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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2004

OR

For the transition period from                      to                     

Commission file number 0-31271

REGENERATION TECHNOLOGIES, INC.

11621 Research Circle

Alachua, Florida 32615

(386) 418-8888

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

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

Shares of common stock, $0.001 par value, outstanding on April 30, 2004: 26,557,081

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REGENERATION TECHNOLOGIES, INC.

FORM 10-Q For the Quarter Ended March 31, 2004

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PART I. FINANCIAL INFORMATION

REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share data)

See notes to unaudited condensed consolidated financial statements.

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REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share data)

See notes to unaudited condensed consolidated financial statements.

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REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

See notes to unaudited condensed consolidated financial statements.

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REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2004 and 2003

(Unaudited)

(In thousands, except share and per share data)

The accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, which the Company considers necessary for a fair presentation of the results of operations for the periods shown. The condensed financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes necessary for a fair presentation of consolidated financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

The condensed consolidated financial statements include the accounts of Regeneration Technologies, Inc. and its wholly owned subsidiaries, Alabama Tissue Center, Biological Recovery Group (inactive) and RTI Services, Inc. (collectively, the “Company”). The condensed consolidated financial statements also include the accounts of RTI Donor Services, Inc., which is a controlled entity.

Restricted Deposits— At March 31, 2004, the Company no longer has any restricted deposits. At December 31, 2003, the Company had $14,757 on deposit with a commercial bank in satisfaction of a collateral requirement contained in a credit agreement, which was fully repaid and terminated on February 20, 2004.

Deferred Financing Costs— Deferred financing costs include costs incurred to obtain financing. Upon funding of debt offerings, deferred financing costs are capitalized as debt issuance costs and amortized using the straight-line method, which approximates the effective interest method, over the life of the related debt. At March 31, 2004, net deferred financing costs approximated $675, net of accumulated amortization of $11, which are included in other assets - net in the accompanying condensed consolidated balance sheet.

Reclassifications— Certain amounts in the condensed consolidated financial statements for the three months ended March 31, 2003, as previously reported, have been reclassified to conform to the 2004 presentation.

Options to purchase approximately 3,054,967 shares of common stock at prices ranging from $1.30 to $14.95 per share were outstanding as of March 31, 2004.

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Had compensation cost for grants of options after March 31, 2000, the date with which all options granted to employees thereafter were issued with an exercise price equal to the fair market value on the date of the grant, been determined on the basis of fair value pursuant to SFAS No. 123, net income and net income per common share would have been affected as follows:

The Company recorded deferred compensation expense for options granted to employees and non-employees during the period October 1, 1999 through March 31, 2000 of $62 and $117 for the three months ended March 31, 2004 and 2003, respectively.

A reconciliation of the weighted average number of shares of common stock used in the calculation of basic and diluted earnings per share is presented below:

For the three months ended March 31, 2004 and 2003, approximately 1,255,000 and 1,743,000, respectively, of issued stock options were not included in the computation of diluted earnings per share because they were anti-dilutive.

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The carrying value of goodwill was $2,863 at March 31, 2004 and December 31, 2003. The following table reflects the components of other intangible assets which are recorded as a component of noncurrent other assets – net in the condensed consolidated balance sheets:

Amortization expense for the three months ended March 31, 2004 and 2003 was $5 and $12, respectively. Management estimates amortization expense of $20 for each of the next five years.

Inventories by stage of completion are as follows:

During the three month periods ended March 31, 2004 and 2003, the Company had inventory write-downs of $0 and $300, respectively, due to estimated obsolescence.

On November 2, 2001 the Company purchased 1,285,347 shares of convertible preferred stock issued by Organ Recovery Systems, Inc. (“ORS”), a privately held company, at a price of $3.89 per share. ORS is organized for the purpose of advancing organ transplantation technology. The Company invested in ORS to continue its commitment to the promotion of effective use and distribution of human tissue. The purchase was paid for in cash and recorded at a total cost of $5,250.

Realization of the Company’s investment in ORS is dependent upon ORS’s successful execution of its operational strategies and the continued industry acceptance of its current and future product developments. Management monitors progress towards these success factors on a continual basis and has concluded that its investment in ORS has not been negatively impacted by operational matters. Additionally, in late 2003, ORS raised additional equity at a price equal to what the Company paid for its shares of preferred stock. Accordingly, management of the Company believes there has been no impairment of the Company’s investment.

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The following table summarizes the notional transaction amount and fair value for the outstanding derivative at March 31, 2004 and December 31, 2003:

On February 20, 2004, the Company terminated the swap agreement by paying off the fair value of the swap, or $1,613. The net increase in fair value for the derivative liability of the interest rate swap for the period from December 31, 2003 to February 20, 2004, the termination date, was $61.

The Company uses the asset and liability method of accounting for income taxes. Deferred income taxes are recorded to reflect the tax consequences in future years for differences between the tax basis of assets and liabilities and their financial reporting amounts at each period-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to amounts which are more likely than not to be realized.

At March 31, 2004, net deferred tax assets were approximately $7,067. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company expects the deferred tax assets, net of the valuation allowance at March 31, 2004 of $500, to be realized through the generation of future taxable income and the reversal of existing taxable temporary differences.

Selected cash payments, receipts, and noncash activities are as follows:

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The Company processes human tissue received from various tissue recovery agencies and distributes the tissue through various channels. This one line of business represents 100% of consolidated fees from tissue distribution and is comprised of four primary product lines: spinal, sports medicine, cardiovascular and general orthopedic. The following table presents net revenues from tissue distribution and for other non-tissue revenues:

Note payable is as follows:

On February 20, 2004, the Company, with proceeds from a new long-term financing agreement, fully repaid the outstanding balance on the credit agreement and terminated the credit agreement. The previously restricted deposits were applied to the outstanding balance and the remaining amount of the restricted deposits, or $1,200, no longer serves as collateral under the agreement.

Long-term debt is as follows:

On February 20, 2004, the Company entered into a new long-term financing agreement with a major financial institution. The new agreement consists of a $9,000 five-year term loan and a five-year $16,000 revolving credit loan. The $9,000 term loan calls for monthly principal payments of $125,000. Interest on the new loan agreement is paid monthly at LIBOR plus 4.25% (5.59% at March 31, 2004). Under the $16,000 revolving credit loan, the Company can borrow up to the maximum eligible amount, based on certain outstanding receivables and inventories. Interest on outstanding amounts under the revolving credit loan is payable at LIBOR plus 3.75%. Principal and interest on the revolving credit loan are payable upon maturity, unless otherwise called for in the agreement. There is a .5% fee payable on any unused portion of the revolving credit facility. No amounts were outstanding under the revolving credit loan at March 31, 2004. The term loan and revolving credit loan are fully collateralized by substantially all of the assets of the Company, including accounts receivable, inventories and certain property and equipment.

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The credit agreement also contains various restrictive covenants which limit, among other things, indebtedness, liens and business combination transactions. In addition, the Company must maintain certain financial covenant ratios, including operating cash flows to fixed charges, senior debt to EBITDA, and total debt to EBITDA, as defined in the agreement. The Company is in compliance with the financial covenant ratios at March 31, 2004.

At March 31, 2004, the Company had recorded, in accounts payable, a liability to Medtronic Sofamor Danek (MSD) of $10,202 for management service fee obligations which were recognized under the terms of the prior distribution agreement. As of April 30, 2004, the Company has paid the $10,202 to MSD.

The Company is disputing the performance by MSD under the prior agreement based on the contractual terms including, among other things, responsibilities of the parties relative to losses on consignment inventories and uncollected accounts receivable. The Company is in discussions with MSD to resolve these matters. The current distribution agreement calls for the Company and MSD to enter into arbitration to settle the dispute if a settlement cannot otherwise be reached. Management believes that the ultimate settlement of these matters will not exceed the liability provided for in the accompanying condensed consolidated financial statements.

The Company is, from time to time, involved in litigation relating to claims arising out of its operations in the ordinary course of business. The Company believes that none of these claims that were outstanding as of March 31, 2004 will have a material adverse impact on its financial position or results of operations.

On April 15, 2004, the Company and MSD entered into an amended exclusive license and distribution agreement, which was effective immediately. The amended agreement provides that, among other things, MSD will continue to serve as the exclusive distributor for specialty tissue allografts and bone paste processed by the Company for use in spinal surgery in the United States, Canada and Puerto Rico. Pursuant to the amended agreement, the Company is able to distribute certain spinal implants outside of MSD’s exclusive territory and is able to develop new markets and distribution channels for non-spinal implants.

Under terms of the amended agreement, the Company remains responsible for processing human allograft tissue for the spine and regulatory compliance related to screening, testing and processing of this tissue. MSD is responsible for developing techniques and instrumentation for implantation of human allograft tissue, training and consultation with surgeons on custom implants, distribution and immediate delivery of available tissue and regulatory compliance related to distribution.

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Cautionary Statement Relating to Forward Looking Statements

Information contained in this filing contains “forward-looking statements” which can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “anticipates” or comparable terminology, or by discussions of strategy. We cannot assure that the future results covered by these forward-looking statements will be achieved. Some of the matters described in the “Risk Factors” section of our Form 10-K constitute cautionary statements which identify factors regarding these forward-looking statements, including certain risks and uncertainties, that could cause actual results to vary materially from the future results indicated in these forward-looking statements. Other factors could also cause actual results to vary materially from the future results indicated in such forward-looking statements.

Three Months Ended March 31, 2004 Compared With Three Months Ended March 31, 2003

Net Revenues. Our net revenues increased by $3.8 million, or 19.2%, to $23.6 million for the three months ended March 31, 2004 from $19.8 million for the three months ended March 31, 2003. The overall increase in net revenues was a result of a 29% increase in unit volume partially offset by a shift in the product mix in the quarter. The higher net revenues were primarily the result of a $3.7 million increase in distributions of spinal allografts to our distributor, Medtronic Sofamor Danek, which is attributable to increased demand for these allografts along with new product introductions.

Costs of Processing and Distribution. Costs of processing and distribution increased by $4.0 million, or 36.6%, to $14.9 million for the three months ended March 31, 2004 from $10.9 million for the three months ended March 31, 2003. Our costs of processing and distribution were impacted by an increase in our donor recovery costs, increases in unit volume, and processing inefficiencies resulting from reduced production levels as we continue to address the inventory buildup that occurred during the second half of 2003. As a percentage of net revenues, costs of processing and distribution increased from 55.2% for the three months ended March 31, 2003 to 63.2% for the three months ended March 31, 2004.

Marketing, General and Administrative Expenses. Marketing, general and administrative expenses decreased by $375,000, or 6.3%, to $5.6 million for the three months ended March 31, 2004 from $5.9 million for the three months ended March 31, 2003. These expenses decreased as a percentage of net revenues from 29.9% for the three months ended March 31, 2003 to 23.5% for the three months ended March 31, 2004. The decrease primarily was due to a $222,000 decrease in commission expense and a reversal of $200,000 in our allowance for bad debts.

Research and Development Expenses. Research and development expenses increased by $455,000, or 113.8%, to $855,000 for the three months ended March 31, 2004 from $400,000 for the three months ended March 31, 2003. As a percentage of net revenues, research and development expenses increased from 2.0% for the three months ended March 31, 2003 to 3.6% for the three months ended March 31, 2004, as we continue to increase our spending associated with new product development initiatives.

Net Interest Expense. Net interest expense was $250,000 for the three months ended March 31, 2004 compared to $231,000 for the three months ended March 31, 2003. This increase primarily was the result of a $61,000 loss on our swap agreement for the three months ended March 31, 2004 compared to a $31,000 gain on our swap agreement for the three months ended March 31, 2003.

Income Tax Expense. Income tax expense for the three months ended March 31, 2004 was $651,000 compared to $921,000 for the three months ended March 31, 2003. Our effective tax rate for the three months ended March 31, 2004 was 32%, which was lower than the three months ended March 31, 2003, due to a tax credit we recognized for qualified research and development expenses incurred.

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Liquidity and Capital Resources

Cash Flows.

Our net cash provided by operating activities was $1.5 million for the three months ended March 31, 2004, compared to $713,000 for the three months ended March 31, 2003. During the three months ended March 31, 2004, cash was provided by net income of $1.4 million, a decrease in inventories of $948,000, and a decrease in prepaid and other current assets of $256,000. During the three months ended March 31, 2004, primary uses of cash were an increase of accounts receivable of $1.7 million, an increase in other assets of $768,000 associated with deferred borrowing costs, and a decrease in accrued expenses of $479,000. Our inventories decreased during the three months ended March 31, 2004 as a result of high distribution levels while restricting our tissue processing activities during the quarter. Significant non-cash adjustments to operating activities for the three months ended March 31, 2004 included depreciation and amortization expense of $1.1 million and a deferred income tax provision of $636,000.

Our net cash used in investing activities was $476,000 for the three months ended March 31, 2004 compared to $1.0 million for the three months ended March 31, 2003. Our investing activities consisted of purchases of property, plant, and equipment.

Our net cash provided by financing activities was $9.8 million for the three months ended March 31, 2004 compared to net cash used in financing activities of $677,000 for the three months ended March 31, 2003. Cash provided by financing activities for the three months ended March 31, 2004 consisted of a $14.8 million decrease in restricted deposits and proceeds from issuance of our new term loan of $9.0 million. Cash used in financing activities for the three months ended March 31, 2004 consisted of the repayment of our previous term loan of $12.1 million, a $1.6 million payment made to terminate a swap agreement, and payments on capital lease and note obligations of $324,000.

Liquidity

As of March 31, 2004, we had $20.9 million of cash and cash equivalents. We believe that our working capital as of March 31, 2004, together with our borrowing ability under the $16.0 million revolving credit loan, will be adequate to fund our operations for at least the next 12 months.

Certain Commitments.

At March 31, 2004, we had recorded, in accounts payable, a liability to MSD of $10.2 million for management service fee obligations which were recognized under the terms of the prior distribution agreement. As of April 30, 2004, we have paid the $10.2 million to MSD.

We have disputed the performance by MSD under the prior agreement based on the contractual terms including, among other things, responsibilities of the parties relative to losses on consignment inventories and uncollected accounts receivable. We are in discussions with MSD to resolve these matters. The current distribution agreement calls for us and MSD to enter into arbitration to settle the dispute if we cannot otherwise reach a settlement. We believe that the ultimate settlement of these matters will not exceed the liability provided for in the accompanying condensed consolidated financial statements.

On February 20, 2004, we entered into a new long-term financing agreement with a major financial institution. The new agreement consists of a $9.0 million five-year term loan and a five-year $16.0 million revolving credit loan. The $9.0 million term loan calls for monthly principal payments of $125,000. Interest on the new loan agreement is paid monthly at LIBOR plus 4.25% (5.59% at March 31, 2004). Under the $16.0 million revolving credit loan, we can borrow up to the maximum eligible amount, based on certain outstanding receivables and inventories. Interest on outstanding amounts under the revolving credit loan is payable at LIBOR plus 3.75%. Principal and interest on the revolving credit loan are payable upon maturity, unless otherwise called for in the agreement. There is a .5% fee payable on any unused portion of the revolving credit facility. No amounts were outstanding under the revolving credit loan at March 31, 2004. The

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term loan and revolving credit loan are fully collateralized by substantially all of our assets, including accounts receivable, inventories and certain property and equipment.

The credit agreement also contains various restrictive covenants, which limit, among other things, indebtedness, liens and business combination transactions. In addition, we must maintain certain financial covenant ratios, including operating cash flows to fixed charges, senior debt to EBITDA, and total debt to EBITDA, as defined in the agreement. We were in compliance with the financial covenants at March 31, 2004.

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We are subject to market risk from exposure to changes in interest rates based upon our financing, investing and cash management activities. We use a mix of debt maturities along with variable-rate debt to manage our exposure to changes in interest rates. We do not expect changes in interest rates to have a material adverse effect on our income or our cash flows in 2004. However, we cannot assure that interest rates will not significantly change in 2004. We do not enter into derivatives or other financial instruments for trading or speculative purposes.

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We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in timely alerting them to material information relating to our company (including all consolidated subsidiaries) required to be included in our periodic SEC filings. There have not been any changes in our internal controls over financial reporting during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II. OTHER INFORMATION

We refer you to Item 1, note 14 entitled “Legal Actions.”

None.

Not applicable.

Not applicable.

Not applicable.

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None.

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SIGNATURE PAGE

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.

Date: May 7, 2004