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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

For the fiscal year ended December 31, 2004

or

Commission file number: 0-31271

REGENERATION TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

11621 Research Circle, Alachua, Florida 32615

(Address of Principal Executive Offices) (Zip Code)

(386) 418-8888

(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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

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

The aggregate market value of the Common Stock held by non-affiliates of the registrant, based upon the last sale price of the Common Stock reported on the Nasdaq Stock Market as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2004), was approximately $285.0 million.

The number of shares of Common Stock outstanding as of March 4, 2005 was 26,734,395.

DOCUMENTS INCORPORATED BY REFERENCE

As stated in Part III of this Annual Report on Form 10-K, portions of the registrant’s definitive proxy statement for the registrant’s 2005 Annual Meeting of Stockholders are incorporated by reference in Part III of this Annual Report on Form 10-K.

REGENERATION TECHNOLOGIES, INC.

FORM 10-K Annual Report

Table of Contents

PART I

This Annual Report on Form 10-K and the documents incorporated by reference contain forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates and projections about our industry, our management’s beliefs and certain assumptions made by our management. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “requires,” “hopes,” “may,” “assumes,” variations of such words and similar expressions are intended to identify such forward-looking statements. Do not unduly rely on forward-looking statements. These statements give our expectations about future performance, but are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Forward-looking statements speak only as of the date they are made, and unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Item 1.    BUSINESS.

Company Overview

We are a leader in the use of natural tissues and innovative technologies to produce allografts that repair and promote the natural healing of human bone and other human tissues and improve surgical outcomes. We process human musculoskeletal and other tissue, including bone, cartilage, tendon, ligament, dermal and cardiovascular tissue in producing our allografts. Surgeons then use these tissues to repair and promote the healing of a wide variety of bone and other tissue defects, including spinal vertebrae repair, musculoskeletal reconstruction, fracture repair, repairs to the jaw and related tissues, and heart valve disorders, among other conditions. Our allografts are distributed in all 50 states and in ten countries.

We provide a comprehensive portfolio of natural tissue products in a broad range of markets. We separate our allografts into four primary product lines within musculoskeletal and cardiovascular surgeries: spinal, sports medicine, cardiovascular and other general orthopedic applications. The following table outlines the product lines we serve and the amount and percentage of our net revenues for the years ended December 31, 2004, 2003 and 2002:

For additional financial information concerning our operating performance, please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of this report and our Consolidated Financial Statements in Part II, Item 8 of this report and incorporated herein by reference.

We distribute our allografts both within and outside the United States. Foreign distribution, primarily in Korea and Europe, accounted for 5.7%, 7.6% and 6.5% of our net revenues during the years ended December 31, 2004, 2003 and 2002, respectively.

We pursue a market-by-market approach to the distribution of our allografts, and establish strategic distribution arrangements in order to increase our penetration in selected markets. We have exclusive distribution

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arrangements with Medtronic Sofamor Danek in the North American spinal market, Stryker Endoscopy for domestic sports medicine applications, Exactech, Inc. for our bone paste implants for general orthopedic uses, and with C.R. Bard, Inc. for certain urological applications for general orthopedic uses. In the cardiovascular market and other markets that our allografts serve, we use a network of independent distributors.

Our BioCleanse^® process is a patented tissue sterilization process that is designed to add a measure of safety to our bone allografts by sterilizing the tissue and providing surgeons and patients allograft implants that are free of spores, fungi, bacteria and viruses. Before tissues are processed using the BioCleanse^® process, tissue recovery agencies perform a risk assessment on every potential donor, interview family members and evaluate the donor’s medical records. All collected tissue is tested for the presence of viral or bacterial diseases. Bone tissue is sterilized through the BioCleanse^® process only after it has passed this screening and testing. The BioCleanse^® process is an automated multi-step cleansing process which first removes blood and fats, then chemically sterilizes the tissue, while maintaining the structural integrity and biocompatibility of the tissue. We believe that BioCleanse^® is the industry leading sterilization process and BioCleanse^® is the only tissue sterilization process for allografts that has been reviewed by the FDA.

On July 17, 2003, we were approved for accreditation by the American Association of Tissue Banks, or AATB, a nationally recognized association of the tissue banking industry. The accreditation covers the processing, storage and distribution of musculoskeletal tissue for transplantation research and informs users of our tissue that we are in compliance with the minimum safety guidelines of the association. Accreditation is for a three-year term, after which we will apply for renewal. At the present time, management believes there is no risk of non-renewal.

We were incorporated in 1997 in Florida as a wholly-owned subsidiary of the University of Florida Tissue Bank, or UFTB. We began operations on February 12, 1998 when UFTB contributed to us its allograft manufacturing and processing operations, related equipment and technologies, distribution arrangements, research and development activities and certain other assets. At the time of our initial public offering in August 2000, we reincorporated in the State of Delaware. Our principal offices are located at 11621 Research Circle, Alachua, Florida, and our phone number is (386) 418-8888. Our Internet address is www.rtix.com. We make available, free of charge, on or through the investor relations portion of our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we file such material with, or furnish it to the Securities and Exchange Commission (“SEC”). These filings are also available on the SEC’s website at www.sec.gov. Also available on our website is our Code of Conduct, our Code of Ethics for Senior Financial Professionals, and the charters for our Audit Committee, Compensation Committee and Nominating and Governance Committee. Within the time period required by the SEC and Nasdaq, we will post any amendment to our Code of Ethics for our Senior Financial Professionals and any waiver of our Code of Conduct applicable to our senior financial professionals, executive officers and directors.

Pursuit of Strategic Alternatives

On February 17, 2005, we announced that we have retained Lehman Brothers to explore strategic alternatives, which could include but are not limited to a possible sale to or merger with a third party; new strategic alliances; or additional or alternative distribution models for both allograft and xenograft products. There can be no assurance that any transaction, new alliance, distribution arrangement or other corporate action will result from this effort. We assume no obligation to make any further announcements regarding our exploration of these strategic alternatives unless and until a final decision is made.

Industry Overview

Defects in bone and other human tissue can be caused by a variety of sources including trauma, congenital defect, aging, infectious disease, cancer and other similar conditions. The prevalent method used by surgeons to

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repair and promote the healing of defective tissue is surgery, principally through the use of surgical implants. When considering a surgical procedure for tissue repair, surgeons and patients face a number of treatment options including:

Metals and Synthetics

Historically, the medical community has used metal and synthetic materials for implant procedures. Metal and synthetic technologies, however, have several shortcomings. One of the principal drawbacks to the use of these materials is that they do not facilitate the body’s natural tissue healing process known as “remodeling.” Metal exhibits different properties than bone and one concern with its use in orthopedics is “stress shielding,” where the bone adjoining the metal can become weak and fragile over time. This problem can be of particular concern to elderly patients who are more likely to suffer from osteoporosis. Additionally, a number of synthetics can wear away in the body, causing a negative immune system response. Other synthetics can chemically break down over time with negative biological and clinical consequences. Finally, some metal and synthetic products may need to be removed and/or replaced, requiring the risk, expense and inconvenience of a second surgery.

Xenograft Tissue

Procedures using xenograft tissue, while not widely used in the United States at the present time other than for cardiac and vascular surgeries, involve recovering animal tissue, typically from cattle (bovine) or pigs (porcine), and then transplanting that recovered tissue into a human patient. Reasons for the limited use of xenografts in the United States include a higher risk of an adverse immune system response and the perceived risk of disease transmission. In the cardiovascular market, however, xenograft tissue is the most prevalent transplant tissue utilized in the United States.

Autografts and Allografts Tissue

Surgeons are increasingly utilizing autograft and allograft tissue in their surgical procedures to take advantage of their natural healing characteristics. Autograft procedures involve a surgeon harvesting tissue from one part of a patient’s body for transplant to another part of the body. In contrast to autograft, allograft tissues are recovered from deceased human donors, processed for certain intended uses and then transplanted by a surgeon into the patient’s body to make the needed repair.

Autografts and allografts are not only “osteoconductive,” meaning they provide a scaffold for new bone to attach itself to, but, in contrast to metals and some synthetics, can be “osteoinductive” as well, meaning they stimulate the growth of new tissue. Because of the osteoinductive nature of allografts and autografts, they are eventually replaced by the patient’s own bone through the remodeling process, typically over a one- to two-year period.

A significant drawback to autograft procedures is that they require an additional and potentially dangerous surgery to harvest the tissue from a second site in the patient’s body. In 20% to 30% of autograft procedures, the site where the patient’s tissue is harvested becomes painful and uncomfortable, a condition known as secondary site morbidity. Additional complications can involve infection, nerve and arterial injury and joint instability. Moreover, a patient may not have sufficient quantities of quality autograft tissue for transplant procedures.

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Our Products and Markets

We process tissue, including bone, cartilage, tendon, ligament, dermal, heart valves, and arteries and veins in producing our line of proprietary grafts. We separate our products into four primary markets: spinal, sports medicine, cardiovascular and other general orthopedic. Our current allografts range from material that is precision tooled for specific surgical applications to grafts conventionally processed for general surgical uses. The following table summarizes our allograft offerings in each of our product lines and distribution of these allografts.

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Spinal

The spinal market for allografts includes bone implants and bone paste utilized in spinal procedures. Our principal spinal allografts are our patented MD Series^™ Threaded Cortical Bone Dowels, our patent-pending CORNERSTONE^™ Machined Allografts, TANGENT^® Impacted Cortical Wedges and PRECISION GRAFT^™ Cortical Rings. We also supply bone paste for the spinal market through our Osteofil^® DBM line of bone paste grafts. During 2004, we shipped over 134,000 spinal allograft units including bone pastes, which accounted for $60.6 million of our net revenues. Our spinal allografts are marketed through our exclusive relationship with Medtronic Sofamor Danek, or “MSD”.

Our MD-Series^™ Threaded Cortical Bone Dowels are used to help restore the anatomical relationships in the lumbar area of the spine between vertebral bodies and open spaces formed between vertebrae known as neural foramen. Our dowels are threaded, providing rigid interface with the vertebrae above and below allowing the surgeon to provide greater stability to the surgical site. Our CORNERSTONE SR^® Cortical Block is used in the cervical area of the spine and is available in both parallel and lordotic versions. Our TANGENT^® Impacted Cortical Wedge and PRECISON GRAFT^™ Cortical Ring allografts are specially designed and contoured to promote stability and restore normal alignment in the lumbar spine.

We currently have new composite allografts available for use in spinal surgery including a full line of CORNERSTONE^™ ASR and L-ASR cortical and cancellous composite grafts as well as new designs in development for both lumbar and cervical spinal applications that are due out in 2005.

Sports Medicine

Many repetitive use and sports-related injuries can be addressed with allograft implants. The most prevalent surgeries include repairs to the anterior cruciate ligament, or ACL in the knee, or rotator cuff, in the shoulder. Our principal sports medicine allografts are patented pre-shaped tendons for ligament reconstruction, interference screws for ligament fixation and our cartilage allografts for knee reconstruction. Many of our sports medicine allografts are precision tooled and shaped to fit surgeon’s requirements, designed for specific instrumentation, making them easier and/or faster to implant. During 2004, we shipped over 11,000 sports medicine allografts which accounted for $9.0 million of our net revenues. Our sports medicine allografts are marketed in the United States through our exclusive relationship with Stryker Endoscopy and internationally through a network of independent distributors.

In March 2004, we began using BioCleanse^® to sterilize many of our soft tissue sports medicine allografts. We are also in the process of developing versions of existing precision tooled allografts derived from bovine tissue.

Cardiovascular

The cardiovascular allograft market includes transplantation of human heart valves and vascular tissue as an alternative to mechanical, synthetic or xenograft substitutes.

We acquired our cardiovascular allograft capability with our acquisition of Alabama Tissue Center in 2000. Our principal cardiovascular allograft is our heart valve allograft, which surgeons use to replace a patient’s own heart valve during coronary surgery. During 2004, we shipped over 1,800 cardiovascular allograft units, including heart valves, vascular tissue and sternal paste, which accounted for $7.4 million of our net revenues. We distribute our cardiovascular allografts through an independent distribution network.

General Orthopedic

Bone Paste.    Surgeons principally use our bone paste allografts, which are composed of demineralized bone matrix and biologic gel carrier, in fracture treatment, bone and joint reconstruction and periodontal applications, such as ridge augmentation for dental implants. Our bone paste allografts for general orthopedic use are marketed under the Optefil^™, Opteform^®, Regenafil^® and Regenaform^® brands through an exclusive relationship with Exactech.

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Conventional Allografts.    Our conventional allograft business includes a wide variety of allograft categories including our osteoarticular grafts, such as our frozen femoral heads which are used for cancer treatment procedures and hip and knee reconstruction. We also produce certain types of blended and milled bone allografts, such as our demineralized bone matrix, cortical cancellous chips and ground cancellous chips, used in total hip and knee replacements and for various injuries. Additionally, we produce various types of fashioned bone, such as wedges, strips and shafts used for various orthopedic and sports medicine procedures. In 2004, we shipped over 40,000 general orthopedic allografts which accounted for $12.9 million of our net revenues.

The BioCleanse^® Tissue Sterilization Solution

We have developed and launched in the United States the patented BioCleanse^® tissue sterilization process, which is an FDA reviewed, automated, pharmaceutical grade chemical sterilization process for musculoskeletal bone and certain soft tissue. This process is fully validated to kill or inactivate all classes of conventional pathogens, viruses, microbes, bacteria and fungi. Our BioCleanse^® process is able to remove greater than 99% of the blood, fats, lipids and other unwanted materials from the tissue we process, a figure that is significantly in excess of traditional processing. We believe the removal of blood, fat, lipids and other unwanted materials results in faster patient healing because it eliminates the need for the patient’s body to remove these substances using natural processes following surgery. An important element of the BioCleanse^® process is that while it removes unwanted materials embedded within the tissue, it maintains the tissue’s structural integrity and compression strength. Studies have shown that tissue sterilized with BioCleanse^® maintains the same compression strength as untreated tissue and has significantly greater compression strength than tissue treated with other sterilization processes.

Our BioCleanse^® process is currently used on all of our bone allografts and most of our soft tissue products. We believe that the BioCleanse^® process is equally applicable to cardiovascular grafts. In addition to the safety advantage of BioCleanse^®, it provides us with a number of significant research and development opportunities, including the ability to sterilize xenograft tissue and to introduce bone-growth factors and anti-bacterial, anti-viral and cancer fighting agents into our allografts.

Tissue Recovery

Tissue recovery is the actual removal of tissue from a donor only after receiving appropriate first person consent. Tissue recovery personnel aseptically recover tissue within 24 hours for musculoskeletal tissue and 12 hours for cardiovascular tissue following a donor’s death, using surgical instruments and sterile techniques similar to those used in hospitals for routine surgery. Recovered tissue is placed on wet or dry ice and then transported by the donor recovery agency to the tissue processor or possibly a research institution.

Under U.S. law, human tissue cannot be sold. However, the law permits the recovery of some costs, such as those involved in recovering, processing and storing tissue and costs related to the advancement of tissue processing technologies, all types of activities in which we are involved.

Our network of donor recovery groups recovers a variety of tissue types from donors including the fibula, femur, tibia, humerus, ilium, pericardium, fascia lata, dermis, tendons, ligaments, hearts for valves and blood vessels. Once we receive tissue that has been screened at our tissue recovery centers, we re-screen this recovered material to guard against transmittable diseases. This screening process includes evaluation of risk on the basis of donor medical history, lifestyle, interviews with the donor’s family and physical examination of the donor. We also perform biomedical testing and culturing at various stages during the processing of tissue, using FDA licensed tests and other tests for known viruses and pathogens.

We have relationships with over thirty tissue donor centers across the country. Southeast Tissue Alliance, or SETA (formerly the University of Florida Tissue Bank, Inc.) which is our largest recovery group, supplied us with approximately 27% of our total tissue during 2004. Our three largest donor recovery groups together recovered approximately 51% of our total tissue during this period.

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Due to the limitations in the availability of human donor tissue, we continue to investigate methods of rendering xenograft tissue (tissue recovered from non-human sources) biocompatible for implant to humans while not adversely affecting tissue strength. Grafts processed from xenograft tissue would be regulated by the FDA as devices and we would be required to obtain approval or licenses from the FDA prior to marketing in the United States.

Marketing and Distribution

Our allografts are distributed in all 50 states and in ten countries internationally. We pursue a market-by-market approach to distribution, including strategic relationships in selected markets, in order to increase our penetration of these markets.

Medtronic Sofamor Danek, serves as our exclusive worldwide distributor for allograft tissue and bone paste for use spinal surgery. On April 15, 2004, we entered into a new license and distribution agreement with MSD which replaced the existing agreement between the two companies. The most recent prior agreement was entered into on November 1, 2002, as under the prior agreement, MSD remains our exclusive distributor in the spinal market and we remain responsible for processing and related regulatory compliance related to screening, testing and processing of this tissue. Additionally, under the new agreement, MSD is responsible for the distribution of available tissue and regulatory compliance related to distribution, as well as training and consultation with surgeons and conducting certain marketing activities. MSD also pays us license and service fees of approximately 40% to 50% of the listed average net distribution fee for specialty tissue allografts and bone paste for use in spinal surgery. The new agreement also provides that MSD has the right to become the exclusive distributor for new allografts we develop for use in the spine. The new agreement is for an initial term expiring June 1, 2014, subject to earlier termination under certain limited circumstances.

The following table summarizes the key contractual terms of the pre-November 1, 2002 MSD agreements and the April 15, 2004 amended agreement.

Under the previous distribution agreement with MSD, the Company recognized total revenues from distribution of tissue after transfer of title to end users and paid MSD a management service fee which was 50% to 70% of amounts charged to customers. This practice was discontinued as of November 1, 2002 when the Company entered into a new form of relationship with MSD as a result of the new distribution agreement. Under the new agreement, the Company distributes tissue directly to MSD rather than the end user.

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Effective January 1, 2003, we entered into an exclusive License and Distribution Services Agreement with Stryker Endoscopy, a division of Stryker Corporation, to serve as the exclusive distributor, in the United States, of allografts we process for use in sports medicine applications, including reconstruction and repair of the knee, hip, shoulder, wrist, elbow, foot and ankle. Prior to this agreement, we distributed these allografts through a network of independent distributors. Under the agreement, Stryker Endoscopy pays us license and service fees based on a percentage of the listed average net distribution fee. Our line of sports medicine allograft products includes menisci, pre-shaped tendons, precision-tooled anchors, screws, and pins. Under the agreement, we remain responsible for processing and delivery of the relevant tissue and related regulatory compliance. Stryker Endoscopy is responsible for distribution of available tissue, managing customer orders and invoicing, as well as customer education and certain marketing activities. The agreement also provides that each party must first offer the other party the opportunity to pursue the development and/or distribution of any new product covered by the agreement. The agreement, which was to expire on December 31, 2004, has been extended to June 30, 2005.

Exactech, Inc., or Exactech, serves as our exclusive worldwide distributor for bone paste products for general orthopedic procedures. Effective July 1, 2002, we entered into a new license and distribution agreement with Exactech which replaced the existing agreement between the two companies. The agreement expands Exactech’s distribution rights to both moldable and flowable bone paste. The original agreement was limited to moldable bone paste products. Under the new agreement, we remain responsible for processing bone paste allograft tissue and related regulatory compliance. Exactech will continue distribution of available bone paste products and regulatory compliance related to distribution. Under the agreement, Exactech is required to pay us license and service fees based on a percentage of the listed average net distribution fee for bone paste used in non-spinal orthopedic procedures. We also are required to pay Exactech a 3% royalty fee with respect to our moldable bone pastes distributed by others. The agreement is for an initial term expiring June 30, 2014, subject to earlier termination under certain limited circumstances.

In the United States, we have 9 independent distributors specializing in general orthopedics, which distribute our allografts through approximately 75 representatives, complemented by our marketing staff of 26 people. Internationally, we have five distributors that distribute our allografts through approximately 75 representatives. This network distributes conventional tissue directly to hospitals and surgeons in their exclusive territory. Distributors and representatives receive compensation for the revenues they generate through commissions.

In the urological market, C.R. Bard serves as the exclusive distributor for our urological allografts. Under this agreement, we may ship our urological allografts directly to C.R. Bard’s customers or to C.R. Bard for their direct distribution. In return, we receive reimbursement for shipping charges and a transfer fee as a percentage of the amount charged to the customer. In order to remain our exclusive distributor of these allografts, C.R. Bard must meet a specific annual distribution quota. C.R. Bard has an exclusive 90-day right to negotiate an agreement for the distribution of any new technology, invention, process or application we may develop in the future for the treatment of “urinary voiding dysfunction or pelvic tissue defects.” This agreement expires in June 2008, subject to a provision providing for automatic renewal.

In the cardiovascular market, we distribute heart valve and vascular tissue allografts through 13 cardiovascular distributors, using approximately 30 representatives within the United States. Distributors and representatives receive compensation for the revenues they generate through commissions.

Research and Development

In 2003, we developed a long-term product development plan to steadily introduce new products which we expect will become an ever-increasing component of our revenues. In 2004, we almost doubled the financial resources in our research and development efforts to support this plan. Our scientists are focusing their studies on delivering optimal regenerative medicine by achieving higher levels of osteoinductivity and osteoconductivity through allograft and xenograft, as well as expanding the uses of the BioCleanse^® process technology to infuse

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healing pharmaceutical components into allograft implants. We are geared to develop sophisticated processing technology to accelerate the introduction of new tissue implants in all product lines and to continuously raise the bar for tissue safety.

We plan to continue to develop new allografts and technologies within the spinal, cardiovascular, sports medicine and orthopedic markets and to develop additional tissue-related technologies for other markets. We will do this by building on our core technology platforms: BioCleanse^®, precision machined and assembled grafts, and tissue mediated induction. As of December 31, 2004, our research and development staff consisted of 26 professional and technical personnel.

In addition, in 2005, we plan to launch six new products, including our assembled bone-tendon-bone product. Development has been advancing on the new products and are on track for 2005 launch dates. We are experimenting with the use of the BioCleanse^® process on cardiovascular tissue and loading bone growth factors, as well as antimicrobial and cancer-fighting agents into our allografts. We will continue to expand upon the ability of our BioCleanse^® process to render various tissues sterile, biocompatible and nonimmunogenic. We have received the CE mark in Europe for seven xenograft cortical and cancellous bone constructs processed by the BioCleanse^® process. We intend to continue to expand our xenograft program to other tissue types and configurations.

We continue to develop our precision machined and composite technology to produce novel graft types previously not possible due to the naturally occurring anatomical constraints of human tissue. Our composite technology allows us to produce optimal graft configurations and expand the offering of allograft tissues into previously unmet applications. Composite technology consists of the construction of grafts from subassemblies enabling the manufacture of more grafts as well as more complex constructs for broader surgical indications. Additionally, tissue that was previously unusable due to anatomical limitations on bone thickness, shape or quality can now be formed into implantable grafts.

Intellectual Property

Our business depends upon the significant know-how and proprietary technology we have developed. To protect this know-how and proprietary technology, we rely on a combination of trade secret laws, patents, trademarks and confidentiality agreements. The effect of these intellectual property rights is to define zones of exclusive use of the covered intellectual property.

Presently, our United States patent holdings include patents relating to or covering: BioCleanse^®, our proprietary method of cleaning, sterilizing and virally inactivating donor tissue; our MD-Series^™ cortical bone dowel; the use of the interference screw technology; our segmentally demineralized graft; claims directed toward our demineralized stent or conduit technology; methods and instruments for improved meniscus transplantation; and materials and methods for improved bone-tendon-bone transplantation. Presently, our foreign patent holdings include: our MD-Series^™ cortical bone dowel technology, our demineralized stent technology, and our BioCleanse^® process. The duration of patent rights generally is 20 years from the date of filing of priority application, while trademarks, once registered, essentially are perpetual. We also have patent applications pending in the U.S. (including continuation and divisional applications), and corresponding foreign patent applications pending in various countries including, but not limited to, Canada, Japan, Australia and the European Union. In addition, we rely on our substantial body of know-how, including proprietary tissue recovery techniques and processes, research and development, tissue processing and quality assurance.

Competition

Competition in the bone and tissue reconstruction and healing industry is intense and subject to rapid technological change and evolving industry requirements and standards. Companies within the industry compete on the basis of design of related instrumentation, efficacy of products, relationships with the surgical community, depth of range of implants, scientific and clinical results, and pricing. Allograft implants compete with autograft, metals and synthetic tissues, and xenografts.

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Our principal competitors in the conventional allograft market include the Musculoskeletal Transplant Foundation, or MTF, AlloSource and LifeNet. Among our competitors in precision tooled allograft are Osteotech, MTF, LifeNet, and Tutogen. Other companies who process bone pastes include Osteotech, AlloSource, Isotis, Wright Medical Technologies, and MTF. Among the companies that market devices used for soft tissue anchoring in bladder neck suspensions are Mentor, Ethicon (a division of Johnson & Johnson), Boston Scientific, Smith & Nephew and C.R. Bard. In the cardiovascular tissue market, CryoLife and LifeNet are our principal competitors distributing human heart valves and vascular tissue. Northwest Tissue Service Center also competes in this market. We estimate that our market share, in conjunction with our related distributors, are: spinal 27.0%; sport medicine 15.0%; cardiovascular 17.0%; and general orthopedic 18.0%.

Government Regulation

Government regulation plays a significant role in the processing and distribution of allografts. The recovery, production, testing, labeling, storage, record keeping, approval, marketing, advertising and promotion of allografts are governed or influenced by the Federal Food, Drug, and Cosmetic Act, the Public Health Service Act, and/or other federal and state statutes and regulations. Failure to comply with applicable requirements could result in fines, injunctions, civil penalties, recall or seizure of products, suspension of production, inability to market current products, criminal prosecution, and/or refusal of the government to authorize the marketing of new products. In addition to being registered as a tissue bank with the FDA, we also are licensed by the states of New York, Florida, California and Maryland. These states have regulations similar to the FDA covering donor screening and tissue processing.

We currently market and distribute allografts that are subject to the FDA’s “Human Tissue Intended for Transplantation” and Subparts A and B of “Human Cells, Tissues, and Cellular and Tissue-Based Products” regulations. Under these regulations, we are required to perform donor screening and infectious disease testing and to document this screening and testing for each donor from whom we process tissue. The FDA has authority under the rules to inspect human tissue processing facilities, and to detain, recall, or destroy tissues for which appropriate documentation is not available. We are not required to obtain pre-market approval or clearance from the FDA for allografts that meet the regulation’s definition of “human tissue.”

In January 2001, the FDA issued a final rule requiring tissue processors to register with the agency and list their tissue products. We are currently an FDA registered tissue processor. The FDA published the “Good Tissue Practices” (“GTPs”) Final Rule in November 2004, with full implementation in May 2005. The FDA also published the Donor Eligibility Final Rule in 2004, with full implementation in May 2005. We had anticipated both regulations, and management believes that current processes will be determined to be in compliance.

The FDA may regulate certain allografts as medical devices, drugs, or biologics, which would require that we obtain approval or product licensure from the FDA. This would occur in those cases where the allograft is deemed to have been “more than minimally manipulated or indicated for nonhomologous use.” In general, “homologous use” occurs when tissue is used for the same basic function that it fulfilled in the donor. The definitional criteria for making these determinations appear in the FDA’s rules. If the FDA decides that certain of our current or future allografts are more than minimally manipulated or indicated for nonhomologous use, it would require licensure, approval or clearances of those allografts. Allografts requiring such approval are subject to pervasive and continuing regulation by the FDA. We would be required to list these allografts as a drug, as a medical device, or as a biologic, and to manufacture them in specifically registered or licensed facilities in accordance with FDA regulation “Current Good Manufacturing Practices.” We would also be subject to post-marketing surveillance and reporting requirements. In addition, our manufacturing facilities and processes would be subject to periodic inspection to assess compliance with Current Good Manufacturing Practices. Depending on the nature and extent of any FDA decision applicable to our allografts, further distribution of the affected products could be interrupted for a substantial period of time, which would reduce our revenues and hurt our profitability. Our labeling and promotional activities would be subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. The export of drugs, devices and biologics is also subject to more intensive regulation than is the case for human tissue products.

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On March 12, 2002, we and other tissue processors were advised by the FDA that our bone paste allografts would be subject to regulation as medical devices under the 510(k) pre-market notification process. We submitted the required documentation to the FDA in August 2002 and in February 2005 we received clearance for both our flowable and moldable bone paste allografts for orthopedic and spinal applications.

Heart valve allografts are currently regulated by the FDA as medical devices. The FDA permits entities that processed and distributed heart valve allografts before June 26, 1991 to continue distributing heart valve allografts without obtaining 510(k) clearance or pre-market approval from the FDA. Our heart valve allografts are covered by this “grandfather” policy provided these heart valves are processed and labeled in the same manner as they were prior to June 26, 1991. Any changes to processes or labels would subject heart valves to the pre-market approval process as a medical device. Heart valves revert to regulation as human tissue when the GTPs become effective in May 2005.

Our tissue processing generates by-products classified as medical hazardous waste by the U.S. Environmental Protection Agency and the Florida Department of Environmental Protection. All such by-products must be segregated and properly disposed of in compliance with applicable environmental regulations. We are in compliance with the various regulations we are required to follow.

Employees

As of December 31, 2004, we had a total of 442 employees. The following chart shows the number of our employees involved in the various aspects of our business:

Risk Factors

An investment in our common stock involves a high degree of risk. You should consider each of the risks and uncertainties described in this section and all of the other information in this document before deciding to invest in our common stock. Any of the risk factors we describe below could severely harm our business, financial condition and results of operations. The market price of our common stock could decline if any of these risks or uncertainties develop into actual events. You may lose all or part of the money you paid to buy our common stock.

We depend heavily upon a limited number of sources of human tissue, and any failure to obtain tissue from these sources in a timely manner will interfere with our ability to process and distribute allografts.

The limited supply of human tissue has at times limited our growth, and may not be sufficient to meet our future needs. In addition, due to seasonal changes in mortality rates, some scarce tissues that we use for our allografts are at times in particularly short supply. Other factors, some of which are unpredictable, such as negative publicity and regulatory actions in our industry also can unexpectedly reduce the available supply of tissue.

We rely on donor recovery groups for our tissue supply. Donor recovery groups are part of relatively complex relationships. They provide support to donor families, are regulated by the FDA, and are often affiliated with hospitals, universities or organ procurement groups. Our relationships with donor recovery groups, which are critical to our supply of tissue, can be affected by relationships they have with other organizations. Any

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negative impact of the regulatory and disease transmission issues facing the industry, as well as the negative publicity that these issues create, could have an impact on our ability to negotiate favorable contracts with recovery groups.

Southeast Tissue Alliance, or SETA, our largest donor recovery group, supplied us with approximately 27% of our total tissue for the year ended December 31, 2004. Our three largest recovery groups together supplied approximately 51% of our total tissue for the year ended December 31, 2004. If we were to lose any one of these three sources of tissue, the impact on our operating results would be material.

We cannot be sure that our supply of tissue will continue to be available at current levels or will be sufficient to meet our needs. If we are no longer able to obtain tissue from our current sources sufficient to meet our needs, we may not be able to locate additional replacement sources of tissue on commercially reasonable terms, if at all. Any interruption of our business caused by the need to locate additional sources of tissue would significantly hurt our revenues. We expect our revenues would decline in proportion to any decline in tissue supply.

If we fail to maintain our existing strategic relationships or are unable to identify additional distributors of our allografts, our revenues may decrease.

We currently derive the majority of our revenues through our relationships with three companies, Medtronic Sofamor Danek, or MSD, Stryker Endoscopy and Exactech, Inc. For the year ended December 31, 2004, we derived approximately 65%, 7%, and 6% of our net revenues from distribution by MSD, Stryker Endoscopy, and Exactech, respectively.

MSD provides nearly all of the instrumentation, surgeon training, distribution assistance and marketing materials for our line of spinal allografts. If our relationship with MSD is terminated or materially reduced for any reason and we are unable to replace the relationship with other means of distribution, we would suffer a material decrease in revenues.

We may need to obtain the assistance of additional distributors to market and distribute our new allografts and technologies, as well as to market and distribute our existing allografts and technologies to new market segments or geographical areas. We may not be able to find additional distributors who will agree to and successfully market and distribute our allografts and technologies on commercially reasonable terms, if at all. If we are unable to establish new distribution relationships on favorable terms, our revenues may decline.

If we fail to achieve and maintain the high processing standards that our allografts require or if we are unable to develop processing capacity as required, our commercial opportunity will be reduced or eliminated.

Our allografts require careful calibration and precise, high-quality processing. Achieving precision and quality control requires skill and diligence by our personnel. If we fail to achieve and maintain these high processing standards, including avoiding processing errors, design defects or component failures:

Further, to be successful, we will need to manage our processing capacity related to tissue recovery and demand for our allografts. It may be difficult for us to match our processing capacity to demand due to problems related to yields, quality control and assurance, tissue availability, adequacy of control policies and procedures,

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and lack of skilled personnel. If we are unable to process and produce our allografts on a timely basis, at acceptable quality and costs, and in sufficient quantities, or if we experience unanticipated technological problems or delays in processing, it will reduce our net revenues and increase our cost per allograft processed.

Our allografts and technologies could become subject to significantly greater regulation by the FDA, which could disrupt our business.

The FDA and several states have statutory authority to regulate allograft processing and allograft-based materials. The FDA could identify deficiencies in future inspections of our facilities or promulgate future regulatory rulings that could potentially disrupt our business, hurting our profitability.

For example, in mid-2001, the FDA reviewed our BioCleanse^® process after the FDA raised concerns about the process. While the FDA concluded that the compliance portion of its review of our BioCleanse^® process in January 2002 and determined we were in compliance with existing FDA requirements and that no regulatory action was warranted, the possibility always exists that the FDA could raise concerns with these or other aspects of our business. The FDA’s decision, that no regulatory action was warranted, does not constitute a formal approval of our BioCleanse^® process and the FDA is free to raise the same or similar concerns in the future.

If any of our allografts fall under the FDA’s definitions of “more than minimally manipulated or indicated for nonhomologous use,” we would be required to obtain medical device approval or clearance or biologics licenses, which could require clinical testing. Disapproval of our license applications and restricted distribution of any of our allografts, which may become subject to pre-market approval, may result. The FDA could require post-market testing and surveillance to monitor the effects of such allografts, could restrict the commercial applications of these allografts, and could conduct periodic inspections of our facility and our suppliers’ facilities. Delays encountered during the FDA approval process could shorten the patent protection period during which we have the exclusive right to commercialize such technologies or could allow others to come to market with similar technologies before us.

Some of our proposed grafts will contain tissue derived from animals, commonly referred to as xenografts. Xenografts are medical devices that are subject to pre-market approval or clearance by the FDA. We may not receive FDA approval or clearance to market these grafts.

FDA regulations of human cellular and tissue-based products, titled “Good Tissue Practices,” which will go into full force as of May 2005, will regulate all stages of allograft processing, from procurement of tissue to distribution of final allografts. These regulations will potentially increase regulatory scrutiny within our industry and this could lead to increased enforcement action affecting the conduct of our business. In addition, the effect of this regulation on recovery agencies which supply us with tissue may be significant and lead to additional costs of recovery activities. These costs may translate into increased costs to us, as we compensate the recovery agencies based on their cost of recovery.

Other regulatory entities include state agencies with statutes covering tissue banking. Of particular relevance to our business are regulations issued by Florida, New York, California and Maryland. Most states do not currently have tissue banking regulations. However, recent incidents of allograft related infections in the industry may stimulate the development of regulation in other states. It is possible that others may make allegations against us or against donor recovery groups or tissue banks, including those with which we have a relationship, about non-compliance with applicable FDA regulations or other relevant statutes and regulations. Allegations like these could cause regulators or other authorities to take investigative or other action, or could cause negative publicity for our business and our industry.

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Our industry is subject to additional local, state, federal and international government regulations and any increased regulations of our current or future activities could significantly increase the cost of doing business, thereby reducing our profitability.

Some aspects of our business are subject to additional local, state, federal or international regulation. Changes in the laws or new interpretations of existing laws could negatively affect our business, revenues or prospects, and increase the costs associated with conducting our business. In particular, the procurement and transplantation of allograft tissue is subject to federal regulation under the National Organ Transplant Act, or NOTA, a criminal statute that prohibits the purchase and sale of human organs, including bone and other tissue. NOTA permits the payment of reasonable expenses associated with the transportation, processing, preservation, quality control and storage of human tissue, which are the types of services we perform. If in the future NOTA were amended or interpreted in a way that makes us unable to include some of these costs in the amounts we charge our customers, it could reduce our revenues and therefore hurt our business. It is possible that more restrictive interpretations or expansions of NOTA could be adopted in the future which could require us to change one or more aspects of our business, at a substantial cost, in order to continue to comply with this statute.

A variety of additional local, state, federal and international government laws and regulations govern our business, including those relating to the storage, handling, generation, manufacture and disposal of medical wastes from the processing of tissue. If we fail to conduct our business in compliance with these laws and regulations, we could be subject to significant liabilities. We could be subject to significant liabilities arising from hazardous biological materials for which our insurance may not be adequate. Moreover, such insurance may not always be available in the future on commercially reasonable terms, if at all. If our insurance proves to be inadequate to pay a damage award, we may not have sufficient funds to do so, which could harm our financial condition and liquidity.

Our success will depend on the continued acceptance of our allografts and technologies by the medical community.

Our new allografts, technologies or enhancements to existing allografts may never achieve broad market acceptance, which can be affected by numerous factors, including:

Market acceptance will also depend on our ability to demonstrate that our existing and new allografts and technologies are an attractive alternative to existing tissue repair treatment options. Our ability to do so will depend on surgeons’ evaluations of the clinical safety, efficacy, ease of use, reliability and cost-effectiveness of these tissue repair options and technologies. For example, we believe that some in the medical community have lingering concerns over the risk of disease transmission through the use of allografts.

Furthermore, we believe that even if the medical community generally accepts our allografts and technologies, recommendations and endorsements by influential surgeons will be important to the commercial success of our allografts and technologies. If our allografts and technologies are not broadly accepted in the marketplace, we may not achieve a competitive position in the market.

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Rapid technological changes will affect us and our customers, which could result in reduced demand for our allografts.

Technologies change rapidly in our industry and there are frequent introductions of new technologies. For example, steady improvements have been made in synthetic human tissue substitutes which compete with our allografts. Unlike allografts, synthetic tissue technologies are not dependent on the availability of human tissue. If one of our competitors successfully introduces synthetic technologies using recombinant technologies, which stimulate the growth of tissue surrounding an implant, it could result in a decline in demand for allografts. Although our growth strategy contemplates introducing new allografts and technologies, the development of these new allografts and technologies is a complex and uncertain process, requiring a high level of innovation, as well as the ability to accurately predict future technology and market trends. The allografts we currently have in development will require significant additional development, investment and testing. We may need to undertake costly and time-consuming efforts to achieve these objectives. We may not be able to respond effectively to technological changes and emerging industry standards, or to successfully identify, develop or support new technologies or enhancements to existing allografts in a timely and cost-effective manner, if at all. If we are unable to achieve the improvements in our allografts necessary for their successful commercialization, the demand for our allografts will suffer.

We face intense competition, which could result in reduced acceptance and demand for our allografts and technologies.

The medical technology/biotechnology industry is intensely competitive. We compete with companies in the United States and internationally that engage in the development and production of medical technologies and processes including:

Many of our competitors have much greater financial, technical, research, marketing, distribution, service and other resources than we have. Moreover, our competitors may offer a broader array of tissue repair treatment products and technologies or may have greater name recognition than we do in the marketplace. For example, we compete with a number of divisions of Johnson & Johnson, a company with significantly greater resources and brand recognition than we have. Our competitors, including several development stage companies, may develop or market technologies that are more effective or commercially attractive than ours, or that may render our technologies obsolete. For example, the successful development of a synthetic tissue product that permits remodeling of bones could result in a decline in the demand for allograft-based products and technologies.

If we do not manage the medical release of donor tissue into processing in an efficient manner, it could affect our profitability.

There are many factors which affect the level and timing of donor medical releases, such as effectiveness of donor screening performed by our donor recovery groups, the timely receipt, recording and review of required medical documentation, and employee loss and turnover in our medical records department. Some of our donor recovery groups are also processors who provide us with partially processed tissues which they have already determined to be medically suitable for processing. Therefore, these sources provide a higher level of documentation than those that perform donor recovery alone. Although we strive for the timely medical release of tissue, while at the same time maximizing safety for our employees and for tissue recipients, our internal policies may sacrifice timely release of tissue in favor of safety. We continue to review our internal policies in order to provide the best framework for medical releases, however we can provide no assurance that releases will occur at levels which maximize our processing efficiency and minimize our cost per allograft processed.

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Negative publicity concerning methods of tissue recovery and screening of donor tissue in our industry could reduce demand for our allografts and impact the supply of available donor tissue.

Media reports or other negative publicity concerning both improper methods of tissue recovery from donors and disease transmission from donated tissue could limit widespread acceptance of our allografts. Unfavorable reports of improper or illegal tissue recovery practices, both in the United States and internationally, as well as incidents of improperly processed tissue leading to transmission of disease, may broadly affect the rate of future tissue donation and market acceptance of allograft technologies.

Potential patients may not distinguish our allografts, technologies and the tissue recovery and the processing procedures we have in place, from those of our competitors or others engaged in tissue recovery. In addition, families of potential donors may become reluctant to agree to donate tissue to for-profit tissue processors.

If our patents and the other means we use to protect our intellectual property prove to be inadequate, our competitors could exploit our intellectual property to compete more effectively against us.

The law of patents and trade secrets is constantly evolving and often involves complex legal and factual questions. The U.S. government may deny or significantly reduce the coverage we seek in our patent applications before or after a patent is issued. We therefore cannot be sure that any particular patent we apply for will be issued, that the scope of the patent protection will be comprehensive enough to provide adequate protection from similar technologies which may compete with ours, that interference proceedings regarding any of our patent applications will not be filed, or that we will achieve any other competitive advantage from a patent. In addition, it is possible that one or more of our patents will be held invalid if challenged or that others will claim rights in or ownership of our patents and other proprietary rights. If any of these events occur, our competitors may be able to use our intellectual property to compete more effectively against us.

Because patent applications are secret until patents are actually issued (or until 18 months after a patent application has been filed) and the publication of discoveries in the scientific or patent literature lags behind actual discoveries, we cannot be certain that our patent application was the first application filed covering a particular invention. If another party’s rights to an invention are superior to ours, we may not be able to obtain a license to use that party’s invention on commercially reasonable terms, if at all. In addition, our competitors, many of which have greater resources than we do, could obtain patents that will prevent, limit or interfere with our ability to make use of our inventions either in the United States or in international markets. Further, the laws of some foreign countries do not always protect our intellectual property rights to the same extent as the laws of the United States. Litigation or regulatory proceedings in the United States or foreign countries also may be necessary to enforce our patent or other intellectual property rights or to determine the scope and validity of our competitors’ proprietary rights. These proceedings can be costly, result in development delays, and divert our management’s attention from our business.

We also rely upon unpatented proprietary techniques and processes in tissue recovery, research and development, tissue processing and quality assurance. It is possible that others will independently develop technology similar to ours or otherwise gain access to or disclose our proprietary technologies. We may not be able to meaningfully protect our rights in these proprietary technologies, which would reduce our ability to compete.

In 1996, a law was passed in the United States that limits the enforcement of patents covering the performance of surgical or medical procedures on a human body. This law prevents medical practitioners and health care entities who practice these procedures, not otherwise covered by a patented procedure, from being sued for patent infringement. Therefore, depending upon how these limitations are interpreted by the courts, they could have a material adverse effect on our ability to enforce any of our proprietary methods or procedures deemed to be surgical or medical procedures.

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Our success will depend in part on our ability to operate without infringing on or misappropriating the proprietary rights of others, and if we are unable to do so we may be liable for damages.

We cannot be certain that U.S. or foreign patents or patent applications of other companies do not exist or will not be issued that would prevent us from commercializing our allografts and technologies. Third parties may sue us for infringing or misappropriating their patent or other intellectual property rights. Intellectual property litigation is costly. If we do not prevail in litigation, in addition to any damages we might have to pay, we could be required to stop the infringing activity or obtain a license requiring us to make royalty payments. It is possible that a required license will not be available to us on commercially acceptable terms, if at all. In addition, a required license may be non-exclusive, and therefore our competitors may have access to the same technology licensed to us. If we fail to obtain a required license or are unable to design around another company’s patent, we may be unable to make use of some of the affected technologies or distribute the affected allografts which would negatively impact our revenues.

We or our competitors may be exposed to product liability claims which could cause us to be liable for damages or cause investors to think we will be liable for similar claims in the future.

The development of allografts and technologies for human tissue repair and treatment entails an inherent risk of product liability claims, and substantial product liability claims may be asserted against us. We may not have adequate insurance coverage for any future claims that arise. Moreover, insurance covering our business may not always be available in the future on commercially reasonable terms, if at all. If our insurance proves to be inadequate to pay a damage award, we may not have sufficient funds to do so, which would harm our financial condition and liquidity. In addition, successful product liability claims made against one of our competitors could cause claims to be made against us or expose us to a perception that we are vulnerable to similar claims. In addition, claims against us, regardless of their merit or potential outcome, may also hurt our ability to obtain surgeon endorsement of our allografts or to expand our business.

If we are not successful in expanding our distribution activities into international markets, we will not be able to pursue one of our strategies for increasing our revenues.

Our current and planned international distribution strategies vary by market, as well as within each country in which we operate. For example, we distribute only a portion of our line of allografts within each country. Our international operations will be subject to a number of risks which may vary from the risks we face in the United States, including:

The value of our investment in Organ Recovery Systems, Inc. is dependent on the financial success of this venture.

We own 1,285,347 shares of convertible preferred stock issued by Organ Recovery Systems, Inc., or ORS, a privately held company, for which the purchase price was $5.25 million. ORS is organized for the purpose of advancing organ transplantation technology. Realization of our investment in ORS is dependent upon ORS’s successful execution of its operational strategies and the continued industry acceptance of its current and future

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product developments. If ORS does not successfully execute its operational strategies and recognize long-term profitability, the value of our investment could be impaired which could have a negative effect on our financial statements for the period in which the impairment occurs.

Our exploration of strategic alternatives may disrupt our operations.

On February 17, 2005, we announced that we had engaged a major investment banking firm to explore strategic opportunities available to us which could include but are not limited to a possible sale or merger with a third party; new strategic alliances; or additional or alternative distribution models of both allograft and xenograft products.

Since we began exploring strategic alternatives, we have experienced, and may continue to experience, delays in expected orders from our key distributors. If orders from our key distributors remain lower than we had anticipated, we will experience a material adverse impact on our results of operations.

Item 2.    PROPERTIES.

Our physical facilities, located in Alachua, Florida, near metropolitan Gainesville, include three new buildings on approximately 21 acres of property that we own, including a 65,000 square foot manufacturing facility, a 50,000 square foot office building and a 20,000 square foot commons building. These facilities include 30 clean-rooms for tissue processing and packaging, eight single-donor BioCleanse^® process sterilization chambers, freezers for storage of tissue and laboratory facilities.

We currently have a separate BioCleanse^® processing unit and laboratory operations in approximately 6,500 square feet of leased space related to xenograft processing and research. The monthly rent is approximately $9,000 and the lease expires on January 31, 2006.

We also lease additional warehousing facilities in Alachua. The monthly rent is $5,200 and the lease expires on August 31, 2005.

Our new manufacturing facility will increase our capacity for tissue processing. We intend for this new facility to meet the FDA’s Current Good Manufacturing Practices requirements and believe it will also allow us to meet the requirements of an FDA approved medical device manufacturer.

Our wholly owned subsidiary, Alabama Tissue Center, operates from a leased space on the campus of the University of Alabama in Birmingham, Alabama comprising 3,200 square feet, with four clean rooms for tissue processing and packaging, and freezers for tissue storage. We had a two-year term lease which expired in August 2002 and we are currently paying $4,000 on a month to month basis. On August 11, 2003, we entered into a new long-term lease agreement at an additional site for Alabama Tissue Center. The new lease, comprising 9,745 square feet, commenced in December 2003 and will run for 65 months. The monthly rent is approximately $11,000.

We also lease space at seven of our recovery group locations throughout the United States. Monthly rent is approximately $20,000, for all seven locations.

Item 3.    LEGAL PROCEEDINGS.

We are, from time to time, involved in litigation relating to claims arising out of our operations in the ordinary course of business. We believe that none of these claims that were outstanding as of December 31, 2004 will have a material adverse impact on our financial position or results of operations.

Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

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PART II

Item 5.    MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Market Information and Holders

Our common stock is quoted on the Nasdaq Stock Market under the symbol “RTIX.” The following table sets forth the range of high and low sales prices for our common stock for each quarterly period in the last two fiscal years.

As of March 4, 2005, we had 145 stockholders of record of our common stock. The closing sale price of our common stock on March 4, 2005 was $11.26 per share.

Dividend Policy

We have never paid cash dividends. We do not expect to declare or pay any dividends on our common stock in the foreseeable future, but instead intend to retain all earnings, if any, to invest in our operations. In addition, our bank credit facility restricts our ability to pay dividends. The payment of future dividends is within the discretion of our board of directors and will depend upon our future earnings, if any, our capital requirements, financial condition, debt covenant terms, and other relevant factors.

Item 6.    SELECTED FINANCIAL DATA.

The statement of operations data set forth below for the years ended December 31, 2000 and 2001, and the balance sheet data set forth as of December 31, 2000, 2001 and 2002 have been derived from our audited consolidated financial statements and accompanying notes which are not included elsewhere in this Form 10-K.

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The statement of operations data set forth below for the years ended December 31, 2002, 2003, and 2004, and selected balance sheet data as of December 31, 2003 and 2004 have been derived from our audited consolidated financial statements and accompanying notes. The consolidated financial statements as of December 31, 2004 and 2003 and for the three years ended December 31, 2004 are included elsewhere in this Form 10-K. The selected consolidated financial data set forth below should be read along with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and accompanying notes included elsewhere in this document.

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Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion of our financial condition and results of operations together with those financial statements and the notes to these statements included elsewhere in this filing. This discussion contains forward-looking statements based on our current expectations, assumptions, estimates and projections about us and our industry. Our actual results could differ materially from those anticipated in these forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

Management Overview

In 2004, we achieved net revenues of $92.7 million and net income of $6.2 million. Our net revenues continue to be driven primarily by our spinal product line, approximately 65%, which is distributed by Medtronic Sofamor Danek (“MSD”); in addition, in 2004 our cardiovascular subsidiary, Alabama Tissue Center, achieved significant growth as its revenues increased by 43% to $7.4 million.

Our goals for 2005 are to continue to build on the Company’s strengths as we focus on our future. There are several challenges we face heading into 2005 that we will focus on in order to meet our goals. The key challenges are:

Our primary goal in 2004 was to establish an improved distribution agreement with MSD. Now that we have accomplished that goal, we will work with MSD to enhance coordination efforts under the agreement. MSD has historically accounted for between 55% and 65% of our net revenues and our relationship with MSD is a key component to our success in 2005 and beyond. In 2005, we plan to work closely with MSD in coordinating the launch of several new products and developing new product plans for the future.

We continue to be committed to maximizing distribution growth in all product categories for 2005 and beyond. During 2004, we amended our distribution agreement with MSD, which now allows us to distribute our spinal allograft products worldwide, except for the United States, Canada and Puerto Rico. Key initiatives for 2005 include developing this international opportunity for our spinal products, as well as exploring all of our avenues for distribution of our sports medicine product line. We will also continue to work with our existing exclusive distributors to further strengthen those relationships and expand product offerings.

The efforts put forth the last two years in our tissue recovery and operational effectiveness initiatives have enabled us to consistently meet the needs of our current distributors. Our national network of tissue procurement agencies provides services to donor families and education to their communities about the benefits of tissue donation. Our state-of-the-art, pharmaceutical-grade processing facility allows us to improve the quality of our implants and increase our effectiveness in meeting surgeon demand. We will continue to advance our operational and procurement programs to improve tissue utilization and raise the bar for safety standards in the industry.

We have a long-term product development plan to steadily introduce new products, which we expect will become an ever-increasing component of our revenue. In 2004, we increased our spending in our research and development efforts by 35% over 2003 spending levels. We expect to continue to increase our research and development spending in an effort to support our product development introduction plan. Our scientists are

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focusing their studies on delivering optimal regenerative medicine solutions, by achieving higher levels of osteoinductivity and osteoconductivity through allograft, and to expand the availability of tissue implants by expanding the uses of the BioCleanse^® process technology to utilize animal tissue or xenograft. In addition, we are planning to launch our composite bone-tendon-bone allograft product. We are geared to develop sophisticated processing technology to accelerate the introduction of new tissue implants and to raise the bar for tissue safety.

We have engaged a major investment banking firm to explore strategic opportunities available to us which could include but are not limited to a possible sale to or merger with a third party; new strategic alliances; or additional or alternative distribution models for both allograft and xenograft products. However, there can be no assurance that any transaction, new alliance, distribution arrangement or other corporate action will result from this effort.

Critical Accounting Policies

Although our financial statements have been prepared in accordance with accounting principles generally accepted in the United States, we must often make estimates and judgments that affect reported amounts. These estimates and judgments are based on historical experience and assumptions that we believe to be reasonable under the circumstances. Assumptions and judgments based on historical experience may provide reported results which differ from actual results.

We often introduce new technologies and processes and therefore we may be at risk of using estimates based on assumptions related to patents, trademarks and other intangible assets that later become invalid.

The accounting policies which we feel are “critical,” or require the most use of estimates and judgment, relate to the following items presented in our financial statements: 1) Tissue Inventory Valuation; 2) Accounts Receivable Allowances; 3) Valuation of Long-Lived Assets; and 4) Revenue Recognition.

Tissue Inventory Valuation.    Accounting principles generally accepted in the United States require that inventory be stated at the lower of cost or market value. Due to various reasons, some tissue within our inventory will never become distributed allograft, the source of our revenue. Therefore we must make estimates of future distribution from existing inventory in order to write-off inventory which will not be distributed and which therefore has reduced or no market value.

Our management reviews available information regarding processing costs, inventory distribution rates, industry supply and demand, medical releases and processed tissue rejections, in order to determine write-offs of cost above market value. For a variety of reasons, we may from time to time be required to adjust our assumptions as processes change and as we gain better information. Although we continue to refine the information on which we base our estimates, we cannot be sure that our estimates are accurate indicators of future events. Accordingly, future adjustments may result from refining these estimates. Such adjustments may be significant.

Accounts Receivable Allowances.    We maintain allowances for doubtful accounts based on our review and assessment of historical payment history and our estimate of the ability of each customer to make payments on amounts invoiced. If the financial condition of any of our customers were to deteriorate, additional allowances might be required. From time to time we must adjust our estimates. For example, during 2004, we determined that our required accounts receivable allowance was lower than previously estimated, which resulted in a $0.6 million decrease in our bad debt allowance during the year as a result of the change in the nature of our accounts receivable portfolio due to changes in our distribution agreements and refining of estimates. Changes in estimates of the collection risk related to accounts receivable can result in decreases and increases to current period net income.

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Valuation of Long-Lived Assets and Investments.    Accounting principles generally accepted in the United States require that long-lived assets on our balance sheet be stated at the lower of cost, net of depreciation and amortization, or fair value. The factors in this valuation which require significant estimates and judgments are: 1) determination of the estimated useful life of each asset, which determines expense per period, number of periods of expense, and the carrying value of each asset at any time; and 2) determination of the fair value of assets, which may result in impairment charges when fair value is lower than the carrying value of assets, which we would recognize as a charge to earnings during the period we made the determination.

If we overestimate the useful life of an asset, or overestimate the fair value of an asset, and at some time in the future we dispose of that asset for a lower amount than its carrying value, our historically reported total assets and net income would have been higher than they would have been during periods prior to our recognition of the loss on disposal of assets, and lower during the period when we recognize the loss.

Long-lived assets include certain long-term investments, such as our investment in ORS and the goodwill associated with our acquisition of ATC. The fair value of these long-term investments are dependent on their performance, as well as volatility inherent in the external markets for this investment. These determinations require complex calculations based on estimated future benefit and fair value. We have often made investments for which the expected future benefit has not been easily estimated. Examples of such investments include, but are not limited to, our acquisition of ATC; our investment in Organ Recovery Systems, Inc., or ORS; our investment in equipment; our investment in development of software; and our investment in obtaining patents. In assessing potential impairment for these investments, we consider these factors as well as forecasted financial performance. If forecasts are not met, impairment charges may be required.

Revenue Recognition.    We recognize revenue upon shipping, or receipt by our customers of the processed tissue for implantation, depending on our distribution agreements with our customers or distributors. For consignment inventory, we recognize revenue when the tissue is transferred from our consignment inventory locations to our customers for implantation. Effective November 1, 2002, our revenues no longer reflect a management service fee as such fees are no longer included in our distribution agreements. However, revenues will continue to be reported on a gross basis, which includes any management services fees incurred by us related to the distribution of our allografts. We recognize our other revenues when all significant contractual obligations have been satisfied.

We permit returns of tissue in accordance with the terms of contractual agreements with customers if the tissue is returned in a timely manner, in unopened packaging and from the normal channels of distribution. We provide allowances for returns based upon analysis of our historical patterns of returns, matched against the fees from which they originated. Historical returns have been within the amounts we reserved.

Off Balance-Sheet Arrangements

As of December 31, 2004, we did not have any significant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

Recent Regulatory Actions

In February 2005, we received 510(k) clearance from the FDA for our bone paste products.

In October 2004, our Alachua, Florida site and in November 2004 our Birmingham, Alabama site were inspected by the FDA. The inspections resulted in Form FDA 483 “Inspectional Observations” (“FD483”) observations at both sites. The form FD483 is used to identify issues that are or may result in non-compliance with FDA regulations. All observations raised were addressed appropriately during or very shortly after each inspection. Our management does not anticipate any further FDA actions regarding these inspections.

In December 2003, our Menasha, Wisconsin site for RTI Donor Services, Inc. was inspected by the FDA. The inspection resulted in no FD483 being issued.

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ISO 9001 standards, a standard intended for quality management system assessment, have been adopted around the world and many companies require their suppliers to have ISO 9001 certification. On June 24, 2003 we renewed our ISO 9001 certifications with the International Organization for Standardization and received an ISO 13485 certification. The ISO 13485 certification is based on the same framework as the ISO 9001 certification, but contains requirements specific to medical device manufacturers. The certification process covers all aspects of a company’s business, from design, procurement, and production, to distribution and customer satisfaction. Maintaining our ISO 9001 and ISO 13485 certifications permits us entry into certain global markets that we would not be able to distribute our products in without those certifications.

On July 17, 2003, we were approved for accreditation by the American Association of Tissue Banks. The accreditation covers the processing, storage and distribution of musculoskeletal tissue for transplantation and research. Accreditation is awarded for a three-year term, after which we will apply for renewal.

Results of Operations

The following table sets forth, in both dollars and as a percentage of net revenues, the results of our operations for the years indicated:

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2004 Compared to 2003

Total Revenues.    Our total revenues increased by $17.2 million or 22.8%, to $92.7 million for the year ended December 31, 2004 from $75.5 million for the year ended December 31, 2003. As described in more detail below, subsequent to November 1, 2002, our total revenues are the same as our net revenues. Accordingly, we believe that analysis of our revenues on a net revenues basis is more meaningful than any comparison on a total revenues basis.

Net Revenues.    Our net revenues, which consist primarily of fees from tissue distributions, increased by $17.2 million, or 22.8%, to $92.7 million for the year ended December 31, 2004 from $75.5 million for the year ended December 31, 2003. The increase was due to an increase of $14.5 million in revenues from the distribution of our spinal allografts, an increase of $147,000 from the distribution of our sports medicine allografts and an increase of $2.2 million from the distribution of our cardiovascular tissues, offset by a $262,000 decrease from the distribution of our general orthopedic allografts. Spinal net revenues increased as a result of a 37.9% increase in units distributed to our distributor, MSD, which is attributed to increased demand for these allografts and new product introductions which represented 15.6% of net spinal revenues for the year. Comparative 2003 net revenues were adversely affected by inventory reductions by MSD in the fourth quarter of 2003. The small increase in the distribution of sports medicine allografts reflects similar amounts of available tissue to distribute between 2004 and 2003. Unit volume distributions of our sports medicine line of products decreased 1.5% in 2004 compared to 2003. The unit volume decrease was offset by a mid-year price increase associated with the introduction of soft tissue BioCleanse^®. The increase in cardiovascular revenues was the result of volume increases of 46.8%, change in product mix and a 7% price increase implemented at the beginning of 2004. Unit volume distributions of general orthopedic products remained constant in 2004, as compared to 2003 levels. Other revenues, which consist of tissue processing fees, tissue recovery fees, biomedical laboratory fees, manufacturing royalties, grant revenues, distribution of reproductions of our allografts to distributors for demonstration purposes, and restocking fees, increased by $642,000 to $2.9 million for the year ended December 31, 2004 compared to $2.2 million for the year ended December 31, 2003.

Costs of Processing and Distribution.    Costs of processing and distribution increased by $12.8 million, or 29.8%, to $55.5 million for the year ended December 31, 2004 from $42.8 million for the year ended December 31, 2003. As a percentage of net revenues, these costs increased from 56.6% for the year ended December 31, 2003 to 59.9% for the year ended December 31, 2004. Our costs of processing and distribution were affected primarily by an increase in the proportion of new cervical units produced as compared to our lumbar spinal line, which on a per unit basis are more costly to produce than our lumbar spinal product line, along with increases in tissue recovery costs.

Marketing, General and Administrative Expenses.    Marketing, general and administrative expenses increased by $120,000, or 0.5%, to $23.2 million for the year ended December 31, 2004 from $23.1 million for the year ended December 31, 2003. These expenses decreased as a percentage of net revenues from 30.6% for the year ended December 31, 2003 to 25.1% for the year ended December 31, 2004. This increase was primarily due to the reversal of $645,000 in our allowance for bad debts, as these reserves are no longer deemed necessary for potential uncollectible accounts, offset by an additional $410,000 of accounting expenses relating to Sarbanes-Oxley compliance.

Research and Development Expenses.    Research and development expenses increased by $1.0 million, or 34.6%, to $3.8 million for the year ended December 31, 2004 from $2.9 million for the year ended December 31, 2003. As a percentage of net revenues, research and development expenses increased from 3.8% for the year ended December 31, 2003 to 4.1% for the year ended December 31, 2004. The increase was the result of our commitment to increase funding of research and development to expand new product development efforts.

Asset Abandonments.    We recognized a loss on asset abandonments of $136,000 during the year ended December 31, 2004. The assets abandoned consisted of obsolete manufacturing equipment.

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Other Expense and Income- Net.    Other expense, net for the year ended December 31, 2004 was an expense of $871,000 compared to $746,000 for the year ended December 31, 2003.

Income Taxes.    Income tax expense for the year ended December 31, 2004 was $3.0 million, compared to an income tax benefit of $483,000 for the year ended December 31, 2003. Our effective tax rate for the year ended December 31, 2004 was 32.4%, which was lower than the statutory rate due to research and development credits recognized during the year ended December 31, 2004. The percentage for the year ended December 31, 2003 was lower than the statutory rate due to the reversal of valuation allowances, of $2.7 million, previously recorded against our future realization of certain deferred tax assets. With our continued profitability, it was determined that it was more likely than not that the deferred tax assets associated with the valuation allowance will be realized.

2003 Compared to 2002

Total Revenues.    Our total revenues decreased by $43.0 million or 36.3%, to $75.5 million for the year ended December 31, 2003 from $118.5 million for the year ended December 31, 2002. Effective November 1, 2002, we entered into a new distribution agreement with MSD, our largest distributor. Under our new agreement with MSD, we are no longer responsible for the collection of total distribution fees but instead receive a fee based on our listed average net distribution fee from MSD. Consequently, subsequent to November 1, 2002, our total revenues will be the same as our net revenues. Accordingly, we believe that analysis of our revenues on a net revenues basis is more meaningful than any comparison on a total revenues basis.

Management Services Fees.    Management services fees, which consisted of amounts paid to MSD for management services it provided to assist in the distribution of our allografts, decreased by $49.4 million, or 100%, to $0 million for the year ended December 31, 2003 from $49.4 million for the year ended December 31, 2002. This decrease was due to the change to our distribution agreement with MSD as described above.

Net Revenues.    Our net revenues, which consist primarily of fees from tissue distributions, increased by $6.5 million, or 9.3%, to $75.5 million for the year ended December 31, 2003 from $69.1 million for the year ended December 31, 2002. The increase was due to an increase of $8.2 million in revenues from the distribution of our spinal allografts and an increase of $1.7 million from the distribution of our cardiovascular tissues, offset by a decrease of $1.2 million from the distribution of our sports medicine allografts and a $3.0 million decrease from the distribution of our general orthopedic allografts. The increased revenues from the distribution of our spinal allografts primarily relates to increases in tissue transfer fees, which were implemented in mid-2002 as part of the new distribution agreement with MSD, noted above. The increase in cardiovascular revenues was the result of the continued high demand for these allografts, together with our success in entering into new recovery agreements. The decrease in the distribution of sports medicine allografts was due to our transition of the distribution of these allografts to Stryker Endoscopy from our previous distribution network. The decrease from the distribution of general orthopedic allografts was primarily due to our transition of the distribution of these allografts to MSD and Exactech from our previous distribution network. Unit volume distributions of our sports medicine line of products increased 9.0% in 2003 compared to 2002. Unit volume distributions of general orthopedic products remained constant in 2003, as compared to 2002 levels, as we focused more of our attention on spine and sports medicine products during the year. The lower net revenues from distributions for both our sports medicine and general orthopedic product lines were offset by lower commission expense in 2003. Under our new distribution agreements with Exactech and Stryker, we do not pay commissions, but instead they pay us license and service fees based on a percent of the average net distribution fee for the products they distribute. Other revenues, which consist of tissue processing fees, tissue recovery fees, biomedical laboratory fees, manufacturing royalties, grant revenues, distribution of reproductions of our allografts to distributors for demonstration purposes, and restocking fees, increased by $695,000 to $2.2 million for the year ended December 31, 2003 compared to $1.5 million for the year ended December 31, 2002. During the three months ended December 31, 2003, we experienced a decrease in our net revenues as a result of our largest distributor executing programs to reduce its levels of inventory.

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Costs of Processing and Distribution.    Costs of processing and distribution decreased by $2.1 million, or 4.7%, to $42.8 million for the year ended December 31, 2003 from $44.9 million for the year ended December 31, 2002. As a percentage of net revenues, these costs decreased from 65% for the year ended December 31, 2002 to 56.6% for the year ended December 31, 2003. This decrease was primarily attributable to lower provisions for product obsolescence in 2003. Also, under our new distribution agreements, gross margins have increased resulting in lower costs of processing and distribution as a percentage of net revenues.

Marketing, General and Administrative Expenses.    Marketing, general and administrative expenses decreased by $6.1 million, or 21.0%, to $23.1 million for the year ended December 31, 2003 from $29.2 million for the year ended December 31, 2002. This decrease was primarily due to $2.6 million of one-time charges and restructuring expenses recognized in 2002 and a decrease in commission expense of $5.5 million for the year ended December 31, 2003 as a result of a change in our distribution structure. Under our new distribution agreements with Exactech and Stryker, we do not pay commissions, but instead they pay us license and service fees based on a percent of the average net distribution fee for the products they distribute.

Research and Development Expenses.    Research and development expenses increased by $392,000, or 15.9%, to $2.9 million for the year ended December 31, 2003 from $2.5 million for the year ended December 31, 2002. As a percentage of net revenues, research and development expenses increased from 3.6% for the year ended December 31, 2002 to 3.8% for the year ended December 31, 2003. The increase was the result of our commitment to increase funding of research and development to expand new product development efforts.

Asset Abandonments.    We recognized a loss on asset abandonments of $169,000 during the year ended December 31, 2003. The assets abandoned consisted of a software project of $111,000, and loss on the sale of our former administrative and manufacturing buildings of $58,000.

Other Expense and Income- Net.    Other expense, net for the year ended December 31, 2003 was $746,000 compared to $2.6 million for the year ended December 31, 2002. This decrease in net expense was the result of a derivative gain of $443,000 for the year ended December 31, 2003 compared to a derivative loss of $2.3 million for the year ended December 31, 2002. The gain on the derivative position was due to the change in fair value of an interest rate swap that we entered into to hedge our previously existing credit facilities.

Income Taxes.    Income tax benefit for the year ended December 31, 2003 was $483,000, compared to $3.0 million for the year ended December 31, 2002. As a percentage of income (loss) before income taxes, the benefit was 8.2% for the year ended December 31, 2003 compared to 18.3% for the year ended December 31, 2002. The percentage for the year ended December 31, 2003 was lower than the statutory rate due to the reversal of valuation allowances, of $2.7 million, previously recorded against our future realization of certain deferred tax assets. With our continued profitability, a determination was made at the end of 2003 that it is now more likely than not that the deferred tax assets associated with the valuation allowance will be realized. This determination resulted in the reversal of the valuation allowances.

Liquidity and Capital Resources

Certain Commitments.

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 $16.0 million revolving line of credit. The $9.0 million term loan calls for monthly principal payments of $125. Interest on the new loan agreement is paid monthly at LIBOR plus 4.25% (6.67% at December 31, 2004). Under the $16.0 million revolving line of credit, we can borrow up to the maximum eligible amount, based on certain outstanding receivables and inventories, of which $10,676 is available at December 31, 2004. Interest on outstanding amounts under the revolving line of credit is payable at LIBOR plus 3.75%. Principal and interest on the revolving line of credit are payable upon maturity. There is a 0.5% fee payable on the unused portion of the revolving credit facility. No amounts were outstanding under the revolving line of credit at December 31, 2004. The term loan and revolving line of credit 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 following table provides a summary of our debt obligations, capital lease obligations, operating lease payments, estimated future expenditures and other purchase obligations as of December 31, 2004.