---

# 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 March 31, 2004                 
|           |                                                                                                                                                       
|           | 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 ofincorporation or organization) |  | 91-1649604(IRS Employer Identification No.)

3830 Monte Villa Parkway, Suite 100Bothell, Washington 98021-7266(Address
 of principal executive offices, including zip code)

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

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

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:

|                                    |  |                                         
|----------------------------------- |  | ----------------------------------------
|ClassCommon Stock, $.0025 Par Value |  | Outstanding as of May 13, 200424,372,261

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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, Use of Proceeds and Issuer Purchases of Equity Securities     
|                               | Item 6. Exhibits and Reports on Form 8-K                                                     
|Signatures                    
|Exhibit 31.1                  
|Exhibit 31.2                  
|Exhibit 32.1                  
|Exhibit 32.2                  

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# Eden Bioscience Corporation

# Index to Form 10-Q

|           |  |                                                                                                        |    |  |    |  |      |  | 
|---------- |  | ------------------------------------------------------------------------------------------------------ | -- |  | -- |  | ---- |  | 
|           |  |                                                                                                        |    |  |    |  | Page
|           |  |                                                                                                        |    |  |    |  |     
|Part I.    |  | Financial Information                                                                                  |    |  |    | 
|Item 1.    |  | Unaudited Financial Statements                                                                         |    |  | 2  | 
|           |  | Condensed Consolidated Balance Sheets as of March 31, 2004 and     December 31, 2003                   |    |  | 2  | 
|           |  | Condensed Consolidated Statements of Operations for the Three Months     Ended March 31, 2004 and 2003 |    |  | 3  | 
|           |  | Condensed Consolidated Statements of Cash Flows for the Three Months     Ended March 31, 2004 and 2003 |    |  | 4  | 
|           |  | Notes to Unaudited Condensed Consolidated Financial Statements                                         |    |  | 5  | 
|Item 2.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                  |    |  | 10 | 
|           |  | Factors That May Affect Our Business, Future Operating Results and Financial Condition                 |    |  | 15 | 
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                             |    |  | 23 | 
|Item 4.    |  | Controls and Procedures                                                                                |    |  | 23 | 
|Part II.   |  | Other Information                                                                                      |    |  |    | 
|Item 2.    |  | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities                       |    |  | 23 | 
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                       |    |  | 24 | 
|Signatures |  |                                                                                                        | 24 | 

 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, net of sales allowances                            
|Inventory                                                               
|Prepaid expenses and 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 March 31, 2004 and December 31, 2003          
|Common stock, $.0025 par value, 100,000,000 shares authorized;          
|24,361,990 issued and outstanding shares at March 31, 2004 and          
|December 31, 2003                                                       
|Additional paid-in capital                                              
|Accumulated other comprehensive loss                                    
|Accumulated deficit                                                     
|                                                                        
|Total shareholders' equity                                              
|                                                                        
|Total liabilities and shareholders' equity                              
|                                                                        

The accompanying notes are an integral part of these
 statements.

- 2 -

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##### Table of Contents

# EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES

# CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

|                                                                       | Three Months Ended March 31, | 
|---------------------------------------------------------------------- | ---------------------------- | 
|
|Product sales, net of sales allowances                                 |                              | 
|                                                                       |                              | 
|Operating expenses:                                                    |                              | 
|Cost of goods sold                                                     |                              | 
|Research and development                                               |                              | 
|Selling, general and administrative                                    |                              | 
|                                                                       |                              | 
|Total operating expenses                                               |                              | 
|                                                                       |                              | 
|                                                                       |                              | 
|Loss from operations                                                   |                              | 
|                                                                       |                              | 
|Other income (expense):                                                |                              | 
|Interest income                                                        |                              | 
|Interest expense                                                       |                              | 
|                                                                       |                              | 
|Total other income                                                     |                              | 
|                                                                       |                              | 
|Loss before income taxes and cumulative effect of                      |                              | 
|adoption of SFAS No. 143                                               |                              | 
|Income taxes                                                           |                              | 
|                                                                       |                              | 
|Loss before cumulative effect of adoption of SFAS No. 143              |                              | 
|Cumulative effect of adoption of SFAS No.143                           |                              | 
|                                                                       |                              | 
|Net loss                                                               |                              | 
|                                                                       |                              | 
|Basic and diluted net loss per share:                                  |                              | 
|Loss before cumulative effect of adoption of SFAS No. 143              |                              | 
|Cumulative effect of adoption of SFAS No. 143                          |                              | 
|                                                                       |                              | 
|Net loss                                                               |                              | 
|                                                                       |                              | 
|Weighted average shares outstanding used to compute net loss per share |                              | 
|                                                                       |                              | 
|Pro forma amounts assuming retroactive application of SFAS No. 143:    |                              | 
|Net loss                                                               |                              | 
|Basic and diluted net loss per share                                   |                              | 

The accompanying notes are an integral part of these
 statements.

- 3 -

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##### Table of Contents

# EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES

# CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited

|                                                                        | Three Months Ended March 31, | 
|----------------------------------------------------------------------- | ---------------------------- | 
|
|Cash flows from operating activities:                                   |                              | 
|Net loss                                                                |                              | 
|Adjustments to reconcile net loss to cash used in operating activities: |                              | 
|Depreciation and amortization                                           |                              | 
|Accretion expense                                                       |                              | 
|Deferred rent payable                                                   |                              | 
|Cumulative effect of adoption of SFAS No. 143                           |                              | 
|Changes in assets and liabilities:                                      |                             
|Accounts receivable                                                     |                              | 
|Inventory                                                               |                              | 
|Prepaid expenses and other assets                                       |                              | 
|Accounts payable                                                        |                              | 
|Accrued liabilities                                                     |                              | 
|Accrued loss on facility subleases                                      |                              | 
|                                                                        |                              | 
|Net cash used in operating activities                                   |                              | 
|                                                                        |                              | 
|Cash flows from investing activities:                                   |                             
|Purchases of property and equipment                                     |                              | 
|Proceeds from disposal of fixed assets                                  |                              | 
|                                                                        |                              | 
|Net cash provided by 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                                                  |                              | 

The accompanying notes are an integral part of these
 statements.

- 4 -

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

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

Basis of Presentation

The
 accompanying unaudited condensed consolidated financial statements have been prepared in accordance
 with 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, 2003 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, 2003 included in the Companys Annual Report on
 Form 10-K, which was filed with the Securities and Exchange Commission on March 26, 2004.

In
 the opinion of management, the unaudited condensed consolidated financial statements include all adjustments,
 consisting only of normal recurring adjustments, necessary to state fairly the financial information
 set forth therein. Results of operations for the three months ended March 31, 2004 are not necessarily
 indicative of the results expected for the full fiscal year or for any future period.

Liquidity

The
 Companys operating expenditures have been significant since its inception. The Company currently anticipates
 that its operating expenses will significantly exceed net product sales and that net losses and working
 capital requirements will consume a material amount of its cash resources. If net product sales do not
 significantly increase in the near term, the Company will have to further reduce its operating expenses.
 The Companys future capital requirements will depend on the success of its operations. Management of
 the Company believes that the balance of its cash and cash equivalents at March 31, 2004 will be sufficient
 to meet its anticipated cash needs for net losses, working capital and capital expenditures for more
 than the next 12 months, although there can be no assurance in that regard.

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

Estimates Used in Financial Statement Preparation

The
 preparation of financial statements in conformity with generally accepted accounting principles requires
 management to make estimates and assumptions that affect the reported amounts of assets and liabilities
 and the disclosure of contingent assets and liabilities at the date of the financial statements and
 the reported amounts of revenues and expenses during the reporting period. Examples include depreciable
 lives of property and equipment; expense accruals; and provisions for sales allowances, warranty claims,
 inventory valuation, asset impairments, losses on facility subleases and bad debts. Such estimates and
 assumptions are based on historical experience, where applicable, and other assumptions. Estimates and
 assumptions are reviewed periodically and the effects of revisions

- 5 -

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##### Table of Contents

# EDEN BIOSCIENCE
CORPORATION AND SUBSIDIARIES

# NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

are reflected in the consolidated
 financial statements in the period 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 amortized over the shorter of their estimated useful lives or lease term,
 which range between two to ten years.

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

Revenue

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

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. Sales allowances related to 2003 sales will be paid upon submission by distributors
 of annual sales data. In January 2004, the Company changed its distributor program to provide for sales
 allowances based on the total amount of products purchased during the year. Volume rebates will be paid
 throughout the year as distributors qualify to receive them.

Gross
 product sales and sales allowances are as follows:

|                                                             | Three Months Ended March 31, | 
|------------------------------------------------------------ | ---------------------------- | 
|
|Gross product sales                                          |                              | 
|Sales allowances                                             |                              | 
|Reduction of previously recorded sales allowance liabilities |                              | 
|                                                             |                              | 
|Product sales, net of sales allowances                       |                              | 
|                                                             |                              | 

Net
 product sales for the three months ended March 31, 2004 and 2003 include the reduction by $95,237 and
 $126,301, respectively, of sales allowance liabilities recognized in prior quarters that will not be
 paid because of changes in distributor programs implemented in 2003 and actual amounts earned by distributors
 being less than amounts previously estimated.

In
 February 2004, the Company received approval to sell Messenger in Spain. The Company initiated marketing
 activities in March, but the approval was not received in time to meet initial sales activity. In order
 to ensure that an adequate supply of Messenger was quickly disbursed in the new distribution channel
 and to limit the amount of working capital required by our new distributors at this early stage of introduction,
 the Company granted

- 6 -

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##### Table of Contents

# EDEN BIOSCIENCE
CORPORATION AND SUBSIDIARIES

# NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

flexible and/or extended payment terms to distributors in this new market. Because
 of this combination of factors, revenues from product deliveries made in March to distributors in Spain
 were not recognized in the first quarter. Through March 31, 2004, the Company had delivered approximately
 112,000 ounces of Messenger to distributors in Spain. Accounts receivable, net of sales allowances,
 includes approximately $112,500 related to a portion of these delivered ounces for which revenue recognition
 has been deferred. The remaining delivered ounces have been treated as consigned inventory and are included
 in the inventory balance at March 31, 2004.

Incentives

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

In
 September 2003, with the cooperation of its retailers, the Company instituted a buy one, get one free
 promotion at the grower level that ran through the end of 2003. Near the end of 2003, the Company announced
 a reduction of approximately 50% in the price of Messenger and determined that Messenger® STS, an improved
 formulation of Messenger introduced in January 2004, would sell for approximately the same price as
 Messenger. At the same time, the Company announced to distributors that it planned to send them additional
 products at no charge in order to reduce the average cost of their existing inventories of Messenger.
 In the first quarter of 2004, the Company delivered approximately 202,000 ounces of free products and
 it estimates that approximately 308,000 ounces of products remain to be given to distributors. This
 will substantially increase channel inventory and negatively affect the Companys sales. The Company
 does not expect distributors that hold significant inventories of its products to place additional orders
 until their current inventories are reduced.

Stock Compensation

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

|                                                        | Three Months Ended March 31, | 
|------------------------------------------------------- | ---------------------------- | 
|
|Net loss, as reported                                   |                              | 
|Deduct: Total stock-based employee compensation expense |                              | 
|under fair value based method                           |                              | 
|                                                        |                              | 
|Pro forma net loss                                      |                              | 
|                                                        |                              | 
|Loss per share:                                         |                              | 
|Basic and diluted - as reported                         |                              | 
|                                                        |                              | 
|Basic and diluted - pro forma                           |                              | 
|                                                        |                              | 

Comprehensive Loss

The
 following table summarizes the Companys comprehensive loss for the three months ended March 31, 2004
 and 2003:

|                                  | Three Months Ended March 31, | 
|--------------------------------- | ---------------------------- | 
|
|Net loss                          |                              | 
|Cumulative translation adjustment |                              | 
|                                  |                              | 
|Total comprehensive loss          |                              | 
|                                  |                              | 

- 7 -

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##### Table of Contents

# EDEN BIOSCIENCE
CORPORATION AND SUBSIDIARIES

# NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Net Loss Per Share

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

|                                  | As of March 31, | 
|--------------------------------- | --------------- | 
|
|Options to purchase common stock  |                 | 
|Warrants to purchase common stock |                 | 

2.     Stock Options and Warrants

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

|                             | Number ofOptions | 
|---------------------------- | ---------------- | 
|                             |                  | 
|Balance at December 31, 2003 |                  | 
|Options granted              |                  | 
|Options cancelled            |                  | 
|                             |                  | 
|Balance at March 31, 2004    |                  | 
|                             |                  | 

As
 of March 31, 2004, the Company had warrants outstanding to purchase 200,000 shares of its common stock
 at $15.00 per share. The warrants are currently exercisable and expire in August 2005. No warrants to
 purchase shares of the Companys common stock were issued during the three-month period ended March
 31, 2004.

3.     Inventory

Inventory,
 at average cost, consists of the following:

|                                            |  |  |   |          
|------------------------------------------- |  |  | - | ---------
|
|                                            |  |  |   |          
|Raw materials                               |  |  | $ | 722,546  
|Work in process and bulk manufactured goods |  |  |   | 760,616  
|Finished goods                              |  |  |   | 760,730  
|                                            |  |  |   |          
|Total inventory                             |  |  | $ | 2,243,892
|                                            |  |  |   |          

4.     Property and Equipment

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

|                               |  |  |   |           
|------------------------------ |  |  | - | ----------
|
|                               |  |  |   |           
|Equipment                      |  |  | $ | 12,723,067
|Equipment under capital leases |  |  |   | 66,646    
|Leasehold improvements         |  |  |   | 11,578,034
|                               |  |  |   |           
|Total property and equipment   |  |  |   | 24,367,747
|Less accumulated depreciation  |  |  |   | (8,590,961
|                               |  |  |   |           
|Net property and equipment     |  |  | $ | 15,776,786
|                               |  |  |   |           

The
 Company recorded depreciation of $528,818 and $595,362 for the three months ended March 31, 2004 and
 2003, respectively.

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##### Table of Contents

# EDEN BIOSCIENCE
CORPORATION AND SUBSIDIARIES

# NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5.     Accrued Liabilities

Accrued
 liabilities consist of the following:

|                                              | March 31,2004 |  | December 31,2003 |          
|--------------------------------------------- | ------------- |  | ---------------- | ---------
|                                              |               |  |                  |          
|Facility costs                                |               |  | $                | 324,700  
|Compensation and benefits                     |               |  |                  | 290,177  
|Warranty                                      |               |  |                  | 228,021  
|Research and development field trial expenses |               |  |                  | 213,723  
|Sales allowances                              |               |  |                  | 111,812  
|Promotions                                    |               |  |                  | 94,969   
|Deferred revenue                              |               |  |                  | 90,289   
|Other                                         |               |  |                  | 100,178  
|                                              |               |  |                  |          
|Total accrued liabilities                     |               |  | $                | 1,453,869
|                                              |               |  |                  |          

6.     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 one and five percent, is reviewed
 periodically and adjusted as necessary, based on historical experience, the results of product quality
 testing and future expectations. There were no changes to the Companys warranty liability during the
 quarter ended March 31, 2004.

7.     Major Customers

Net
 product sales revenue resulted from sales to 13 distributors for the three months ended March 31, 2004
 and sales to 11 distributors for the three months ended March 31, 2003. Net product sales to the following
 distributors accounted for more than ten percent of net revenues (excluding the reduction of previously
 recorded sales allowances) for the periods indicated:

|                           | Three Months Ended March 31, | 
|-------------------------- | ---------------------------- | 
|
|Customer A                 |                              | 
|Customer B                 |                              | 
|Customer C                 |                              | 
|Customer D                 |                              | 
|Customer E                 |                              | 
|                           |                              | 
|**  Less than ten percent. |                              | 

8.     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:

|                                                            | 
|----------------------------------------------------------- | 
|Balance at December 31, 2003                                | 
|Accretion expense for the three months ended March 31, 2004 | 
|                                                            | 
|Balance at March 31, 2004                                   | 
|                                                            | 

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##### Table of Contents

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

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

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

Overview

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

We
 have incurred significant operating losses since inception. At March 31, 2004, we had an accumulated
 deficit of $99.4 million. We incurred net losses of $2.3 million and $2.9 million for the quarters ended
 March 31, 2004 and 2003, respectively, and annual losses of $11.2 million in 2003, $23.5 million in
 2002 and $23.7 million in 2001. We expect to incur significant additional net losses as we proceed with
 the commercialization of our current products and the development of new products and technologies.

Results of Operations

Three Months Ended March 31, 2004 and 2003

Revenues

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

|                                                             | Three Months Ended March 31, | 
|------------------------------------------------------------ | ---------------------------- | 
|
|Gross product sales                                          |                              | 
|Sales allowances                                             |                              | 
|Reduction of previously recorded sales allowance liabilities |                              | 
|                                                             |                              | 
|Product sales, net of sales allowances                       |                              | 
|                                                             |                              | 

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Gross
 product sales revenue for the first quarter of 2004 was $132,000, a decrease of $630,000 (83%) from
 $762,000 in the same quarter of 2003. Sales in the first quarter of 2004 were made primarily to 13 distributors,
 three of which accounted for an aggregate of 71% of net product sales revenue (excluding the reduction
 of previously recorded sales allowances). Sales in the first quarter of 2003 were made primarily to
 11 distributors, three of which accounted for an aggregate of 55% of net product sales revenue (excluding
 the reduction of previously recorded sales allowances). Sales in the quarters ended March 31, 2004 and
 2003 were significantly lower than expected and were negatively impacted by high levels of inventory
 in the channel, free product provided under the price reduction program and the continuing challenges
 of commercializing a fundamentally new technology and products. We expect that high levels of inventory
 in the channel, free product to be provided under the price reduction program and the difficult economic
 conditions in certain sectors of agriculture will continue to adversely impact our commercialization
 efforts and sales of Messenger Products.

Gross
 product sales revenue from sales to foreign customers totaled $5,000 and $20,000 in the three months
 ended March 31, 2004 and 2003, respectively. These sales were made primarily to distributors
 in Europe in 2004 and Central America in 2003. In February 2004, we received approval to sell Messenger
 in Spain. We initiated marketing activities in March, but the approval was not received in time to meet
 initial sales activity. In order to ensure that an adequate supply of Messenger was quickly disbursed
 in the new distribution channel and to limit the amount of working capital required by our new distributors
 at this early stage of introduction, we granted flexible and/or extended payment terms to distributors
 in this new market. Because of this combination of factors, revenues from product deliveries made in
 March to distributors in Spain were not recognized in the first quarter. Through March 31, 2004, we
 had delivered approximately 112,000 ounces of Messenger to distributors in Spain. Accounts receivable,
 net of sales allowances, includes approximately $112,500 related to a portion of these delivered ounces
 for which revenue recognition has been deferred. The remaining delivered ounces have been treated as
 consigned inventory and are included in the inventory balance at March 31, 2004.

Gross
 sales of Messenger to consumers in the home and garden market in the United States totaled $82,000 and
 $2,000 in the three months ended March 31, 2004 and 2003, respectively. We expect sales of our home
 and garden products to increase. However, we do not expect revenues from this market to be significant
 in 2004.

In
 the first three months of 2004, we recognized revenue on the shipment of approximately 22,000 ounces
 of Messenger and Messenger STS to domestic distributors, compared to approximately 208,000 ounces in
 the first three months of 2003, a decrease of approximately 186,000 ounces (89%). Based on information
 received from distributors, we estimate that domestic distributors sold approximately 172,000 ounces
 to growers in the first quarter of 2004, an increase of approximately 9% from approximately 158,000
 ounces in the first quarter of 2003. Based on information received from distributors, we estimate that
 Messenger STS inventory held by distributors at March 31, 2004 (including the shipment of free products
 described in the following paragraph) is high, at approximately 556,000 ounces.

In
 December 2003, we announced a reduction of approximately 50% in the price of Messenger and determined
 that Messenger STS would sell for approximately the same price as Messenger. We also announced to distributors
 that we planned to send them approximately 550,000 ounces of Messenger Products at no charge in order
 to reduce the average cost of their existing inventories of Messenger. In the first quarter of 2004,
 we delivered approximately 202,000 ounces of free Messenger Products and we estimate that approximately
 308,000 ounces of products remain to be given to distributors. This free product will substantially
 increase channel inventory and negatively affect our sales to distributors in the immediate term but
 will, we believe, improve our growth rate and sales to distributors over the medium term. We do not
 expect distributors that hold significant inventories of Messenger STS to place additional orders until
 their current inventories are reduced and, therefore, we expect sales to domestic distributors in the
 second quarter of this year to be minor.

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

Sales Allowances

Sales
 allowances represent allowances granted to independent distributors for sales and marketing support,
 product warehousing and delivery and information exchange and are estimated based on the terms of the
 distribution agreements. Sales allowances are accrued when the related product sales revenue is recognized
 and are paid in

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accordance with the terms of the then-current distributor program agreement. Distributor
 program agreements expire annually, generally on December 31. Prior to 2004, sales allowances were generally
 based on a percentage of sales and were required to be paid when the distributors sold the product and
 reported the sales data to us. We expect that sales allowances related to 2003 sales will be paid upon
 submission by distributors of annual sales data. In January 2004, we changed our distributor program
 to provide for sales allowances based on the total amount of products purchased during the year. Volume
 rebates will be paid throughout the year as distributors qualify to receive them.

Sales
 allowances for the quarters ended March 31, 2004 and 2003 include the reduction by $95,237 and $126,301,
 respectively, of sales allowance liabilities recognized in prior quarters that will not be paid because
 of changes in distribution programs implemented in 2003 and actual amounts earned by distributors being
 less than amounts previously estimated. Excluding these sales allowance reductions, sales allowances
 during the quarter ended March 31, 2004 totaled $14,000 (11% of gross product sales) compared to $41,000
 (5% of gross product sales) in the comparable quarter of 2003. We expect 2004 sales allowances to average
 approximately 5-10% of gross product sales.

Cost of Goods Sold

Cost
 of goods sold consists primarily of the cost of Messenger Products sold to distributors, idle capacity
 charges and the cost of Messenger Products used for promotional purposes. Cost of goods sold was $658,000
 in the first quarter of 2004, compared to $578,000 in the first quarter of 2003. This increase is due
 primarily to the write-off of Messenger labels that will not be used due to the introduction of Messenger
 STS. Idle capacity charges for the quarter ended March 31, 2004 were down from the same period in the
 prior year due to resumption of limited manufacturing operations early in 2004. We expect to complete
 our current manufacturing operations in the second quarter of this year, at which time idle capacity
 charges are expected to again increase.

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 $841,000 (56%) from $1.5 million
 in the first quarter of 2003 to $676,000 in the same quarter of this year. This decrease was primarily
 due to staff reductions announced in May 2003 and lower spending on field trials and facilities.

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 $388,000 (23%) from $1.7 million in
 the first quarter of 2003 to $1.3 million in the same quarter of 2004. The majority of this decrease
 occurred in the United States and resulted primarily from reductions in advertising and marketing, travel
 and personnel costs.

Interest Income

Interest
 income consists of earnings on our cash and cash equivalents. Interest income decreased $42,000 (45%)
 from $94,000 in the first quarter of 2003 to $52,000 in the same quarter of this year. This decrease
 was due primarily to significantly lower average cash balances available for investment in the current
 year.

Income Taxes

We
 have generated a net loss from operations in each period since we began doing business. As of December
 31, 2003, we had accumulated approximately $90.9 million of U.S. net operating loss carryforwards for
 federal income tax purposes. These carryforwards expire between 2009 and 2023. Our foreign tax net operating
 loss carryforwards totaled $7.9 million at December 31, 2003 and expire between 2006 and 2008. The annual
 use of these net operating loss carryforwards may be limited in the event of a cumulative change in
 ownership of more than 50%.

Liquidity and Capital Resources

Our
 operating expenditures have been significant since our inception. We currently anticipate that our operating
 expenses will significantly exceed net product sales and that net losses and working capital requirements
 will consume a material amount of our cash resources. If net product sales do not significantly increase
 in the near term, we will have to further reduce our operating expenses and/or raise additional funds
 to support operations. Our future

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capital requirements will depend on the success of our operations.
 We believe that the balance of our cash and cash equivalents at March 31, 2004 will be sufficient to
 meet our anticipated cash needs for net losses, working capital and capital expenditures for more than
 the next 12 months, although there can be no assurance in that regard.

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.

At
 March 31, 2004, our cash and cash equivalents totaled $17.7 million, a decrease of $2.1 million from
 the balance of $19.8 million at December 31, 2003. Prior to October 2000, we financed our operations
 primarily through the private sale of our equity securities, resulting in net proceeds of approximately
 $36.5 million through September 30, 2000. In October 2000, we received approximately $91.5 million
 in net proceeds from the initial public offering of 6,670,000 shares of our common stock. To a lesser
 extent, we have financed our equipment purchases through lease financings.

Net
 cash used in operations decreased $2.5 million (54%) from $4.6 million in the first three months of
 2003 to $2.1 million in the same period of 2004. Net cash used in operations in the first three months
 of 2004 resulted primarily from a net loss of $1.8 million, after adding back depreciation expense of
 $529,000, and fluctuations in various asset and liability balances totaling $292,000. We expect that
 net cash used in operations will continue to be significant.

We
 conduct our operations in three primary functional currencies: the U.S. dollar, the European Union euro
 and the Mexican peso. Historically, neither fluctuations in foreign exchange rates nor changes in foreign
 economic conditions have had a significant impact on our financial condition or results of operations.
 We currently do not hedge our foreign currency exposures and are therefore subject to the risk of exchange
 rate fluctuations. We may invoice our international customers in U.S. dollars, euros and Mexican pesos,
 as the case may be. We are exposed to foreign exchange rate fluctuations as the financial results of
 foreign subsidiaries are translated into U.S. dollars in consolidation. Foreign exchange rate fluctuations
 did not have a material impact on our financial results in the three-month periods ended March 31, 2004
 or 2003.

The
 following are our contractual obligations as of March 31, 2004:

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

Critical Accounting Policies, Estimates and Judgments

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

Revenue Recognition

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

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analysis of whether all of our significant obligations
 have been satisfied or situations where acceptance provisions or other contingencies or arrangements
 exist, we consider the following elements, among others: sales terms and arrangements, historical experience
 and current incentive programs.

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.
 We expect that sales allowances related to 2003 sales will be paid upon submission by distributors of
 annual sales data. In January 2004, we changed our distributor program to provide for sales allowances
 based on the total amount of products purchased during the year. Volume rebates will be paid throughout
 the year as distributors qualify to receive them.

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

Accounts Receivable and Allowance for Doubtful Accounts

Accounts
 receivable balances are reported net of customer-specific related sales allowances. In determining the
 adequacy of the allowance for doubtful accounts, we consider a number of factors, including the 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 March 31, 2004, 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 in the value
 of inventory and write-offs.

Valuation of Property and Equipment

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

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

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

We 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 March 31, 2004, we have
 accumulated a deficit of $99.4 million. For the years ended December 31, 2003, 2002, 2001 and 2000,
 we had net losses of $11.2 million, $23.5 million, $23.7 million and $15.7 million, respectively.
 To date, our revenues have been limited. For example, there were no sales of Messenger in the fourth
 quarter of 2001 and annual net sales decreased from $3.5 million in 2001 to $1.9 million in 2002 and
 $1.8 million in 2003. Further, we expect domestic sales in the first half of 2004 to be minor. We expect
 our future revenues to come primarily from the sale of Messenger, Messenger STS, Employ and other products
 and these sales are highly uncertain.

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

If
 net product sales do not significantly increase in the near term, we will have to reduce our operating
 expenses or cease operations. Our future capital requirements will depend on the success of our operations.
 We believe that the balance of our cash and cash equivalents at March 31, 2004 will be sufficient to
 meet our anticipated cash needs for net losses, working capital and capital expenditures for more than
 the next 12 months, although there can be no assurance in this regard.

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

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

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

We currently depend on four 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 four products, Messenger, Messenger STS, Employ and MightyPlant, which are based on a new technology.
 We have had only limited sales of Messenger since its introduction in August 2000 and we began
 marketing Employ in November 2003, Messenger STS in January 2004 and MightyPlant in April 2004. These
 four 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, Employ and MightyPlant
 may not gain commercial acceptance or success. If we are unable to successfully achieve broad market
 acceptance of our

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products, we may not be able to generate enough product revenues in the future to
 achieve profitability. A variety of factors will determine the success of our market development and
 commercialization efforts and the rate and extent of market acceptance of our products, including our
 ability to implement and maintain an appropriate pricing policy and general economic conditions in agricultural
 markets, including commodity prices, climatic conditions and the extent that growers, regulatory authorities
 and the public accept new agricultural practices and products developed through biotechnology.

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

Based
 on information received from distributors, we estimate that distributors sold 66,000 ounces of Messenger
 in 2000, 596,000 ounces in 2001, 684,000 ounces in 2002 and 734,000 ounces in 2003. During the first
 three months of 2004, we estimate that distributors sold 172,000 ounces to growers, compared to 158,000
 ounces in the same period of 2003, an increase of 9%. We estimate that Messenger and Messenger STS inventory
 held by distributors at March 31, 2004 was approximately 556,000 ounces, which we believe is high. We
 sent distributors approximately 202,000 ounces of additional products for free in the quarter ended
 March 31, 2004 as part of an effort to lower the average cost of their year-end Messenger inventories
 by approximately 50%. We estimate that approximately 308,000 ounces of our products remain to be given
 to distributors, which will significantly increase channel inventory and negatively affect our sales
 to distributors. We do not expect distributors that hold significant inventories of Messenger STS to
 place additional orders for our products until their current inventories and free product 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 consists primarily of sales and marketing specialists who are trained to educate growers and independent
 distributors on the uses and benefits of our products. We will need to further develop our sales and
 marketing capabilities in order to enhance our commercialization efforts, which will involve substantial
 costs. These specialists require a high level of technical expertise and knowledge regarding our products
 capabilities and other plant protection and yield enhancement products and techniques. We cannot assure
 you that our specialists and other members of our sales and marketing team will successfully compete
 against the sales and marketing operations of our current and future competitors that may have more
 established relationships with distributors, retailers and growers. Failure to recruit, train and retain
 important sales and marketing personnel, such as our sales and marketing specialists, or the inability
 of new sales and marketing personnel to effectively market and sell our products and other products
 we may develop, could impair our ability to gain market acceptance of our products and cause our sales
 to suffer.

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

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

Three
 distributors accounted for an aggregate of 71% of net product sales revenue (excluding the reduction
 of previously recorded sales allowances) in the quarter ended March 31, 2004 and three distributors
 accounted for an aggregate of 43% of our net sales revenue (excluding the reduction of previously recorded
 sales allowances) in all of 2003. If any distributor that purchases a significant amount of our products
 were to discontinue purchasing

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Messenger Products at any time, our sales would be adversely affected.
 In addition, the failure of any of these distributors, or of any other distributor to which we extend
 a significant amount of credit, to pay its account, now or in the future, may harm our operating results.

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

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

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

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

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

Messenger
 is currently being stored in large quantities under various conditions by us and by distributors. Most
 of this material was manufactured in 2000, 2001 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 our products quality to degrade over a shorter time period.

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

Our
 inventory includes approximately 1.4 million ounces of Messenger and Messenger STS that was manufactured
 in 2000, 2001 and 2002. In addition, we estimate that distributors own approximately 556,000 ounces
 of Messenger and Messenger STS 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. In 2003,
 we voluntarily recalled and replaced approximately 10,000 ounces of Messenger owned by distributors
 that our limited re-testing indicated had degraded below our quality control standards.

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

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

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

We
 are 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 and Messenger STS in 48 states for use on virtually all crops for crop production and disease
 management, and in California for use on citrus for yield enhancement and on strawberries, citrus, grapes
 and fruiting vegetables, such as tomatoes and peppers, for disease management, we have not received
 approval for 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, Spain, Germany, Mexico and six Central American countries. Our registration in China
 is temporary and limited to the sale of Messenger for use on tomatoes, peppers, tobacco, cotton and
 rapeseed. Our registration in Spain is limited to the sale of Messenger for use on tomatoes, peppers,
 cucumbers, melons, strawberries, lettuce, citrus and olives. The EPA has approved the use of Messenger
 STS and we are currently in the process of obtaining foreign registrations for this product, but there
 can be no assurance that such registration will be obtained on acceptable terms.

Neither
 Employ nor MightyPlant are pesticides and they are not regulated by the EPA. However, several states
 and foreign governments regulate both products. Many states regulate Employ as a plant amendment or
 soil conditioner and some of these states and foreign regulatory authorities require the submission
 and review of performance data and other information prior to granting their approval. We are authorized
 to sell Employ in 33 states and no foreign countries. MightyPlant is classified by most states as a
 fertilizer and we are now in the process of obtaining state approvals for its sale. We are authorized
 to sell MightyPlant in 34 states and no foreign countries. However, there can be no assurance that we
 will obtain approval to sell Employ or MightyPlant in other states or foreign countries.

If
 we significantly modify our current products 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 citrus could limit or prevent sales of Messenger in that state.

Our
 California registration for use on citrus for yield enhancement, granted in March 2003, is conditioned
 on the requirement that we submit data from several additional studies within various required timeframes
 ending on December 31, 2005. There are no conditions on our registration to sell Messenger
 in California for use on citrus, strawberries, fruiting vegetables and grapes for disease management.
 We expect to submit the results of additional

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citrus field trials at various required timeframes through
 2005, in accordance with our registration. If we are unable to conduct the studies required by the California
 Department of Pesticide Regulation (CDPR) in a timely manner, or if the results of the studies are
 unacceptable to the CDPR, they may not allow the continued use of Messenger STS in California on citrus
 for yield enhancement, or they may impose limitations on this use of Messenger STS, which could have
 a negative impact on our sales. Because EPA and state approvals are required for commercial sales of
 our current products, the loss of any of these approvals for any reason would prevent further sales
 of Messenger and/or Messenger STS 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. For example, from September
 to December 2003 we offered growers a buy one, get one free promotion and in January 2004 we introduced
 Messenger STS at a price that is approximately 50% of the 2003 price of Messenger.

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

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

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

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

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

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

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

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

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size and timing of significant customer transactions,
 the delay or deferral of customer use of our products and the fiscal or quarterly budget cycles of our
 customers. For example, customers may purchase large quantities of our products under a promotion such
 as buy one, get one free in a particular quarter to store and use over long periods of time, or time
 their purchases to coincide with the availability of capital, either of which may cause significant
 fluctuations in our operating results for a particular quarter or year.

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 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.

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.

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

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

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

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


 pay damages; or

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

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

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

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.

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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 our products in the quantities
 that we may require.

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

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

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

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

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

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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 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.

Item 4. Controls and Procedures

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

PART II  OTHER INFORMATION

Item 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
 Bioscience, after accounting for $7.0 million in underwriting discounts and commissions and approximately
 $1.6 million in other expenses of the offering, were approximately $91.5 million.

To
 date, of the net offering proceeds, we have used approximately $18.6 million to expand and enhance our
 manufacturing, research and development and administration facilities, and approximately $56.1 million
 for working capital and general corporate purposes. The remaining portion of the net offering proceeds
 has been invested in cash equivalent investments. Our use of the proceeds from the offering does not
 represent a material change in the use of proceeds described in the prospectus included as part of the
 Registration Statement.

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Item 6. Exhibits and Reports on Form 8-K

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.

SIGNATURES

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

|                   |                                                       |                       | 
|------------------ | ----------------------------------------------------- | --------------------- | 
|                   | EDEN BIOSCIENCE CORPORATION                           |                      
|                  
|Date: May 14, 2004 |                                                       |                       | 
|                  
|                   | By:                                                   | /s/   Rhett R. Atkins | 
|                   |                                                       |                      
|                   | Rhett R. Atkins
President and Chief Executive Officer |                      



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

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