
measurement of the liability. The adoption of SFAS No. 146 is not expected to have a
material impact on our consolidated results of operations, financial position or cash
flows.

In
November 2002, the FASB issued Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5,
57 and 107 and a rescission of FASB Interpretation No. 34. FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial statements about
its obligations under guarantees issued. FIN 45 also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of FIN 45 are
applicable to guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of interim and annual periods ended
after December 15, 2002. The disclosure modifications required for interim and annual
periods ended after December 15, 2002 are included in the notes to the unaudited
condensed consolidated financial statements included in this quarterly report.

In
December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation
 Transition and Disclosure, an Amendment of FASB Statement No. 123. SFAS No.
148 amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair value method
of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of Statement No. 123 to require more prominent disclosures in both
annual and interim financial statements. Certain of the disclosure modifications are
required for fiscal years ended after December 15, 2002 and are included in the
notes to the unaudited condensed consolidated financial statements included in this
quarterly report.

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

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

We currently depend on
three products and our development and commercialization of those products may not be
successful.

For
the immediately foreseeable future we will be dependent on the successful development and
commercialization of three products, Messenger, Messenger STS and Employ, which are based
on a new technology. While Messenger has been subject to numerous field tests on a wide
variety of crops with favorable results, we have had only limited sales of Messenger since
its introduction in August 2000, and Messenger could prove to be commercially
unsuccessful. We plan to introduce Employ in November 2003 and Messenger STS in early
2004. These two new products are unproven and could prove to be commercially unsuccessful.
Our products may not prove effective or economically viable for all crops or markets. In
addition, because our products have not been put to widespread commercial use over
significant periods of time, no assurance can be given that adverse consequences might not
result from their use, such as soil or other environmental degradation, the development of
negative effects on animals or plants or reduced benefits in terms of crop yield or
protection.

The
markets for our products and other harpin-based products we may develop are unproven.
Messenger has not gained, and may not gain, commercial acceptance or success. Messenger
STS and Employ may not gain commercial acceptance or success. If we are unable to
successfully achieve broad market acceptance of our products, we may not be able to
generate enough product revenues in the future to achieve profitability. A variety of

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factors will determine the success of our market development and commercialization efforts
and the rate and extent of market acceptance of our products, including our ability to
implement and maintain an appropriate pricing policy and general economic conditions in
agricultural markets, including commodity prices, climatic conditions and the extent that
growers, regulatory authorities and the public accept new agricultural practices and
products developed through biotechnology.

We have experienced
limited grower usage of Messenger, and independent distributors hold significant
inventories of Messenger.

Based
on information received from distributors, we estimate that distributors sold 66,000
ounces of Messenger in 2000, 596,000 ounces in 2001 and 684,000 ounces in 2002. During the
first nine months of 2003, we estimate that distributors sold 497,000 ounces to growers,
compared to 611,000 ounces in the same period of 2002, a decrease of 19%. We estimate that
inventory held by distributors at September 30, 2003 was approximately 515,000 ounces,
which we believe is high. We expect that the amount of inventory held by distributors will
increase significantly in the immediate term as we send distributors additional free
product to lower the average cost of their year-end Messenger inventories. We do not
expect distributors that hold significant inventories of Messenger to place additional
orders for Messenger until their current inventories are reduced, which will adversely
affect our sales and results of operations.

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

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

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

We
have incurred operating losses in each quarter since inception and we expect to continue
to incur further operating losses for the foreseeable future. From our inception in July
1994 to September 30, 2003, we have accumulated a deficit of $94.6 million. For the years
ended December 31, 2002, 2001 and 2000, we had net losses of $23.5 million, $23.7
million and $15.7 million, respectively. For the nine months ended September 30, 2003 we
had a net loss of $8.7 million. To date, our revenues have been limited. We expect our
future revenues to come primarily from the sale of Messenger, Messenger STS and Employ,
and these sales are highly uncertain. For example, there were no sales of Messenger in the
fourth quarter of 2001, annual net sales decreased from $3.5 million in 2001 to $1.9
million in 2002 and we expect sales for the remainder of 2003 to be minor.

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

If
net product sales do not significantly increase in the near term, we will have to reduce
our operating expenses. Our future capital requirements will depend on the success of our
operations. We believe that the balance of our cash and cash equivalents at September 30,
2003 will be sufficient to meet our anticipated cash needs for net losses, working capital
and capital expenditures for at least the next 24 months.

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

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

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

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

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

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

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

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

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

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

Our
inventory includes approximately 504,000 ounces of Messenger that was manufactured more
than two years ago. In addition, we estimate that distributors own approximately 515,000
ounces of Messenger that was manufactured more than two years ago. Due to the age of this
inventory, we conducted limited re-testing of Messenger samples produced in 2000 and 2001.
During the first nine months of 2003, we voluntarily recalled and replaced approximately
10,000 ounces of Messenger owned by distributors that our limited re-testing indicated had
degraded below our quality control standards.

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

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

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

Three
distributors accounted for an aggregate of 48% of our net revenue in the nine months ended
September 30, 2003 and two distributors accounted for an aggregate of 21% of our net
sales revenue in all of 2002. If any distributor that purchases a significant amount of
our products were to discontinue purchasing Messenger at any time, our sales would be
adversely affected. In addition, the failure of any of these distributors, or of any other
distributor to which we extend a significant amount of credit, to pay its account, now or
in the future, may harm our operating results.

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

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

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

Employ
is not a pesticide and is not regulated by the EPA. However, several states and foreign
governments regulate this product as a plant amendment or soil conditioner and some of
these states and foreign regulatory authorities require the submission and review of
performance data and other information prior to granting their

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approval. We are authorized
to sell Employ in 27 states and no foreign countries. However, there can be no assurance
that we will obtain approval to sell Employ in other states or foreign countries.

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

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

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

Our
registration to sell Messenger in California for use on strawberries for disease
management is conditioned on the requirement that we submit data from several additional
studies within various required timeframes ended on March 31, 2003. We have
submitted additional data and are currently awaiting a response. Our California
registration for use on citrus and tomato for yield enhancement, granted in March 2003, is
conditioned on the requirement that we submit data from several additional studies within
various required timeframes ending on December 31, 2005. There are no conditions on our
registration to sell Messenger in California for use on citrus, fruiting vegetables and
grapes for disease management. As required by the California registration for use on
strawberries, we submitted the results of six additional strawberry field trials in
December 2001, other information in March 2002 and the results of another six strawberry
field trials in July 2002. In July 2003, we submitted to the California Department of
Pesticide Regulation (the CDPR) a summary of all of the strawberry trials
conducted in support of the conditional registration in accordance with the conditions of
our strawberry registration and subsequent discussions with the CDPR. We expect to submit
the results of additional citrus and tomato field trials at various required timeframes
through 2005, in accordance with our registration. If we are unable to conduct the studies
required by the CDPR in a timely manner, or if the results of the studies are unacceptable
to the CDPR, they may not allow the continued use of Messenger in California on
strawberries, or on citrus or tomatoes for yield enhancement, or they may impose
limitations on this use of Messenger, which could have a negative impact on our sales. The
CDPR has approved Messenger STS as an alternate product formulation, and as such, its use
is subject to the same limits and conditions as Messenger. Because EPA and state approvals
are required for commercial sales of our current products, the loss of any of these
approvals for any reason would prevent further sales of Messenger in the affected state or
nationwide.

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

The
market for plant protection and yield enhancement products is intensely competitive,
rapidly changing and undergoing consolidation. We may be unable to compete successfully
against our current or future competitors, which may result in price reductions, reduced
margins or the inability to achieve market acceptance of our current products or any other
products we may develop.

Many
companies are engaged in developing plant protection and yield enhancement products. Our
competitors include major international agri-chemical companies, specialized biotechnology
companies and research and academic institutions. Many of these organizations have
significantly more capital, research and development, regulatory, manufacturing,
distribution, sales, marketing, human and other resources than we do. As a result, they
may be able to devote greater resources to the development, manufacture, promotion or sale
of their products,

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receive greater resources and support from independent distributors,
initiate or withstand substantial price competition or take advantage of acquisition or
other opportunities more readily. Furthermore, these large agri-chemical companies have a
more diversified product offering than we do, which may give them an advantage in meeting
customer needs by enabling them to offer integrated solutions to plant protection and
yield enhancement.

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

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

  
  new products or product enhancements will be uneconomical to market or will be difficult to produce on a large scale;

  
  proprietary rights of third parties will prevent us from marketing products; and

  
  third parties will market superior or equivalent products or will market their products
first.

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

Our
operating results for a particular quarter or year are likely to fluctuate, which could
result in uncertainty surrounding our level of sales and earnings and possibly result in a
decrease in our stock price. For example, there were no sales of Messenger in the fourth
quarter of 2001 and annual net product sales decreased 45% from 2001 to 2002. Numerous
other factors will contribute to the unpredictability of our operating results. In
particular, our sales are expected to be highly seasonal. Sales of plant protection and
yield enhancement products depend on planting and growing seasons, climatic conditions and
economic and other variables, which we expect to result in substantial fluctuations in our
quarterly sales and earnings. For example, weather-related events such as droughts and
floods, severe heat and frost, hail, tornadoes and hurricanes could decrease demand for
our products and any future products we may develop, and have an adverse impact on our
operating results from quarter to quarter. In addition, most of our expenses, such as
employee compensation and lease payments for facilities and equipment, are relatively
fixed. Our expense levels are based, in part, on our expectations regarding future sales.
As a result, any shortfall in sales relative to our expectations could cause significant
changes in our operating results from quarter to quarter. Other factors may also
contribute to the unpredictability of our operating results, including the amount of
Messenger carried in inventory by independent distributors and retailers, the size and
timing of significant customer transactions, the delay or deferral of customer use of our
product and the fiscal or quarterly budget cycles of our customers. For example, customers
may purchase large quantities of our products in a particular quarter to store and use
over long periods of time, or time their purchases to coincide with the availability of
capital, either of which may cause significant fluctuations in our operating results for a
particular quarter or year.

We cannot assure you
that our common stock will continue to be listed on the Nasdaq National Market, and
delisting could further depress our stock price and make it more difficult for us to
raise capital.

On
October 24, 2003, the closing price of our common stock was $0.95 per share. Our stock
price could continue to decline or be subject to wide fluctuations. To maintain listing of
our common stock on the Nasdaq National Market, we must continue to satisfy ongoing
listing requirements, including consistently maintaining a minimum bid price for the
common stock of $1.00 per share or more. If our common stock were to trade below the $1.00
minimum bid requirement for a period of 30 consecutive business days or more, or if we
were to otherwise fail to meet Nasdaqs ongoing listing criteria, Nasdaq could
initiate delisting procedures at any time. If we were to lose our Nasdaq National Market
status, we would likely seek listing of our common stock in the over-the-counter market,
which is viewed by many investors as a less liquid marketplace. Among other things, our
common stock may then constitute penny stock, which would place increased
regulatory burden upon brokers, making them less likely to make a market in our stock.
Loss of our Nasdaq National Market status could also make it more difficult for us to
raise capital or complete acquisitions and would also complicate compliance with state
blue sky laws.

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

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

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

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

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

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

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

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

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

  
  stop or delay selling, manufacturing or using products that incorporate the challenged intellectual property;

  
  pay damages; or

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  
  enter into licensing or royalty agreements that may be unavailable on acceptable terms.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Item 3. Quantitative
and Qualitative Disclosures About Market Risk

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 not
sensitive to interest rate movements. Therefore, 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.

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##### Table of Contents

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 upon 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 2. Changes in
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, 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 $18.5 million to expand and
enhance our manufacturing, research and development and administration facilities, and
approximately $52.0 million for working capital and general corporate purposes. The
remaining portion of the net offering proceeds has been invested in cash equivalent
investments. Our use of the proceeds from the offering does not represent a material
change in the use of proceeds described in the prospectus included as part of the
Registration Statement.

Item 6. Exhibits and Reports on Form 8-K

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

(a)  Exhibits.

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

(b)  Reports on Form 8-K.

No reports on Form 8-K were "filed"
during the quarter for which this report is filed.

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##### Table of Contents

# SIGNATURES

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

|                       |                                                       |                       | 
|---------------------- | ----------------------------------------------------- | --------------------- | 
|                       | EDEN BIOSCIENCE CORPORATION                           |                      
|                      
|Date: November 6, 2003 |                                                       |                       | 
|                      
|                       | By:                                                   | /s/   Rhett R. Atkins | 
|                       |                                                       |                      
|                       | Rhett R. Atkins
President and Chief Executive Officer |                      



| |                                                                                                                                |                         | 
| | ------------------------------------------------------------------------------------------------------------------------------ | ----------------------- | 
| | By:                                                                                                                            | /s/   Bradley S. Powell | 
| |                                                                                                                                |                        
| | Bradley S. Powell
Vice President of Finance, Chief FinancialOfficer and Secretary
(principal financial and accounting officer) |                        

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