---

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

---

FORM 10-Q

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

Commission
File Number 0-31499

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

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

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

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

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

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

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

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

|Class                          |  | Outstanding as of October 21, 2005
|------------------------------ |  | ----------------------------------
|Common Stock, $.0025 Par Value |  | 24,395,870                        

---

---



Eden
Bioscience Corporation

Index to Form
10-Q

|               |                                                                                              |    | Page | 
|-------------- | -------------------------------------------------------------------------------------------- | -- | ---- | 
|Part
      I.  | Financial
      Information                                                                  |    |      | 
|               |                                                                                              |    |      | 
|Item
      1.  | Unaudited
      Financial Statements                                                         |    | 2    | 
|               |                                                                                              |   
|               | Condensed
      Consolidated Balance Sheets as of September 30, 2005 and                     |   
|               | December
      31, 2004                                                                      |    | 2    | 
|               |                                                                                              |   
|               | Condensed Consolidated Statements of Operations for
the Three Months and                     |   
|               | Nine Months Ended September 30, 2005 and 2004                                                |    | 3    | 
|               |                                                                                              |   
|               | Condensed
      Consolidated Statements of Cash Flows for the Nine Months                    |   
|               | Ended September 30, 2005 and 2004                                                            |    | 4    | 
|               |                                                                                              |    |      | 
|               | Notes
      to Unaudited Condensed Consolidated Financial Statements                         |    | 5    | 
|               |                                                                                              |    |      | 
|Item
      2.  | Managements
      Discussion and Analysis of Financial Condition and Results of Operations  |    | 10   | 
|               |                                                                                              |    |      | 
|               | Factors
      That May Affect Our Business, Future Operating Results and Financial Condition |    | 16   | 
|               |                                                                                              |    |      | 
|Item
      3.  | Quantitative
      and Qualitative Disclosures About Market Risk                             |    | 24   | 
|               |                                                                                              |    |      | 
|Item
      4.  | Controls
      and Procedures                                                                |    | 24   | 
|               |                                                                                              |   
|Part
      II. | Other
      Information                                                                      |   
|               |                                                                                              |    |      | 
|Item
      2.  | Unregistered Sales of Equity Securities and Use of
Proceeds                                  |    | 25   | 
|               |                                                                                              |    |      | 
|Item
      6.  | Exhibits                                                                                     |    | 25   | 
|               |                                                                                              |    |     
|Signatures     |                                                                                              | 26 |     

-1-

---



Table
  of Contents

|               |                                                                                             
|-------------- | --------------------------------------------------------------------------------------------
|Part
      I.  | Financial
      Information                                                                 
|               |                                                                                             
|Item 1.        | Unaudited
      Financial Statements                                                        
|               |                                                                                             
|               | Condensed
      Consolidated Balance Sheets as of September 30, 2005 and                    
|               | December
      31, 2004                                                                     
|               |                                                                                             
|               | Condensed Consolidated Statements of Operations for
the Three Months and                    
|               | Nine Months Ended September 30, 2005 and 2004                                               
|               |                                                                                             
|               | Condensed
      Consolidated Statements of Cash Flows for the Nine Months                   
|               | Ended September 30, 2005 and 2004                                                           
|               |                                                                                             
|               | 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.  | Unregistered Sales of Equity Securities and Use of
Proceeds                                 
|               |                                                                                             
|Item 6.        | Exhibits                                                                                    
|              
|Signatures    
|              
|10.1           | Form of Option Letter Agreement for Directors and Officers                                  
|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).                                 



---



PART I --
FINANCIAL INFORMATION

Item 1.
Unaudited Financial Statements.

EDEN
BIOSCIENCE CORPORATION AND SUBSIDIARIES

CONDENSED
CONSOLIDATED BALANCE SHEETS (Unaudited)

|ASSETS                                                                  
|------------------------------------------------------------------------
|                                                                        
|                                                                        
|Current assets:                                                         
|Cash and cash equivalents                                               
|Accounts receivable, net of sales allowances                            
|Inventory, current portion                                              
|Prepaid expenses and other current assets                               
|                                                                        
|Total current assets                                                    
|Inventory, non-current portion                                          
|Property and equipment, net                                             
|Other assets                                                            
|                                                                        
|Total assets                                                            
|                                                                        
|                                                                        
|LIABILITIES AND SHAREHOLDERS EQUITY                                    
|                                                                        
|Current liabilities:                                                    
|Accounts payable                                                        
|Accrued liabilities                                                     
|Current portion of accrued loss on facility subleases                   
|Current portion of capital lease obligations                            
|                                                                        
|Total current liabilities                                               
|Accrued loss on facility subleases, net of current portion              
|Capital lease obligations, net of current portion                       
|Other long-term liabilities                                             
|                                                                        
|Total liabilities                                                       
|                                                                        
|                                                                        
|Commitments and contingencies                                           
|                                                                        
|Shareholders equity:                                                   
|Preferred stock, $.01 par value, 10,000,000 shares authorized; no shares
|issued and outstanding at September 30, 2005 and December 31, 2004      
|Common stock, $.0025 par value, 100,000,000 shares authorized; issued   
|and outstanding shares  24,395,870 shares at September 30, 2005;       
|24,381,870 shares at December 31, 2004                                  
|Additional paid-in capital                                              
|Accumulated other comprehensive loss                                    
|Accumulated deficit                                                     
|                                                                        
|Total shareholders equity                                              
|                                                                        
|Total liabilities and shareholders equity                              
|                                                                        

The
accompanying notes are an integral part of these statements.

-2-

---



EDEN
BIOSCIENCE CORPORATION AND SUBSIDIARIES

CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

|                                         |  |  | Three Months Ended September 30, |            | Nine Months Ended September 30, |  
|---------------------------------------- |  |  | -------------------------------- | ---------- | ------------------------------- | -
|                                         |  |  |                                  |            |                                 |  
|                                         |  |  | 2005                             |            | 2004                            |  
|                                         |  |  |                                  |            |                                 |  
|Product sales, net of sales allowances   |  |  | $                                | 343,398    |                                 | $
|Operating expenses:                      |  | 
|Cost of goods sold                       |  |  |                                  | 585,730    |                                 |  
|Research and development                 |  |  |                                  | 807,237    |                                 |  
|Selling, general and administrative      |  |  |                                  | 1,233,315  |                                 |  
|Lease termination loss                   |  |  |                                  | 2,260,538  |                                 |  
|                                         |  |  |                                  |            |                                 |  
|Total operating expenses                 |  |  |                                  | 4,886,820  |                                 |  
|                                         |  |  |                                  |            |                                 |  
|Loss from operations                     |  |  |                                  | (4,543,422 | )                               |  
|                                         |  |  |                                  |            |                                 |  
|Other income (expense):                  |  | 
|Interest income                          |  |  |                                  | 83,781     |                                 |  
|Interest expense                         |  |  |                                  | (72        | )                               |  
|                                         |  |  |                                  |            |                                 |  
|Total other income                       |  |  |                                  | 83,709     |                                 |  
|                                         |  |  |                                  |            |                                 |  
|Loss before income taxes                 |  |  |                                  | (4,459,713 | )                               |  
|Income taxes                             |  |  |                                  | --         |                                 |  
|                                         |  |  |                                  |            |                                 |  
|Net loss                                 |  |  | $                                | (4,459,713 | )                               | $
|                                         |  |  |                                  |            |                                 |  
|Basic and diluted net loss per share     |  |  | $                                | (0 18)     |                                 | $
|                                         |  |  |                                  |            |                                 |  
|Weighted average shares outstanding used |  | 
|to compute net loss per share            |  |  |                                  | 24,395,870 |                                 |  
|                                         |  |  |                                  |            |                                 |  

The
accompanying notes are an integral part of these statements.

-3-

---



EDEN
BIOSCIENCE CORPORATION AND SUBSIDIARIES

CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

|                                                                         |  |  | Nine Months Ended September 30, |           
|------------------------------------------------------------------------ |  |  | ------------------------------- | ----------
|                                                                         |  |  |                                 |           
|                                                                         |  |  | 2005                            |           
|                                                                         |  |  |                                 |           
|Cash flows from operating activities:                                    |  |  |                                 |           
|Net loss                                                                 |  |  | $                               | (7,538,201
|Adjustments to reconcile net loss to cash used in operating activities:  |  | 
|Depreciation and amortization                                            |  |  |                                 | 1,737,971 
|Accretion expense                                                        |  |  |                                 | 20,821    
|Deferred rent payable                                                    |  |  |                                 | 33,704    
|(Gain) Loss on disposal of property and equipment                        |  |  |                                 | (84,806   
|Loss on property and equipment on lease termination                      |  |  |                                 | 3,480,883 
|Termination of lease obligations                                         |  |  |                                 | (2,724,124
|Forfeiture of security deposit on lease termination                      |  |  |                                 | 1,250,000 
|Loss on facility sublease                                                |  |  |                                 | --        
|Changes in assets and liabilities:                                       |  | 
|Accounts receivable                                                      |  |  |                                 | (75,562   
|Inventory                                                                |  |  |                                 | 80,242    
|Prepaid expenses and other assets                                        |  |  |                                 | 360,537   
|Accounts payable                                                         |  |  |                                 | 38,717    
|Accrued liabilities                                                      |  |  |                                 | 358,737   
|Accrued loss on facility subleases                                       |  |  |                                 | (336,915  
|                                                                         |  |  |                                 |           
|Net cash used in operating activities                                    |  |  |                                 | (3,397,996
|                                                                         |  |  |                                 |           
|Cash flows from investing activities:                                    |  | 
|Purchases of property and equipment                                      |  |  |                                 | --        
|Proceeds from disposal of fixed assets                                   |  |  |                                 | 204,228   
|                                                                         |  |  |                                 |           
|Net cash provided by investing activities                                |  |  |                                 | 204,228   
|                                                                         |  |  |                                 |           
|Cash flows from financing activities:                                    |  | 
|Payment of capital lease obligations                                     |  |  |                                 | (10,453   
|Proceeds from issuance of common stock                                   |  |  |                                 | 5,600     
|                                                                         |  |  |                                 |           
|Net cash used in financing activities                                    |  |  |                                 | (4,853    
|                                                                         |  |  |                                 |           
|Effect of foreign currency exchange rates on cash and cash equivalents . |  |  |                                 | (29,978   
|                                                                         |  |  |                                 |           
|Net decrease in cash and cash equivalents                                |  |  |                                 | (3,228,599
|Cash and cash equivalents at beginning of period                         |  |  |                                 | 11,860,385
|                                                                         |  |  |                                 |           
|Cash and cash equivalents at end of period                               |  |  | $                               | 8,631,786 
|                                                                         |  |  |                                 |           
|Supplemental disclosures:                                                |  | 
|Cash paid for interest                                                   |  |  | $                               | 538       

The
accompanying notes are an integral part of these statements.

-4-

---



EDEN
BIOSCIENCE CORPORATION AND SUBSIDIARIES

NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.
Organization and Summary of Significant Accounting  Policies

Organization
and Business

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

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

Basis of
Presentation

The
accompanying unaudited condensed consolidated  financial statements have been prepared in
accordance with  U.S. generally accepted accounting principles for interim  financial
information and pursuant to the instructions to  Form 10-Q. Accordingly, they do not
include all of the  information and notes required by U.S. generally accepted  accounting
principles for complete financial statements. The  balance sheet at December 31, 2004 has
been derived from the  audited financial statements at that date but does not  include
all of the information and notes required by U.S.  generally accepted accounting
principles for complete  financial statements. These financial statements and notes
should be read in conjunction with the financial statements  and notes as of and for the
year ended December 31, 2004  included in the Companys Annual Report on Form 10-K,
which  was filed with the Securities and Exchange Commission on  March 25, 2005.

In
the opinion of management, the unaudited condensed  consolidated financial statements
include all adjustments,  consisting only of normal recurring adjustments, necessary  to
state fairly the financial information set forth therein.  Results of operations for the
three months and nine months  ended September 30, 2005 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 September 30, 2005 will be  sufficient to meet its anticipated cash
needs for net  losses, working capital and capital expenditures for more  than the next
12 months, although there can be no assurance  in that regard. After the next 12 months,
if net product  sales do not significantly increase, the Company will have  to further
reduce operating expenses or secure additional  financing. The Company may be unable to
obtain adequate or  favorable financing at that time or at all and may cease  operations.
The sale of additional equity securities could  result in dilution to the Companys
shareholders.

Estimates
Used in Financial Statement Preparation

The
preparation of financial statements in conformity  with U.S. generally accepted
accounting principles requires  management to make estimates and assumptions that affect
the  reported amounts and classification of assets and  liabilities and the disclosure of
contingent assets and  liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the  reporting period. Examples include
depreciable lives of  property and equipment; expense accruals; provisions for  sales
allowances, warranty claims, inventory valuation and  classification; cash flow
projections and determination of  asset group used in evaluating whether asset impairment
loss  is recorded; losses on facility subleases and bad debts.  Such estimates and
assumptions are based on historical  experience, where applicable, managements
plans and other  assumptions. Estimates and assumptions are reviewed  periodically and
the effects of revisions are reflected in  the consolidated financial statements
prospectively when  they are determined to be necessary. Actual results could  differ
from these estimates.

-5-

---



EDEN
BIOSCIENCE CORPORATION AND SUBSIDIARIES

NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Accounts
Receivable

Accounts
receivable balances are reported net of  customer-specific related sales allowances of
$103,000 at  September 30, 2005 and $11,000 at December 31, 2004. In  determining the
adequacy of the allowance for doubtful  accounts, the Company considers a number of
factors,  including the aging of the accounts receivable portfolio,  customer payment
trends, the financial condition of its  customers, historical bad debts and current
economic trends.  Based upon an analysis of outstanding net accounts  receivable, no
allowance for doubtful accounts was recorded  at September 30, 2005 or December 31, 2004.

Inventory

Inventory
is valued at the lower of average cost or  market. Costs include material, labor and
overhead.  Inventory expected to be utilized in the next twelve-month  period is
classified as current and inventory expected to be  utilized beyond that period is
classified as non-current. In  determining the classification of inventory, the Company
considers a number of factors, including historical sales  experience and trends,
existing distributor inventory,  expansion into new markets, introduction of new products
and  estimates of future sales growth.

Property
and Equipment

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

In
October 2004, the Company began marketing lab and  office space it occupied and estimated
it would sublease  substantially all of this space by the end of 2005. Based on  the
sublease market at that time, the Company believed that  a portion of the leasehold
improvements and certain  equipment related to the lab space would not be recovered  from
the receipt of future sublease payments. Therefore, the  estimated useful life of a
portion of leasehold improvements  and certain equipment related to this lab space was
reduced  from January 2011, the end of the lease term, to December  31, 2005. In the
first eight months of 2005, amortization  and depreciation of $947,000 was included in
research and  development expense in the condensed consolidated statements  of
operations. The lease of this lab and office space was  terminated effective August 31,
2005 and resulted in a $3.5  million impairment loss on leasehold improvements and
certain equipment that was transferred to the landlord.

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

In
February 2004, the Company received approval to sell  Messenger in Spain. The Company
initiated marketing  activities in March 2004, but the approval was not received  in time
to pre-position product in the trade channel 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 new
distributors at this early stage of  introduction, the Company granted flexible and/or
extended  payment terms to distributors in this new market. Because of  this combination
of factors, revenues from these product  deliveries are deferred and recognized when
payment is  received. The Company recognized net revenue of $153,000

-6-

---



EDEN
BIOSCIENCE CORPORATION AND SUBSIDIARIES

NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

from these
deliveries when payment was received in the three  months ended September 30, 2005 and
$226,000 in the three  months ended September 30, 2004. The Company recognized net
revenue of $602,000 from these deliveries when payment was  received in the nine months
ended September 30, 2005 and  $317,000 in the nine months ended September 30, 2004. Gross
revenues of $258,000 and cost of goods sold of $73,000 were  deferred at September 30,
2005 and will be recognized when  payment is received.

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

Gross
product sales and sales allowances are as follows:

|                                         |  |  | Three Months Ended September 30, |         | Nine Months Ended September 30, |  
|---------------------------------------- |  |  | -------------------------------- | ------- | ------------------------------- | -
|                                         |  |  |                                  |         |                                 |  
|                                         |  |  | 2005                             |         | 2004                            |  
|                                         |  |  |                                  |         |                                 |  
|Gross product sales                      |  |  | $                                | 371,418 |                                 | $
|Sales allowances                         |  |  |                                  | (28,020 | )                               |  
|Elimination of previously recorded sales |  | 
|allowance liabilities                    |  |  |                                  | --      |                                 |  
|                                         |  |  |                                  |         |                                 |  
|Product sales, net of sales allowances   |  |  | $                                | 343,398 |                                 | $
|                                         |  |  |                                  |         |                                 |  

Net
product sales by geographical region were:

|                                       |  |  | Three Months Ended September 30, |         | Nine Months Ended September 30, |  
|-------------------------------------- |  |  | -------------------------------- | ------- | ------------------------------- | -
|                                       |  |  |                                  |         |                                 |  
|                                       |  |  | 2005                             |         | 2004                            |  
|                                       |  |  |                                  |         |                                 |  
|United States                          |  |  | $                                | 185,009 |                                 | $
|Spain                                  |  |  |                                  | 153,278 |                                 |  
|Other regions                          |  |  |                                  | 5,111   |                                 |  
|                                       |  |  |                                  |         |                                 |  
|Product sales, net of sales allowances |  |  | $                                | 343,398 |                                 | $
|                                       |  |  |                                  |         |                                 |  

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

Sales
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  distributors, 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  introduced Messenger STS, an improved formulation in January
2004 at this lower price point. 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 nine months of
2004, the Company delivered  approximately 400,000 ounces of Messenger products at no
charge to distributors.

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

-7-

---



EDEN
BIOSCIENCE CORPORATION AND SUBSIDIARIES

NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

|                                      |  |  | Three Months Ended September 30, |            | Nine Months Ended September 30, |  
|------------------------------------- |  |  | -------------------------------- | ---------- | ------------------------------- | -
|                                      |  |  |                                  |            |                                 |  
|                                      |  |  | 2005                             |            | 2004                            |  
|                                      |  |  |                                  |            |                                 |  
|Net loss, as reported                 |  |  | $                                | (4,459,713 | )                               | $
|Deduct: Total stock-based employee    |  |  |                                  |            |                                 |  
|compensation expense under fair value |  |  |                                  |            |                                 |  
|based method                          |  |  |                                  | (161,650   | )                               |  
|                                      |  |  |                                  |            |                                 |  
|Pro forma net loss                    |  |  | $                                | (4,621,363 | )                               | $
|                                      |  |  |                                  |            |                                 |  
|Loss per share:                       |  | 
|Basic and diluted  as reported       |  |  | $                                | (0.18      | )                               | $
|                                      |  |  |                                  |            |                                 |  
|Basic and diluted  pro forma         |  |  | $                                | (0.19      | )                               | $
|                                      |  |  |                                  |            |                                 |  

Net Loss
Per Share

Basic
net loss per share is the net loss divided by the  weighted average number of shares
outstanding during the  period. Diluted net loss per share is the net loss divided  by
the sum of the weighted average number of shares  outstanding during the period plus the
additional shares  that would have been issued had all dilutive warrants and  options
been exercised, less shares that would be  repurchased with the proceeds from such
exercise using the  treasury stock method. The effect of including outstanding  options
and warrants is antidilutive for all periods  presented. Therefore, options and warrants
have been  excluded from the calculation of diluted net loss per share.  Shares issuable
pursuant to stock options and warrants that  have not been included in the above
calculations because  they are antidilutive totaled 2,504,251 and 2,676,751 as of
September 30, 2005 and 2004, respectively.

2.  Stock Options

The
following table summarizes stock option activity  since December 31, 2004:

|                              |  |  |  | Number of
Options |  
|----------------------------- |  |  |  | ----------------- | -
|                              |  |  |  |                   |  
|Balance at December 31, 2004  |  |  |  | 2,620,578         |  
|Options granted               |  |  |  | 50,000            |  
|Options cancelled             |  |  |  | (166,327          | )
|                              |  |  |  |                   |  
|Balance at September 30, 2005 |  |  |  | 2,504,251         |  
|                              |  |  |  |                   |  

No
warrants to purchase shares of the Companys common  stock were issued during the
nine-month period ended  September 30, 2005.

3.  Inventory

Inventory,
at average cost, consists of the following:

|                                            |  |  | September 30,
2005 |            | December 31,
2004 |  
|------------------------------------------- |  |  | ------------------ | ---------- | ----------------- | -
|                                            |  |  |                    |            |                   |  
|Raw materials                               |  |  | $                  | 544,543    |                   | $
|Bulk manufactured goods and work in process |  |  |                    | 1,788,858  |                   |  
|Finished goods                              |  |  |                    | 1,502,580  |                   |  
|                                            |  |  |                    |            |                   |  
|Total inventory                             |  |  |                    | 3,835,981  |                   |  
|Less non-current portion of inventory       |  |  |                    | (1,937,962 | )                 |  
|                                            |  |  |                    |            |                   |  
|Current portion of inventory                |  |  | $                  | 1,898,019  |                   | $
|                                            |  |  |                    |            |                   |  

The
non-current portion of inventory at September 30,  2005 consists primarily of raw
materials and bulk  manufactured goods that the Company does not expect to  utilize in
the next twelve months. Prior to September 30,  2005, the Company expected all
inventories to be utilized in  the twelve month period subsequent to the balance sheet
date.

-8-

---



EDEN
BIOSCIENCE CORPORATION AND SUBSIDIARIES

NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Property
and Equipment

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

|                                               |  |  | September 30,
2005 |            | December 31,
2004 |  
|---------------------------------------------- |  |  | ------------------ | ---------- | ----------------- | -
|                                               |  |  |                    |            |                   |  
|Equipment                                      |  |  | $                  | 11,032,757 |                   | $
|Equipment under capital leases                 |  |  |                    | 19,418     |                   |  
|Leasehold improvements                         |  |  |                    | 3,670,654  |                   |  
|                                               |  |  |                    |            |                   |  
|Total property and equipment                   |  |  |                    | 14,722,829 |                   |  
|Less accumulated depreciation and amortization |  |  |                    | (6,571,551 | )                 |  
|                                               |  |  |                    |            |                   |  
|Net property and equipment                     |  |  | $                  | 8,151,278  |                   | $
|                                               |  |  |                    |            |                   |  

The
Company recorded depreciation and amortization of  $552,342 and $528,288 for the three
months ended September  30, 2005 and 2004, respectively, and $2,135,990 and  $1,573,425
for the nine months ended September 30, 2005 and  2004, respectively.

5.  Accrued
Liabilities

Accrued
liabilities consist of the following:

|                                              |  |  | September 30,
2005 |           | December 31,
2004 |  
|--------------------------------------------- |  |  | ------------------ | --------- | ----------------- | -
|                                              |  |  |                    |           |                   |  
|Compensation and benefits                     |  |  | $                  | 311,666   |                   | $
|Research and development field trial expenses |  |  |                    | 262,287   |                   |  
|Facility costs                                |  |  |                    | 280,599   |                   |  
|Promotions                                    |  |  |                    | 36,200    |                   |  
|Sales allowances                              |  |  |                    | 464,245   |                   |  
|Warranty                                      |  |  |                    | 74,871    |                   |  
|Other                                         |  |  |                    | 174,778   |                   |  
|                                              |  |  |                    |           |                   |  
|Total accrued liabilities                     |  |  | $                  | 1,604,646 |                   | $
|                                              |  |  |                    |           |                   |  

6.  Warranty
Liability

The
Company provides a limited warranty to customers  that products, at the time of the first
sale, conform to the  chemical description on the label and under normal  conditions are
reasonably fit for the purposes referred to  in the directions for use, subject to
certain inherent  risks. 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. There were no significant  changes to the Companys warranty
liability during the nine  months ended September 30, 2005.

7.  Leases

On
September 9, 2005, the Company entered into an  Amendment of Lease and Termination
Agreement with the  landlord to terminate the lease of 63,200 square feet of  research
and office space in Bothell, Washington.  The lease  originally expired January 11, 2011.
Average annual rent  and operating costs under the lease were approximately $1.9
million.  The termination was effective as of August  31, 2005.

Approximately
34,300 square feet of the space subject to  the lease was subleased. The sublease had an
initial term  that expired in December 2007.  Average annual rent and  operating costs
under the sublease were approximately $1.2  million.  In connection with the Amendment of
Lease and  Termination Agreement, the existing sublease was transferred  to the landlord.

The
lease termination resulted in a loss totaling  $2,260,538.  The lease termination loss is
comprised of a  termination fee totaling $1,500,000, consisting of $250,000  cash and the
forfeiture of a $1,250,000 security deposit  (previously included in long-term other
assets on the balance  sheet), an asset impairment loss on leasehold improvements  and
equipment at the leased facility totaling $3,480,883,  and other costs, offset by the
write-off of liabilities  recorded for accrued losses on facility subleases and rent
expense in excess of rent payments totaling $2,724,124.

-9-

---



EDEN
BIOSCIENCE CORPORATION AND SUBSIDIARIES

NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In
September 2004, as a result of another companys  default under a five year sublease
agreement, the Company  recorded a loss of $202,007 based upon an estimate of the  time
needed to re-sublease the space and expected future  rents to be collected.

8.  Major
Customers

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

|           |  |  | Three Months Ended September 30, |        | Nine Months Ended September 30, |  
|---------- |  |  | -------------------------------- | ------ | ------------------------------- | -
|           |  |  |                                  |        |                                 |  
|           |  |  | 2005                             |        | 2004                            |  
|           |  |  |                                  |        |                                 |  
|Customer A |  |  | $                                | 87,700 |                                 | $
|Customer B |  |  |                                  | 79,700 |                                 |  
|Customer C |  |  |                                  | 73,600 |                                 |  
|Customer D |  |  |                                  | **     |                                 |  
|Customer E |  |  |                                  | --     |                                 |  
|Customer F |  |  |                                  | --     |                                 |  

**
Less than ten percent

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 2004 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 25, 2005.

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 that markets a  line of products based on Eden
Biosciences proprietary  harpin protein technology and manufacturing processes.
These products are marketed under the umbrella brand of  Harp-N-TekTM and are used in
agricultural and horticultural  production as well as the Home & Garden market. We
believe  that Harp-N-Tek products enhance plant health and improve  overall plant
production and output quality. Harpins are  naturally occurring proteins produced by
disease-causing  bacteria that attack plants.  Harpin proteins are not a part  of the
destructive disease complex but instead serve the  beneficial purpose of alerting plants
to the fact that they  are under attack.  They activate signaling receptors present  in
most plants designed to specifically detect the presence  of harpin proteins.  This
warning signal is transmitted  throughout the plant and turns on the plants
intrinsic  ability to protect itself by deploying both growth and  defense responses.
Eden Biosciences Harp-N-Tek products  provide these harmless yet potent
signal-inducing harpin  proteins and protein extracts, which trigger beneficial
responses designed to protect plants, to help plants grow  through stress, to improve
plants uptake of nutrients, and  to enhance the overall level of plant health.

We
have incurred significant operating losses since  inception. At September 30, 2005, we
had an accumulated  deficit of $113 million. We incurred net losses of $7.5  million and
$6.3 million for the nine months ended September  30, 2005 and 2004, respectively, and
annual losses of $8.9  million in 2004, $11.2 million in 2003 and $23.5 million in  2002.
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.

-10-

---



Results of
Operations

Three months
and nine months ended September 30, 2005 and 2004

Revenues

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

|                                         |  |  | Three Months Ended September 30, |         | Nine Months Ended September 30, |  
|---------------------------------------- |  |  | -------------------------------- | ------- | ------------------------------- | -
|                                         |  |  |                                  |         |                                 |  
|                                         |  |  | 2005                             |         | 2004                            |  
|                                         |  |  |                                  |         |                                 |  
|Gross product sales                      |  |  | $                                | 371,418 |                                 | $
|Sales allowances                         |  |  |                                  | (28,020 | )                               |  
|Elimination of previously recorded sales |  | 
|allowance liabilities                    |  |  |                                  | --      |                                 |  
|                                         |  |  |                                  |         |                                 |  
|Product sales, net of sales allowances   |  |  | $                                | 343,398 |                                 | $
|                                         |  |  |                                  |         |                                 |  

Gross
product sales revenue for the third quarter of  2005 was $371,000, a decrease of $56,000
(13%) from $427,000  in the same quarter of 2004. This decrease was primarily a  result
of lower revenue recognized in Spain. We believe this  is a result of drought conditions
in Spain which caused  growers to delay their purchases until later in the growing
season.. Gross product sales for the first nine months of  2005 totaled $3,758,000, an
increase of $2,851,000 (314%)  from $907,000 for the same period of 2004. The increase is
a  result of sales of Messenger in foreign markets, sales  growth in the home and garden
market and sales of our new  Harp-N-Tek products  N-Hibit, ProAct and MightyPlant.
Sales  of new products produced over 50% of total revenue in the  nine months ended
September 30, 2005. Sales in the quarter  and nine months ended September 30, 2004 were
negatively  impacted by high levels of inventory in the channel and free  product
provided under the price reduction program. Sales in  the first nine months of 2005 were
made primarily to 51  distributors, three of which accounted for an aggregate of  38% of
net product sales revenue. Sales in the first nine  months of 2004 were made primarily to
41 distributors, three  of which accounted for an aggregate of 44% of net product  sales
revenue. Based on our experience and seasonality, we  expect sales in the second half of
2005 to be significantly  lower than in the first half of 2005.

Net
product sales revenue from sales to foreign  customers totaled $158,000 and $226,000 in
the three months  ended September 30, 2005 and 2004, respectively, and  $698,000 and
$316,000 in the nine months ended September 30,  2005 and 2004, respectively. These sales
were made primarily  to distributors in Europe. In February 2004, we received  approval
to sell Messenger in Spain. We initiated marketing  activities in March 2004, but the
approval was not received  in time to meet initial sales activity. In order to ensure
that an adequate supply of Messenger 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
these  product deliveries were deferred and will be recognized when  payment is received.
We recognized net revenue of $153,000  from these deliveries when payment was received in
the three  months ended September 30, 2005 and $226,000 in the three  months ended
September 30, 2004. We recognized net revenue  of $602,000 from these deliveries when
payment was received  in the nine months ended September 30, 2005 and $317,000 in  the
nine months ended September 30, 2004. Gross revenues of  $258,000 and cost of goods sold
of $73,000 were deferred at  September 30, 2005 and will be recognized when payment is
received.

Net
sales of Messenger to consumers in the home and  garden market in the United States
totaled $40,000 and  $28,000 in the three months ended September 30, 2005 and  2004,
respectively, and $375,000 and $181,000 in the nine  months ended September 30, 2005 and
2004, respectively.  Based on our experience and seasonality, we expect fourth  quarter
sales of our home and garden products to be  comparable to third quarter.

-11-

---



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 additional
ounces of Messenger STS  at no charge in order to reduce the average cost of their
existing inventories of Messenger. In the first nine months  of 2004, we delivered
approximately 400,000 ounces of free  Messenger STS. In the last quarter of 2004, we
delivered  approximately 70,000 ounces of free Messenger STS. This free  product
substantially increased channel inventory and  negatively affected our Messenger STS
sales to distributors.  We do not expect distributors that hold significant  inventories
of Messenger STS to place additional orders  until their current inventories are reduced.

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

Sales Allowances

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

Sales
allowances during the three months ended September  30, 2005 totaled $28,000 (8% of gross
product sales)  compared to $59,000 (14% of gross product sales) in the  comparable
period of 2004. Sales allowances for the nine  months ended September 30, 2005 and 2004
include the  reduction by $91,000 and $95,000, respectively, of sales  allowance
liabilities recognized in prior quarters that will  not be paid because actual amounts
earned by distributors  were less than amounts previously estimated. Excluding these
sales allowance reductions, sales allowances during the nine  months ended September 30,
2005 totaled $674,000 (18% of  gross product sales) compared to $131,000 (14% of gross
product sales) in the comparable period of 2004. We expect  2005 sales allowances to
average approximately 15-20% of  total gross product sales based on current product
specific  distributor programs.

Cost of Goods
Sold

Cost
of goods sold consists primarily of the cost of  products sold to distributors, idle
capacity charges and the  cost of products used for promotional purposes. Cost of  goods
sold was $586,000 in the third quarter of 2005, an  increase of $255,000 (77%) compared
to $331,000 in the third  quarter of 2004. This increase was primarily due to less
manufacturing activity in the third quarter of 2005 compared  to the same quarter of 2004
which resulted in higher idle  capacity costs being charged directly to cost of goods
sold.  Cost of goods sold for the first nine months of 2005 was  $1.8 million compared to
$1.5 million in the same period of  2004. An increase in cost of products sold related to
higher  sales volumes in 2005 was offset by a reduction in idle  capacity charges
resulting from additional manufacturing  activities in 2005 compared to 2004 and the
write-off in  2004 of Messenger labels that were not used due to the  introduction of
Messenger STS. We completed our current  manufacturing operations in the second quarter
of this year  and we expect idle capacity charges to continue in the  fourth quarter of
2005.

Research and
Development Expenses

Research
and development expenses consist primarily of  personnel, field trial, laboratory,
regulatory, patent and  facility expenses. Research and development expenses  decreased
$56,000 (6%) from $863,000 in the third quarter of  2004 to $807,000 in the same quarter
of this year. This  decrease was primarily a result of lower facility and field  trial
costs and a gain from the sales of certain assets,  which was offset by an increase in
depreciation and  amortization. For the first nine months of 2005, research  and
development costs were $2.7 million, an increase of  $400,000 (17%) from $2.3 million in
the same period last  year. This increase was primarily due to an increase in
depreciation and amortization expense that resulted from  reducing the estimated useful
life of leasehold improvements  and certain equipment at our research facility. Prior to
terminating this facility lease effective August 31, 2005,  we were pursuing additional
tenants to sublease this lab and  office space and we had expected to complete the
sublease by  December 2005.

-12-

---



Selling,
General and Administrative Expenses

Selling,
general and administrative expenses consist of  payroll and related expenses for sales
and marketing,  executive and administrative personnel; advertising,  marketing and
professional fees; and other corporate  expenses. Selling, general and administrative
expenses were  $1.2 million in the third quarter of 2005 and 2004. For the  first nine
months of 2005, selling, general and  administrative costs were $4.2 million, an increase
of $0.6  million (17%) from $3.6 million in the same period last  year. This increase
resulted primarily from additional  spending on advertising and marketing costs for the
home and  garden market and for the introduction of our new products  during the first
half of 2005.

In
April 2003, we subleased approximately 7,300 square  feet of office space to another
company under a five year  sublease agreement. Due to declines in the real estate
market, the rent we pay on the subleased space exceeded the  initial rent to be collected
under the sublease and we  recorded a loss of $213,000. Due to the subtenants financial
difficulties, the subtenant later reduced the rental payment  and an additional loss of
$159,000 was recorded in the  quarter ended September 30, 2003. The subtenant vacated the
space in October 2004. As a result, we recorded an  additional loss of $202,000 at
September 30, 2004 based upon  an estimate of the time needed to re-sublease the space
and  expected future rents to be collected.

Lease
Termination Loss

On
September 9, 2005, we entered into an Amendment of  Lease and Termination Agreement with
the landlord to  terminate the lease of 63,200 square feet of research and  office space
in Bothell, Washington.  The lease originally  expired January 11, 2011.
Average annual rent and operating  costs under the lease were approximately $1.9 million.
The  termination was effective as of August 31, 2005.

Approximately
34,300 square feet of the space subject to  the lease was subleased. The sublease had an
initial term  that expired in December 2007.  Average annual rent and  operating costs
under the sublease were approximately $1.2  million.  In connection with the Amendment of
Lease and  Termination Agreement, the existing sublease was transferred  to the landlord.

The
lease termination resulted in a loss totaling  approximately $2.3 million.  The lease
termination loss is  comprised of a termination fee totaling $1.5 million,  consisting of
$250,000 cash and the forfeiture of a $1.25  million security deposit (previously
included in long-term  other assets on the balance sheet at December 31, 2004);  other
costs, and an asset impairment loss on leasehold  improvements and equipment at the
leased facility totaling  approximately $3.5 million, offset by the write-off of
liabilities recorded for accrued losses on facility  subleases and rent expense in excess
of rent payments  totaling approximately $2.7 million.

Interest Income

Interest
income consists of earnings on our cash and  cash equivalents. Interest income increased
$65,000 from  $159,000 in the first nine months of 2004 to $224,000 in the  same period
of this year. The change was due to higher  interest rates in 2005 offset by
significantly lower average  cash balances available for investment in the nine months
ended September 30, 2005 compared to the same period in  2004.

Income Taxes

We
have generated a net loss from operations for each  period since we began doing business.
As of December 31,  2004, we had accumulated approximately $101.9 million of net
operating loss carryforwards for federal income tax  purposes, which expire between 2009
and 2024, and  approximately $9.6 million in foreign tax net operating loss
carryforwards, which expire between 2006 and 2009. We have  provided a valuation
allowance against our net deferred tax  assets because of the significant uncertainty
surrounding  our ability to realize them. The annual use of these net  operating loss
carryforwards may be limited in the event of  a cumulative change in ownership of more
than 50%.

-13-

---



Liquidity
and Capital Resources

Our
operating expenditures have been significant since  our inception. We currently
anticipate that our operating  expenses will significantly exceed net product sales and
that net losses and working capital requirements will  consume a material amount of our
cash resources. If net  product sales do not significantly increase in the near  term, we
will have to further reduce our operating expenses.  Our future capital requirements will
depend on the success  of our operations. We believe that the balance of our cash  and
cash equivalents at September 30, 2005 will be  sufficient to meet our anticipated cash
needs for net  losses, working capital and capital expenditures for more  than the next
12 months, although there can be no assurance  in that regard. After the next 12 months,
if net product  sales do not significantly increase, we will have to further  reduce
operating expenses or secure additional financing. We  may be unable to obtain adequate
or favorable financing at  that time or at all and may be required to cease operations.
In this regard, our common stock listing was transferred  from The Nasdaq National Market
to The Nasdaq Capital Market  on October 10, 2005. We elected to seek a
transfer to The  Nasdaq Capital Market because we had been unable to regain  compliance
with Nasdaq's minimum $1.00 bid price requirement  for continued listing. By transferring
to The Nasdaq Capital  Market, we have been afforded an additional 180-calendar day
grace period, or until March 31, 2006, in which to satisfy  Nasdaq's $1.00 minimum bid
price requirement. To regain  compliance, the closing bid price of our common stock has
to  remain at $1.00 per share or more for a minimum of ten  consecutive trading days. If
we do not regain compliance  with the minimum bid price rule by March 31, 2006, our
common stock will be delisted. Trading on the Nasdaq Capital  Market may have a negative
impact on the value of our common  stock, because securities trading on the Nasdaq
Capital  Market typically are less liquid than those traded on The  Nasdaq National
Market. As a result, it may be more  difficult for us to raise capital. Moreover, if our
common  stock is delisted from The Nasdaq Capital Market, it could  become even more
difficult for us to raise capital and would  further reduce the market liquidity for our
common stock.  The sale of additional equity securities could result in  dilution to our
shareholders.

At
September 30, 2005, our cash and cash equivalents  totaled $8.6 million, a decrease of
$3.3 million from the  balance of $11.9 million at December 31, 2004. 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 $2.4 million (41%)  from $5.8 million in the first nine
months of 2004 to $3.4  million in the same period of 2005. Net cash used in  operations
in the first nine months of 2005 resulted  primarily from a net loss of $7.5 million,
which includes  depreciation and amortization expense of $1.7 million and a  loss on
lease termination of $2.3 million, and fluctuations  in various asset and liability
balances totaling $426,000.  We expect that net cash used in operations will continue to
be significant.

We
conduct our operations in two primary functional  currencies:  the U.S. dollar and the
euro. Historically,  neither fluctuations in foreign exchange rates nor changes  in
foreign economic conditions have had a significant impact  on our financial condition or
results of operations. We  currently do not hedge our foreign currency exposures and
are, therefore, subject to the risk of exchange rate  fluctuations. We may invoice our
international customers in  U.S. dollars and euros, as the case may be. We are exposed
to foreign exchange rate fluctuations as the financial  results of foreign subsidiaries
are translated into U.S.  dollars in consolidation. Foreign exchange rate fluctuations
did not have a material impact on our financial statements  in the nine months ended
September 30, 2005 or 2004.

The
following are our contractual obligations as of  September 30, 2005 associated with our
capital and operating  lease obligations:

|                                              |  |  | Payments Due by Period |    
|--------------------------------------------- |  |  | ---------------------- | ---
|                                              |  |  |                        |    
|                                              |  |  | (in thousands)         |    
|                                              |  |  | Total                  |    
|                                              |  |  |                        |    
|Capital lease obligations, including interest |  |  | $                      | 2  
|Operating lease obligations                   |  |  |                        | 521
|                                              |  |  |                        |    
|Total                                         |  |  | $                      | 523
|                                              |  |  |                        |    

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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 25, 2005. Certain of our
accounting policies  require the application of significant judgment by  management in
selecting the appropriate assumptions for  calculating financial estimates. By their
nature, these  judgments are subject to an inherent degree of uncertainty.  These
judgments are based on historical experience, terms of  existing contracts, commonly
accepted industry practices,  information provided by our customers and other assumptions
that we believe are reasonable under the circumstances. Our  estimates and assumptions
are reviewed periodically and the  effects of revisions are reflected in the consolidated
financial statements in the period in which they are  determined to be necessary. Actual
results may differ from  these estimates under different assumptions or conditions.  Our
critical accounting policies and estimates include:

Revenue
Recognition

We
sell the majority of our products to independent,  third-party distributors. Our
arrangements with those  distributors provide no price protection or product-return
rights. We recognize revenue from product sales, net of  sales allowances, when product
is delivered to our  distributors and all of our significant obligations have  been
satisfied, unless acceptance provisions or other  contingencies or arrangements exist,
including whether  collection is reasonably assured. If acceptance provisions  or
contingencies exist, revenue is recognized after such  provisions or contingencies have
been satisfied. As part of  the analysis of whether all of our significant obligations
have been satisfied or situations where acceptance  provisions or other contingencies or
arrangements exist, we  consider the following elements, among others:  sales terms  and
arrangements, including customer payment terms,  historical experience and current
incentive programs.

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

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

Accounts
Receivable and Allowance for Doubtful Accounts

Accounts
receivable balances are reported net of  customer-specific related sales allowances. In
determining  the adequacy of the allowance for doubtful accounts, we  consider a number
of factors, including the age of  outstanding invoices, customer payment trends, the
financial  condition of our customers, historical bad debts and current  economic trends.
Based upon our analysis of outstanding net  accounts receivable at September 30, 2005, no
allowance for  doubtful accounts was recorded. Changes in the factors above  or other
factors could result in a significant charge.

Inventory

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

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

Valuation of
Property and Equipment

We
periodically review the carrying values of our  property and equipment to determine
whether such assets have  been impaired. An impairment loss must be recorded pursuant  to
SFAS No. 144, Accounting for the Impairment or Disposal  of Long-Lived Assets, when
the undiscounted net cash flows  expected to be realized from the use of such assets are
less  than their carrying value. The determination of undiscounted

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net cash flows
expected requires us to make many estimates,  projections and assumptions, including the
lives of the  assets, future sales and expense levels, additional capital  investments or
expenditures necessary to maintain the  assets, industry market trends and general and
industry  economic conditions. Our property and equipment consists  primarily of assets
used to manufacture and sell our  products and assets used in our research and
administration.  For the purpose of assessing asset impairment, we have  grouped all of
these assets together in one asset group  because our administration and research support
our  manufacturing and sales activities and do not have a  separate identifiable cash
flow.

Based
upon our most recently completed analysis of net  cash flows expected to be realized from
our remaining  investments in property and equipment, including  consideration of the
reduction of rent and operating costs  and write-off of leasehold improvements and
equipment  associated with the lease termination, no additional  impairment loss was
recorded. The critical estimates in the  analysis are our ability to significantly
increase sales  over the next five years while controlling operating  expenses at about
current levels over the next four years.  If net product sales do not significantly
increase in the  near term or if expenses significantly increase over the  current level,
a significant impairment loss may need to be  recorded.

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 September 30, 2005, we have  accumulated a deficit of $113 million. For the
nine months  ended September 30, 2005, we incurred a net loss of $7.5  million. For the
years ended December 31, 2004, 2003, 2002,  2001 and 2000, we had net losses of $8.9
million, $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
in the fourth quarter of 2001  and annual net sales decreased from $3.5 million in 2001
to  $1.9 million in 2002, $1.8 million in 2003 and $1 million in  2004. We expect our
future revenues to come primarily from  the sale of Messenger STS, employ, MightyPlant,
ProAct,  N-Hibit 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.

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. We believe that the
balance of our cash and cash equivalents at September 30,  2005 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.

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.

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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.

Our
common stock listing was transferred from The Nasdaq  National Market to The Nasdaq
Capital Market (formerly known  as The Nasdaq SmallCap Market); we currently are not in
compliance with The Nasdaq Capital Market minimum bid  requirement and failure to regain
and maintain compliance  with this and other continued listing standards could result  in
delisting and adversely affect our market price and  liquidity.

Our
common stock listing was transferred from The Nasdaq  National Market to The Nasdaq
Capital Market on  October 10, 2005.  We elected to seek a transfer to The
Nasdaq Capital Market because we had been unable to regain  compliance with Nasdaq's
minimum $1.00 bid price requirement  for continued listing.  By transferring to The
Nasdaq  Capital Market, we have been afforded an additional  180-calendar day grace
period, or until March 31, 2006, in  which to satisfy Nasdaq's $1.00 minimum bid price
requirement.  To regain compliance, the closing bid price of  our common stock has to
remain at $1.00 per share or more  for a minimum of ten consecutive trading days.  If we
do not  regain compliance with the minimum bid price rule by March  31, 2006, Nasdaq
will provide us written notification that  our common stock will be delisted.  In such
case, we have  the right to appeal Nasdaqs delisting determination to a
Listing Qualifications Panel.  Trading on The Nasdaq Capital  Market may have a negative
impact on the value of our common  stock, because securities trading on The Nasdaq
Capital  Market typically are less liquid than those traded on The  Nasdaq National
Market.  Furthermore, we will not be  eligible to relist our common stock on The Nasdaq
National  Market unless and until our common stock maintains a minimum  bid price of
$5.00 per share for 90 consecutive trading days  and we otherwise comply with the initial
listing  requirements for The Nasdaq National Market

If
our common stock were to be delisted from The Nasdaq  Capital Market, we may seek
quotation on a regional stock  exchange, if available.  Such listing could reduce the
market liquidity for our common stock.  If our common stock  is not eligible for
quotation on another market or exchange,  trading of our common stock could be conducted
in the  over-the-counter market on an electronic bulletin board  established for unlisted
securities such as the Pink Sheets  or the OTC Bulletin Board.  As a result, an investor
would  find it more difficult to dispose of, or obtain accurate  quotations for the price
of, our common stock.

If
our common stock is delisted from The Nasdaq Capital  Market, and if we fail to obtain
quotation on another market  or exchange, and if the trading price remains below $5.00
per share, then trading in our common stock might also  become subject to the
requirements of certain  rules promulgated under the Securities Exchange Act of
1934,  which require additional disclosure by broker-dealers in  connection with any
trade involving a stock defined as a  penny stock (generally, any equity
security not listed on a  national securities exchange or quoted on Nasdaq that has a
market price of less than $5.00 per share, subject to  certain exceptions).  Many
brokerage firms are reluctant to  recommend low-priced stocks to their clients.
Moreover,  various regulations and policies restrict the ability of  shareholders to
borrow against or margin low-priced  stocks, and declines in the stock price
below certain levels  may trigger unexpected margin calls.  Additionally, because  brokers commissions
on low-priced stocks generally  represent a higher percentage of the stock price than
commissions on higher priced stocks, the current price of  the common stock can result in
an individual shareholder  paying transaction costs that represent a higher percentage
of total share value than would be the case if our share  price were higher.  This factor
may also limit the  willingness of institutions to purchase our common stock.  Finally,
the additional burdens imposed upon broker-dealers  by these requirements could
discourage broker-dealers from  facilitating trades in our common stock, which could
severely limit the market liquidity of the stock and the  ability of investors to trade
our common stock

We
currently depend on products that are based on the same  new technology, 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 six products in our Harp-N-Tek product  portfolio (Messenger,
Messenger STS, ProAct, N-Hibit, employ  and MightyPlant) which are based on the same 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,
MightyPlant in  April 2004 and N-Hibit and ProAct in early 2005. These six  products may
not be commercially successful. 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.

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

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,  734,000
ounces in 2003 and 800,000 ounces in 2004. During  the first nine months of 2005, we
estimate that distributors  sold 718,000 ounces to growers, compared to 730,000 ounces
in the same period of 2004. We estimate that Messenger and  Messenger STS inventory held
by distributors at September  30, 2005 was approximately 270,000 ounces. We sent
distributors approximately 470,000 ounces of additional  Messenger STS for free in 2004
as part of an effort to lower  the average cost of their year-end Messenger inventories
by  approximately 50%. This free product significantly increased  channel inventory and
negatively affected our sales to  distributors. We do not expect distributors that hold
significant inventories of Messenger or Messenger STS to  place additional orders for our
products until their current  inventories are reduced, which will adversely affect our
sales and results of operations.

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

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

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Three
distributors accounted for an aggregate of 38% of  net product sales revenue in first
nine months of 2005 and  three distributors accounted for an aggregate of 44% of our  net
sales revenue in the same period of 2004. If any  distributor that purchases a
significant amount of our  products were to discontinue purchasing our products at any
time, our sales would be adversely affected. In addition,  the failure of 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 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
largely in the development stage 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 stage of development, our novel  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.

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 recently began selling our  products in Spain. 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, such as different
regulatory  requirements and reduced protection of intellectual property  rights, which
could adversely affect our ability to compete  in international markets and could have a
negative effect on  our operating results.

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.

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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.

Our
products are currently being stored in large  quantities under various conditions by us
and by  distributors. Most of this material was manufactured in  2001, 2002, 2004 and
2005. We have conducted two year  long-term stability studies that indicate Messenger is
stable for at least two years under our recommended storage  conditions. Further, the
results of recently completed  re-testing of Messenger manufactured in 2000 indicate that
it is still stable with similar biological activity and  performance as of the original
manufacture date. 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 and
our  results of operations.

Our
inventory at September 30, 2005 includes  approximately 2.6 million ounces of Messenger
and Messenger  STS that was manufactured in 2001, 2002, 2004 and 2005. In  addition, we
estimate that distributors own approximately  270,000 ounces of Messenger and Messenger
STS that was  manufactured between 2001 and 2004. 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
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, although we are not  required
to, 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.

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, ProAct,  N-Hibit, 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 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
to sell Messenger and Messenger STS  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 of
Messenger, Messenger STS or N-Hibit for  use on other crops in California. In Colorado,
Messenger is  approved for use on virtually all crops for home and garden  use. ProAct
has been approved for use in 47 states,  including Colorado, and is pending approval in
all other  states except California. We have also received  authorization to sell
Messenger, or are exempt from formal  authorization requirements, in at least 26 foreign
countries, including Spain, Germany, Mexico, China and six  Central American countries.
Our registration in China is  temporary and limited to the sale of Messenger for use on
tomatoes, peppers, tobacco, 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 registrations will be obtained on  acceptable terms.

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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 45 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 designs  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.

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 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 70% from 2001 to 2004.
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
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.

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

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

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

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

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

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

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

- stop or delay selling,
manufacturing or using  products that incorporate the challenged intellectual  property;
- pay damages; or
- 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.

-22-

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

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

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

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

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

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

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

Inability
to produce high quality products 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.

-23-

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

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.

If
we experience growth and 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.

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.

Our
financial instruments include primarily cash and  cash equivalents. We do not use
derivative financial  instruments, nor do we engage in hedging activities. Also,  we do
not have any outstanding variable rate debt. Because  of the relatively short-term
average maturity of our  investment funds, we do not expect interest rate  fluctuations
to significantly affect the aggregate value of  our financial assets.

Our
operations are currently based primarily in the U.S.  and Europe. Transactions in the
U.S. are denominated in U.S.  dollars and transactions in our European unit are generally
denominated in foreign currencies, primarily Euros. The  balance of foreign
currency-denominated assets and  liabilities at September 30, 2005 was not significant.

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.

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PART II --
OTHER INFORMATION

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

(b)  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.

As
of September 30, 2005, 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 $64.3 million  for working capital and
general corporate purposes. The  remaining portion of the net offering proceeds has been
invested in cash equivalent investments. Our use of the  proceeds from the offering does
not represent a material  change in the use of proceeds described in the prospectus
included as part of the Registration Statement.

Item 6.
Exhibits.

Exhibits
10.1, 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.

|ExhibitNumber |  | Description
|------------- |  | -----------

|10.1 |  | Form of Option Letter Agreement for Directors and Officers
|---- |  | ----------------------------------------------------------

|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).
|---- |  | -----------------------------------------------------

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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: | October 28, 2005 |                                                                                                                                                        
|      |                  |                                                                                                                                                        
|      |                  | By:                                                                                                                                                    
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|      |                  |                                                                                                                                                        
|      |                  | By:                                                                                                                                                    
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