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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2005

OR

For the transition period from              to             

Commission file number 0-31271

REGENERATION TECHNOLOGIES, INC.

11621 Research Circle

Alachua, Florida 32615

(386) 418-8888

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

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

Shares of common stock, $0.001 par value, outstanding on April 29, 2005: 26,734,895

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REGENERATION TECHNOLOGIES, INC.

FORM 10-Q For the Quarter Ended March 31, 2005

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share data)

See notes to unaudited condensed consolidated financial statements.

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REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share data)

See notes to unaudited condensed consolidated financial statements.

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REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

See notes to unaudited condensed consolidated financial statements.

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REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2005 and 2004

(Unaudited)

(In thousands, except share and per share data)

1. Basis of Presentation and Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, which the Company considers necessary for a fair presentation of the results of operations for the periods shown. The condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes necessary for a fair presentation of consolidated financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

The consolidated financial statements include the accounts of RTI and its wholly owned subsidiaries, Alabama Tissue Center, Biological Recovery Group (inactive), and RTI Services, Inc. (collectively, the “Company”).

The condensed consolidated financial statements also include the accounts of RTI Donor Services, Inc., (“RTIDS”) which is a controlled entity. RTIDS is a taxable not for profit entity organized and controlled by the Company. RTIDS is the corporate entity that is responsible for procuring most of the tissue for the Company. Expenses incurred by RTIDS to procure tissue are passed through to the Company. RTIDS has no significant assets or liabilities except for its intercompany account and accounts payable to tissue recovery agencies. The Company pays all expenses of RTIDS. All intercompany balances and transactions have been eliminated in consolidation.

2. Stock Based Compensation

Options to purchase approximately 2,843,205 shares of common stock at prices ranging from $1.30 to $14.95 per share were outstanding as of March 31, 2005.

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

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The Company recorded deferred compensation expense for options granted during the period October 1, 1999 through March 31, 2000 of $17 and $62 for the three months ended March 31, 2005 and 2004, respectively.

3. Earnings Per Share

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

For the three months ended March 31, 2005 and 2004, approximately 1,292,000 and 1,255,000, respectively, of issued stock options were not included in the computation of diluted earnings per share because they were anti-dilutive. For the three months ended March 31, 2005, options to purchase 465,476 shares of common stock were not included in the computation of diluted EPS because dilutive shares are not factored into the calculation of EPS when a loss from continuing operations is reported.

4. Goodwill and Other Intangible Assets

The carrying value of goodwill was $2,863 at March 31, 2005 and December 31, 2004. The Company’s intangible assets are recorded as a component of noncurrent other assets – net in the accompanying condensed consolidated balance sheets. Amortization expense for the three months ended March 31, 2005 and 2004 was $19 and $5, respectively. Management estimates amortization expense of $76 for each of the next five years.

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On January 21, 2005 the Company purchased all patents and intellectual property rights from Southeast Tissue Alliance (“SETA”), the Company’s largest tissue recovery agency, for $1,600. As part of the patent assignment agreement, the Company will pay SETA a 1.25% quarterly royalty associated with all product distributions related to the assigned patents.

5. Inventories

Inventories by stage of completion are as follows:

During the three month periods ended March 31, 2005 and 2004, the Company had inventory write-downs of $158 and $0, respectively, due to estimated obsolescence.

6. Investment in Organ Recovery Systems, Inc.

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

Realization of the Company’s investment in ORS is dependent upon ORS’s successful execution of its operational strategies and the continued industry acceptance of its current and future product developments. Management monitors progress towards these success factors on a continual basis and has concluded that its investment in ORS has not been negatively impacted by operational matters. Additionally, in mid 2004, ORS raised additional funds through a private placement convertible debt offering with a conversion value of the equity securities equivalent to the price the Company paid for its shares of preferred stock. Accordingly, management of the Company believes there has been no impairment of the Company’s investment.

7. Derivatives

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

8. Income Taxes

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

At March 31, 2005, net deferred tax assets were approximately $6,023. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets

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will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company expects the deferred tax assets, net of the valuation allowance at March 31, 2005 of $542, to be realized through the generation of future taxable income and the reversal of existing taxable temporary differences. During the three months ended March 31, 2005, the Company decreased its valuation allowance as it has determined that it is now more likely than not that $113 of certain deferred tax assets will be realized, based on the characteristics of the research and development expenditures incurred.

9. Supplemental Cash Flow Information

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

10. Segment Data

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

11. Note Payable

On February 20, 2004, the Company repaid the outstanding balance on the term loan with proceeds from a new long-term financing agreement and terminated the previous term loan. Restricted deposits were applied to the outstanding loan balance and the remaining amount of the restricted deposits, or $1,076 became unrestricted cash as under the new loan agreement, cash no longer serves as collateral.

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12. Long-Term Obligations

Long-term obligations are as follows:

On February 20, 2004, the Company entered into a new long-term financing agreement with a major financial institution. The new agreement consists of a $9,000 five-year term loan and a five-year $16,000 revolving line of credit. The $9,000 term loan calls for monthly principal payments of $125. Interest on the new loan agreement is paid monthly at LIBOR plus 4.25% (7.11% at March 31, 2005). Under the $16,000 revolving line of credit, the Company can borrow up to the maximum eligible amount, based on certain outstanding receivables and inventories, of which $10,491 is available at March 31, 2005. The Company borrowed $3.0 million under the revolving line of credit on May 4, 2005. 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 March 31, 2005. 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.

The credit agreement also contains various restrictive covenants which limit, among other things, indebtedness, liens and business combination transactions. In addition, the Company must maintain certain financial covenant ratios, including operating cash flows to fixed charges, senior debt to EBITDA, and total debt to EBITDA, as defined in the agreement. The Company is in compliance with the financial covenant ratios at March 31, 2005.

13. Related Parties

During the three months ended March 31, 2005 and 2004, the Company recognized revenues of $1,645 and $1,935, respectively, from distributions to Stryker Endoscopy, a division of Stryker Corporation (Stryker), representing 11.0% and 8.2% of our total net revenues. A member of our board of directors serves as a non-executive officer of Stryker Corporation.

14. Commitments

The Company has entered into an agreement for the build out of a new processing facility for its wholly owned subsidiary Alabama Tissue Center in Birmingham, Alabama. As of March 31, 2005, $1.0 remains on this purchase commitment.

15. Legal Actions

The Company is, from time to time, involved in litigation relating to claims arising out of its operations in the ordinary course of business. The Company believes that none of the claims that were outstanding as of March 31, 2005 will have a material adverse impact on its financial position or results of operations.

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

Cautionary Statement Relating to Forward Looking Statements

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

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Management Overview: Recent Developments

On February 17, 2005, we announced that we had engaged an investment banking firm to explore strategic alternatives available to us including, but not limited to, a possible sale or merger with a third party; new strategic alliances; or additional or alternative distribution models for both allograft and xenograft products. Since that time, we performed a thorough review of various strategic alternatives to enhance shareholder value. Our board of directors has determined that, at this time, the best alternative available to us for our shareholders, employees and customers is to remain an independent company and continue to consider new strategic alliances; or additional or alternative distribution models for both allograft and xenograft products.

During the first quarter of 2005 we operated our business to allow us to meet our long term financial goals as set forth in our Annual Report on Form 10-K. Since we began exploring strategic alternatives, however, we have experienced delays in expected orders from our key distributors. Donor recovery activities continued as planned, which has resulted in an increase in inventories because customer orders were well below our expectations for the quarter. We believe that this slowdown was due at least in part, to our evaluation of strategic alternatives. If customer orders do not improve from levels experienced during the first quarter, it would have a material adverse effect on the Company.

Three Months Ended March 31, 2005 Compared With Three Months Ended March 31, 2004

Net Revenues. Our net revenues decreased by $8.7 million, or 36.7%, to $15.0 million for the three months ended March 31, 2005 from $23.6 million for the three months ended March 31, 2004.

Spinal - Net revenues from spinal allografts decreased $7.8 million, or 49.4%, for the three months ended March 31, 2005 compared to the three months ended March 31, 2004. Net revenues from spinal allografts include a fee increase of $211,000 relating to certain spinal allograft products distributed during the quarter. Spinal allograft net revenues decreased as a result of our distributor, Medtronic Sofamor Danek (“MSD”), decreasing their orders for our spinal implants.

Sports Medicine - Net revenues from sports medicine allografts decreased $538,000, or 19.3%, for the three months ended March 31, 2005 compared to the three months ended March 31, 2004. Net revenues from sports medicine decreased as we experienced delays in tissue sterilization during the quarter ended March 31, 2005, causing certain grafts to be held in tissue in process inventory until we could complete final processing. These grafts, with a list fee of $455,000, will be available for distribution in subsequent quarters in 2005. In addition, we believe that revenues are lower, at least in part as a result of our exploration of strategic alternatives during the quarter. We deferred signing a new long-term arrangement with Stryker, the Company’s current exclusive domestic distributor of our sports medicine product line, until we completed our strategic review. The uncertainty of our future relationship had an impact on Stryker’s distribution pattern during the quarter ended March 31, 2005.

General Orthopedic - Net revenues from general orthopedic allografts decreased $1.3 million, or 44.3%, for the three months ended March 31, 2005 compared to the three months ended March 31, 2004. Net revenues from general orthopedic distributions decreased due to a slow down in orders from Exactech, our exclusive distributor of bone paste for orthopedic purposes, as well as reduced orders from MSD and our independent network of distributors.

Cardiovascular - Net revenues from cardiovascular distributions increased $661,000, or 43.3%, for the three months ended March 31, 2005 compared to the three months ended March 31, 2004. The volume increases are directly related an increase in donor recoveries in the past two quarters, as the demand for these vital grafts continues to exceed supply.

Other non-tissue - Net revenues from other non-tissue 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 $322,000, or 57.3%, for the three months ended March 31, 2005 compared to the three months ended March 31, 2004. The increase related to higher recovery fees from other tissue processors.

Costs of Processing and Distribution. Costs of processing and distribution decreased by $4.6 million, or 30.8%, to $10.3 million for the three months ended March 31, 2005 from $14.9 million for the three months ended March 31, 2004. As a percentage of net revenues, costs of processing and distribution increased from 63.2% for the three months ended March 31, 2004 to 69.1% for the three months ended March 31, 2005. Our costs of processing and distribution were impacted by our production plant running lower than normal capacity levels primarily due to lower orders of our spinal implants. As a result, fixed costs per unit produced were 9.8% higher for the three months ended March 31, 2005 compared to the three months ended March 31, 2004.

Marketing, General and Administrative Expenses. Marketing, general and administrative expenses increased by $122,000, or 2.2%, to $5.7 million for the three months ended March 31, 2005 from $5.6 million for the three months ended March 31, 2004. These expenses increased as a percentage of net revenues from 23.5% for the three months ended March 31, 2004 to 38.0% for the three months ended March 31, 2005 as a result of lower revenues and $196,000 of additional costs relating to accounting and legal fees incurred as part of our review of strategic alternatives.

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Research and Development Expenses. Research and development expenses increased by $118,000, or 13.8%, to $973,000 for the three months ended March 31, 2005 from $855,000 for the three months ended March 31, 2004. As a percentage of net revenues, research and development expenses increased from 3.6% for the three months ended March 31, 2004 to 6.5% for the three months ended March 31, 2005 as a result of a decrease in net revenues and an increase in spending as we continue our product development efforts in anticipation of new product offerings in 2005 and beyond.

Net Interest Expense. Net interest expense was $173,000 for the three months ended March 31, 2005 compared to $250,000 for the three months ended March 31, 2004. Included in net interest expense for the three months ended March 31, 2004 was a $61,000 loss associated with our previously outstanding interest rate swap agreement. The swap agreement was terminated on February 20, 2004.

Income Tax Benefit (Expense). Income tax benefit for the three months ended March 31, 2005 was $959,000 compared to income tax expense of $651,000 for the three months ended March 31, 2004. Our effective tax rate for the three months ended March 31, 2005 was 43%, compared to 32% for the three months ended March 31, 2004. Our effective tax rate for the three months ended March 31, 2005 was impacted by a tax credit recognized for qualified research and development expenses incurred, as well as the reversal of certain valuation allowances against our future realization of certain deferred tax assets.

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Liquidity and Capital Resources

Cash Flows.

Our net cash used in operating activities was $4.0 million for the three months ended March 31, 2005, compared to $1.5 million of net cash provided by operating activities for the three months ended March 31, 2004. During the three months ended March 31, 2005, cash was provided by a decrease in our accounts receivable of $1.5 million and primary uses of cash were a net loss of $1.3 million, an increase in inventories of $3.0 million, and a $1.5 million decrease in accrued expenses. Significant non-cash adjustments to operating activities for the three months ended March 31, 2005 included depreciation and amortization expense of $1.1 million. Our accounts receivable days sales outstanding were 35 at March 31, 2005 and December 31, 2004. Our inventory days outstanding were 295 annualized for the three months ended March 31, 2005, compared to 262 for year ended December 31, 2004. The increase in inventory days is the result of the increase in inventory levels and the lower annualized revenues as a result of the lower revenues experienced for the three months ended March 31, 2005.

Our cash used in investing activities was $1.8 million for the three months ended March 31, 2005 compared to $476,000 for the three months ended March 31, 2004. Investing activities for the three months ended March 31, 2005 consisted of a $1.6 million acquisition of intellectual property rights and $180,000 of purchases of property, plant, and equipment.

Our net cash used in financing activities was $154,000 for the three months ended March 31, 2005 compared to net cash provided by financing activities of $9.8 million for the three months ended March 31, 2004. Cash used in financing activities for the three months ended March 31, 2005 consisted of $618,000 of payments made on our outstanding term loan and capital lease obligations, offset by $464,000 of proceeds from exercises of stock options. Cash provided by financing activities for the three months ended March 31, 2004 consisted of a $14.8 million decrease in restricted deposits and proceeds of $9.0 million from issuance of our new term loan. Cash used in financing activities for the three months ended March 31, 2004 consisted of the repayment of our previous term loan of $12.1 million, a $1.6 million payment made to terminate a swap agreement and payments on capital lease and note obligations of $324,000.

Liquidity.

As of March 31, 2005, we had $5.5 million of cash and cash equivalents. We believe that our working capital as of March 31, 2005, together with our borrowing ability under our revolving line of credit, will be adequate to fund our operations for at least the next 12 months. On May 4, 2005 we borrowed $3.0 million on our $16.0 million revolving line of credit. If customer orders do not improve from levels experienced during the first quarter, it would have a material adverse effect on the Company.

Certain Commitments.

We have entered into an agreement for the build out a new processing facility for our wholly owned subsidiary Alabama Tissue Center in Birmingham, Alabama. As of March 31, 2005, $1.0 remains on this purchase commitment.

On February 20, 2004, we entered into a new long-term financing agreement with a major financial institution. The new agreement consists of a $9.0 million five-year term loan and a five-year $16.0 million revolving line of credit. The $9.0 million term loan calls for monthly principal payments of $125,000. As of March 31, 2005, the term loan balance was $7.5 million. Interest on the new loan agreement is paid monthly at LIBOR plus 4.25% (7.11% at March 31, 2005). 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. As of March 31, 2005, $10.5 million was available under the revolving line of credit. We borrowed $3.0 million under the revolving line of credit on May 4, 2005. Interest on outstanding amounts under the revolving credit loan is payable at LIBOR plus 3.75%. Principal and interest on the revolving credit loan are payable upon maturity. 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 March 31, 2005. The term loan and revolving line of credit are collateralized by substantially all of our assets, including accounts receivable, inventories and certain property and equipment.

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The credit agreement also contains various restrictive covenants, which limit, among other things, indebtedness, liens and business combination transactions. In addition, we must maintain certain financial covenant ratios, including operating cash flows to fixed charges, senior debt to EBITDA, and total debt to EBITDA, as defined in the agreement. We were in compliance with the financial covenants at March 31, 2005.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risk from exposure to changes in interest rates based upon our financing, investing and cash management activities. We use a mix of debt maturities along with variable-rate debt to manage our exposure to changes in interest rates. We do not expect changes in interest rates to have a material adverse effect on our income or our cash flows in 2005. However, we cannot assure that interest rates will not significantly change in 2005. We do not enter into derivatives or other financial instruments for trading or speculative purposes. A 1.0% increase in interest rates would not have a material effect on our results of operations.

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Item 4. Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Exchange Act Rule 13a-15 and 15d-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that material information is recorded, processed, summarized and reported by management on a timely basis in order to comply with our disclosure obligations under the Securities Exchange Act of 1934 and the SEC rules thereunder. There have not been any changes in our internal controls over financial reporting during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We refer you to Item 1, note 15 entitled “Legal Actions.”

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

None.

Item 3. Defaults upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5. Other Information

Not applicable.

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Item 6. Exhibits

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SIGNATURES

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

Date: May 10, 2005