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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

For the transition period from              to             .

Commission File Number 000-31275

LARGE SCALE BIOLOGY CORPORATION

(Exact name of registrant as specified in its charter)

3333 Vaca Valley Parkway, Vacaville, CA 95688

(Address of principal executive offices and zip code)

(707) 446-5501

(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 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 Exchange Act). Yes  ¨    No  x

The number of shares outstanding of registrant’s common stock, $0.001 par value, as of May 4, 2004: 31,183,208

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Some of the statements contained in this report constitute forward-looking statements that involve substantial risks and uncertainties. In some cases, you can identify these statements by forward-looking words such as “may,” “will,” “expect,” “plan,” “anticipate,” “believe,” “forecast,” “project,” or “continue” and variations of these words or comparable words. In addition, any statements, which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations contain many such forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and situations that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. The risk factors contained in this report, under the heading Factors That May Affect Our Business, as well as any other cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to differ from the expectations described or implied in our forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this report. Except as required by law, we do not undertake to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.

Large Scale Biology Corporation, LSBC, our logo, GENEWARE^®, BAMF^™, GRAMMR^™, APRONEXIN^TM NP and other product and trade names are trademarks of or registered trademarks of Large Scale Biology Corporation in the United States and/or other countries. Other product and trade names mentioned herein may be trademarks and/or registered trademarks of their respective companies. References in this report to “the Company,” “our,” “we” and “us” refer collectively to Large Scale Biology Corporation, a Delaware corporation, and its predecessors and subsidiaries.

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Large Scale Biology Corporation

Form 10-Q

For the Quarter Ended March 31, 2004

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PART I – FINANCIAL INFORMATION

L arge Scale Biology Corporation

Condensed Consolidated Balance Sheets

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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Large Scale Biology Corporation

C ondensed Consolidated Statements of Operations

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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Large Scale Biology Corporation

C ondensed Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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Large Scale Biology Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. The Company and Summary of Significant Accounting Policies

Large Scale Biology Corporation and its subsidiaries (collectively, the “Company”, “we” or “our”) is an integrated biotechnology company focusing on product development and biomanufacturing of vaccines, complex proteins and follow-on off-patent therapeutics. We are focusing our efforts on the following products:

The Company’s proprietary systems are supported by patents and patent applications. The Company’s corporate offices and research and development are headquartered in Vacaville, California. The Company’s biomanufacturing operation is located in Owensboro, Kentucky.

The Company incurred net losses of $4,324,000 and $25,293,000, and negative operating cash flows of $4,242,000 and $15,207,000 in the three months ended March 31, 2004 and the year ended December 31, 2003, respectively. These negative cash flows were financed primarily by proceeds from the Company’s IPO in 2000. If we are unable to generate significant revenues in 2004 or generate other potential sources of working capital including partnerships, mergers or sales of assets or technologies, the Company’s operations may be adversely affected.

Basis of Presentation — The unaudited condensed consolidated financial statements have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission regarding interim financial information. Accordingly, these financial statements and notes thereto do not include certain disclosures normally associated with financial statements prepared in accordance with accounting principles generally accepted in the United States of America. This interim financial information should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2003 included in the Company’s Annual Report on Form 10-K.

The unaudited condensed consolidated financial statements include the accounts of Large Scale Biology Corporation and its subsidiaries. All intercompany balances and transactions have been eliminated. In the opinion of the Company’s management, the unaudited condensed consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) and disclosures considered necessary for a fair presentation of the results of the interim periods presented. This interim financial information is not necessarily indicative of the results of any future interim periods or for the Company’s full year ending December 31, 2004.

Segment Reporting — The Company operates in one reportable segment.

Workforce Reductions — In connection with our 2003 restructuring plans and staff reductions, we accrued $1,401,000 for severance payments and other related termination benefits provided to employees. Of this amount, $860,000 was paid during 2003 leaving $541,000 in accrued expenses at December 31, 2003. We accrue for these benefits in the period when benefits are communicated to the terminated employees. Typically, terminated employees are not required to provide continued service to receive termination benefits. In general, we use a formula based on the number of years of service to calculate the termination benefits to be provided to affected employees. During 2004, former employees were paid $256,000 under the 2003 workforce reduction programs leaving $285,000 in accrued expenses at March 31, 2004 to be paid during the remainder of 2004.

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Stock-Based Compensation — The Company adopted Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation” effective as of January 1, 2003 for its stock-based employee compensation plans using the prospective recognition method under Statement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of SFAS 123.” This method applies the recognition provisions of SFAS 123 to all employee stock awards granted, modified, or settled after January 1, 2003 and accordingly, the Company recognized compensation expense for those issuances under our stock-based employee compensation plans. For stock awards granted prior to January 1, 2003, compensation expense has not been recognized under SFAS 123, unless those stock awards were modified after January 1, 2003.

Prior to January 1, 2003, the Company accounted for stock options granted to employees and directors and other stock-based employee compensation plans using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees” and related interpretations. As such, the Company recognized compensation expense for stock options only if the quoted market value of the Company’s common stock exceeded the exercise price of the option on the grant date. Any compensation expense realized using this intrinsic value method is being amortized over the vesting period of the option.

The following table presents the effect on net loss and net loss per share if we had applied the fair value recognition provisions of SFAS 123 to all stock-based awards to employees:

The fair values of stock options are estimated at the date of grant using the Black-Scholes option-pricing model and amortized over the vesting period of typically 3 or 4 years for the calculation of stock-based employee compensation in the above table. The Company granted 510,000 stock options to employees and directors during the three months ended March 31, 2004 and did not grant any stock options to employees and directors during the three months ended March 31, 2003.

Stock options issued to non-employees as consideration for services provided to the Company have been and continue to be accounted for under the fair value method in accordance with SFAS 123, which requires that compensation expense be recognized for all such options.

Net Loss Per Share — Basic net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period, plus the potential dilutive effect of common shares issuable upon exercise or conversion of outstanding stock options and warrants during the period. The weighted average number of potentially dilutive common shares were 984,878 and 12,028 for the three months ended March 31, 2004 and 2003, respectively. These shares are excluded from diluted net loss per share because of their anti-dilutive effect.

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2. Private Placement of Common Stock

On March 8, 2004, we sold 5,169,682 shares of common stock at $1.58 a share and issued warrants to purchase 1,492,044 shares of common stock in a private placement with gross proceeds of approximately $8.2 million and after expenses, net proceeds of approximately $7.5 million. The warrants are exercisable starting September 8, 2004 and have an exercise price of $2.18 per share, subject to adjustments for stock splits, combinations, reclassifications and similar events, and expire on September 8, 2009. These warrants contain priced-based anti-dilution protective provisions providing for adjustments of the exercise price of the warrants upon the occurrence of any sale of shares below the exercise price of the warrants. In particular, if we issue shares of our common stock at an effective price per share less than $2.18 on or before March 8, 2005, the exercise price of these warrants will adjust downward to the lower price per share (but in no event less than $1.984 per share). Following March 8, 2005, the exercise price of these warrants will adjust downward based on a weighted formula (but in no event to a price less than $1.984 per share) if we issue shares of our common stock at an effective price per share less than $2.18. Under the terms of the warrants, a holder may not exercise the warrant for a number of shares that would cause it to own more than 4.99% of the number of shares of the common stock outstanding immediately after giving effect to the issuance of shares under the warrant.

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in this Report and our audited consolidated financial statements and related notes for the year ended December 31, 2003 included in our Annual Report on Form 10-K.

Introduction

Our current efforts are focused on improving cash flows, manufacturing products and entering into relationships to market and sell our products. Management’s objective is to manufacture and sell products in order to generate sufficient cash flows to sustain the Company’s operations. Our cash balance was $11.2 million at March 31, 2004. We have incurred negative operating cash flows of $4.2 million during the first quarter of 2004 and $15.2 million during 2003. We are reducing all expenditures not supporting commercial end points. Further significant cost reduction initiatives could limit our ability to develop and manufacture additional products. We expect that our operating cash usage will remain stable over the next few quarters and we anticipate additional capital expenditures of approximately $1.6 million in 2004 for our biomanufacturing facility in Owensboro, Kentucky that may be funded through an equipment financing arrangement or working capital.

Recent Developments

On March 8, 2004, we sold 5,169,682 shares of common stock at $1.58 a share and issued warrants to purchase 1,492,044 shares of common stock in a private placement with gross proceeds of approximately $8.2 million and after expenses, net proceeds of approximately $7.5 million. The warrants are exercisable starting September 8, 2004 and have an exercise price of $2.18 per share, subject to adjustments for stock splits, combinations, reclassifications and similar events, and expire on September 8, 2009. These warrants contain priced-based anti-dilution protective provisions providing for adjustments of the exercise price of the warrants upon the occurrence of any sale of shares below the exercise price of the warrants. In particular, if we issue shares of our common stock at an effective price per share less than $2.18 on or before March 8, 2005, the exercise price of these warrants will adjust downward to the lower price per share (but in no event less than $1.984 per share). Following March 8, 2005, the exercise price of these warrants will adjust downward based on a weighted formula (but in no event to a price less than $1.984 per share) if we issue shares of our common stock at an effective price per share less than $2.18. Under the terms of the warrants, a holder may not exercise the warrant for a number of shares that would cause it to own more than 4.99% of the number of shares of the common stock outstanding immediately after giving effect to the issuance of shares under the warrant.

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We shipped sample quantities of our plant-produced recombinant aprotinin product to prospective customers for R&D and manufacturing applications. Aprotinin is a protease inhibitor commercially marketed for medical, research and biomanufacturing applications. Also, we entered into a biomanufacturing and commercial distribution agreement for our APRONEXIN NP aprotinin product with Sigma-Aldrich Corporation. We believe that this is the initial step for meet