UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



FORM 10-K



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



| | For the fiscal year ended December 31, 2007
| | -------------------------------------------

or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from                              to
                            .

Commission file number: 0-31271

REGENERATION TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 59-3466543                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)

11621 Research Circle, Alachua, Florida 32615

(Address of Principal Executive Offices) (Zip Code)

(386) 418-8888

(Registrants telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:    None

Securities registered pursuant to Section 12(g) of the Act:    Common Stock, par value $0.001

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  ̈    No x

Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ̈    No x

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.  ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of accelerated filer, large
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated
Filer  ̈ Accelerated Filer x Non-Accelerated Filer  ̈ Smaller Reporting Company  ̈

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

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, 2007), was approximately $335.4 million.

The number of shares of Common Stock outstanding as of February 20, 2008 was 29,894,296.









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DOCUMENTS INCORPORATED BY REFERENCE

None.



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REGENERATION TECHNOLOGIES, INC.

FORM 10-K Annual Report

Table of Contents



|         |  |                                                                                                              |  |      
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | -----
|Part I   |  |                                                                                                              |  | Page 
|Item 1   |  | Business                                                                                                     |  | 1    
|         |  | Company Overview                                                                                             |  | 1    
|         |  | Proposed Merger                                                                                              |  | 2    
|         |  | Industry Overview                                                                                            |  | 3    
|         |  | Our Products and Markets                                                                                     |  | 4    
|         |  | The BioCleanse® Tissue Sterilization Solution                                                                |  | 7    
|         |  | Tissue Recovery                                                                                              |  | 8    
|         |  | Marketing and Distribution                                                                                   |  | 9    
|         |  | Research and Development                                                                                     |  | 10   
|         |  | Intellectual Property                                                                                        |  | 11   
|         |  | Competition                                                                                                  |  | 11   
|         |  | Government Regulation                                                                                        |  | 11   
|         |  | Employees                                                                                                    |  | 13   
|         |  | Proposed Merger with Tutogen                                                                                 |  | 13   
|Item 1A  |  | Risk Factors                                                                                                 |  | 14   
|Item 1B  |  | Unresolved Staff Comments                                                                                    |  | 22   
|Item 2   |  | Properties                                                                                                   |  | 22   
|Item 3   |  | Legal Proceedings                                                                                            |  | 22   
|Item 4   |  | Submission of Matters to a Vote of Security Holders                                                          |  | 23   
|         |  |                                                                                                             
|Part II  |  |                                                                                                              |  |      
|Item 5   |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 25   
|Item 6   |  | Selected Financial Data                                                                                      |  | 27   
|Item 7   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 29   
|Item 7A  |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 40   
|Item 8   |  | Consolidated Financial Statements and Supplementary Data                                                     |  | 40   
|Item 9   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 41   
|Item 9A  |  | Controls and Procedures                                                                                      |  | 41   
|Item 9B  |  | Other Information                                                                                            |  | 41   
|         |  |                                                                                                             
|Part III |  |                                                                                                              |  |      
|Item 10  |  | Directors and Executive Officers of the Registrant                                                           |  | 42   
|Item 11  |  | Executive Compensation                                                                                       |  | 45   
|Item 12  |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 61   
|Item 13  |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 63   
|Item 14  |  | Principal Accounting Fees and Services                                                                       |  | 64   
|         |  |                                                                                                             
|Part IV  |  |                                                                                                              |  |      
|Item 15  |  | Exhibits and Financial Statement Schedules                                                                   |  | 65-67
|         |  | Index to Consolidated Financial Statements                                                                   |  | 68   



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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 orthopedic and
other surgical implants 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 and dermal tissue
in producing our allografts. We also process animal tissue to produce our new Sterling® xenograft line of products. Surgeons then use our products 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 products are
distributed in all 50 states and in 14 other countries.

The Company processes human and animal tissue and distributes the tissue through
various channels. This one line of business is comprised primarily of four product categories: spinal constructs, sports medicine, bone graft substitutes, and general orthopedic. As of December 31, 2007, we have completed our exit from the
cardiovascular business. The following table outlines the product categories we serve and the amount and percentage of our revenues for the years ended December 31, 2007, 2006 and 2005:



|                               |  |                         |        |  |       |   |  |      |        |  |       |   |  |   |        |  |       |  
|------------------------------ |  | ----------------------- | ------ |  | ----- | - |  | ---- | ------ |  | ----- | - |  | - | ------ |  | ----- | -
|                               |  | Year Ended December 31, |       
|                               |  | 2007                    |        |  | 2006  |   |  | 2005 |       
|                               |  | (In thousands)          |       
|Fees from tissue distribution: |  |                         |        |  |       |   |  |      |        |  |       |   |  |   |        |  |       |  
|Spinal constructs              |  | $                       | 41,067 |  | 43.5  | % |  | $    | 35,085 |  | 47.4  | % |  | $ | 35,084 |  | 46.7  | %
|Sports medicine                |  |                         | 27,685 |  | 29.4  | % |  |      | 14,959 |  | 20.2  | % |  |   | 10,545 |  | 14.0  | %
|Bone graft substitutes         |  |                         | 17,011 |  | 18.1  | % |  |      | 13,506 |  | 18.3  | % |  |   | 18,055 |  | 24.0  | %
|General orthopedic             |  |                         | 993    |  | 1.1   | % |  |      | 969    |  | 1.3   | % |  |   | 1,000  |  | 1.3   | %
|Cardiovascular                 |  |                         | 1,952  |  | 2.1   | % |  |      | 5,639  |  | 7.6   | % |  |   | 7,653  |  | 10.2  | %
|Other revenues                 |  |                         | 5,499  |  | 5.8   | % |  |      | 3,812  |  | 5.2   | % |  |   | 2,862  |  | 3.8   | %
|                               |  |                         |        |  |       |   |  |      |        |  |       |   |  |   |        |  |       |  
|Total                          |  | $                       | 94,207 |  | 100.0 | % |  | $    | 73,970 |  | 100.0 | % |  | $ | 75,199 |  | 100.0 | %
|                               |  |                         |        |  |       |   |  |      |        |  |       |   |  |   |        |  |       |  

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 implants both within and outside the United States. Foreign distribution, primarily in Korea and Europe, accounted for
6.5%, 7.2% and 6.3% of our revenues during the years ended December 31, 2007, 2006 and 2005, respectively.



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We pursue a market-by-market approach to the distribution of our implants, and establish strategic
distribution arrangements in order to increase our penetration in selected markets. We have distribution arrangements with Medtronic Sofamor Danek (MSD), Blackstone Medical, Inc. (Blackstone), a subsidiary of Orthofix
International NV, and Stryker Spine, a division of Stryker (Stryker) for spine implants, and with Zimmer, Inc. (Zimmer), Exactech, Inc., (Exactech) and Pioneer Surgical Technology, Inc. (Pioneer) for
our allograft paste implants, and with Wright Medical Technology, Inc. (Wright) for our sports medicine implants. We had an exclusive distribution arrangement with ATS Medical, Inc., (ATS) for the cardiovascular market, which
ended in November 2007. In the domestic sports medicine and general orthopedic applications we have developed a direct distribution force and a network of independent distributors. In the international market we use a network of independent
distributors.

As part of the tissue procurement process we rely on tissue recovery
agencies to perform a risk assessment on every potential donor, interview family members and evaluate the donors medical records. Blood collected from each donor by the recovery agency is tested for the presence of viral or bacterial diseases.
Bone tissue and soft tissue grafts are sterilized through our BioCleanse® process only after it has passed this screening by the recovery agency and testing of the blood samples. Our
BioCleanse®process is a patented tissue sterilization process that is designed to add a measure of safety to our tissue implants and provide
surgeons and patients with tissue implants that are free of spores, fungi, bacteria and viruses and is the only tissue sterilization process that has been reviewed by the FDA. 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.

We are
an accredited member of 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 and research and informs users of our human tissue implants that we are in compliance with the minimum safety guidelines of the association.

We were incorporated in 1997 in Florida as a wholly-owned subsidiary of the University of Florida Tissue Bank, UFTB. We began operations on February 12, 1998 when UFTB contributed to us its allograft
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. Information included on our website is not incorporated by reference in
our Form 10-K. 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 (the Exchange Act), 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.

Proposed Merger

On November 12, 2007, the Company, Tutogen Medical, Inc., (Tutogen) and Rockets FL Corp., a newly formed, wholly owned subsidiary of the
Company, entered into an Agreement and Plan of Merger to combine Tutogen and the Company in a tax-free, stock-for-stock exchange. The merger is discussed more fully below under the caption Proposed Merger with Tutogen.



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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 to repair and
promote the healing of defective tissue is surgical intervention, 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;
| | - |  | ----------------------



| |  |  | xenograft tissue;
| | - |  | -------------------



| |  |  | autograft tissue; and
| | - |  | -----------------------



| |  |  | allograft tissue.
| | - |  | -------------------

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, despite best efforts, 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. Using metal and synthetic products may also make it difficult to do a second surgery or revision. 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

Surgical procedures using xenograft tissue-based implants are common in many areas of medicine including cardiac and vascular procedures, soft tissue
repair and wound care. Xenograft based products are also used in the repair of bone defects in orthopedic surgery as carriers for Demineralized Bone Matrix and Bone Morphogenic Protein products. The production of xenograft products involves
recovering animal tissue, typically from cattle (bovine) or pigs (porcine), and then transplanting that recovered tissue into a human patient. Xenografts are not widely used in the United States as a direct bone graft substitute due to a higher risk
of an adverse immune system response and the perceived risk of disease transmission.

We have completed extensive animal model research to validate that the BioCleanse® tissue sterilization process can be successfully applied to xenograft tissues to mitigate these
risks and render xenograft tissue implants equivalent to the human tissue implants. Our BioCleanse® process for xenograft tissue has also been reviewed by the FDA.

Autograft and Allograft 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.



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A significant drawback to autograft procedures is that they require an additional surgery to harvest the
tissue from a second site in the patients body. Often in autograft procedures, the site where the patients tissue is harvested becomes painful and uncomfortable, and can take longer to heal than the primary surgical site. 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.

We believe allograft is a superior surgical solution compared to autograft because the procedure involves only the primary surgical site. However,
historically there have been inadequate amounts of donated tissue to meet the demand of the market for these implants.

Our Products and Markets

The Company processes human and animal tissue and distributes the tissue through various channels. This one line of business is comprised
primarily of four product categories: spinal constructs, sports medicine, bone graft substitutes, and general orthopedic. We exited the cardiovascular business and ceased processing of cardiovascular tissue in late 2006. During 2007 we distributed
our remaining cardiovascular inventory. Our current implants range from allografts and xenografts that are precision machined for specific surgical applications to grafts conventionally processed for general surgical uses. The following table
summarizes our implants offerings in each of our product categories and the distribution of these implants.



|                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                                                                                                                                            
|----------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------
|Product Category  |  | Allografts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | Distribution                                                                                                                               
|Spinal Constructs |  |   MD Series Threaded Cortical Bone Dowels   CORNERSTONE-SR® Cortical Block   CORNERSTONE ACSR, L-ACSR, ASR and L-ASR Cortical Blocks   CORNERSTONE
RESERVE Cortical Cancellous Ring, Assembled Cortical Cancellous   CORNERSTONE SELECT Fibula Wedge   TANGENT® Impacted Cortical Wedge   PRECISION GRAFT Cortical Ring   CRESCENT Cortical Spacer   CORNERSTONE Conventional Allografts (unicortical, bicortical and tricortical blocks; ilium block)   Interbody Conventional Allografts (cancellous block, bicortical block, tricortical ilium block, patellar
tricortical wedge, unicortical dowel) |  | Medtronic Sofamor Danek (Domestic and Canada);
some independent international distribution (conventional allografts only)                  
|                  |  |   ALLOQUENT Assembled Cervical Allograft                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | Blackstone Medical, Inc., a subsidiary of Orthofix International, NV                                                                       
|                  |  |   ALLOCRAFT Assembled Cervical Allograft                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | Stryker Spine, a division of Stryker                                                                                                       
|Sports medicine   |  |   Assembled grafts: Adjustable bone-tendon-bone and bone- tendon-bone Select   Pre-shaped
bone-tendon-bone, Achilles tendons   Soft tissue tendons (gracilis, semitendinosus, tibialis)   Tendons with bone blocks (patellar and Achilles)   Meniscus grafts   HTO Wedge   Sterling® Interference Screw ST, Interference Screw HT   Sterling®
Wedge                                                                                                                                                                                                                                                              |  | Our domestic direct distribution force and network of independent distributors (domestic and international) Wright Medical Technology, Inc.



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|                             |  |                                                                                                                                                                                                                   |  |                                                                                                                                                           
|---------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|Product Category             |  | Allografts                                                                                                                                                                                                        |  | Distribution                                                                                                                                              
|Bone graft substitutes       |  |   BioSet RT Allograft Paste, Allograft Paste, IC RT Paste, IC Moldable strips and discs                                                                                                                         |  | Our domestic direct distribution force and a network of independent distributors; Pioneer Surgical Technology, Inc.                                       
|                             |  |   RTI Allograft Paste                                                                                                                                                                                            |  | Independent distribution (International)                                                                                                                  
|                             |  |   Demineralized bone matrix   Cancellous and cortical cancellous chips   Cancellous cubes   Sterling ® Cancellous Chips, Cancellous Cubes                                                                     |  | Our domestic direct distribution force and a network of independent distributors; independent international distribution                                  
|                             |  |   OSTEOFIL® DBM Paste, RT DBM Paste, ICM Moldable Strip, RT ICM Moldable Strip, IC Moldable Allograft Syringe                                                                                                    |  | Medtronic Sofamor Danek (Domestic and
Canada)                                                                                                             
|                             |  |   OsteoBridge® Moldable Bone Paste, Flowable Bone Paste   Regenafil® Injectable Bone Paste   Regenaform® Moldable Bone Paste   Opteform® Moldable Bone Paste   Optefil Flowable Bone Paste                  |  | Exactech, Inc.                                                                                                                                            
|Cardiovascular*              |  |   Cardiac (Valves, Conduit)   Patches / Hemi Arteries   Vascular (Veins, Arteries)                                                                                                                             |  | ATS Medical through November 1, 2007 Our domestic distribution force from November 1, 2007 through December 31, 2007                                      
|General orthopedic and other |  |   Femoral heads   Ilium
strips   Cortical and cortical cancellous strips   Shafts (femoral, tibial, fibular and humeral)   Whole / proximal / distal femur   Whole / proximal / distal tibia   Pericardium |  | Our domestic direct distribution force and network of independent distributors domestic and internationally; Medtronic Sofamor Danek (Domestic and Canada)



|* | We no longer process and distribute cardiovascular tissue.
|- | ----------------------------------------------------------

Spinal Constructs

The spinal constructs market for allografts includes precision machined implants utilized in
spinal procedures. During 2007, we shipped over 76,000 spinal constructs allograft units, which accounted for $41.1 million of our revenues. Our spinal constructs allografts are marketed domestically through our non-exclusive relationships with MSD,
Blackstone, and Stryker.

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 TANGENT® Impacted Cortical Wedge, CRESCENT Cortical Spacer and PRECISON GRAFT Cortical Ring
allografts are specially designed and contoured to promote stability and restore normal alignment in the lumbar spine. Our CORNERSTONE SR® Cortical Block is used in the cervical area of the
spine and is available in both parallel and lordotic versions.

On June 6, 2007, the Company entered into an Allograft Distribution
and Supply Agreement with an initial term of 3 years with Stryker, under which the Company is processing and packaging grafts designed by Stryker for distribution by Stryker.

On November 21, 2006, the Company entered into an Allograft Distribution and Supply Agreement with Blackstone for an initial term of 3 years. Under
this agreement, the Company is processing and packaging grafts designed by Blackstone for distribution by Blackstone. November 17, 2007, this agreement was expanded to include four additional graft designs.



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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, and rotator cuff, in the shoulder. Our principal sports medicine allografts are tendons for ligament reconstruction and our meniscal allografts for
transplantation. Many of our sports medicine allografts utilize our patented pre-shape technology and are shaped to fit surgeons requirements making them easier and/or faster to implant. During 2007, we shipped over 16,000 sports medicine
allografts which accounted for $27.7 million of our revenues which included over 750 units and $94,000 of revenues from Sterling® interference screws derived from animal tissue. Our sports
medicine products are marketed domestically through our direct distribution force and through our network of independent distributors and internationally through a network of independent distributors.

In 2004, we began using BioCleanse® to
sterilize many of our soft tissue sports medicine allografts, which have quickly become the preferred grafts in the market place.

In
December 2005, we implanted the first tendons using our patented assembled technology.

During 2006 we introduced our first assembled
tendon allografts for use in ACL reconstruction surgery. The new assembled implant significantly increased the supply of the bone tendon bone pre-shaped implant to help us meet the growing demand for this surgery.

In December, 2006 we announced an Exchange and Service Agreement with CryoLife, Inc. (CryoLife) whereby we transferred certain rights to our
cardiovascular business to CryoLife in exchange for certain rights related to CryoLifes orthopedic sports medicine business. As a result, effective January 1, 2007, we no longer procure and process cardiovascular tissue. We will continue
to distribute our existing cardiovascular tissue inventory through June 30, 2008. After that date, CryoLife will become entitled to distribute our remaining cardiovascular tissue inventory through December 31, 2008. Under the Exchange and
Service Agreement, from July 1, 2008 through December 31, 2016 we have agreed not to market or solicit orders for human cardiac and vascular tissues.

On February 9, 2007, the Company entered into a Xenograft Distribution and Supply Agreement with Wright. Under this contract, Wright distributes certain Sterling xenografts as well as xenografts designed by
Wright which are processed and packaged by the Company. This agreement was expanded to include additional designs effective March 9, 2007.

In 2007 we enhanced the sports medicine product category by introducing the following new products: BioCleanse Meniscus, Bone-Tendon-Bone Select, BioCleanse Peroneus Longus and Sterling Xenograft Wedge.

Bone graft substitutes

Allograft Paste.    Surgeons principally use our allograft paste
implants, which are composed of demineralized bone matrix (DBM) and biologic gel carrier, in fracture treatment, bone and joint reconstruction and periodontal applications, such as ridge augmentation for dental implants. Our allograft
paste implants are marketed under Osteofil by MSD and the Optefil, Opteform®, Regenafil® and Regenaform® brands with Exactech and we distribute directly the BioSet family of paste products through our direct distributor force, Pioneer, and our international distribution network.

On May 14, 2007, the Company entered into an Exclusive License and Distribution Agreement with Zimmer with an initial term of 10 years. The
distribution agreement relates to certain new products currently in production. As part of the agreement, Zimmer agreed to make payments to the Company totaling $5.0 million for the aforementioned exclusive distribution rights, and maintain certain
minimum order volumes. The first payment of $1.0 million was made at the time of entering the agreement. The remaining payments of $4.0 million are expected to be paid in the first half of 2008. The $5.0 million exclusivity payment has been deferred



6



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and is being recognized as other revenue on a straight-line basis over the initial term of the contract. The contract provides for repayment, on a pro rata
basis, of the exclusivity payments during the initial contract term for specific events of non-performance, as defined in the agreement. The agreement also includes automatic two-year renewal terms, as well as buy-out provisions by both parties upon
proper notice of cancellation. In addition, the agreement with Zimmer was expanded to include additional allografts through an Amendment executed on December 14, 2007.

Milled Allograft and Xenograft.    Our bone graft substitutes allografts business also includes 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. In 2007, we shipped approximately 1,800 units and $312,000 of
revenues of milled xenograft implants.

During 2006 we received 510k premarket approval for BioSet XC a combination product including human
DBM and milled xenograft.

Cardiovascular

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

Our principal cardiovascular product was our heart valve allograft, which surgeons use to replace a patients own heart valve during coronary
surgery. During 2007, we shipped approximately 500 cardiovascular allograft units, including heart valves and vascular tissue which accounted for $2.0 million of our revenues. We distributed our cardiovascular allografts through an exclusive
distribution agreement with ATS Medical through November 1, 2007. After that date, we distributed our cardiovascular allografts through our domestic distribution force.

In December, 2006 we announced an Exchange and Service Agreement with CryoLife whereby we transferred certain rights to our cardiovascular business to
CryoLife in exchange for certain rights related to CryoLifes orthopedic sports medicine business. As a result, effective January 1, 2007, we no longer procured and processed cardiovascular tissue. During 2007 we continued to distribute
our remaining cardiovascular tissue inventory. Under the Exchange and Service Agreement, from July 1, 2008 through December 31, 2016 we have agreed not to market or solicit orders for human cardiac and vascular tissues.

General Orthopedic

Conventional Allografts.    Our conventional allograft business includes a wide variety of allograft categories including our intercalary grafts, such as our frozen femoral heads which are used for cancer
treatment procedures and hip and knee reconstruction. We also produce various types of fashioned bone, such as strips and shafts used for various orthopedic and sports medicine procedures. In 2007, we shipped over 2,100 general orthopedic allografts
which accounted for approximately $1.0 million of our revenues.

The BioCleanse® Tissue Sterilization Solution

We have developed and utilized 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



7



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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 hard-tissue allografts and xenografts and most of our soft tissue products. In addition to the safety advantage of BioCleanse®, it provides us with a number of
significant research and development opportunities, including the ability to introduce bone-growth factors and anti-bacterial, anti-viral and cancer fighting agents into our implants.

Tissue Recovery

Tissue recovery is the actual removal of tissue from a donor only after receiving
appropriate consent. Consent is obtained by the tissue recovery group. We operate certain tissue recovery groups directly, and contract with other FDA registered tissue recovery groups which specialize in this activity. Tissue recovery personnel
aseptically recover tissue within 24 hours for musculoskeletal 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 in 2007. Our five largest donor recovery groups together recovered for the years ended December 31, 2007, 2006 and 2005 approximately 49%, 48%, and 54%, respectively.
Southeast Tissue Alliance, or SETA (formerly the University of Florida Tissue Bank, Inc.) supplied us for the years ended December 31, 2007, 2006 and 2005 with approximately 14%, 22%, and 25%, respectively, of our total tissue. RTI Donor
Services, Inc.  Texas supplied us for the years ended December 31, 2007, 2006 and 2005 with approximately 11%, 0%, and 0%, respectively, of our total tissue. RTI Donor Services, Inc.  Wisconsin supplied us for the years ended
December 31, 2007, 2006 and 2005 with approximately 7%, 11%, and 13%, respectively, of our total tissue. DCI Donor Services, Inc. supplied us for the years ended December 31, 2007, 2006 and 2005 with approximately 9%, 5%, and 5%,
respectively, of our total tissue. Alabama Organ Center supplied us for the years ended December 31, 2007, 2006 and 2005 with approximately 8%, 10%, and 11%, respectively, of our total tissue. If we were to lose any one of these five sources of
tissue, the impact on our operating results would be material.

We continue to
develop new xenograft tissue implants. Grafts processed from xenograft tissue are regulated by the FDA as devices and require approval or licenses from the FDA prior to marketing in the United States. The source of our animal tissue is an FDA
regulated closed herd. Through clinical studies we have determined that our xenograft implants, after processing through BioCleanse®, are equivalent to our allograft implants with respect
to functionality, safety and incorporation. We believe the continued development of our xenograft implants will help us meet the unmet demand for allograft and also allow us to develop new biological implants that cannot currently be made due to
structural limitations of human tissue.



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Marketing and Distribution

Our allograft and xenograft products are distributed in all 50 states and in 14 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.

Our most significant market is the spinal market, in which MSD is our principal
distributor. Our distribution and license agreement with MSD has a term expiring June 1, 2014 unless renewed. Under our current agreement with MSD:



| |  | We supply MSD with human allograft tissue and bone paste for spine surgery, using our best efforts to meet the needs of MSD and its surgeons.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  | We are responsible for the processing of tissue and related regulatory compliance.
| | - | ----------------------------------------------------------------------------------



| |  | We license MSD to distribute these products. MSD has an exclusive license with respect to certain specialty allograft products in the United States, Canada and Puerto Rico, and a
non-exclusive license with respect to other products.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Inventories are carried by MSD.
| | - | -------------------------------



| |  | MSD pays us a license and service fee ranging from 40%50% of listed average net distribution fee. We pay MSD a 5% royalty based upon net revenues of our spinal allograft
products distributed by other U.S. distributors.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We bill MSD directly. MSD payment terms to us are 30 days from the date of shipment, and we recognize MSDs licensing and servicing fees as revenue upon receipt of products by
MSD.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We have amended our agreement with MSD several times during the periods covered by this report. Prior to
September 12, 2006, MSD had an exclusive right to distribute our precision machined spinal allograft implants in the United States and was required to make minimum purchases of exclusive products. The 2006 amendment also modified the product
and transfer fee schedules between us and MSD and provided us with certain development and processing rights relating to jointly-owned intellectual property. Prior to December 15, 2005, MSD had exclusive rights to distribute our spinal
allograft paste products in the United States, Canada and Puerto Rico.

We distribute allografts we process for use in sports medicine
through our direct distribution. Prior to June 30, 2005, Stryker Endoscopy, a division of Stryker Corporation (Stryker Endoscopy), served as the exclusive distributor for these products in the United States.

Exactech is our principal distributor for allograft paste products for general orthopedic procedures. We also distribute these products through our own
direct distribution force, Pioneer, and international distribution network. Prior to December 15, 2005, Exactech was the exclusive distributor for these products. Under our licensing and distribution agreement with Exactech, we remain
responsible for processing and related regulatory compliance. Exactech is responsible for regulatory compliance related to its distribution. Exactech pays us license and service fees based on a percentage of the listed average distribution fee for
allograft paste used in non-spinal orthopedic procedures. We also are required to pay Exactech a 3% royalty fee with respect to our moldable allograft pastes distributed by others which is the same formulation as the Exactech product. The agreement
is for an initial term expiring June 30, 2014, subject to earlier termination under certain limited circumstances.

In November 2006,
the Company and Tutogen entered into a strategic sourcing relationship. Under the terms of the sourcing agreements, the Company has the first right of refusal to soft tissue used in sports medicine surgeries recovered by Tutogens recovery
partners. Tutogen, in turn, has a first right of refusal to all dermis, fascia and pericardium recovered by RTI Donor Services agencies.



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In December, 2006 we announced an Exchange and Service Agreement with CryoLife whereby we transferred
certain rights to our cardiovascular business to CryoLife in exchange for certain rights related to CryoLifes orthopedic sports medicine business. As a result, effective January 1, 2007, we no longer procured or processed cardiovascular
tissue. During 2007 we continued to distribute our remaining cardiovascular tissue inventory. Under the Exchange and Service Agreement, from July 1, 2008 through December 31, 2016 we have agreed not to market or solicit orders for human
cardiac and vascular tissues. We previously distributed cardiac and vascular tissue allografts through ATS Medical. We ended this relationship as of November 1, 2007.

The Tutogen and Cryolife agreements resulted in higher levels of tissue available for distribution of sports medicine implants in 2007 and should provide
higher levels of tissue in subsequent years.

At the end of 2007, our domestic distribution organization consisted of eight direct
biologics representatives and 15 distributors with a combined total of more than 100 active representatives marketing our sports medicine and general orthopedics tissues. Internationally, we have 14 distributors that distribute our products through
approximately 75 representatives. This network distributes conventional tissue directly to hospitals and surgeons in their exclusive territory. Representatives and distributors receive compensation for the revenues they generate through commissions.

Prior to June 2006, C.R. Bard served as the exclusive distributor for our urological allograft implants. Under our agreement with C.R.
Bard, we shipped our urological allografts directly to C.R. Bards customers or to C.R. Bard for their direct distribution. In return, we received reimbursement for shipping charges and a transfer fee as a percentage of the amount charged to
the customer. This agreement was terminated in June 2006 and we no longer distribute products to this market.

Research and Development

Our research and development costs for the years ended December 31, 2007,
2006 and 2005 were $5,190, $5,403 and $5,003, respectively. In 2007, we continued to increase our investment in our R&D efforts by funding new projects. Our scientists are focusing their studies on delivering optimal regenerative medicine
solutions 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
healing pharmaceutical components into allograft implants. We are focused on developing new processing technology to accelerate the introduction of new tissue implants in all product categories and to continuously raise the bar for tissue safety.

We plan to continue to develop new implants and technologies within the spinal,
sports medicine, bone graft substitutes and general 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 machining, assembled grafts, and tissue mediated osteoinduction, and focusing on advanced technologies for existing markets. As of December 31, 2007, our research and development staff consisted of 48
scientists, professional, engineering and technical personnel. Our R&D staff was reorganized into areas of specialty in early 2007. We now operate a dedicated research team working on advanced technologies, and have embedded development
/technical teams who work directly in the business/marketing teams focused on expanding the scope and scale of existing core competencies such as tissue sterilization, and tissue machining, meeting specific surgical needs. This new approach has
already resulted in the development of core science platforms, a pipeline of concepts for development and marketing and focused development to meet immediate needs.

The marketing/development teams launched 12 new products to market in 2007, including 6 products
in the Spine/GO area, three of which were xenograft products, and 6 in the Sport Medicine business, including the application of BioCleanse® for Meniscus which completes the range of
sterile tissues for soft tissue repair, and additional products in the assembled bone-tendon portfolio. In 2008 we anticipate 12-15 product launches. We are continuing to show progress in research on xenograft tendons for sports medicine indications
and optimized osteoinductive materials. In 2007 we began pre-clinical studies in both areas. We also continue to evaluate a number of new technologies both in-house and in collaboration with others.



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

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.

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; soft and calcified tissue implants; intervertebral spacers and
other spinal implants; matrix compositions comprised of muscle or pulverized dermis; the use of the interference screw technology; our segmentally demineralized graft; our demineralized stent or conduit technology; methods and instruments for
improved meniscus transplantation; and materials and methods for improved bone- tendon-bone transplantation. Our foreign patent holdings include: our MD-Series cortical bone dowel technology, our precision machined spinal implants, 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.

No significant patents are expected to expire in the next five years.

Competition

Competition in the 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 and our xenograft implants compete with autograft, metals and synthetic tissues.

Our principal competitors in the conventional allograft market include the Musculoskeletal Transplant Foundation, or MTF, AlloSource and LifeNet. Among our competitors in precision machined allograft are Osteotech, MTF, LifeNet, AlloSource
and Tutogen. Other companies who process allograft pastes include Osteotech, AlloSource, Integra, Wright, and MTF. We estimate that our market share, in conjunction with our related distributors, are: spinal constructs 28%; sport medicine 15%; and
bone graft substitutes 8%. Other companies who process and distribute xenograft tissue include Tutogen and Osteotech.

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



11



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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.

The FDA requires 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 are 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.

Our bone paste allografts are 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 allograft paste implants for
orthopedic and spinal applications.

Our xenograft implants are regulated by the FDA as medical devices and are subject to pre-market
approval or clearance by the FDA. We received 510(k) pre-market approval for two new products in 2007. RTI xenograft implants are CE-marked and are therefore subject to a design examination review by a Notified Body. We received approval to CE-mark
one new product in 2007.

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 believe that we are in compliance with the
applicable regulations.



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Employees

As of December 31, 2007, we had a total of 508 employees. The following chart shows the number of our employees involved in the various aspects of our business:



|                                    |  |                    
|----------------------------------- |  | -------------------
|Department                          |  | Number of Employees
|Tissue Processing and Manufacturing |  | 257                
|Tissue Recovery                     |  | 95                 
|Distribution and Marketing          |  | 33                 
|Research and Development            |  | 48                 
|General and Administrative          |  | 75                 

Proposed Merger with Tutogen

On November 12, 2007, the Company entered into an Agreement and Plan of Merger with Tutogen and Rockets FL Corp., a newly formed, wholly owned subsidiary of the Company. Under the terms of the Agreement,
Rockets FL Corp. will be merged with and into Tutogen, with Tutogen being the surviving corporation. As a result, Tutogen will become a wholly owned subsidiary of the Company. The proposed merger is structured as a tax-free stock-for-stock
exchange pursuant to which Tutogens shareholders will receive 1.22 shares of the Companys common stock for each share of Tutogens common stock. Upon completion of the merger, the Company will change its name to RTI Biologics,
Inc.

The proposed merger is subject to approval by the respective shareholders of Tutogen and the Company, as well as customary
closing conditions and regulatory approvals. If the Company terminates the proposed Agreement and Plan of Merger, under certain limited conditions, the Company could owe a termination fee of $6.5 million. The proposed merger will be voted
on at the special meeting of stockholders on February 27, 2008.

The combined company will be headquartered in Alachua, FL. Brian
K. Hutchison, currently Chairman, President and Chief Executive Officer of Regeneration Technologies, will be the Chairman and Chief Executive Officer of the combined company. Thomas F. Rose, currently Vice President, Chief Financial Officer
and Secretary of Regeneration Technologies, will serve in the same capacity of the combined entity. Guy L. Mayer, currently President and Chief Executive Officer of Tutogen, will become President of the combined company, with a focus on
international activities and sales and marketing. Mr. Mayer will also join the board of directors of the combined company. L. Robert Johnston, currently Vice President and Chief Financial Officer of Tutogen, will serve as Vice President of
Finance for the combined company.

The board of directors of the combined company will be comprised of all seven directors from
Regeneration Technologies current board and five directors from Tutogens board, bringing the total number of directors to 12, including Messrs. Hutchison and Mayer.

The Companys board of directors and the board of directors of Tutogen have both approved the merger.

The foregoing description of the merger does not purport to be complete and is qualified in its entirety by reference to the Companys Proxy
Statement on the Form S-4 filed with the Securities and Exchange Commission on January 23, 2008.

Satisfaction of the closing
conditions could take several months or longer. There can be no assurance that the conditions necessary to complete the merger will be met, or that the proposed merger will be completed at all.

Statements made in this Form 10-K relating to the Companys business strategies, operating plans, planned expenditures, expected capital
requirements and other forward-looking statements regarding the Companys business do not take into account potential future impacts of the Companys proposed merger with Tutogen.



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Item 1A.    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.

The pending merger with Tutogen may create uncertainty for our suppliers, employees and business partners.

On November 13, 2007, we announced that we had entered into a merger agreement with Tutogen. The merger is currently expected to close in late
February 2008. While the merger is pending, donor recovery groups may delay or defer decisions to become Regeneration Technologies suppliers and existing suppliers may experience uncertainty about our service, including the results of any
integration of our business with that of Tutogen. This may adversely affect our ability to gain new suppliers and retain existing suppliers, which could adversely affect our revenues as well as the market price of our common stock. Current
employees may experience uncertainty about their post-merger roles with Regeneration Technologies and key employees may depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with Regeneration
Technologies following the merger. Other parties with whom we have or are pursuing relationships, such as distributors, hospitals and surgeons, may defer agreeing to further arrangements with us, or may opt not to become a business partner of
ours at all.

The merger with Tutogen is subject to Shareholder approval and may not occur.

We and Tutogen must obtain shareholder approval for the merger to occur. If either we or Tutogen do not receive this approval, then we will not be
able to complete the merger. We cannot assure you that the merger will be completed in the anticipated time frame or at all. A failure to complete the merger may result in a decline in the market price of our common stock.

The issuance of shares of our common stock to Tutogen stockholders in the merger will substantially reduce the percentage interests of our current
stockholders.

If the merger is completed, we will issue approximately 23,694,000 shares of our common stock in the merger to
former stockholders of Tutogen. Based on the number of shares of Regeneration Technologies and Tutogen common stock outstanding on the date of the Merger Agreement, former Tutogen stockholders will own, in the aggregate, approximately 45% of the
shares of common stock of the combined company outstanding immediately after the merger. The issuance of shares of our common stock to Tutogen stockholders in the merger and to holders of assumed options and restricted stock units to acquire shares
of Tutogen common stock and warrants will cause a significant reduction in the relative voting power and percentage interests in earnings of our current stockholders and also will reduce their liquidation value and book value.

We will incur significant transaction and merger-related costs in connection with the merger.

Regeneration Technologies expects to incur charges of approximately $4 million in outside costs, including legal, accounting and financial advisory fees,
which are expected to be accounted for as part of the purchase price when the merger is completed. The actual transaction costs may be higher than this estimate. In addition, the combined company expects to incur integration costs associated with
the merger. These integration costs will be charged to operations in the fiscal quarter in which they are incurred, which would adversely affect the financial condition, results of operations and cash flows of the combined company. Further,
diversion of attention from ongoing operations on the part of management and employees could adversely affect our business. Although,



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after the merger closes, we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of
the businesses, may offset incremental transaction and transaction-related costs over time, this net benefit may not be achieved in the near term, or at all. In addition, speculation regarding the likelihood of closing the merger could increase
the volatility of our stock price, and pendency of the merger could make it difficult to effect other significant transactions, to the extent opportunities arise to engage in such transactions. We will incur these costs, as well as face the
disruptions to our business and the potential harm to our relationships with suppliers, employees and business partners discussed above, even if the merger is not completed.

The merger may not provide all of the anticipated benefits.

If we are able to complete the merger, we expect to achieve various benefits from combining our and Tutogens resources, as well as significant cost savings from a combined operation. Achieving the
anticipated benefits of the merger will depend in part upon whether our two companies integrate our businesses in an efficient and effective manner. To date, we have operated independently from Tutogen and legal restrictions limit planning
prior to the merger for integration of the two companies. Accordingly, we may not be able to accomplish this integration process smoothly or successfully or in a timely manner. Any inability of management to integrate successfully the
operations of our two companies, or to do so in a timely manner, could have an adverse effect on the combined company or the expected benefits from the merger.

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 human 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 organizations. 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 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.

Our five largest donor recovery groups together recovered for the years ended December 31, 2007, 2006 and 2005 approximately 49%, 48%, and 54%, respectively, of our total tissue supply. Southeast Tissue Alliance, or SETA (formerly the
University of Florida Tissue Bank, Inc.) supplied us for the years ended December 31, 2007, 2006 and 2005 with approximately 14%, 22%, and 25%, respectively, of our total tissue. RTI Donor Services, Inc.  Texas supplied us for the years
ended December 31, 2007, 2006 and 2005 with approximately 11%, 0%, and 0%, respectively, of our total tissue. RTI Donor Services, Inc.  Wisconsin supplied us for the years ended December 31, 2007, 2006 and 2005 with approximately 7%,
11%, and 13%, respectively, of our total tissue. DCI Donor Services, Inc. supplied us for the years ended December 31, 2007, 2006 and 2005 with approximately 9%, 5%, and 5%, respectively, of our total tissue. Alabama Organ Center supplied us
for the years ended December 31, 2007, 2006 and 2005 with approximately 8%, 10%, and 11%, respectively, of our total tissue. If we were to lose any one of these five sources of tissue, the impact on our operating results would be material.

We cannot be sure that our supply of human 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



15



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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 implants, our revenues may decrease.

We currently derive
the majority of our revenues through our relationships with two companies, MSD and Exactech. For the years ended December 31, 2007, 2006, and 2005 we derived approximately 47%, 54% and 60% and 6%, 6% and 5% of our revenues from distribution by
MSD and Exactech, respectively. In addition, MSD provides nearly all of the instrumentation, surgeon training, distribution assistance and marketing materials for our line of spinal allografts.

Variations in the timing and volume of orders by MSD sometimes have had a material effect upon our revenues. If our relationship with MSD is terminated
or 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
additional distribution relationships on favorable terms, our revenues may decline.

If third party payers fail to provide
appropriate levels of reimbursement for the use of our implants, our revenues would be adversely affected.

Political, economic and
regulatory influences are subjecting the healthcare industry in the United States to fundamental change. Any new federal or state legislation could result in significant changes in the availability, delivery, pricing or payment for healthcare
services and products. While we cannot predict what form any new legislation will take, it is possible that any significant healthcare legislation, if adopted, could lower the amounts paid to us for our services, which would decrease our revenues.

Our revenues depend largely on the reimbursement of patients medical expenses by government health care programs and private health
insurers. Governments and private insurers closely examine medical procedures incorporating new technologies to determine whether the procedures will be covered by payment, and if so, the level of payment which may apply. We cannot be sure that
third party payers will continue to reimburse us at current levels.

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

Our implants 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:



| |  |  | we could be forced to recall, withdraw or suspend distribution of our implants;
| | - |  | -------------------------------------------------------------------------------



| |  |  | our implants and technologies could fail quality assurance and performance tests;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | production and deliveries of our implants could be delayed or cancelled; and
| | - |  | ----------------------------------------------------------------------------



| |  |  | our processing costs could increase.
| | - |  | ------------------------------------



16



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Further, to be successful, we will need to manage our human tissue 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, and
lack of skilled personnel. If we are unable to process and produce our implants 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 revenues and increase our cost per allograft processed.

Our allograft and xenograft implants 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 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.

FDA regulations of human
cellular and tissue-based products, titled Good Tissue Practices, became effective as of May 2005. These regulations cover all stages of allograft processing, from procurement of tissue to distribution of final allografts. These
regulations may increase regulatory scrutiny within our industry and lead to increased enforcement action which affects the conduct of our business. In addition, the effect of these regulations may have a significant effect upon recovery agencies
which supply us with tissue and increase the cost of recovery activities. Any such increase would translate into increased costs to us, as we reimburse 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 the industry in which we operate.

Some of our implants in development will contain tissue derived from animals, commonly referred to as xenografts. Xenograft implants are medical devices
that are subject to pre-market approval or clearance by the FDA. We received FDA clearance on several xenograft implants in 2005, 2006 and 2007. However, we may not receive FDA approval or clearance to market new implants as we attempt to expand the
quantity of xenograft implants available for distribution.



17



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The allograft 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 made 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 allograft and xenograft implants and technologies by the medical community.

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



| |  |  | lack of clinical acceptance of our implants and technologies;
| | - |  | -------------------------------------------------------------



| |  |  | introduction of competitive tissue repair treatment options which render our implants and technologies too expensive or obsolete;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | lack of availability of third-party reimbursement; and
| | - |  | ------------------------------------------------------



| |  |  | difficulty training surgeons in the use of our tissue implants and technologies.
| | - |  | --------------------------------------------------------------------------------

Market acceptance will also depend on our ability to demonstrate that our existing and new implants 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 implants and technologies, recommendations and endorsements by influential surgeons will be important to their broad commercial success. If our implants and
technologies are not broadly accepted in the marketplace, we may not achieve a competitive position in the market.

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

Technologies change
rapidly in our industry. For example, steady improvements have been made in synthetic human tissue substitutes which compete with our tissue implants. Unlike allografts, synthetic tissue



18



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technologies are not dependent on the availability of 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 tissue implants. 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 implants in a timely and cost-effective manner, if at all. If we are unable to achieve the improvements in our implants necessary for their successful
commercialization, the demand for our implants will suffer.

We face intense competition, which could result in reduced acceptance
and demand for our implants 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:



| |  |  | biotechnology, orthopedic, pharmaceutical, biomaterial and other companies;
| | - |  | ---------------------------------------------------------------------------



| |  |  | academic and scientific institutions; and
| | - |  | -----------------------------------------



| |  |  | public and private research organizations.
| | - |  | ------------------------------------------

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 and xenograft-based products and technologies.

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

Many factors 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. We can provide no assurance that releases will occur at levels which
maximize our processing efficiency and minimize our cost per allograft processed.

Negative publicity concerning methods of human
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.



19



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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 for which we apply 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 its 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.

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.

The defense costs and settlements for patent infringement lawsuits are not covered
by insurance. Patent infringement lawsuits can take up to several years to settle. If we are not successful in our defenses or not successful in obtaining dismissals of any such lawsuit, legal fees or settlement costs could have a material adverse
effect on our quarterly results of operations and our financial position.



20



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On September 11, 2006, Osteotech, Inc. filed
a lawsuit in the United States District Court for the District of New Jersey claiming infringement of one of their patents by our BioCleanse® process. The suit requests (i) that we be
enjoined permanently from infringing the patent, (ii) damages, along with treble damages as a result of alleged willful infringement, and (iii) reimbursement of costs and expenses and reasonable attorney fees. The parties have exchanged
substantial written discovery, much of which has been filed under seal in accordance with a stipulated Discovery Confidentiality Order. We have filed a motion for partial summary judgment, on which a hearing is pending. We believe the suit is
without merit and we have, and we will continue to, vigorously defend our position. However, a finding of infringement could have a material adverse effect upon our revenues.

We or our competitors may be exposed to product or professional 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 or professional liability claims, and substantial product or professional liability claims may be asserted against us. We are party to a number of legal proceedings relating to product
liability.

The implantation of donated human tissue products creates the potential for transmission of communicable disease. Although we
comply with Federal and state regulations and guidelines intended to prevent communicable disease transmission, and our tissue suppliers are also required to comply with such regulations, there can be no assurances that: (i) our tissue
suppliers will comply with such regulations intended to prevent communicable disease transmissions; (ii) even if such compliance is achieved, that our products have not been or will not be associated with transmission of disease; or
(iii) a patient otherwise infected with disease would not erroneously assert a claim that the use of our products resulted in disease transmission.

We currently have $20 million of product liability insurance and $20 million of professional liability insurance to cover claims. This amount of insurance may not be adequate for current claims if we are not
successful in our defenses, and furthermore, 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. 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.

We have been named as a party, along with a number of other defendants, in tort based lawsuits
relating to the recall of tissue recovered by Biomedical Tissue Service, Ltd., an unaffiliated recovery agency (BTS). As of January 31 2008, there have been 831 law suits filed related to the recall of which 13 law suits have been
dismissed. These lawsuits generally allege that we were negligent in not discovering deficiencies in recovery practices at BTS and include related claims for matters such as misrepresentation and breach of warranty. On October 20, 2006, we
filed a joint motion in federal court to dismiss the claims based on scientific evidence that it is impossible for sterilized tissue to transmit infections to implant recipients. This science first motion has been updated to reflect that
no freeze dried allograft has ever transmitted disease or infection from a donor to a patient. Where specific damages have been identified, the actions seek compensatory damages in ranges of $15,000 to $5 million and punitive damages in ranges of
$75,000 to $10 million.

We believe that we have meritorious defenses to these claims, and are defending them vigorously. In addition, we
believe our existing insurance should cover all litigation expenses and damage awards, if any. However, the existing insurance coverage may not be adequate if we are not successful in our defenses and certain lawsuits may not be eligible for such
insurance coverage. If we are not successful in our defenses to lawsuits not covered by insurance, or if existing insurance coverage is not adequate, the legal fees and settlements for such lawsuits could have a material adverse effect on quarterly
results of our operations and our financial position.



21



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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 allograft and xenograft products 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 need to obtain regulatory approvals in additional foreign countries before we can offer our implants and technologies for use;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | longer distribution-to-collection cycles, as well as difficulty in collecting amounts owed to us;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | dependence on local distributors;
| | - |  | ---------------------------------



| |  |  | limited protection of intellectual property rights;
| | - |  | ---------------------------------------------------



| |  |  | fluctuations in the values of foreign currencies; and
| | - |  | -----------------------------------------------------



| |  |  | political and economic instability.
| | - |  | -----------------------------------

Item 1B.    UNRESOLVED STAFF COMMENTS.

Not applicable.

Item 2.    PROPERTIES.

Our physical facilities, located in Alachua, Florida, near metropolitan Gainesville, include three
buildings on approximately 21 acres of property that we own, including a 65,000 square foot processing 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. Our processing facility meets the
FDAs Current Good Manufacturing Practices requirements and it allows us to meet the requirements of an FDA approved medical device manufacturer.

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 lease expires on January 31, 2009. The monthly rent is approximately
$9,000.

We also lease additional storage facilities in Alachua. The lease expires October 31, 2009. The monthly rent is approximately
$4,000.

Our wholly owned subsidiary, Regeneration Technologies, Inc.  Cardiovascular operated from a leased space of approximately
9,745 square feet. The lease expires April 2009. The monthly rent is approximately $11,000. Since we have exited the cardiovascular business we are attempting to assign our lease and sell the processing and office equipment. During the fourth
quarter of 2007, we recognized an other than temporary asset impairment to cardiovascular assets of $2,945.

We also lease space at five of
our recovery group locations throughout the United States. The aggregate monthly rent for all five locations is approximately $21,000.

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, 2007 will have a material adverse impact on our financial position or results of operations.



22



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On October 14, 2005, we issued a voluntary recall of certain allograft implants processed from
donated tissue recovered by BTS. The recall was initiated as a result of questions raised by the processors and the Food and Drug Administration in relation to the accuracy of documentation provided by BTS. We have been named as a party, along with
a number of other defendants, in tort based lawsuits relating to the recall of tissue recovered by BTS. As of January 31 2008, there have been 831 law suits filed related to the recall of which 13 law suits have been dismissed. These lawsuits
generally allege that we were negligent in not discovering deficiencies in recovery practices at BTS and include related claims for matters such as misrepresentation and breach of warranty. On October 20, 2006, we filed a joint motion in
federal court to dismiss the claims based on scientific evidence that it is impossible for sterilized tissue to transmit infections to implant recipients. This science first motion has been updated to reflect that no freeze dried
allograft has ever transmitted disease or infection from a donor to a patient. Where specific damages have been identified, the actions seek compensatory damages in ranges of $15,000 to $5 million and punitive damages in ranges of $75,000 to $10
million.

We believe that we have meritorious defenses to these claims, and are defending them vigorously. In addition, we believe our
existing insurance should cover all litigation expenses and damage awards, if any. However, the existing insurance coverage may not be adequate if we are not successful in our defenses and certain lawsuits may not be eligible for such insurance
coverage. If we are not successful in our defenses to lawsuits not covered by insurance the legal fees, or if existing insurance coverage is not adequate, the legal fees and settlements for such lawsuits could have a material adverse effect on
quarterly results of our operations and our financial position.

On
September 11, 2006, Osteotech, Inc. filed a lawsuit in the United States District Court for the District of New Jersey claiming infringement of one of their patents by our BioCleanse®
process. The suit requests (i) that we be enjoined permanently from infringing the patent, (ii) damages, along with treble damages as a result of alleged willful infringement, and (iii) reimbursement of costs and expenses and
reasonable attorney fees. We believe the suit is without merit and we have, and we will continue to, vigorously defend our position. The parties have exchanged substantial written discovery, much of which has been filed under seal in accordance with
a stipulated Discovery Confidentiality Order. We have filed a motion for partial summary judgment, on which a hearing is pending. However, a finding of infringement would have a material adverse effect upon our revenues.

We did not incur any penalties under Sections 6662(h), gross valuation misstatements, 6662A, understatements with respect to reportable transactions, or
6707A, failure to include reportable transactions, of the Internal Revenue Code during the year ended December 31, 2007.

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

Not applicable.

Additional Information

The following information is furnished in this Part I pursuant to Instruction
3 to Item 401(b) of Regulation S-K.

Executive Officers of the Company

Our executive officers and their respective ages and positions as of the date of this report and their previous business experience are as follows:



|                   |  |     |  |                                                                                        
|------------------ |  | --- |  | ---------------------------------------------------------------------------------------
|NAME               |  | AGE |  | POSITION WITH THE COMPANY                                                              
|Brian K. Hutchison |  | 48  |  | Chairman, President and Chief Executive Officer                                        
|Thomas F. Rose     |  | 57  |  | Vice President, Chief Financial Officer and Secretary                                  
|Roger W. Rose      |  | 48  |  | Executive Vice President                                                               
|Caroline Hartill   |  | 51  |  | Vice President of Quality Assurance and Regulatory Affairs and Chief Scientific Officer
|Joseph W. Condon   |  | 46  |  | Vice President of Operations                                                           



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Brian K. Hutchison has served as our President and Chief Executive Officer since December 2001, and
became Chairman of the Board in December 2002. Prior to this time, Mr. Hutchison served 12 years in various positions for Stryker, a leading worldwide medical services company. In 1999, Mr. Hutchison was named senior vice president and
chief operating officer of Stryker Howmedica Osteonics division and was instrumental in implementing the merger between Pfizers Howmedica Division and Strykers Osteonics Division. Mr. Hutchison served most recently as vice
president, worldwide product development and distribution. Mr. Hutchison earned a bachelors degree in business administration from Grand Valley State University in 1981. Mr. Hutchison also completed the Program for Management
Development from Harvard Business School in 1995.

Thomas F. Rose has served as our Vice President, Chief Financial Officer and Secretary
since May 2002. Mr. Rose served the previous ten years as vice president and chief financial officer at A. M. Todd Group, an international flavor and fragrance company. From 1988 to 1991, Mr. Rose was vice president and corporate
controller for Sothebys Holdings Inc. in New York. Prior to this, Mr. Rose was an audit partner with Ernst & Whinney (currently Ernst & Young) in New York, providing audit, tax and consulting services for clients in a
variety of industries for 15 years. Mr. Rose earned a bachelors degree in business administration from Western Michigan University in Kalamazoo. Mr. Rose has also completed numerous executive education courses at University of
Michigan and Northwestern University focusing on strategy and organizational issues.

Roger W. Rose has served as our Executive Vice
President since October 2004 and our Vice President of Distribution, Marketing and Donor Services since December 2002. Prior to joining us in October 2002, Mr. Rose served seven years in various positions with Stryker, including vice president
of sales and vice president of marketing for Strykers medical division. Mr. Rose also has extensive experience in healthcare sales and marketing with 20 years of service with healthcare companies such as Stryker, Johnson &
Johnson, Herman Miller and Nellcor. Mr. Rose holds a bachelors degree in business administration from Western Michigan University and has completed continuing education courses in finance, medical marketing and leadership.

Caroline A. Hartill has served as our Vice President of Quality Assurance and Regulatory Affairs since December 2002, our Executive Director of Quality
Assurance and Regulatory Affairs since October 2001, and was named Chief Scientific Officer in March 2007. Prior to that, Ms. Hartill was an independent consultant working with biotechnology and medical device companies worldwide. Earlier,
Ms. Hartill worked for the British Standards Institute (UK) and the Ministry of Defence (UK). Ms. Hartill earned a bachelors degree in health sciences from Birmingham University in England, as well as a masters degree in
management from the University of Wolverhampton in England. Ms. Hartill has also earned masters level credits in sterilization science from Manchester University.

Joseph W. Condon has served as our Vice President of Operations since June 2003. From March 2000 until 2003, he served as vice president of operations
for Stryker Howmedica Osteonics. Mr. Condon has 15 years of experience running manufacturing facilities for Stryker Howmedica Osteonics and Stryker Medical, as well as Atwood Automotive and KL Spring and Stamping Corporation.
Mr. Condons leadership practices have been published in the Corporate Leadership Councils Fall 2002 edition of The Hourly Employee: Best Practices in Increasing Engagement and Retention. Mr. Condon earned a bachelors
degree in mechanical engineering from University of Illinois at Chicago and a masters in business administration from Illinois Institute of Technology.



24



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PART II



|Item 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ------------------------------------------------------------------------------------------------------------

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.



|               |  |      |       |     |   |     
|-------------- |  | ---- | ----- | --- | - | ----
|2006           |  | High |       | Low
|First Quarter  |  | $    | 8.25  |     | $ | 6.86
|Second Quarter |  | $    | 8.24  |     | $ | 6.10
|Third Quarter  |  | $    | 7.18  |     | $ | 4.87
|Fourth Quarter |  | $    | 7.19  |     | $ | 5.59
|               |  |     
|2007           |  | High |       | Low
|First Quarter  |  | $    | 7.89  |     | $ | 5.12
|Second Quarter |  | $    | 11.94 |     | $ | 7.12
|Third Quarter  |  | $    | 11.99 |     | $ | 9.05
|Fourth Quarter |  | $    | 11.40 |     | $ | 8.23

As of February 20, 2008, we had 196 stockholders of record of our common stock. The closing
sale price of our common stock on February 20, 2008 was $8.66 per share.



25



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Stock Performance Graph

The Securities and Exchange Commission requires us to present a chart comparing the cumulative total stockholder return on our common stock with the cumulative total stockholder return of: (1) a broad equity
market index, and (2) a published industry or line-of-business index. We selected the Standards & Poors Biotechnology Index based on our good faith determination that this index fairly represents the companies which compete in the same
industry or line-of-business as we do. The chart below compares our common stock with the Nasdaq Composite Index and the Standards & Poors Biotechnology Index and assumes an investment of $100 on December 31, 2002 in each of the common
stock, the stocks comprising the Nasdaq Composite Index and the stocks comprising the Standards & Poors Biotechnology Index.

LOGO



26



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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 credit facility restricts our ability to pay dividends. The payment of future will depend upon our future earnings, if any, our capital requirements, financial condition, debt covenant terms, and other relevant factors.

Securities Authorized For Issuance Under Equity Compensation Plans

The Company has two stock-based compensation plans under which employees, consultants and outside directors receive stock options and other equity-based awards. At December 31, 2007, awards relating to 3,727,739
shares were outstanding, and 1,226,551 shares remained available for the grant of awards under our plans. For the year ended December 31, 2007, employees and outside directors of the Company were granted 642,000 stock options under the plans.
Stock options are granted with an exercise price equal to 100% of the market value of a share of common stock on the date of the grant, generally have ten-year contractual terms, and vest no later than five years from the date of grant.



|                                                           |  |                                                                                          |  |                                                                          |      |                                                                                                                                        |          
|---------------------------------------------------------- |  | ---------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ | ---- | -------------------------------------------------------------------------------------------------------------------------------------- | ---------
|                                                           |  | Equity Compensation Plan Information                                                    
|Plan Category                                              |  | Number of Securities tobe issued upon exerciseof
outstanding options,warrants and rights |  | Weighted averageexercise price
ofoutstanding options,warrants and rights |      | Number of securitiesremaining available forfuture issuance
underequity compensation plans(excluding securitiesreflected in column (a))
|                                                           |  | (a)                                                                                      |  | (b)                                                                      |      | (c)                                                                                                                                   
|Equity compensation plans approved by security holders     |  | 3,727,739                                                                                |  | $                                                                        | 7.59 |                                                                                                                                        | 1,226,551
|Equity compensation plans not approved by security holders |  |                                                                                         |  |                                                                          |     |                                                                                                                                        |         
|                                                           |  |                                                                                          |  |                                                                          |      |                                                                                                                                        |          
|Total                                                      |  | 3,727,739                                                                                |  | $                                                                        | 7.59 |                                                                                                                                        | 1,226,551
|                                                           |  |                                                                                          |  |                                                                          |      |                                                                                                                                        |          



|Item 6. | SELECTED FINANCIAL DATA.
|------- | ------------------------

The statement of
operations data set forth below for the years ended December 31, 2004 and 2003, and the balance sheet data set forth as of December 31, 2005, 2004 and 2003 have been derived from our audited consolidated financial statements and
accompanying notes which are not included elsewhere in this Form 10-K.



27



---

The statement of operations data set forth below for the years ended December 31, 2007, 2006, and
2005, and selected balance sheet data as of December 31, 2007 and 2006 have been derived from our audited consolidated financial statements and accompanying notes. The consolidated financial statements as of December 31, 2007 and 2006 and
for the three years ended December 31, 2007 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.



|                                                  |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|------------------------------------------------- |  | ----------------------------------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | - |  | ---- | ---------- | - |  | - | ---------- | -
|                                                  |  | Year Ended December 31,                         |           
|                                                  |  | 2007                                            |            |   | 2006 |   |            | 2005 |  |   | 2004       |   |  | 2003 |           
|                                                  |  | (In thousands, except share and per share data) |           
|Statement of Operations Data:                     |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Revenues:                                         |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Fees from tissue distribution                     |  | $                                               | 88,708     |   |      | $ | 70,158     |      |  | $ | 72,337     |   |  | $    | 89,603     |   |  | $ | 73,299     |  
|Other revenues                                    |  |                                                 | 5,499      |   |      |   | 3,812      |      |  |   | 2,862      |   |  |      | 3,100      |   |  |   | 2,211      |  
|                                                  |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Total revenues                                    |  |                                                 | 94,207     |   |      |   | 73,970     |      |  |   | 75,199     |   |  |      | 92,703     |   |  |   | 75,510     |  
|Costs of processing and distribution              |  |                                                 | 56,557     |   |      |   | 54,647     |      |  |   | 55,457     |   |  |      | 55,526     |   |  |   | 42,766     |  
|                                                  |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Gross profit                                      |  |                                                 | 37,650     |   |      |   | 19,323     |      |  |   | 19,742     |   |  |      | 37,177     |   |  |   | 32,744     |  
|                                                  |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Expenses:                                         |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Marketing, general and administrative             |  |                                                 | 31,040     |   |      |   | 27,252     |      |  |   | 23,350     |   |  |      | 23,224     |   |  |   | 23,104     |  
|Research and development                          |  |                                                 | 5,190      |   |      |   | 5,403      |      |  |   | 5,003      |   |  |      | 3,838      |   |  |   | 2,852      |  
|Gain on business exchange                         |  |                                                 | (197       | ) |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Asset impairments and abandonments                |  |                                                 | 4,185      |   |      |   | 4,202      |      |  |   | 336        |   |  |      | 136        |   |  |   | 169        |  
|Total expenses                                    |  |                                                 | 40,218     |   |      |   | 36,857     |      |  |   | 28,689     |   |  |      | 27,198     |   |  |   | 26,125     |  
|                                                  |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Operating (loss) income                           |  |                                                 | (2,568     | ) |      |   | (17,534    | )    |  |   | (8,947     | ) |  |      | 9,979      |   |  |   | 6,619      |  
|                                                  |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Other (expense) income:                           |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Interest expense                                  |  |                                                 | (753       | ) |      |   | (898       | )    |  |   | (862       | ) |  |      | (967       | ) |  |   | (981       | )
|Interest income                                   |  |                                                 | 849        |   |      |   | 934        |      |  |   | 361        |   |  |      | 96         |   |  |   | 235        |  
|                                                  |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Total other income (expense)net                  |  |                                                 | 96         |   |      |   | 36         |      |  |   | (501       | ) |  |      | (871       | ) |  |   | (746       | )
|                                                  |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|(Loss) income before income tax benefit (expense) |  |                                                 | (2,472     | ) |      |   | (17,498    | )    |  |   | (9,448     | ) |  |      | 9,108      |   |  |   | 5,873      |  
|Income tax benefit (expense)                      |  |                                                 | 376        |   |      |   | 6,373      |      |  |   | 3,897      |   |  |      | (2,953     | ) |  |   | 483        |  
|                                                  |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Net (loss) income                                 |  | $                                               | (2,096     | ) |      | $ | (11,125    | )    |  | $ | (5,551     | ) |  | $    | 6,155      |   |  | $ | 6,356      |  
|                                                  |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Net (loss) income per common sharebasic          |  | $                                               | (0.07      | ) |      | $ | (0.37      | )    |  | $ | (0.20      | ) |  | $    | 0.23       |   |  | $ | 0.24       |  
|                                                  |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Net (loss) income per common sharediluted        |  | $                                               | (0.07      | ) |      | $ | (0.37      | )    |  | $ | (0.20      | ) |  | $    | 0.23       |   |  | $ | 0.24       |  
|                                                  |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Weighted average shares outstandingbasic         |  |                                                 | 29,824,816 |   |      |   | 29,753,166 |      |  |   | 27,754,003 |   |  |      | 26,593,030 |   |  |   | 26,365,348 |  
|                                                  |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Weighted average shares outstandingdiluted       |  |                                                 | 29,824,816 |   |      |   | 29,753,166 |      |  |   | 27,754,003 |   |  |      | 27,063,283 |   |  |   | 26,999,175 |  
|                                                  |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|                                                  | 
|                                                  |  | As of December 31,                              |           
|                                                  |  | 2007                                            |            |   | 2006 |   |            | 2005 |  |   | 2004       |   |  | 2003 |           
|Balance Sheet Data:                               |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Cash and cash equivalents                         |  | $                                               | 18,560     |   |      | $ | 15,509     |      |  | $ | 25,559     |   |  | $    | 11,484     |   |  | $ | 10,051     |  
|Working capital                                   |  |                                                 | 70,621     |   |      |   | 56,784     |      |  |   | 69,597     |   |  |      | 54,192     |   |  |   | 40,196     |  
|Total assets                                      |  |                                                 | 135,966    |   |      |   | 129,808    |      |  |   | 142,262    |   |  |      | 124,730    |   |  |   | 136,353    |  
|Long-term obligationsless current portion        |  |                                                 | 1,875      |   |      |   | 3,401      |      |  |   | 5,606      |   |  |      | 7,919      |   |  |   | 621        |  
|Total stockholders equity                        |  |                                                 | 111,643    |   |      |   | 109,890    |      |  |   | 117,813    |   |  |      | 99,602     |   |  |   | 92,397     |  



28



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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.

Proposed Merger

On November 12, 2007, the Company entered into an Agreement and Plan of Merger with Tutogen and Rockets FL Corp., a newly formed, wholly owned
subsidiary of Regeneration Technologies. Under the terms of the Agreement, Rockets FL Corp. shall be merged with and into Tutogen, with Tutogen being the surviving corporation. As a result, Tutogen will become a wholly-owned subsidiary of the
Company.

Statements in the following discussion and analysis relating to the Companys business strategies, operating plans, planned
expenditures, expected capital requirements and other forward-looking statements regarding the Companys business do not take into account potential future impacts of the Companys proposed merger with Tutogen.

Management Overview

In 2007, we achieved record revenues of $94.2 million and incurred a net loss of $2.1 million. Revenues continue to be driven primarily by the spinal allograft implant product category, which represents approximately
44% of our revenues and which is distributed by MSD. Revenues from spinal allografts increased to $41.1 million, as compared to $35.1 million for the years ended December 31, 2007 and 2006. Revenues from sports medicine allografts increased
$12.7 million to $27.7 million for the year ended December 31, 2007 compared to $15.0 million for the year ended December 31, 2006. The significant improvement in sports medicine revenues were driven by the companys distribution
network delivering numerous types of tendons to meet the demand for ACL and other soft tissue reconstruction surgeries. In addition, available implants increased with the market acceptance of the assembled tendon line and the introduction of the
BioCleanse® sterilized Achilles tendon and BioCleanse® sterilized meniscus.Bone graft substitutes revenues increased by
$3.5 million for the year ended December 31, 2007 compared to the year ended December 31, 2006. Cardiovascular revenues of $5.6 million decreased significantly to $2.0 million as a result of our decision in 2006 to exit the cardiovascular
business.

We are committed to maximizing distribution growth in all product categories for 2008 and beyond. In 2007, we have added
distribution relationships with Pioneer for bone graft substitutes for use in the spine and orthopedics, Blackstone, and Stryker for spinal allograft implants, Wright for xenograft for ankle reconstructions, and with Zimmer for bone graft substitute
implants. In September 2006, we amended our distribution agreement with MSD removing exclusivity restrictions and allowing us to distribute spinal allograft implants through other channels.

During 2007, we increased efforts with our tissue recovery relationships to maintain and grow our available tissue supplies. In November 2006, we opened
a new recovery center based in Dallas, Texas to service more than 220 hospitals in the organ procurement organization service area. We are working with Southwest Transplant Alliance, the federally designated organ procurement organization for the
area. In addition, we entered tissue sourcing arrangements for tissue with both Tutogen and CryoLife in late 2006, which impacted this area in 2007.

We have a long-term product development plan to steadily introduce new products. We expect to continue our research and development spending at similar levels in 2007 as a percentage of revenues in an effort to
support our product development introduction plan. Our scientists are focusing their studies on delivering



29



---

optimal regenerative medicine solutions, by achieving higher levels of osteoinductivity and osteoconductivity through allograft, and expanding the
availability of tissue implants through the use of the BioCleanse® process technology to sterilize animal tissue or xenograft. We continue to develop new processing technologies to
accelerate the introduction of new tissue implants and to raise the bar for tissue safety.

Our goals for 2008 are to build on the
Companys competitive strengths as we focus on our future. There are several long-term strategies which we focus on in order to meet our goals. The key strategies are:



| |  |  | develop new allograft and xenograft implants for current and new distributors;
| | - |  | ------------------------------------------------------------------------------



| |  |  | increase efforts with our tissue recovery relationships to maintain and increase tissue available for processing;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | focus on marketing, distribution and regulatory support of our Sterling® line of xenograft implants; and
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | maintain our commitment to research and development and focus clinical efforts to support the market acceptance of our assembled tendon and xenograft implants.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, if our shareholders approve the merger with Tutogen, a significant amount of effort will be required in
2008 and 2009 to successfully integrate the companies.

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, however, these assumptions and judgments have not historically varied significantly from actual experience and are therefore not expected to vary significantly in the
future.

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 Investments; 4) Revenue Recognition; 5) Fair Value of Stock Options.

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 available for distribution. 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. Changes in estimates of the collection risk related to accounts receivable can result in
decreases and increases to current period net income.



30



---

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 other than temporary 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 in which 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 Lifeline Scientific, Inc.
(formerly Organ Recovery Systems, Inc.), (LSI) and the goodwill associated with our acquisition of Regeneration Technologies, Inc.  Cardiovascular (formerly Alabama Tissue Center, Inc.). The fair value of these long-term
investments is dependent on their performance, as well as volatility inherent in the external markets for these investments. 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 Regeneration Technologies, Inc.  Cardiovascular (formerly Alabama Tissue Center,
Inc.); our investment in LSI; our investment in equipment; 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 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. 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.

Fair Value of Stock Options.Until December 31, 2005 we elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related
Interpretations in accounting for our employee stock options as allowed pursuant to FASB Statement No. 123, Accounting for Stock-Based Compensation, (SFAS 123), as amended by FASB Statement No. 148, Accounting for
Stock-Based Compensation, (SFAS 148). Accordingly, no compensation expense related to the granting of stock options has been recognized for the year ended December 31, 2005.

As noted in Note 2 to the consolidated financial statements, New Accounting Standards, in December 2004, the FASB issued FASB Statement
No. 123(R), Accounting for Stock-Based Compensation, (SFAS 123(R)) that requires compensation costs related to share-based payment transactions to be recognized in the financial statements. Had compensation cost for our stock
option plans been determined on the basis of fair value at the grant date for awards under those plans, consistent with this statement and using our existing valuation method for our employee stock options, the Black-Scholes option pricing model, we
estimate that our net loss for the year ended December 31, 2005 would have been increased by 27%. However, these calculations use option valuation models that use highly subjective assumptions, including expected stock price volatility.
Therefore, our results of operations could be materially different if different assumptions are used.



31



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In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157). This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The adoption of SFAS 157 did not have a material
impact on our financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159 expands opportunities to use fair value measurement in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS
159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS 159 did not have a material impact on our financial statements.

Off Balance-Sheet Arrangements

As of December 31, 2007, there were no off-balance-sheet arrangements, as defined in
Item 303(a)(4)(ii) of Regulation S-K.

Recent Regulatory Actions



| |  |  | May 2007: Korean Food and Drug Administration approved the xenograft implant Sterling Interference Screw ST for distribution in Korea.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | May 2007: FDA cleared a 510(k) for the STERLING® IF Screw
Eyelet xenograft implant.
| | - |  | -----------------------------------------------------------------------------------



| |  |  | October 2007: FDA cleared a 510(k) for the CANCELLO-PURE Evans/Cotton xenograft implants, distributed by Wright.
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | October 2007: RTI obtained the certificate necessary to apply the CE Mark to the CANCELLO-PURE Evans/Cotton xenograft implants, distributed by Wright.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | October 2007: FDA issued RTI a small business identification number, qualifying RTI for reduced user fees through the end of September 2008.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | November 2007: EDQM determined RTIs xenograft implant material meets its safety requirements with respect to bovine spongiform encephalopathy (BSE), and
issued a Certificate of Suitability for RTIs xenograft implant material.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | December 2007: In response to new Canadian regulations affecting allograft products, RTI registered with Health Canada to enable continued distribution of allograft
products in Canada.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Certifications, Accreditations and Inspections



| |  |  | February 2007: U.S. Food and Drug Administration inspection at the RTI Cardiovascular, Birmingham, Alabama facility
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | March 2007: American Association of Tissue Banks reaccreditation inspection at the RTI Donor Services Southeast Division, Marietta, Georgia facility
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | March 2007: U.S. Food and Drug Administration inspection at the RTI Donor Services Midwest Division, Madison, Wisconsin facility
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | March 2007: U.S. Food and Drug Administration inspection at the RTI Donor Services Texas Division, Dallas, Texas facility
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | May 2007: ISO 13485 recertification audit at the RTI Alachua, Florida facility
| | - |  | ------------------------------------------------------------------------------



| |  |  | May 2007: State of Florida xenograft unit inspection at the RTI Alachua, Florida facility
| | - |  | -----------------------------------------------------------------------------------------



32



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| |  |  | July 2007: American Association of Tissue Banks accreditation inspection for cardiovascular storage and distribution at the RTI Alachua, Florida facility
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | August 2007: State of Georgia inspection at the RTI Donor Services Southeast Division, Marietta, Georgia facility
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | December 2007: State of New York laboratory inspection at the RTI Alachua, Florida facility
| | - |  | -------------------------------------------------------------------------------------------

All certifications and accreditations were renewed or continued and no regulatory actions are pending from the state and federal inspections.

In October 2005, RTI initiated a voluntary recall of all allograft processed from tissue supplied by BTS. The activities associated with this recall
were on-going throughout 2007. The remaining activities relate to litigation arising from the BTS product recall.

Results of Operations

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



|                                      |  |                         |        |   |  |       |    |      |   |         |   |  |       |      |  |   |        |   |  |       |   
|------------------------------------- |  | ----------------------- | ------ | - |  | ----- | -- | ---- | - | ------- | - |  | ----- | ---- |  | - | ------ | - |  | ----- | --
|                                      |  | Year Ended December 31, |       
|                                      |  | 2007                    |        |   |  |       |    | 2006 |   |         |   |  |       | 2005 |  |   |        |  
|                                      |  | (Dollars in thousands)  |       
|Statement of Operations Data:         |  |                         |        |   |  |       |    |      |   |         |   |  |       |      |  |   |        |   |  |       |   
|Revenues:                             |  |                         |        |   |  |       |    |      |   |         |   |  |       |      |  |   |        |   |  |       |   
|Fees from tissue distribution         |  | $                       | 88,708 |   |  |       |    |      | $ | 70,158  |   |  |       |      |  | $ | 72,337 |   |  |       |   
|Other revenues                        |  |                         | 5,499  |   |  |       |    |      |   | 3,812   |   |  |       |      |  |   | 2,862  |   |  |       |   
|                                      |  |                         |        |   |  |       |    |      |   |         |   |  |       |      |  |   |        |   |  |       |   
|Total revenues                        |  |                         | 94,207 |   |  | 100.0 | %  |      |   | 73,970  |   |  | 100.0 | %    |  |   | 75,199 |   |  | 100.0 | % 
|Costs of processing and distribution  |  |                         | 56,557 |   |  | 60.0  |    |      |   | 54,647  |   |  | 73.9  |      |  |   | 55,457 |   |  | 73.7  |   
|                                      |  |                         |        |   |  |       |    |      |   |         |   |  |       |      |  |   |        |   |  |       |   
|Gross profit                          |  |                         | 37,650 |   |  | 40.0  |    |      |   | 19,323  |   |  | 26.1  |      |  |   | 19,742 |   |  | 26.3  |   
|                                      |  |                         |        |   |  |       |    |      |   |         |   |  |       |      |  |   |        |   |  |       |   
|Expenses:                             |  |                         |        |   |  |       |    |      |   |         |   |  |       |      |  |   |        |   |  |       |   
|Marketing, general and administrative |  |                         | 31,040 |   |  | 32.9  |    |      |   | 27,252  |   |  | 36.8  |      |  |   | 23,350 |   |  | 31.1  |   
|Research and development              |  |                         | 5,190  |   |  | 5.5   |    |      |   | 5,403   |   |  | 7.3   |      |  |   | 5,003  |   |  | 6.7   |   
|Gain on business exchange             |  |                         | (197   | ) |  | (0.2  | )  |      |   |        |   |  |      |      |  |   |       |   |  |      |   
|Asset impairment and abandonments     |  |                         | 4,185  |   |  | 4.4   |    |      |   | 4,202   |   |  | 5.7   |      |  |   | 336    |   |  | 0.4   |   
|                                      |  |                         |        |   |  |       |    |      |   |         |   |  |       |      |  |   |        |   |  |       |   
|Total expenses                        |  |                         | 40,218 |   |  | 42.7  |    |      |   | 36,857  |   |  | 49.8  |      |  |   | 28,689 |   |  | 38.2  |   
|                                      |  |                         |        |   |  |       |    |      |   |         |   |  |       |      |  |   |        |   |  |       |   
|Operating loss                        |  |                         | (2,568 | ) |  | (2.7  | )  |      |   | (17,534 | ) |  | (23.7 | )    |  |   | (8,947 | ) |  | (11.9 | ) 
|                                      |  |                         |        |   |  |       |    |      |   |         |   |  |       |      |  |   |        |   |  |       |   
|Other income (expense):               |  |                         |        |   |  |       |    |      |   |         |   |  |       |      |  |   |        |   |  |       |   
|Interest expense                      |  |                         | (753   | ) |  | (0.9  | )  |      |   | (898    | ) |  | (1.3  | )    |  |   | (862   | ) |  | (1.2  | ) 
|Interest income                       |  |                         | 849    |   |  | 0.9   |    |      |   | 934     |   |  | 1.3   |      |  |   | 361    |   |  | 0.5   |   
|                                      |  |                         |        |   |  |       |    |      |   |         |   |  |       |      |  |   |        |   |  |       |   
|Total other income (expense)net      |  |                         | 96     |   |  |      |    |      |   | 36      |   |  |      |      |  |   | (501   | ) |  | (0.7  | ) 
|                                      |  |                         |        |   |  |       |    |      |   |         |   |  |       |      |  |   |        |   |  |       |   
|Loss before income tax benefit        |  |                         | (2,472 | ) |  | (2.7  | )  |      |   | (17,498 | ) |  | (23.7 | )    |  |   | (9,448 | ) |  | (12.6 | ) 
|Income tax benefit                    |  |                         | 376    |   |  | 0.5   |    |      |   | 6,373   |   |  | 8.7   |      |  |   | 3,897  |   |  | 5.2   |   
|                                      |  |                         |        |   |  |       |    |      |   |         |   |  |       |      |  |   |        |   |  |       |   
|Net loss                              |  | $                       | (2,096 | ) |  | (1.8  | )% |      | $ | (11,125 | ) |  | (15.0 | )%   |  | $ | (5,551 | ) |  | (7.4  | )%
|                                      |  |                         |        |   |  |       |    |      |   |         |   |  |       |      |  |   |        |   |  |       |   

2007 Compared to 2006

Revenues.    Our revenues, which consist primarily of fees from tissue distributions, increased by $20.2 million, or 27.4%, to $94.2 million for the year ended December 31, 2007 from
$74.0 million for the year ended December 31, 2006.



33



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Spinal ConstructsRevenues from spinal allografts increased $6.0 million, or 17.1%, to
$41.1 million for the year ended December 31, 2007 compared to the year ended December 31, 2006. Unit volumes were up 15.3% as a result of higher distributions of both lumbar and cervical grafts to both current and new distributors.
Average revenue per unit increased by 1.5% due to price increases and changes in product mix.

Sports MedicineRevenues
from sports medicine allografts increased $12.7 million, or 85.1%, to $27.7 million for the year ended December 31, 2007 compared to the year ended December 31, 2006. Sports medicine revenues increased as a result of increases in unit
volume of 43.5% and average revenue per unit increasing by 28.9% primarily due to changes in the mix of implants distributed. Unit volumes were up primarily due to higher numbers of tendons distributed, including our assembled tendons.

Bone Graft SubstitutesRevenues from bone graft substitute allografts increased $3.5 million, or 26.0%, to $17.0 million for the
year ended December 31, 2007 compared to the year ended December 31, 2006. Bone graft substitute allograft revenues increased as a result of unit volumes increasing by 18.7%, and average revenue per unit increasing 5.9% due to changes in
mix of implants distributed.

General OrthopedicRevenues from general orthopedic allografts increased $24,000, or 2.5%,
to $993,000 for the year ended December 31, 2007 compared to the year ended December 31, 2006. General orthopedic revenues for the period increased due to changes in the overall mix of products distributed.

CardiovascularRevenues from cardiovascular allografts decreased $3.7 million, or 65.4%, to $2.0 million for the year ended
December 31, 2007 compared to the year ended December 31, 2006, as a result of our exiting the cardiovascular processing business effective January 1, 2007. Cardiovascular unit distributions decreased 48.6% as compared to the year
ended December 31, 2006. We continued to distribute remaining tissue inventory which existed as of January 1, 2007.

Other
revenuesRevenues from other sources, consisting of tissue recovery fees, biomedical laboratory fees, grants, deferred revenues, shipping fees, distribution of reproductions of our allografts to distribute for demonstration purposes,
and restocking fees, increased $1.7 million, or 44.3%, to $5.5 million for the year ended December 31, 2007 compared to the year ended December 31, 2006. The increase is primarily related to higher amounts of tissue recovered for other
tissue processors.

Costs of Processing and Distribution.    Costs of processing and distribution increased $1.9
million, or 3.5%, to $56.6 million for the year ended December 31, 2007 compared to the year ended December 31, 2006. As a percentage of revenues, costs of processing and distribution decreased from 73.9% for the year ended
December 31, 2006 to 60.0% for the year ended December 31, 2007.

The increase in cost of processing and distribution was
primarily due to higher levels of sports medicine tissue processed with higher average costs in 2007 compared to the prior year. Total sports medicine units processed were 41.1% higher for the year ended December 31, 2007 compared to the year
ended December 31, 2006. The decrease in cost of processing as a percentage of revenues is due primarily to higher average revenue per unit on sports medicine products, as well as sports medicine revenues increasing as a proportion to total
revenue, representing 29.4% of total revenues as compared to 20.2% in the prior year.

Marketing, General and Administrative
Expenses.    Marketing, general and administrative expenses increased by $3.8 million, or 13.9%, to $31.0 million for the year ended December 31, 2007 from $27.3 million for the year ended December 31, 2006. The
increase was primarily due to increased distributor commissions of $2.1 million, an increase in amortization expense of $574,000, and an increase in legal expenses of $482,000 as well as an increase in payroll and benefits expense of $1.8 million,
which included an increase in management incentive plan of $800,000. This was offset by a decrease in consulting expenses of $346,000, and a decrease in accounting expenses of $308,000. Marketing, general and administrative expenses decreased as a
percentage of revenues from 36.8% for the year ended December 31, 2006 to 32.9% for the year ended December 31, 2007.



34



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Research and Development Expenses.    Research and development expenses
decreased by $213,000, or 3.9%, to $5.2 million for the year ended December 31, 2007 from $5.4 million for the year ended December 31, 2006. As a percentage of revenues, research and development expenses decreased from 7.3% for the year
ended December 31, 2006 to 5.5% for the year ended December 31, 2007 as a result of an increase in revenues without a commensurate increase in research and development expenses.

Gain on Business Exchange.    On December 15, 2006 the Company entered into an Exchange and Service Agreement with
CryoLife, whereby on January 1, 2007 the Company transferred certain rights of its cardiovascular business for certain rights of CryoLifes orthopedic sports medicine business which resulted in a gain of $197,000. No cash was exchanged in
the transaction. The transaction was treated as a non-monetary exchange in the current year and the fair value of certain assets in the Companys cardiovascular business, including the Companys goodwill, was exchanged for intangibles
related to CryoLifes orthopedic sports medicine business.

Asset Impairments and Abandonments.    We
recognized a $4.2 million loss on asset impairment and abandonments during the year ended December 31, 2007 as compared to $4.2 million for the year ended December 31, 2006. The asset impairments in 2007 resulted primarily from an other
than temporary asset impairment in the value of the assets of our cardiovascular business, including leasehold improvements, of $2.9 million. We also recorded an other than temporary asset impairment in our investment in LSI, as a result of being
negatively impacted by operational and financing events. Accordingly, in the fourth quarter of 2007 we recorded an additional write-down of $1.1 million dollars in our investment in LSI. Lastly, we charged off intangibles of $80,000 for deferred
patent and trademark expenses relating to abandoned research and development projects.

Other Income and
ExpenseNet.    Net interest income was $96,000 for the year ended December 31, 2007 compared to $36,000 for the year ended December 31, 2006. Interest income decreased by $85,000 for the year ended
December 31, 2007, to $849,000 from $934,000 for the year ended December 31, 2006. The decrease in interest income is due to the lower interest earned on the investment of excess cash in interest bearing cash equivalents as a result of
lower average excess cash balances. Interest expense decreased by $145,000 for the year ended December 31, 2007 to $753,000 from $898,000 for the year ended December 31, 2006 due to the lower interest paid on long-term obligations as a
result of lower loan and capital lease balances.

Income Tax Benefit.    Income tax benefit for the year ended
December 31, 2007 was $376,000, compared to $6.4 million for the year ended December 31, 2006. Our effective tax rate for the year ended December 31, 2007 was 15.2% compared to 36.4% for the year ended December 31, 2006. Our
effective tax rate for the year ended December 31, 2007 as compared to 2006 was negatively impacted by non-deductible stock compensation expense.

2006 Compared to 2005

Revenues.    Our revenues, which consist primarily of fees from tissue
distributions, decreased by $1.2 million, or 1.6%, to $74.0 million for the year ended December 31, 2006 from $75.2 million for the year ended December 31, 2005.

Spinal ConstructsRevenues from spinal allografts remained unchanged at $35.1 million for the year ended December 31, 2006
compared to the year ended December 31, 2005. Cervical units distributed as a percentage of total spinal construct units distributed increased to 78.5% from 73.1% for the year ended December 31, 2006 compared to the year ended
December 31, 2005. The average revenue per unit of cervical implants was 40.6% of the average revenue per unit of lumber implants for the year ended December 31, 2006. Unit volumes decreased by 9.7% as a result of lower amounts of donated
tissue available for processing into spinal constructs, while average selling prices increased by 10.6% as a result of pricing adjustments included in our amended agreement with MSD.



35



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Sports MedicineRevenues from sports medicine allografts increased $4.4 million, or
41.9%, for the year ended December 31, 2006 compared to the year ended December 31, 2005. Sports medicine revenues increased primarily as a result of changes during the second half of 2005 in the way in which these products are
distributed. Our direct distribution network commenced July 1, 2005 and distributes the product directly to end users as opposed to working through a distributor relationship, which resulted in higher revenue. Accordingly, the average revenue
per unit for sports medicine allografts distributed increased by 22.7%, while unit volume distributions of our sports medicine allografts increased 15.0% for the year ended December 31, 2006 compared to the prior year. Unit volume increased as
higher numbers of tendons were distributed including our assembled tendons which were introduced in the fourth quarter of 2006.

Bone
Graft SubstitutesRevenues from bone graft substitute allografts decreased $4.5 million, or 25.2%, for the year ended December 31, 2006 compared to the year ended December 31, 2005. Bone graft substitute allograft revenues
decreased as a result of reduced orders from our largest distributor. Unit volumes of paste implants distributed to MSD decreased 50.8% for the year ended December 31, 2006 compared to the year ended December 31, 2005. In addition,
distribution of cancellous tissue decreased 46.2% during 2006.

General OrthopedicRevenues from general orthopedic
allografts decreased $31,000, or 3.1%, for the year ended December 31, 2006 compared to the year ended December 31, 2005. Unit volumes of general orthopedic implants increased 28.8% due to higher distribution of conventional tissues with
lower average selling prices; however, revenue decreased due to the overall mix of products distributed.

CardiovascularRevenues from cardiovascular allografts decreased $2.0 million, or 26.3%, for the year ended December 31, 2006 compared to the year ended December 31, 2005. Cardiovascular revenues decreased due
to unit distributions being 33.2% lower for the year ended December 31, 2006 compared to the year ended December 31, 2005. The decrease in revenue is directly related to lower recoveries of cardiovascular tissue during 2006. This decrease
in unit volume was partially offset by the average revenue per unit of cardiovascular tissue increasing by 10.4% due to change in mix and price increases.

Other revenuesOther revenues increased $1.0 million, or 33.2%, for the year ended December 31, 2006 compared to the year ended December 31, 2005. Other revenues consist of tissue recovery
fees, biomedical laboratory fees, grants, manufacturing royalties, shipping fees, distribution of reproductions of our allografts to distributors for demonstration purposes, and restocking fees. The increase in other revenues is primarily related to
higher volumes of tissue recovered for other tissue processors which increased fees by $922,000 for the year ended December 31, 2006 compared to the year ended December 31, 2005.

Costs of Processing and Distribution.    Costs of processing and distribution of $54.6 million decreased $810,000, or 1.5%,
for the year ended December 31, 2006 compared to the year ended December 31, 2005. As a percentage of revenues, these costs increased from 73.7% for the year ended December 31, 2005 to 73.9% for the year ended December 31, 2006.

The cost of processing and distribution for the year ended December 31, 2006 included a charge of $2.9 million related to exiting the
cardiovascular business primarily representing inventory write-downs. In 2005, the cost of processing and distribution included a $3.5 million charge related to a recall of donor tissue received from BTS.

In addition, the proportion of cervical units produced for the year ended December 31, 2006 increased compared to the year ended December 31,
2005. The per unit cost to produce cervical units is 9.1% greater as a percentage of spinal constructs revenue than that for our spinal lumbar units.

Our costs of processing and distribution continues to be affected by our production plant running lower than normal capacity levels due to lower orders for our implants and the mix of products produced and shipped for
the year ended December 31, 2006. As a result, our fixed costs per unit produced were 17.2% higher for the year



36



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ended December 31, 2006 compared to the year ended December 31, 2005. Lastly, stock-based compensation expense included in costs of planning and
distribution was $465,000, as the Company implemented SFAS No. 123R, Share-Based Payment (SFAS 123R), effective January 1, 2006.

Marketing, General and Administrative Expenses.    Marketing, general and administrative expenses increased by $3.9 million, or 16.7%, to $27.3 million for the year ended December 31,
2006 from $23.4 million for the year ended December 31, 2005. The increase was primarily due to higher expenses related to our direct distribution network of $1.7 million, consisting of increased staffing levels and travel of $790,000,
distributor commissions of $290,000, and general marketing of $600,000, and stock-based compensation expense of $2.5 million. These expenses increased as a percentage of revenues from 31.1% for the year ended December 31, 2005 to 36.8% for the
year ended December 31, 2006.

Research and Development Expenses.    Research and development expenses
increased by $400,000, or 8.0%, to $5.4 million for the year ended December 31, 2006 from $5.0 million for the year ended December 31, 2005. As a percentage of revenues, research and development expenses increased from 6.7% for the year
ended December 31, 2005 to 7.3% for the year ended December 31, 2006. The increase was primarily due to severance expense of $310,000 relating to a reorganization of our research group in the fourth quarter of 2006 and stock-based
compensation expense of $127,000.

Asset Impairments and Abandonments.    We recognized a loss on asset
impairment and abandonments of $4.2 million during the year ended December 31, 2006 as compared to $336,000 for the year ended December 31, 2005. The other than temporary asset impairment in 2006 resulted from our investment in LSI, being
negatively impacted by operational and financing events. Accordingly, we recorded a write-down of $4.1 million dollars in our investment in LSI. We also charged off intangibles of $69,000 for deferred patent and trademark expenses relating to
abandoned research and development projects.

Other Income and ExpenseNet.    Net interest income was
$36,000 for the year ended December 31, 2006 compared to net interest expense of $501,000 for the year ended December 31, 2005. Interest income for the year ended December 31, 2006 was $934,000 compared to interest income of $361,000
for the year ended December 31, 2005. The increase in interest income is due to the interest earned on the investment of higher average excess cash balances during 2006.

Income Tax Benefit (Expense).    Income tax benefit for the year ended December 31, 2006 was $6.4 million, compared $3.9
million for the year ended December 31, 2005. Our effective tax rate for the year ended December 31, 2006 was 36.4% compared to 41.2% for the year ended December 31, 2005. Our effective tax rate for the year ended December 31,
2006 as compared to 2005 was negatively impacted by non-deductible stock compensation expense.

Liquidity and Capital Resources

Cash Flows.

Our net cash provided by
operating activities was $7.1 million for the year ended December 31, 2007, as compared to net cash used in operating activities of $6.7 million for the year ended December 31 2006. During the year ended December 31, 2007, cash was
provided by an increase in accrued expenses of $1.9 million primarily relating to annual incentive compensation and merger related expenses, an increase in other long-term liabilities of $460,000 as a result of our adoption of FIN48, relating to a
reclassification of a valuation allowance recorded in noncurrent deferred tax assets to unrecognized tax benefits included in other long-term liabilities resulting from our income tax positions, an increase in intangibles of $2.7 million resulting
from the Cryolife exchange transaction, a decrease in other assets of $242,000, and an increase in deferred revenue of $5.0 million related to the Zimmer distribution agreement. During the year ended December 31, 2007, primary uses of cash were
a net loss of $2.1 million inclusive of non-cash adjustments, an increase in accounts receivable of $802,000 due to higher revenue in the fourth quarter, an increase in inventories of $4.3 million primarily due to increase in



37



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tissue in process, an increase in prepaid and other current assets of $4.3 million, an increase in other intangible assets of $3.4 million due to the
Cryolife exchange transaction, in which we received intangibles related to CryoLifes orthopedic sports medicine business, and a decrease in accounts payable of $1.4 million. The new Zimmer distribution agreement resulted in deferred revenue of
$5.0 million, of which $4.0 million is receivable at December 31, 2007, and is included in other current assets. Significant non-cash adjustments to operating activities for the year ended December 31, 2007 included depreciation and
amortization expense of $5.6 million, a provision for inventory write-downs of $1.5 million, stock-based compensation of $3.0 million, and an other than temporary asset impairment of $4.1 million. Our net cash used in operating activities was $6.7
million for the year ended December 31, 2006. During the year ended December 31, 2006, cash was provided by an increase in accounts payable of $679,000 due primarily to increased amounts due for recoveries of donated tissue and an increase
in accrued expenses of $104,000. During the year ended December 31, 2006, primary uses of cash were a net loss of $11.1 million inclusive of non-cash adjustments, an increase in accounts receivable of $491,000 due to timing of revenues, an
increase in inventories of $2.3 million due to increased unprocessed donor tissue, an increase in prepaid and other current assets of $109,000, and a net increase in other assets of $2.8 million which included a $3.0 million buyout of exclusivity
rights. Significant non-cash adjustments to operating activities for the year ended December 31, 2006 included depreciation and amortization expense of $5.2 million, an increase of inventory write-downs of $3.9 million, an increase in deferred
income tax benefit of $6.4 million, stock-based compensation of $3.1 million, and an other than temporary asset impairment of $4.1 million.

Our cash used in investing activities was $2.6 million for the year ended December 31, 2007 compared to $1.1 million for the year ended December 31, 2006. Our investing activities in 2007 consisted of purchases of property, plant,
and equipment of $2.2 million, and expenses related to business combination of $492,000, offset by proceeds from the sale of equipment in the amount of $80,000 from our cardiovascular processing facility in Birmingham, Alabama. Our investing
activities in 2006 consisted of purchases of property, plant, and equipment of $1.3 million, offset by proceeds from the sale of equipment in the amount of $200,000 from our cardiovascular processing facility in Birmingham, Alabama. Since we have
exited the cardiovascular business we are attempting to assign our lease and sell the leasehold improvements and equipment.

Our net cash
used in financing activities was $1.4 million for the year ended December 31, 2007 compared to net cash used by financing activities of $2.2 million for the year ended December 31, 2006. Cash used in financing activities for the year ended
December 31, 2007 consisted of $2.3 million of payments made on our outstanding long-term obligations, offset by proceeds from exercises of stock options of $725,000, and excess tax benefit from exercise of stock options of $150,000. Cash used
in financing activities for the year ended December 31, 2006 consisted of $2.2 million of payments made on our outstanding long-term obligations, offset by proceeds from exercises of stock options of $47,000.

Liquidity.

As of December 31,
2007, we had $18.6 million of cash and cash equivalents and $7.2 million available under our revolving line of credit. We believe that our working capital as of December 31, 2007, together with our borrowing ability under our revolving line of
credit, will be adequate to fund our on-going operations.

Our accounts receivable days sales outstanding were 38 as of December 31,
2007 and 46 as of December 31, 2006. The decrease was due to successful collections efforts. Our inventory days outstanding were 248 as of December 31, 2007, compared to 252 as of December 31, 2006.

Certain Commitments.

On May 14,
2007, the Company entered into an exclusive distribution agreement with Zimmer with an initial term of 10 years. The distribution agreement relates to certain new products currently in production. As part of the agreement, Zimmer agreed to make two
payments to the Company totaling $5.0 million for the aforementioned exclusive distribution rights, and maintain certain minimum order volumes. The first payment of $1.0 million was made at the time of entering the agreement. The second payment of
$4.0 million is expected to



38



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be paid in the first quarter of 2008. The $5.0 million exclusivity payment has been deferred and is being recognized as other revenue on a straight-line
basis over the initial term of the contract. The contract provides for repayment, on a pro rata basis, of the exclusivity payments during the initial contract term for specific events of non-performance, as defined in the agreement. The agreement
also includes automatic two-year renewal terms, as well as buy-out provisions by both parties upon proper notice of cancellation. This agreement was expanded to include additional grafts through an Amendment executed on December 14, 2007.

On December 15, 2006, the Company and CryoLife entered an agreement where we, effective January 1, 2007, transferred certain
rights of our cardiovascular business for certain rights of CryoLifes orthopedic sports medicine business. Under the agreement we will continue to distribute our existing cardiovascular tissue inventory and CryoLife will continue to distribute
its existing orthopedic tissue inventory through June 30, 2008. After that date, CryoLife will become entitled to distribute our remaining cardiovascular tissue inventory and we will become entitled to distribute CryoLifes remaining
orthopedic tissue inventory through December 31, 2008. Under the agreement, from July 1, 2008 through December 31, 2016, CryoLife has agreed not to market or solicit orders for certain human orthopedic tissues for sports injuries and
we have agreed not to market or solicit orders for human cardiac and vascular tissues.

On September 12, 2006, we entered into a
Fourth Amendment to the First Amended Exclusive Distribution and License Agreement with MSD, providing among other things for us to supply MSD with human allograft tissue and bone paste for spine surgery. Among other things, the amended MSD
distribution agreement: 1) modifies the exclusivity provisions of the MSD distribution agreement to permit us to distribute spinal allograft implants in the United States through channels other than MSD, 2) provides that we will set
priority on processing the implants ordered by MSD, using our best efforts to meet the needs of MSD and its surgeons, 3) ends the requirement that MSD make minimum purchases of exclusive products, 4) modifies the product and transfer fee
schedules between us and MSD, and 5) provides us with certain development and processing rights relating to jointly-owned intellectual property.

We paid MSD a fee of $3.0 million upon execution of the Fourth Amendment to buyout exclusivity provisions under the former distribution agreement. The Fourth Amendment requires us to pay MSD a royalty on any transfer
fees from new spinal allograft distributors. In addition to other changes in the fee schedules, the Fourth Amendment provided for MSD to pay us a processing fee surcharge related to allograft processed and shipped during the months of June, 2006
through September, 2006 as follows: June, 2006, $672,000, July, 2006, $500,000, August, 2006, $500,000, and September 2006, $328,000. The agreement includes increases to transfer fees of approximately 10%. The fees became effective October 1,
2006.

On February 20, 2004, we entered into a long-term financing agreement with a major financial institution. The 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. Interest on the term loan agreement is paid monthly at LIBOR plus
4.25% (8.85% at December 31, 2007). Under the $16.0 million revolving line of credit, we can borrow up to the maximum eligible amount, based on certain outstanding receivables of which $7.2 million is available at December 31, 2007.
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, 2007. 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. The original credit agreement included a requirement to maintain certain financial covenant ratios computed on a four-quarter rolling average, including operating cash
flows to fixed charges, senior debt to earnings before interest, taxes, depreciation and amortization (EBITDA), and total debt to EBITDA, as defined in the agreement. In the second quarter of 2006, the lender replaced all



39



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financial covenants with a minimum liquidity requirement of $6.0 million. Minimum liquidity is defined as the amount available under the revolving line of
credit plus unrestricted cash. We exceeded the $6.0 million minimum liquidity requirement as of December 31, 2007.

The following
table provides a summary of our debt obligations, operating lease payments, estimated future expenditures, other purchase obligations, and unrecognized tax benefits as of December 31, 2007.



|                                 |  |                                    |       |      |   |       |  |      |       |      |   |     |  |   |   
|-------------------------------- |  | ---------------------------------- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | --- |  | - | --
|                                 |  | Contractual Payments Due by Period
|                                 |  | Total                              |       | 2008 |   | 2009  |  | 2010 |       | 2011
|                                 |  | (In thousands)                    
|Debt obligations(1)              |  | $                                  | 3,375 |      | $ | 1,500 |  | $    | 1,875 |      | $ |    |  | $ |  
|Operating lease payments(2)      |  |                                    | 1,080 |      |   | 581   |  |      | 277   |      |   | 158 |  |   | 64
|Estimated future expenditures(3) |  |                                    | 200   |      |   | 200   |  |      |      |      |   |    |  |   |  
|Other purchase obligations(4)    |  |                                    | 941   |      |   | 941   |  |      |      |      |   |    |  |   |  
|Unrecognized tax benefits(5)     |  |                                    |      |      |   |      |  |      |      |      |   |    |  |   |  
|                                 |  |                                    |       |      |   |       |  |      |       |      |   |     |  |   |   
|Total                            |  | $                                  | 5,596 |      | $ | 3,222 |  | $    | 2,152 |      | $ | 158 |  | $ | 64
|                                 |  |                                    |       |      |   |       |  |      |       |      |   |     |  |   |   



|(1) | These amounts are included on our Consolidated Balance Sheets, excluding interest, which is estimated to be $285 for the
next two years based upon an assumed interest rate of 9.50%, representing the effective interestrate as of December 31, 2007.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Our operating lease obligations are described in Note 18 of the Notes to the Consolidated Financial Statements.
|--- | ---------------------------------------------------------------------------------------------------------------

|(3) | These amounts consisted of contractual obligations for tissue recovery development grants.
|--- | ------------------------------------------------------------------------------------------

|(4) | Our other purchase obligations consisted of our issued and outstanding purchase orders as of December 31, 2007.
|--- | ---------------------------------------------------------------------------------------------------------------

|(5) | Our unrecognized tax benefits of $460 at December 31, 2007 was excluded due to the uncertainty of reliable
estimates about the period of cash settlement.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

As of December 31, 2007, we had federal and state net operating loss
carryforwards of $14.6 million and $27.6 million, respectively, and research and experimentation tax credit carryforwards of $3.2 million. We anticipate a portion of these amounts will be utilized to offset our tax liability in 2008, with any
remainder used in ensuing years. When these carryforwards are fully utilized, they will increase our cash flows by $8.2 million due to the reduction in taxes payable.

Impact of Inflation

Inflation generally affects us by increasing our cost of labor, equipment and
processing tools and supplies. We do not believe that the relatively low rates of inflation experienced in the United States since the time we began operations have had any material effect on our business.

Item 7A.    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 do not
expect changes in interest rates to have a material adverse effect on our income or our cash flows in 2008. However, we cannot assure that interest rates will not significantly change in 2008. 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.

Item 8.    CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Our consolidated financial
statements and supplementary data required in this item are set forth at the pages indicated in Item 15(a)(1).



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Item 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.

Not applicable.

Item 9A.    CONTROLS AND PROCEDURES.

Attached as exhibits to this Form 10-K
are certifications of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), which are required in accordance with Rule 13a-15 of the Exchange Act. This Controls and Procedures section includes information concerning the
controls and controls evaluation referred to in the certifications. The report of Deloitte & Touche LLP, our independent registered public accounting firm, regarding its audit of our internal control over financial reporting appears on page
69. This section should be read in conjunction with the certifications and the Deloitte & Touche LLP report for a more complete understanding of the topics presented.

As of the end of the period covered by this report, an evaluation was performed on the effectiveness of the design and operation of our disclosure
controls and procedures under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Disclosure controls and procedures include controls and other procedures that are designed
to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commissions rules and
forms, and accumulated and communicated to the Companys management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required
disclosure. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this report.

Managements Report on Effectiveness of Internal Controls

The management of Regeneration Technologies, Inc. and subsidiaries (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Securities
Exchange Act Rules 13a-15(f) and 15d-15(f)). The Companys internal control system was designed to provide reasonable assurance to the Companys management and board of directors regarding the preparation and fair presentation of published
financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

The
Companys management assessed the effectiveness of the Companys internal control over financial reporting as of December 31, 2007. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) in Internal Control  Integrated Framework. Based on this assessment, management believes that, as of December 31, 2007, the Companys internal control over financial reporting is
effective based on those criteria.

There have been no changes in the Companys internal control over financial reporting that
occurred during the Companys last fiscal quarter that materially affected, or are reasonably likely to materially affect the Companys internal control over financial reporting.

The Companys independent registered public accounting firm has issued a report on the Companys internal control over financial reporting.
This report appears on page 69.

Item 9B.    OTHER INFORMATION.

None.



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PART III

Item 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

The following table sets
forth the names and ages of the directors and executive officers of the Company, the positions and offices held by each of them with the Company, and the period during which each served in such position.



|                    |  |     |  |                                                                                         |  |                                
|------------------- |  | --- |  | --------------------------------------------------------------------------------------- |  | -------------------------------
|Name                |  | Age |  | Offices/Position                                                                        |  | Period Served inOffice/Position
|Brian K. Hutchison  |  | 48  |  | President, Chief Executive Office & Chairman of the Board                               |  | 2001present                   
|Thomas F. Rose      |  | 57  |  | Vice President of Finance, Chief Financial Officer and Secretary of the Board           |  | 2002present                   
|Roger W. Rose       |  | 48  |  | Executive Vice President Vice President                                                 |  | 2004present 20022004         
|Caroline A. Hartill |  | 51  |  | Vice President of Quality Assurance and Regulatory Affairs and Chief Scientific Officer |  | 2001present 2007present      
|Joseph W. Condon    |  | 46  |  | Vice President of Operations                                                            |  | 2003present                   
|Philip R. Chapman   |  | 46  |  | Director                                                                                |  | 1998present                   
|Peter F. Gearen     |  | 59  |  | Director                                                                                |  | 1998present                   
|Michael J. Odrich   |  | 44  |  | Director                                                                                |  | 1998present                   
|David J. Simpson    |  | 61  |  | Director                                                                                |  | 2002present                   
|Gregory P. Rainey   |  | 55  |  | Director                                                                                |  | 2007present                   
|Julianne M. Bowler  |  | 44  |  | Director                                                                                |  | 2007present                   

The following is a summary of the business experience of each of the persons listed in the above
referenced table.

Brian K. Hutchison has served as our President and Chief Executive Officer since December 2001, and became Chairman of
the Board in December 2002. Prior to this time, Mr. Hutchison served 12 years in various positions for Stryker, a leading worldwide medical services company. In 1999, Mr. Hutchison was named senior vice president and chief operating
officer of Stryker Howmedica Osteonics division and was instrumental in implementing the merger between Pfizers Howmedica Division and Strykers Osteonics Division. Mr. Hutchison served most recently as vice president, worldwide
product development and distribution. Mr. Hutchison earned a bachelors degree in business administration from Grand Valley State University in 1981. Mr. Hutchison also completed the Program for Management Development from Harvard
Business School in 1995.

Thomas F. Rose has served as our Vice President, Chief Financial Officer and Secretary since May 2002.
Mr. Rose served the previous ten years as vice president and chief financial officer at A. M. Todd Group, an international flavor and fragrance company. From 1988 to 1991, Mr. Rose was vice president and corporate controller for
Sothebys Holdings Inc. in New York. Prior to this, Mr. Rose was an audit partner with Ernst & Whinney (currently Ernst & Young) in New York, providing audit, tax and consulting services for clients in a variety of
industries for 15 years. Mr. Rose earned a bachelors degree in business administration from Western Michigan University in Kalamazoo. Mr. Rose has also completed numerous executive education courses at University of Michigan and
Northwestern University focusing on strategy and organizational issues.

Roger W. Rose has served as our Executive Vice President since
October 2004 and our Vice President of Distribution, Marketing and Donor Services since December 2002. Prior to joining us in October 2002, Mr. Rose served seven years in various positions with Stryker, including vice president of sales and
vice president of marketing for Strykers medical division. Mr. Rose also has extensive experience in healthcare sales and



42



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marketing with 20 years of service with healthcare companies such as Stryker, Johnson & Johnson, Herman Miller and Nellcor. Mr. Rose holds a
bachelors degree in business administration from Western Michigan University and has completed continuing education courses in finance, medical marketing and leadership.

Caroline A. Hartill has served as our Vice President of Quality Assurance and Regulatory Affairs since December 2002, our Executive Director of Quality
Assurance and Regulatory Affairs since October 2001, and was named Chief Scientific Officer in March 2007. Prior to that, Ms. Hartill was an independent consultant working with biotechnology and medical device companies worldwide. Earlier,
Ms. Hartill worked for the British Standards Institute (UK) and the Ministry of Defence (UK). Ms. Hartill earned a bachelors degree in health sciences from Birmingham University in England, as well as a masters degree in
management from the University of Wolverhampton in England. Ms. Hartill has also earned masters level credits in sterilization science from Manchester University.

Joseph W. Condon has served as our Vice President of Operations since June 2003. From March 2000 until 2003, he served as vice president of operations
for Stryker Howmedica Osteonics. Mr. Condon has 15 years of experience running manufacturing facilities for Stryker Howmedica Osteonics and Stryker Medical, as well as Atwood Automotive and KL Spring and Stamping Corporation.
Mr. Condons leadership practices have been published in the Corporate Leadership Councils Fall 2002 edition of The Hourly Employee: Best Practices in Increasing Engagement and Retention. Mr. Condon earned a bachelors
degree in mechanical engineering from University of Illinois at Chicago and a masters in business administration from Illinois Institute of Technology.

Philip R. Chapman has served as a member of our Board of Directors since we began operations in February 1998. Mr. Chapman is the President of Venad Administrative Services, Inc., and has been a general partner
of Adler & Company since 1995. From 1991 until 1995, Mr. Chapman served as a principal of Adler & Company. From 1981 until 1989, Chapman served as a senior consultant at Booz Allen & Hamilton International.
Mr. Chapman is also a Director of Shells Seafood Restaurants, Inc. Mr. Chapman holds a bachelors degree and masters of business administration degree from Columbia University.

Dr. Peter F. Gearen has served as a member of our Board of Directors since we began operations in February 1998. Dr. Gearen was Chief of
Staff at the Shands Hospital at the University of Florida and served as Assistant Dean of Clinical Affairs at the University of Florida College of Medicine from 1992 until 1999. Dr. Gearen also has been an Associate Professor of Orthopedics at
the University of Florida College of Medicine since 1993. Dr. Gearen was appointed Chairman of the Department of Orthopedics in May 2002. Dr. Gearen holds a B.A. from Spring Hill College and an M.D. from the Stritch Loyola Medical School.

Michael J. Odrich has served as a member of our Board of Directors since we began operations in February 1998. Mr. Odrich is a
Managing Director of Lehman Brothers, Inc. and head of its Private Equity Division. Mr. Odrich also is a member of the Lehman Brothers Management Committee and Investment Committee. Mr. Odrich has served as a director of Active Software,
Inc. since 1997 and PEMSTAR, Inc. since 1998. Mr. Odrich holds a B.A. from Stanford University and received an M.B.A. from Columbia University.

David J. Simpson has served as a member of our Board of Directors since October 2002. Mr. Simpson formerly served as Chief Financial Officer and Secretary of Stryker Corporation, a leading worldwide medical
products and services company, from June 1987 until January 1, 2003, and served as a non-executive officer of Stryker Corporation until December 31, 2007. Mr. Simpson earned a bachelors degree of business administration in
accounting and finance from Western Michigan University and attended the Advanced Management Program at Harvard University. Mr. Simpson also serves on the Board of Directors of Kinetic Concepts, Inc., a medical technology company.

Gregory P. Rainey joined our Board of Directors in March 2007. Mr. Rainey is the president of CCI Performance Group, a sales and marketing
consulting company. Prior to opening CCI Performance Group in 2004, Mr. Rainey served 10 years with Stryker Corporation, most recently as vice president of sales for Strykers



43



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Orthopedic Division for four years. Previous to Stryker, Mr. Rainey served as director of sales for Joint Medical Corporation, as well as sales
positions with U.S. Surgical Corporation. Mr. Rainey earned a bachelors degree in biology from Loyola University.

Julianne M.
Bowler joined our Board of Directors in May 2007. Ms. Bowler served as commissioner of insurance for the Massachusetts Division of Insurance, based in Boston, Mass, from March 2002 to January 2007. Ms. Bowler has more than 10 years of
experience in insurance regulation and health policy for companies such as Blue Cross Blue Shield of Massachusetts and the University of Massachusetts Medical Center, including 9 years with the Massachusetts Division of Insurance. Ms. Bowler
has a bachelors degree in philosophy from Assumption College in Worcester, Mass., and a masters degree in philosophy from the University of Dallas in Dallas, Texas. Ms. Bowler was a doctoral candidate in biomedical ethics at
Georgetown University in Washington, D.C., and received her masters degree in business administration with a concentration in finance from the University of Massachusetts in Boston, Mass.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

The Company believes that the reporting requirements, under Section 16(a) of the Exchange Act, for all its executive officers, directors, and each person who is the beneficial owner of more than 10% of the common
stock of a company were satisfied except for the following: Mr. Rainey filed a late Form 4 Report relating to one transaction involving the granting of an option.



CODE OF ETHICS FOR SENIOR FINANCIAL PROFESSIONALS

Our Board of Directors has adopted a Code of Ethics for Senior Financial Professionals, applicable to our Chief Executive Officer, Chief Financial Officer and Controller. The Code of Ethics for Senior Financial
Professionals is available on our website at www.rtix.com/investors/ethicsfp.cfm.

CODE OF CONDUCT

Our Board of Directors has also adopted a Code of Conduct applicable to all of our directors, officers and employees. The Code of Conduct is available on
our website at www.rtix.com/investors/code.cfm.

COMMITTEES OF THE BOARD OF DIRECTORS

Compensation Committee.    The Compensation Committee is composed of Mr. Simpson, Dr. Gearen and
Mr. Rainey, and is chaired by Mr. Chapman. This Committee plans, reviews and administers our executive compensation programs. Our Board has determined that each member of our Compensation Committee is independent as defined in
Rule 4200(a)(15) of The Nasdaq Stock Market. The charter of our Compensation Committee is available on our website at www.rtix.com/investors/compencharter.cfm.

Audit Committee.    The Audit Committee is composed of Mr. Chapman, Dr. Gearen and Ms. Bowler and is chaired by Mr. Simpson. This Committee is charged with, among
other things, the appointment of our independent registered public accounting firm, as well as discussing and reviewing with the independent registered public accounting firm the scope of the annual audit and results thereof, pre-approving the
engagement of the independent registered public accounting firm for all audit-related services and permissible non-audit related services, and reviewing and approving all related-party transactions. Our Audit Committee also reviews



44



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interim financial statements included in our quarterly reports and reviews documents filed with the Securities and Exchange Commission. Our Board of
Directors has determined that Mr. Simpson qualifies as an audit committee financial expert as defined by Item 401(h) of Regulation S-K of the Securities Exchange Act of 1934, as amended. All of the members of the Audit
Committee are independent as defined in Rule 4200(a)(15) of The Nasdaq Stock Market and that each member satisfies the financial literacy requirements of The Nasdaq Stock Market. The charter of our Audit Committee is available on our
website at www.rtix.com/investors/auditcharter.cfm.

Nominating and Governance Committee.    The
Nominating and Governance Committee is composed of Dr. Gearen and Mr. Odrich. This Committee was established for the purposes of assisting our Board of Directors in its selection of nominees for election to the Board at annual meetings of
the stockholders and to fill any vacancies or newly created directorships and assisting the Board of Directors in its corporate governance oversight. Our Board has determined that each member of the Nominating and Governance Committee is
independent as defined in Rule 4200(a)(15) of The Nasdaq Stock Market. The charter of the Nominating and Governance Committee is available on our website at www.rtix.com/investors/nomincharter.cfm.

Item 11.    EXECUTIVE COMPENSATION.

Compensation Discussion and Analysis

Oversight of Executive Compensation Program

General.    The Compensation Committee of our Board of Directors (the Compensation Committee),
presently consisting of Messrs. Chapman, Gearen and Simpson, is responsible for the planning, review and administration of our executive compensation programs. The Board of Directors adopted a written charter for the Compensation Committee on
March 5, 2004, a copy of which is available on our website at www.rtix.com/investors/compencharter.cfm.

Our primary corporate
objective is to provide a superior return to stockholders. To support this objective, we believe we must attract, retain and motivate top quality executive talent. The executive compensation program we adopt is a critical tool in this process. The
executive compensation program is designed to link executive compensation to our performance through at-risk compensation opportunities, providing significant reward to executives based on our success. The executive compensation program consists of
base salary, annual cash incentive opportunities and long-term incentives represented by stock options and restricted stock agreements.

The Compensation Committee oversees our executive compensation programs. Our compensation programs include programs that are designed specifically for (1) our executive officers named in the Summary Compensation Table and other
officers of the Company; and (2) a broad-base of Company employees. Additionally, the Compensation Committee is charged with the review and approval of all annual compensation decisions relating to executive officers and our annual compensation
guidelines for all other company officers and employees.

The Compensation Committee is composed entirely of independent, non-management
members of the Board of Directors. Members of the Compensation Committee are eligible for awards under our Omnibus Stock Plan and 2004 Equity Incentive Plan. No Compensation Committee member participates in any of the Companys other employee
compensation programs. The Board of Directors has determined that none of the Compensation Committee members have any material business relationships with us.

The responsibilities of the Compensation Committee include the following:



| |  |  | reviewing and approving the Companys general compensation strategy and objectives;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | reviewing and approving the Companys goals and objectives relevant to the executive officers compensation annually, evaluating the executive officers
performance in light of such goals and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | objectives, and determining the executive officers compensation level based on this evaluation and other relevant information;
| | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | reviewing and approving annually the individual elements of total compensation for the executive officers, including annual salary, annual bonus and long-term
incentive compensation, and reporting such determinations to the Board of Directors, as required;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | reviewing and discussing with management the disclosures made in the Compensation Discussion and Analysis prior to the filing of the Companys Annual Report on
Form 10-K and Proxy Statement for the annual meeting of stockholders, and recommending to the Board of Directors whether the Compensation Discussion and Analysis should be included in the Form 10-K and Proxy Statement;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | maintaining and reviewing with the Board of Directors a list of potential successors to the Chief Executive Officer, in the event of an emergency or retirement of
the CEO on short notice;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | making recommendations to the Board of Directors regarding employment agreements, severance agreements, change in control provisions and agreements and any special
supplemental benefits applicable to the Companys executive officers;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | assuring that the Companys incentive compensation program, including the annual and long-term incentive plans, is administered in a manner consistent with the
Companys compensation strategy in regards to participation, target awards, corporate financial goals and actual awards paid to executive officers;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | approving and/or recommending to the Board of Directors new incentive compensation plans and equity-based compensation plans, and submitting for stockholder
approval where appropriate;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | approving annual salary levels for the Companys executive officers;
| | - |  | --------------------------------------------------------------------



| |  |  | reviewing the levels of stock ownership by the executive officers of the Company;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | reviewing the Companys employee benefit programs and recommending for approval all changes that may be subject to the approval of the stockholders or the
Board of Directors; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | producing an annual compensation committee report for inclusion in the Companys Proxy Statement in accordance with applicable rules and regulations.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

Compensation Consultant

Beginning in 2005, the Compensation Committee retained Watson, Wyatt and Associates Human Resource Consulting (Watson, Wyatt and Associates), an independent compensation consultant, to advise the Compensation Committee on all
matters related to the executive officers compensation and general compensation programs.

The independent compensation consultant
assists the Compensation Committee by providing comparative market data on compensation practices and programs based on an analysis of peer competitors, and also provides guidance on industry best practices.

Peer Group and Compensation Targets

With the
assistance of Management, the Compensation Committee selected a compensation peer group of companies consisting of six publicly-traded, medical device related companies (the Peer Group). The Peer Group is used to benchmark executive
compensation levels against companies that have executive positions with responsibilities similar in breadth and scope to ours and that compete with us for executive talent. The Peer Group consisted of the following companies: CryoLife, Inc.,
Exactech, Inc., Lifecell Corp., Osteotech, Inc., Wright Medical Group, Inc., and Tutogen Medical, Inc.



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Overview of Compensation Philosophy and Program

In order to recruit and retain the most qualified and competent individuals as executive officers, we strive to maintain a compensation program that is
competitive in the global labor market. The purpose of our compensation program is to reward exceptional organizational and individual performance.

The following compensation objectives are considered in setting the compensation programs for our executive officers:



| |  |  | drive and reward performance which supports the Companys core values of integrity, leadership and performance;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | provide a significant percentage of total compensation that is at-risk, or variable, based on predetermined performance criteria;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | design competitive total compensation and rewards programs to enhance our ability to attract and retain knowledgeable and experienced executive officers; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | set compensation and incentive levels that reflect competitive market practices.
| | - |  | --------------------------------------------------------------------------------

Compensation Elements and Rationale for Pay Mix Decisions

To reward both short and long-term
performance in the compensation program and in furtherance of our compensation objectives noted above, our executive compensation philosophy includes the following four principles:

(i) Compensation should be related to performance

The Compensation Committee believes that a significant portion of an executive officers compensation should be tied not only to individual performance, but also to the performance of the executive officers
function and to Company performance measured against both financial and non-financial goals and objectives. We also place emphasis on relative performance within the Peer Group as a means to ensure that we consistently deliver stockholder value.

During periods when performance meets or exceeds the established objectives, executive officers should be paid at or more than expected
levels, respectively. When our performance does not meet key objectives, incentive award payments, if any, should be less than such levels.

(ii) Incentive compensation should represent a large portion of executive officers, total officers compensation

The
Company intends to minimize the amount of fixed compensation paid to executive officers in order to minimize costs when Company performance is not optimum. The larger portion of compensation should be paid in the form of short-term and long-term
incentives, which are calculated and paid based primarily on financial measures of profitability and stockholder value creation. Executive officers have the incentive of increasing Company profitability and stockholder return in order to earn the
major portion of their compensation package.

(iii) Compensation levels should be competitive

The Compensation Committee reviews the survey data to ensure that the compensation program is competitive. We believe that a competitive compensation
program will enhance our ability to attract and retain executive officers.



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(iv) Incentive compensation should balance short and long-term performance

The Compensation Committee seeks to structure a balance between achieving strong short-term annual results and ensuring our long-term viability and
success. To reinforce the importance of balancing these perspectives, executive officers are regularly provided both short and long-term incentives.

We provide executive officers and many employees with various means of becoming stockholders of the Company. These opportunities include stock option grants, and restricted stock awards.

The Compensation Committee believes that the mix of long-term incentives allows us to deliver long-term incentive awards aligned with the interests of
stockholders. Stock options and restricted stock awards create a focus on share price appreciation. Finally, restricted stock awards serve as a retention tool to ensure that recipients remain at the Company.

Financial Metrics Used in Compensation Programs

Several financial metrics are commonly referenced in defining Company performance for executive officer compensation. These metrics are defined here and their use in annual and long-term incentive programs is described below.

Earnings Per Share

To ensure compensation is
proportional to the return on investment earned by stockholders, we use Earnings per Share (EPS) as a metric in the bonus plan for executive officers. EPS is a GAAP measure and generally defined as our net income divided by the average
number of shares outstanding during that period.

Operating Cash Flow

A related metric used in the annual incentive calculations is operating cash flow. Operating Cash flow is a GAAP measure. We believe that Operating Cash Flow is useful because it is a consistent measure of the
underlying results of our business. Furthermore, management uses it internally as a measure of the performance of our operations.

Increase in Revenue

A key driver for earnings per share and operating cash flow are increases in revenues. Increases in revenue are directly related to
creation of shareholder value at the Company.

Review of Executive Officer Performance

The Compensation Committee reviews, on an annual basis, each compensation element of an executive officer. In each case, the Compensation Committee takes
into account the scope of responsibilities and experience and balances these against competitive salary levels.

In addition, each year,
the CEO presents to the Compensation Committee his evaluation of each executive officer, which includes a review of contribution and performance over the past year, strengths, weaknesses, development plans and succession potential. Following this
presentation and a review of the survey data, the Compensation Committee makes its own assessments and approves compensation for each executive officer.

Components of the Executive Compensation Program

The Compensation Committee believes the total compensation and benefits
program for executive officers should consist of the following:



| |  |  | base salaries;
| | - |  | --------------



| |  |  | annual incentive plan;
| | - |  | ----------------------



| |  |  | long-term incentive compensation; and
| | - |  | -------------------------------------



| |  |  | retirement, and health and welfare benefits.
| | - |  | --------------------------------------------



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Base Salaries

Executive officers base salaries are targeted at median levels of the survey data. Base salaries are determined by evaluating an executive officers level of responsibility and experience and the Companys performance.

Increases to base salaries, if any, are driven primarily by individual performance and comparative data from the survey data. Individual
performance is evaluated by reviewing the executive officers success in achieving business results, promoting our core values and demonstrating leadership abilities.

In setting the base salary of the executive officers for fiscal year 2007, the Compensation Committee reviewed the compensation of comparable executive
officers from the survey data. The Compensation Committee also considered the Companys continuing achievement of its short- and long-term goals to:



| |  |  | achieve specific EPS and cash flow and revenue goals;
| | - |  | -----------------------------------------------------



| |  |  | communicate strategy and financial results effectively; and
| | - |  | -----------------------------------------------------------



| |  |  | develop leadership capabilities.
| | - |  | --------------------------------

The Compensation Committee based its compensation decisions on the Companys performance related to the objectives listed above. The Compensation Committee does not rely solely on predetermined formulas or a limited set of criteria
when it evaluates the performance of the executive officers.

The Compensation Committee reviews the survey data annually. The survey data
and general economic conditions and marketplace compensation trends are evaluated with the assistance of an outside consultant. The Compensation Committee usually adjusts base salaries for executive officers when:



| |  |  | the current compensation demonstrates a significant deviation from the market data;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | recognizing outstanding individual performance; or
| | - |  | --------------------------------------------------



| |  |  | recognizing an increase in responsibility.
| | - |  | ------------------------------------------

The salaries paid to the executive officers during fiscal year 2007 are shown in the Summary Compensation Table.

Annual Bonus Plan

The Annual Bonus Plan provides executive officers with the opportunity to earn cash bonuses based on the achievement of specific
Company-wide performance goals. The Compensation Committee approves the design of the annual incentive component of our compensation program to ensure alignment of executive officer pay with our annual (short-term) performance. Incentive bonuses are
generally paid in cash in February or March of each year for the prior fiscal years performance.

The Compensation Committee approves
a target incentive payout as a percentage of the base salary earned during the incentive period for each executive officer. These target percentages are based on competitive practices for each comparable position in the survey data. The incentive
target percentage represents the executive officers annual bonus opportunity if the annual performance goals of the incentive plan are achieved.

The Annual Bonus Plan establishes a set of financial metrics for each executive officer. These metrics are selected to drive annual performance. In 2007, quantitative metrics comprised 100% of the target incentive.
The metrics included in the 2007 Annual Incentive Plan were the financial metrics of EPS and operating cash flow.



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Annual Bonus Plan Weightings for 2007 for Named Executive Officers



|                                         |  |               |   |  |             |   |  |             |   |  |             |   |  |            |  
|---------------------------------------- |  | ------------- | - |  | ----------- | - |  | ----------- | - |  | ----------- | - |  | ---------- | -
|                                         |  | Mr. Hutchison |   |  | Mr. T. Rose |   |  | Mr. R. Rose |   |  | Ms. Hartill |   |  | Mr. Condon |  
|Target Incentive Compensation (% of Base |  |               |   |  |             |   |  |             |   |  |             |   |  |            |  
|Salary)                                  |  | 62            | % |  | 52          | % |  | 48          | % |  | 44          | % |  | 43         | %

In 2007, bonuses were approved as follows: Mr. Hutchison ($97,500), Mr. T. Rose
($48,750), Mr. R. Rose ($61,116), Ms. Hartill ($37,500), and Mr. Condon ($34,200). These bonuses were awarded by the Compensation Committee based on achieving the Companys financial targets during 2007 and approved by the Board
of Directors. These bonuses will be paid in February 2008.

The targets are based upon the budgets approved by the Board of Directors which
the Board believes are achievable, but represent significant improvements over prior years performance.

Long-Term Incentive Compensation

Long-term incentives comprise a significant portion of an executive officers total direct compensation package. Long-term incentives
are consistent with our at-risk pay philosophy. The Compensation Committees objective is to provide executive officers with long-term incentive award opportunities that are consistent with the survey data and based on each executive
officers individual performance. Currently, we provide executive officers with stock options and restricted stock awards.

The
Compensation Committee approved long-term incentive awards to executive officers in 2007 consisting of stock options.

The Compensation
Committee approves the total stock options and restricted stock awards that will be made available to executive officers as well as the size of individual grants for each executive officer. The amounts granted to executive officers vary each year
and are based on the executive officers performance, the survey data, as well as the executive officers total compensation package. Previous awards and grants, whether vested or unvested, have no impact on the current years awards
and grants.

The long-term incentive information related to the executive officers during fiscal year 2007 is included in the Summary
Compensation Table. Additional information on long-term incentive awards is shown in the Grants of Plan-Based Awards Table and the Outstanding Equity Awards at Fiscal Year-End Table.

Stock Options

An important objective of the long-term incentive program is to strengthen the
relationship between the long-term value of our stock price and the potential financial gain for employees. Stock options provide executive officers with the opportunity to purchase our Common Stock at a price fixed on the grant date regardless of
future market price. Stock options generally vest and become exercisable one-fifth annually after the original award date.

A stock option
becomes valuable only if our Common Stock price increases above the option exercise price and the holder of the option remains employed during the period required for the option to vest thus, providing an incentive for an option holder
to remain employed by the Company. In addition, stock options link a portion of an employees compensation to stockholders interests by providing an incentive to make decisions designed to increase the market price of our stock.

The exercise prices of the stock options granted to the executive officers during fiscal year 2007 are shown in the Grants of Plan-Based
Awards Table. Additional information on these grants, including the number of shares subject to each grant, also is shown in the Grants of Plan-Based Awards Table.



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Options generally are granted annually at the first board of directors meeting of the year, at the same
time as grants to the general eligible employee population, after final determination of our previous year operating results. Our practice is that the exercise price for each stock option is the market value on the date of grant. Under our option
plans, the Option Price shall not be less than the Fair Market Value of the shares on the date of grant.

There is a limited term in which
the executive officers can exercise stock options, known as the option term. The option term is generally ten years from the date of grant. At the end of the option term, the right to purchase any unexercised options expires. Option holders
generally forfeit any unvested options if their employment with us terminates.

In certain instances, stock options may vest on an
accelerated schedule. Retirement may trigger accelerated vesting if an executive officers age plus years of service with us is greater than or equal to 65 years. In this instance, all unvested options will vest as of the retirement date,
and the executive officer will have three or five years to exercise the options depending on the terms outlined in the stock option award agreement. However, the exercise window may not exceed the original option term.

Additionally, death or disability while employed with the Company will cause all stock options to vest automatically and become exercisable per the terms
outlined in the stock option award agreement.

Restricted Stock Awards

Restricted stock awards (RSAs) are intended to retain key employees, including the executive officers, through vesting periods. Restricted stock awards provide the opportunity for capital accumulation and
more predictable long-term incentive value.

RSAs generally are awarded periodically and determined by the Compensation Committee. RSAs are
shares of our Common Stock that are awarded with the restriction that the executive officer remains with us until the date of vesting. RSAs generally vest one-third annually after the original award date. The purpose of granting RSAs is to encourage
ownership of our Common Stock by, and retention of, our executive officers. Executive officers are allowed to vote RSAs as a stockholder based on the number of shares held free of restriction.

Any unvested RSAs generally are forfeited if the executive officer terminates employment with the Company or if the executive officer fails to meet the
continuing employment restriction outlined in the RSA agreement. In the event of death or disability, any unvested RSAs are immediately vested.

No RSAs were awarded in fiscal 2007.

Tax Implications of Executive Compensation

Section 162(m) of the Internal Revenue Code of 1986, as amended (the Code) places a limit of $1,000,000 on the amount of compensation
that may be deducted by the Company in any year with respect to the executive officers unless the compensation is performance-based compensation as described in Section 162(m) and the related regulations, as well as pursuant to a plan approved
by the Companys stockholders. We may from time to time pay compensation to our executive officers that may not be deductible, including discretionary bonuses or other types of compensation outside of our plans.

Although the Compensation Committee has generally attempted to structure executive compensation so as to preserve deductibility, it also believes that
there are circumstances where our interests are best served by maintaining flexibility in the way compensation is provided, even if it might result in the non-deductibility of certain compensation under the Code.

Although equity awards may be deductible for tax purposes by the Company, the accounting rules pursuant to APB 25 and FAS 123(R) require that the portion
of the tax benefit in excess of the financial compensation cost be recorded to paid-in-capital.



51



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Retirement, Health and Welfare Benefits

We offer a variety of health and welfare and retirement programs to all eligible employees. The executive officers generally are eligible for the same
benefit programs on the same basis as the rest of the broad-based employees. The health and welfare programs are intended to protect employees against catastrophic loss and encourage a healthy lifestyle. Our health and welfare programs include
medical, wellness, pharmacy, dental, vision, life insurance and accidental death and disability. Coverage under the life insurance and disability programs offer benefit amounts specific to executive officers.

We offer retirement programs that are intended to supplement the employees personal savings and social security. The program includes Regeneration
Technologies, Inc. Retirement Plan which is a 401(k) plan. All U.S. employees, including executive officers, are generally eligible for the 401(k) Plan.

We adopted the 401(k) Plan to enable employees to save for retirement through a tax-advantaged combination of employee and Company contributions and to provide employees the opportunity to directly manage their
retirement plan assets through a variety of investment options. The 401(k) Plan allows eligible employees to elect to contribute up to 100% of their eligible compensation to an investment trust. Eligible compensation generally means all wages,
salaries and commissions from the Company. Employee contributions are matched in cash by us at the rate of $1.00 per $1.00 employee contribution for the first 6% of the employees salary. Employees contributions vest immediately and the
employers contributions vest after the employee has three years of service with the Company. The 401(k) Plan provides for over twenty different investment options, for which the participant has sole discretion in determining how both the
employer and employee contributions are invested. The 401(k) Plan does not provide our employees the option to invest directly in the Companys stock. The 401(k) Plan offers in-service withdrawals in the form of loans, hardship distributions
and age 59.5 distributions. The 401(k) Plan benefits are payable pursuant to the participants election.

Perquisites and Perquisite Allowance
Payments

Executive officers are provided with the following benefits as a supplement to their other compensation:



| |  |  | Life Insurance & Accidental Death & Dismemberment Coverage: We pay 100% of the premium for both term life insurance and accidental death and dismemberment
coverage, equal to $500,000 for executive officers. In addition, we also pay 100% of the premium for a $50,000 term life insurance policy for the executive officer, and all officers and employees of the company
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Short-Term and Long-Term Disability: We pay 100% of the premium cost for these benefit programs for executive officers. The short-term disability program provides
income replacement at 60% of base pay level for up to eleven weeks or recovery. The program then pays 60% of the base pay level beginning on week twelve up to age 65.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Executive Physical Program: At our expense each executive officer is allowed to have a complete and professional personal physical exam on an annual basis.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

Severance Plan

The
Company does not have a severance plan for executive officers.

Employment Agreements

We entered into an employment agreement with Mr. Hutchison effective December 1, 2001. The agreement provides for an annual base salary of
$350,000 for the first two years, after which his salary will be reviewed annually by our Board of Directors. The agreement had an initial term ending on November 30, 2004, and has been renewed for successive one-year periods.
Mr. Hutchison is also eligible to receive an annual bonus in an amount to be determined by our Board of Directors provided we achieve certain specified goals. When he



52



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entered into the employment agreement with us, Mr. Hutchison received a sign-on bonus and related tax gross-up totaling $61,400, temporary housing and
moving expenses and an option to purchase 500,000 shares of our common stock. This option is subject to a stock option agreement under which one-fifth of the option vests on each anniversary date of the grant. In March 2007, March
2006, June 2005, April 2004, April 2003 and May 2002, Mr. Hutchison received an additional option to purchase 30,000, 40,000, 100,000, 40,000, 20,000 and 600,000, respectively, shares of our common stock, which are also subject
to five-year vesting.

Our agreement with Mr. Hutchison provides for us to pay for a $1.0 million life insurance policy payable to a
beneficiary of Mr. Hutchisons choosing. Mr. Hutchison is also eligible to receive standard employee benefits and matching contributions to our 401(k) plan of up to 6% of his salary up to the maximum excludable dollar amount permitted
by the Internal Revenue Code. If we terminate Mr. Hutchison without cause, he will be entitled to severance pay equal to his salary and benefits for one year from the date of termination. In the event of termination for
cause, Mr. Hutchison will not be entitled to severance pay. In either case, or in the case of a voluntary termination by Mr. Hutchison, he will be precluded from competing with us for two years following termination.

We entered into an employment agreement with Mr. Thomas Rose effective May 1, 2002. The agreement provides for an annual base
salary of $180,000 for the first two years, after which his salary will be reviewed annually. The agreement had an initial term ending on April 30, 2004, and has been renewed for successive one-year periods. Mr. Thomas Rose is also
eligible to receive a bonus at any time during the year, or after the close of the year. When he entered into the agreement, Mr. Thomas Rose also received an option to purchase 200,000 shares of our common stock. This option is subject to a
stock option agreement under which one-fifth of the option vests each anniversary date of the grant. In March 2007, March 2006, June 2005, April 2004 and April 2002, Mr. Thomas Rose received an additional option to purchase
30,000, 20,000, 50,000, 20,000, and 20,000, respectively, shares of our common stock, which are also subject to five-year vesting.

We
entered into an employment agreement with Mr. Roger Rose effective October 4, 2002. The agreement provides for an annual base salary of $175,000 for the first year, after which his salary will be reviewed annually. The agreement had an
initial term ending on October 20, 2005, and has been renewed for successive one-year periods. Mr. Roger Rose is also eligible to receive a bonus during the first calendar quarter of each year of the agreement. When he entered into the
agreement, Mr. Roger Rose also received an option to purchase 100,000 shares of our common stock and a signing bonus of $40,000. This option is subject to a stock option agreement under which one-fifth of the option vests each anniversary date
of the grant. In March 2007, March 2006, June 2005, August 2004, April 2004 and April 2003, Mr. Roger Rose received an additional option to purchase 30,000, 20,000, 50,000, 20,000, 20,000, and 20,000, respectively, shares of
our common stock, which are also subject to five-year vesting.

Change in Control Agreements

The Company does not have a Change in Control Agreement in place for executive officers.

Indemnification Agreements

The company does not have indemnification agreements with executive
officers.

Restricted Stock Awards

Upon vesting of a restricted stock award and after the payment of the taxes due as a result of vesting, the executive officer is allowed to sell his vested shares.

Exercise of Stock Options

Upon exercise of a stock option and after netting down the shares to pay
the taxes due as a result of exercise, the executive officer is allowed to sell his vested stock options.



53



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COMPENSATION OF EXECUTIVE OFFICERS

The following table sets forth information concerning all cash and non-cash compensation for fiscal 2007 awarded to, earned by or paid to our chief
executive officer, our chief financial officer and each of the other three most highly compensated executive officers who were serving as executive officers at December 31, 2007.

SUMMARY COMPENSATION TABLE





|                                                                                        |  |      |  |           |  |          |  |                   |  |                    |  |                          |     |  |          
|--------------------------------------------------------------------------------------- |  | ---- |  | --------- |  | -------- |  | ----------------- |  | ------------------ |  | ------------------------ | --- |  | ---------
|Name and Principal Position                                                             |  | Year |  | Salary($) |  | Bonus($) |  | StockAwards($)(6) |  | OptionAwards($)(6) |  | All OtherCompensation($) |     |  | Total ($)
|Brian K. Hutchison                                                                      |  | 2007 |  | 414,615   |  | 97,500   |  | 23,145            |  | 421,798            |  | 17,548                   | (1) |  | 974,606  
|Chairman, President and Chief Executive Officer                                         |  |      |  |           |  |          |  |                   |  |                    |  |                          |     |  |          
|                                                                                        |  |      |  |           |  |          | 
|Thomas F. Rose                                                                          |  | 2007 |  | 241,939   |  | 48,750   |  | 11,572            |  | 201,486            |  | 20,838                   | (2) |  | 524,585  
|Vice President, Chief Financial Officer and Secretary                                   |  |      |  |           |  |          |  |                   |  |                    |  |                          |     |  |          
|                                                                                        |  |      |  |           |  |          | 
|Roger W. Rose                                                                           |  | 2007 |  | 247,308   |  | 61,116   |  | 11,572            |  | 274,569            |  | 22,322                   | (3) |  | 616,887  
|Executive Vice President                                                                |  |      |  |           |  |          |  |                   |  |                    |  |                          |     |  |          
|                                                                                        |  |      |  |           |  |          | 
|Caroline A. Hartill                                                                     |  | 2007 |  | 223,270   |  | 37,500   |  | 11,572            |  | 155,725            |  | 13,152                   | (4) |  | 441,219  
|Vice President of Quality Assurance and Regulatory Affairs and Chief Scientific Officer |  |      |  |           |  |          |  |                   |  |                    |  |                          |     |  |          
|                                                                                        |  |      |  |           |  |          | 
|Joseph W. Condon                                                                        |  | 2007 |  | 207,311   |  | 34,200   |  | 11,572            |  | 208,768            |  | 19,418                   | (5) |  | 481,269  
|Vice President of Operations                                                            |  |      |  |           |  |          |  |                   |  |                    |  |                          |     |  |          



|(1) | Includes matching contributions under our 401(k) Plan of $10,363, payment of $5,309 for health and dental insurance and
payment of $1,876 for term life insurance.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes matching contributions under our 401(k) Plan of $14,100, payment of $5,086 for health and dental insurance and
payment of $1,652 for term life insurance.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes matching contributions under our 401(k) Plan of $15,919, payment of $5,309 for health and dental insurance,
payment of $1,094 for term life insurance.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes matching contributions under our 401(k) Plan of $11,296, payment of $877 for health and dental insurance and
payment of $979 for term life insurance.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Includes matching contributions under our 401(k) Plan of $12,717, payment of $4,641 for health and dental insurance and
payment of $2,060 for term life insurance.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Reflects the dollar amount recognized for financial statement reporting purposes during 2007, in accordance with FAS
123(R), and thus includes amounts from stock options and restricted stock awards granted in and prior to 2007. Assumptions used in the calculation of these amounts are included in footnote 3 to our financial statements for the fiscal year ended
December 31, 2007.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



54



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GRANTS OF PLAN-BASED AWARDS

This table discloses the actual numbers of stock options granted during 2007 and the grant date fair value of these awards. It also captures potential
future payouts under the Companys non-equity incentive plans.



|                    |           |          |              |                                                                  |           |                                                          |            |                                                                |  |   |                                           |        |                                                  |  |      |  |        
|------------------- | --------- | -------- | ------------ | ---------------------------------------------------------------- | --------- | -------------------------------------------------------- | ---------- | -------------------------------------------------------------- |  | - | ----------------------------------------- | ------ | ------------------------------------------------ |  | ---- |  | -------
|Name                |           |          |              | Estimated Future PayoutsUnder Non-EquityIncentive Plan Awards(1) |           | All OtherStockAwards:Number ofShares ofStock orUnits (#) |            | All OtherOptionAwards:Number ofSecuritiesUnderlyingOptions (#) |  |   | Exerciseor BasePrice ofOptionAwards($/Sh) |        | Grant DateFair Valueof Stockand OptionAwards ($)
|                    | GrantDate |          | Threshold($) |                                                                  | Target($) |                                                          | Maximum($) |                                                                |  |   |                                          
|Brian K. Hutchison  |           | 3/2/2007 |              |                                                                 |           | 260,000                                                  |            | 260,000                                                        |  |  |                                           | 30,000 | (2)                                              |  | 7.25 |  | 162,858
|Thomas F. Rose      |           | 3/2/2007 |              |                                                                 |           | 130,000                                                  |            | 130,000                                                        |  |  |                                           | 30,000 | (2)                                              |  | 7.25 |  | 162,858
|Roger W. Rose       |           | 3/2/2007 |              |                                                                 |           | 120,000                                                  |            | 120,000                                                        |  |  |                                           | 30,000 | (2)                                              |  | 7.25 |  | 162,858
|Caroline A. Hartill |           | 3/2/2007 |              |                                                                 |           | 100,000                                                  |            | 100,000                                                        |  |  |                                           | 30,000 | (2)                                              |  | 7.25 |  | 162,858
|Joseph W. Condon    |           | 3/2/2007 |              |                                                                 |           | 90,000                                                   |            | 90,000                                                         |  |  |                                           | 30,000 | (2)                                              |  | 7.25 |  | 162,858



|(1) | These amounts represent the threshold, target, and maximum bonuses payable to each executive under the Companys
2007 Bonus Plan.
|--- | ---------------------------------------------------------------------------------------------------------------------------------

|(2) | Such options were granted on March 2, 2007 pursuant to our 2004 Equity Incentive Plan. Subject to the
recipients continued service with us, 20% of these options will become exercisable on each anniversary date from March 2, 2008 through March 2, 2012. Such options will vest immediately upon a change of control of the Company.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



55



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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

The following table shows outstanding stock option awards classified as exercisable and unexercisable as of December 31, 2007 for executive
officers. The table shows unvested and unearned stock awards (both time-based awards and performance-contingent) assuming a market value of $8.68 a share (the closing market price of the Companys stock on December 31, 2007).



|                       |  |                                                                |  |                                                                  |  |                        |  |                      |  |                                                      |  |                                                              |  |                                                                                               |  |                                                                                                              
|---------------------- |  | -------------------------------------------------------------- |  | ---------------------------------------------------------------- |  | ---------------------- |  | -------------------- |  | ---------------------------------------------------- |  | ------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------
|                       |  | Option Awards                                                  |  | Stock Awards                                                    
|Name                   |  | Number ofSecuritiesUnderlyingUnexercisedOptions (#)Exercisable |  | Number ofSecuritiesUnderlyingUnexercisedOptions (#)Unexercisable |  | OptionExercisePrice($) |  | OptionExpirationDate |  | Number ofShares orUnits ofStockThat HaveNotVested(#) |  | MarketValue ofShares orUnits ofStockThatHave NotVested($)(6) |  | EquityIncentive PlanAwards:Number ofUnearnedShares, Unitsor OtherRights
ThatHaveNot Vested($) |  | EquityIncentive PlanAwards:Market orPayout Valueof UnearnedShares, Unitsor OtherRights
ThatHave NotVested ($)
|Brian K. Hutchison(1)  |  | 500,000                                                        |  |                                                                 |  | 4.80                   |  | 5/29/2012            |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  | 40,000                                                         |  | 60,000                                                           |  | 6.18                   |  | 6/27/2015            |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  |                                                               |  | 30,000                                                           |  | 7.25                   |  | 3/2/2017             |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  | 8,000                                                          |  | 32,000                                                           |  | 7.28                   |  | 3/7/2016             |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  | 16,000                                                         |  | 4,000                                                            |  | 9.33                   |  | 4/28/2013            |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  | 24,000                                                         |  | 16,000                                                           |  | 10.04                  |  | 4/26/2014            |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  | 500,000                                                        |  |                                                                 |  | 10.13                  |  | 12/3/2011            |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  |                                                                |  |                                                                  |  |                        |  |                      |  | 6,667                                                |  | 39,067                                                       |  |                                                                                              |  |                                                                                                             
|Thomas F. Rose(2)      |  | 200,000                                                        |  |                                                                 |  | 4.80                   |  | 5/29/2012            |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  | 20,000                                                         |  | 30,000                                                           |  | 6.18                   |  | 6/27/2015            |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  |                                                               |  | 30,000                                                           |  | 7.25                   |  | 3/2/2017             |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  | 4,000                                                          |  | 16,000                                                           |  | 7.28                   |  | 3/7/2016             |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  | 16,000                                                         |  | 4,000                                                            |  | 9.33                   |  | 4/28/2013            |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  | 12,000                                                         |  | 8,000                                                            |  | 10.04                  |  | 4/26/2014            |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  |                                                                |  |                                                                  |  |                        |  |                      |  | 3,333                                                |  | 19,533                                                       |  |                                                                                              |  |                                                                                                             
|Roger W. Rose(3)       |  | 20,000                                                         |  | 30,000                                                           |  | 6.18                   |  | 6/27/2015            |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  |                                                               |  | 30,000                                                           |  | 7.25                   |  | 3/2/2017             |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  | 4,000                                                          |  | 16,000                                                           |  | 7.28                   |  | 3/7/2016             |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  | 100,000                                                        |  |                                                                 |  | 8.70                   |  | 10/21/2012           |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  | 12,000                                                         |  | 8,000                                                            |  | 9.18                   |  | 8/9/2014             |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  | 16,000                                                         |  | 4,000                                                            |  | 9.33                   |  | 4/28/2013            |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  | 12,000                                                         |  | 8,000                                                            |  | 10.04                  |  | 4/26/2014            |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  |                                                                |  |                                                                  |  |                        |  |                      |  | 3,333                                                |  | 19,533                                                       |  |                                                                                              |  |                                                                                                             
|Caroline A. Hartill(4) |  | 40,000                                                         |  |                                                                 |  | 4.80                   |  | 5/29/2012            |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  | 20,000                                                         |  | 30,000                                                           |  | 6.18                   |  | 6/27/2015            |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  |                                                               |  | 30,000                                                           |  | 7.25                   |  | 3/2/2017             |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  | 4,000                                                          |  | 16,000                                                           |  | 7.28                   |  | 3/7/2016             |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  | 16,000                                                         |  | 4,000                                                            |  | 9.33                   |  | 4/28/2013            |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  | 12,000                                                         |  | 8,000                                                            |  | 10.04                  |  | 4/26/2014            |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  | 40,000                                                         |  |                                                                 |  | 10.07                  |  | 11/12/2011           |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  |                                                                |  |                                                                  |  |                        |  |                      |  | 3,333                                                |  | 19,533                                                       |  |                                                                                              |  |                                                                                                             
|Joseph W. Condon(5)    |  | 8,000                                                          |  | 12,000                                                           |  | 6.18                   |  | 6/27/2015            |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  |                                                               |  | 30,000                                                           |  | 7.25                   |  | 3/2/2017             |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  | 2,000                                                          |  | 8,000                                                            |  | 7.28                   |  | 3/7/2016             |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  | 6,000                                                          |  | 4,000                                                            |  | 9.18                   |  | 8/9/2014             |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  | 12,000                                                         |  | 8,000                                                            |  | 10.04                  |  | 4/26/2014            |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  | 40,000                                                         |  | 10,000                                                           |  | 13.15                  |  | 6/16/2013            |  |                                                      |  |                                                              |  |                                                                                              |  |                                                                                                             
|                       |  |                                                                |  |                                                                  |  |                        |  |                      |  | 3,333                                                |  | 19,533                                                       |  |                                                                                              |  |                                                                                                             



|(1) | Mr. Hutchison holds the following stock options which vest 20% per year over a five-year period from the date
of grant and a restricted stock award which vests 33.3% per year over a three-year period from the date of grant:
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

500,000 stock options granted on May 29, 2002. 100,000 stock options vested on each of May 29, 2003, 2004, 2005, 2006 and 2007.



56



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100,000 stock options granted on June 27, 2005. 20,000 stock options vested on each of June 27,
2006 and 2007. 20,000 stock options will vest on each of June 27, 2008, 2009 and 2010.

30,000 stock options granted on March 2,
2007. 6,000 stock options will vest on each of March 2, 2008, 2009, 2010, 2011 and 2012.

40,000 stock options granted on March 7,
2006. 8,000 stock options vested on March 7, 2007. 8,000 stock options will vest on each of March 7, 2008, 2009, 2010 and 2011.

20,000 stock options granted on April 28, 2003. 4,000 stock options vested on each of April 28, 2004, 2005, 2006 and 2007. 4,000 stock options will vest on April 28, 2008.

40,000 stock options granted on April 26, 2004. 8,000 stock options vested on April 26 2005, 2006 and 2007. 8,000 stock options will vest on
each of April 26, 2008 and 2009.

500,000 stock options granted on December 3, 2001. 100,000 stock options vested on each of
December 3, 2002, 2003, 2004, 2005 and 2006.

10,000 restricted stock awards granted March 2, 2006. 3334 restricted stock awards
vested on March 7, 2007 and 3,333 will vest on each of March 7, 2008 and 2009.



|(2) | Mr. Thomas Rose holds the following stock options which vest 20% per year over a five-year period from the
date of grant and a restricted stock award which vests 33.3% per year over a three-year period from the date of grant:
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

200,000 stock options granted on May 29, 2002. 40,000 stock options vested on each of May 29, 2003, 2004, 2005, 2006 and 2007.

50,000 stock options granted on June 27, 2005. 10,000 stock options vested on each of June 27, 2006 and 2007. 10,000 stock options will vest on each of June 27, 2008, 2009 and 2010.

30,000 stock options granted on March 2, 2007. 6,000 stock options will vest on each of March 2, 2008, 2009, 2010, 2011 and 2012.

20,000 stock options granted on March 7, 2006. 4,000 stock options vested on March 7, 2007. 4,000 stock options will vest on each of
March 7, 2008, 2009, 2010 and 2011.

20,000 stock options granted on April 28, 2003. 4,000 stock options vested on each of
April 28, 2004, 2005, 2006 and 2007. 4,000 stock options will vest on April 28, 2008.

20,000 stock options granted on
April 26, 2004. 4,000 stock options vested on each of April 26, 2005, 2006 and 2007. 4,000 stock options will vest on each of April 26, 2008 and 2009.

5,000 restricted stock awards granted on March 7, 2006. 1,667 restricted stock awards vested on March 7, 2007. 1,667 restricted stock awards will vest on March 7, 2008 and 1,666 restricted stock awards
will vest on March 7, 2009.



|(3) | Mr. Roger Rose holds the following stock options which vest 20% per year over a five-year period from the date
of grant and a restricted stock award which vests 33.3% per year over a three-year period from the date of grant:
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

50,000 stock options granted on June 27, 2005. 10,000 stock options vested on each of June 27, 2006 and 2007. 10,000 stock options will vest on each of June 27, 2008, 2009 and 2010.

30,000 stock options granted on March 2, 2007. 6,000 stock options will vest on each of March 2, 2008, 2009, 2010, 2011 and 2012.

20,000 stock options granted on March 7, 2006. 4,000 stock options vested on March 7, 2007. 4,000 stock options will vest on each of
March 7, 2008, 2009, 2010 and 2011.

100,000 stock options granted on October 21, 2002. 20,000 stock options vested on each of
October 21, 2003, 2004, 2005, 2006 and 2007.

20,000 stock options granted on August 9, 2004. 4,000 stock options vested on each
of August 9, 2005, 2006 and 2007. 4,000 stock options will vest on each of August 9, 2008 and 2009.

20,000 stock options granted
on April 28, 2003. 4,000 stock options vested on each of April 28, 2004, 2005, 2006 and 2007. 4,000 stock options will vest on April 28 2008.



57



---

20,000 stock options granted on April 26, 2004. 4,000 stock options vested on each of April 26,
2005, 2006 and 2007. 4,000 stock options will vest on each of April 26, 2008 and 2009.

5,000 restricted stock awards granted on
March 7, 2006. 1,667 restricted stock awards vested on March 7, 2007. 1,667 restricted stock awards will vest on March 7, 2008 and 1,666 restricted stock awards will vest on March 7, 2009.



|(4) | Ms. Hartill holds the following stock options which vest 20% per year over a five-year period from the date of
grant and a restricted stock award which vests 33.3% per year over a three-year period from the date of grant:
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

40,000 stock options granted on May 29, 2002. 8,000 stock options vested on each of May 29, 2003, 2004, 2005, 2006 and 2007.

50,000 stock options granted on June 27, 2005. 10,000 stock options vested on each of June 27, 2006 and 2007. 10,000 stock options will vest on each of June 27, 2008, 2009 and 2010.

30,000 stock options granted on March 2, 2007. 6,000 stock options will vest on each of March 2, 2008, 2009, 2010, 2011 and 2012.

20,000 stock options granted on March 7, 2006. 4,000 stock options vested on March 7, 2007. 4,000 stock options will vest on each of
March 7, 2008, 2009, 2010 and 2011.

20,000 stock options granted on April 28, 2003. 4,000 stock options vested on each of
April 28, 2004, 2005, 2006 and 2007. 4,000 stock options will vest on April 28, 2008.

20,000 stock options granted on
April 26, 2004. 4,000 stock options vested on each of April 26, 2005, 2006 and 2007. 4,000 stock options will vest on each of April 26, 2008 and 2009.

40,000 stock options granted on November 12, 2001. 8,000 stock options vested on each of November 12, 2002, 2003, 2004, 2005 and 2006.

5,000 restricted stock awards granted on March 7, 2006. 1,667 restricted stock awards vested on March 7, 2007. 1,667 restricted stock awards
will vest on March 7, 2008 and 1,666 restricted stock awards will vest on March 7, 2009.



|(5) | Mr. Condon holds the following stock options which vest 20% per year over a five-year period from the date of
grant and a restricted stock award which vests 33.3% per year over a three-year period from the date of grant:
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20,000 stock options granted on June 27, 2005. 4,000 stock options vested on each of June 27, 2006 and 2007. 4,000 stock options will vest on each of June 27, 2008, 2009 and 2010.

30,000 stock options granted on March 2, 2007. 6,000 stock options will vest on each of March 2, 2008, 2009, 2010, 2011 and 2012.

10,000 stock options granted on March 7, 2006. 2,000 stock options vested on March 7, 2007. 2,000 stock options will vest on each of
March 7, 2008, 2009, 2010 and 2011.

10,000 stock options granted on August 9, 2004. 2,000 stock options vested on each of
August 9, 2005, 2006 and 2007. 2,000 stock options will vest on each of August 9, 2008 and 2009.

20,000 stock options granted on
April 26, 2004. 4,000 stock options vested on each of April 26, 2005, 2006 and 2007. 4,000 stock options will vest on each of April 26, 2008 and 2009.

50,000 stock options granted on June 16, 2003. 10,000 stock options vested on each of June 16, 2004, 2005, 2006 and 2007. 10,000 stock options will vest on June 16 2008.

5,000 restricted stock awards granted on March 7, 2006. 1,667 restricted stock awards vested on March 7, 2007. 1,667 restricted stock awards
will vest on March 7, 2008 and 1,666 restricted stock awards will vest on March 7, 2009.



|(6) | Based on the closing price of our Common Stock of $8.68 on The Nasdaq Stock Market on December 31, 2007.
|--- | --------------------------------------------------------------------------------------------------------



58



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OPTION EXERCISES AND STOCK VESTED

The following table sets forth information with respect to: (1) exercises of stock options during fiscal year 2007 and (2) vested restricted
stock awards held at December 31, 2007 by the persons named in the Summary Compensation Table.



|                    |  |                                       |  |                             |  |                                      |  |                                |       
|------------------- |  | ------------------------------------- |  | --------------------------- |  | ------------------------------------ |  | ------------------------------ | ------
|                    |  | Option Awards                         |  | Stock Awards               
|Name                |  | Number ofSharesAcquiredon Exercise(#) |  | ValueRealizedon Exercise(#) |  | Numberof SharesAcquiredon Vesting(#) |  | ValueRealizedon Vesting(#) (1)
|Brian K. Hutchison  |  |                                      |  |                            |  | 3,334                                |  | $                              | 28,939
|Thomas F. Rose      |  |                                      |  |                            |  | 1,667                                |  |                                | 14,470
|Roger W. Rose       |  |                                      |  |                            |  | 1,667                                |  |                                | 14,470
|Caroline A. Hartill |  |                                      |  |                            |  | 1,667                                |  |                                | 14,470
|Joseph W. Condon    |  |                                      |  |                            |  | 1,667                                |  |                                | 14,470



|(1) | Based on the closing price of our Common Stock of $8.68 on The Nasdaq Stock Market on December 31, 2007.
|--- | --------------------------------------------------------------------------------------------------------

DIRECTOR COMPENSATION

Our directors who are also our employees or officers do not receive any compensation specifically related to their activities as directors, other than reimbursement for expenses incurred relating to their attendance
at meetings of our Board of Directors. Our non-employee directors are eligible to receive an annual retainer of $25,000, to be paid in quarterly installments. In addition, our non-employee directors are eligible to receive an attendance fee of
$5,000 per meeting, $500 for teleconference meetings and $2,000 per committee meeting and reimbursement for their expenses incurred relating to their attendance at meetings of the Board of Directors and committees thereof. The Chairman of our Audit
Committee receives additional annual compensation of $15,000 in recognition of the increased responsibilities of the Audit Committee as a result of rules and regulations enacted by the Securities and Exchange Commission and The Nasdaq Stock Market
pursuant to the Sarbanes-Oxley Act of 2002. The Chairman of our Compensation Committee receives additional annual compensation of $10,000.

At the discretion of our Board of Directors or Compensation Committee, our directors are also eligible to receive awards under our Omnibus Stock Plan and our 2004 Equity Incentive Plan. In 2004, all of our non-employee directors received a
grant of an option to purchase 30,000 shares of our common stock at an exercise price of $10.04 per share. Each such option will vest as to 10,000 shares on April 26, 2005, April 26, 2006 and April 26, 2007. Such options will
vest immediately upon a change of control of the Company. In 2005, no non-employee directors received a grant of options to purchase shares of our common stock. In 2006, our non-employee director, Philip R. Chapman, received a grant of 30,000
options at an exercise price of $7.00 per share to purchase shares of our common stock. This option is subject to a stock option agreement under which one-third of the option vests each anniversary date of the grant. On April 24, 2007, our
non-employee directors, David J. Simpson, Peter F. Gearen, and LBI Group, Inc., (Michael J. Odrich) each received grants of 30,000 options at an exercise price of $8.45 per share to purchase shares of our common stock. Each such option will vest as
to 10,000 shares on April 24, 2008, April 24, 2009 and April 24, 2010. Upon Mr. Raineys election as non-employee director on March 7, 2007, Mr. Rainey received a grant of an option to purchase 30,000 shares of our common stock
at an exercise price of $7.62 per share. Each such option will vest as to 10,000 shares on March 7, 2008, March 7, 2009 and March 7, 2010. Upon the election of Julianne M. Bowler as non-employee director in May 14, 2007,
Ms. Bowler received a grant of an option to purchase 30,000 shares of our common stock at an exercise price of $9.57 per share. Each such option will vest as to 10,000 shares on May 14, 2008, March 7, 2009 and May 14, 2010.



59



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The following table discloses the cash, equity awards and other compensation earned, paid or awarded, as
the case may be, to each of the Companys directors during the fiscal year ended 2007.



|                   |  |                            |  |             |  |              |  |                       |  |        
|------------------ |  | -------------------------- |  | ----------- |  | ------------ |  | --------------------- |  | -------
|                   |  |                            |  |             |  |              |  |                       |  |        
|                   |  | Fees Earned orPaid in Cash |  | StockAwards |  | OptionAwards |  | All OtherCompensation |  | Total  
|Name               |  | ($)(1)                     |  | ($)(2)      |  | ($)(2)       |  | ($)                   |  | ($)    
|Philip R. Chapman  |  | 79,500                     |  |            |  | 74,416       |  |                      |  | 153,916
|Peter F. Gearen    |  | 71,000                     |  |            |  | 66,691       |  |                      |  | 137,691
|Michael J. Odrich  |  | 45,750                     |  |            |  | 66,691       |  |                      |  | 112,441
|David J. Simpson   |  | 82,500                     |  |            |  | 66,691       |  |                      |  | 149,191
|Gregory P. Rainey  |  | 50,375                     |  |            |  | 43,689       |  |                      |  | 94,064 
|Julianne M. Bowler |  | 31,000                     |  |            |  | 42,391       |  |                      |  | 73,391 



|(1) | Includes annual cash retainer and fees for serving on our Board and committees of our Board.
|--- | --------------------------------------------------------------------------------------------

|(2) | Reflects the dollar amount recognized for financial statement reporting purposes during 2007, in accordance with FAS
123(R), and thus includes amounts from stock options and restricted stock awards granted in and prior to 2007. Assumptions used in the calculation of these amounts are included in footnote 3 to our financial statements for the fiscal year ended
December 31, 2007.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



COMPENSATION COMMITTEE
REPORT

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based upon such
review, the related discussions and such other matters deemed relevant and appropriate by the Compensation Committee, the Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in
this Annual Report on Form 10-K.

Philip R. Chapman (Chairman)

David J. Simpson

Peter F. Gearen

Gregory P. Rainey



60



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Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following table sets forth information as of February 20, 2008 regarding the
beneficial ownership of our common stock by: (1) each person known by us to own beneficially more than 5% of our outstanding common stock; (2) each of our directors and nominees for director; (3) each executive officer named in the
Summary Compensation Table below; and (4) all of our directors and executive officers as a group. Except as otherwise specified, the named beneficial owner has the sole voting and investment power over the shares listed. Unless otherwise
indicated, the address of the beneficial owner is: c/o Regeneration Technologies, Inc., 11621 Research Circle, Alachua, Florida 32615.



|                                                                       |  |                                        |  |        
|---------------------------------------------------------------------- |  | -------------------------------------- |  | -------
|                                                                       |  |                                       
|                                                                       |  | Shares BeneficiallyVested and
Owned(1)
|Name and Address of Beneficial Owner                                   |  | Number                                 |  | Percent
|Brian K. Hutchison(2)                                                  |  | 1,270,200                              |  | 4.2    
|Thomas F. Rose(3)                                                      |  | 285,501                                |  | *      
|Roger W. Rose(4)                                                       |  | 193,003                                |  | *      
|Caroline A. Hartill(5)                                                 |  | 155,001                                |  | *      
|Joseph W. Condon(6)                                                    |  | 94,002                                 |  | *      
|David J. Simpson(7)                                                    |  | 63,157                                 |  | *      
|Philip R. Chapman(8)                                                   |  | 97,688                                 |  | *      
|Peter F. Gearen(9)                                                     |  | 78,800                                 |  | *      
|Gregory P. Rainey(10)                                                  |  | 15,000                                 |  | *      
|Julianne M. Bowler                                                     |  |                                       |  | *      
|Michael J. Odrich(11)                                                  |  | 1,693,925                              |  | 5.7    
|                                                                       |  |                                       
|LBI Group Inc.(11)c/o Lehman Brothers
Inc.                             |  |                                        |  |        
|745 Seventh Avenue                                                     |  |                                        |  |        
|30th Floor                                                             |  |                                        |  |        
|New York, NY 10019                                                     |  | 1,615,085                              |  | 5.4    
|                                                                       |  |                                       
|Gagnon Securities LLC(12)                                              |  |                                        |  |        
|1370 Avenue of the Americas Suite 2002                                 |  |                                        |  |        
|New York, NY 10019-4602                                                |  | 4,154,500                              |  | 13.9   
|                                                                       |  |                                       
|LeRoy C. Kopp(13)                                                      |  |                                        |  |        
|7701 France Avenue South                                               |  |                                        |  |        
|Suite 500                                                              |  |                                        |  |        
|Edina, MN 55435                                                        |  | 1,969,390                              |  | 6.6    
|                                                                       |  |                                       
|Frontier Capital Management Co., Inc.(14)                              |  |                                        |  |        
|99 Summer Street                                                       |  |                                        |  |        
|Boston, MA 02110                                                       |  | 1,917,870                              |  | 6.4    
|                                                                       |  |                                       
|HealthCor Management, LP(15)                                           |  |                                        |  |        
|152 West 57th Street 47th Floor                                        |  |                                        |  |        
|New York, NY 10019-3386                                                |  | 1,700,000                              |  | 5.7    
|                                                                       |  |                                       
|All executive officers and directors, including those named as a group |  |                                        |  |        
|(12 persons)(16)                                                       |  | 3,975,277                              |  | 13.3   





|* | Represents beneficial ownership of less than 1%.
|- | ------------------------------------------------



|(1) | Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, which
generally attribute beneficial ownership of securities to persons who possess sole or shared voting power and/or investment power with respect to those securities. Shares of common stock issuable pursuant to options, to the extent such options are
exercisable or convertible within 60 days after
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



61



---

| | February 20, 2008 are treated as outstanding for purposes of computing the percentage of the person holding such securities but are not treated as
outstanding for purposes of computing the percentage of any other person.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes currently-exercisable options to purchase 1,088,000 shares of our common stock, options to purchase an
additional 6,000 shares of common stock that will vest on March 2, 2008, options to purchase an additional 8,000 shares of common stock that will vest on March 7, 2008, options to purchase an additional 8,000 shares of common stock that
will vest on April 26, 2008 and options to purchase an additional 4,000 shares of common stock that will vest on April 28, 2008.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes currently-exercisable options to purchase 252,001 shares of our common stock, options to purchase an additional
6,000 shares of common stock that will vest on March 2, 2008, options to purchase an additional 4,000 shares of common stock that will vest on March 7, 2008, options to purchase an additional 4,000 shares of common stock that will vest on
April 26, 2008 and options to purchase an additional 4,000 shares of common stock that will vest on April 28, 2008.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes currently-exercisable options to purchase 164,003 shares of our common stock, options to purchase an additional
6,000 shares of common stock that will vest on March 2, 2008, options to purchase an additional 4,000 shares of common stock that will vest on March 7, 2008, options to purchase an additional 4,000 shares of common stock that will vest on
April 26, 2008 and options to purchase an additional 4,000 shares of common stock that will vest on April 28, 2008.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Includes currently-exercisable options to purchase 132,001 shares of our common stock, options to purchase an additional
6,000 shares of common stock that will vest on March 2, 2008, options to purchase an additional 4,000 shares of common stock that will vest on March 7, 2008, options to purchase an additional 4,000 shares of common stock that will vest on
April 26, 2008 and options to purchase an additional 4,000 shares of common stock that will vest on April 28, 2008.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Includes currently-exercisable options to purchase 68,002 shares of our common stock, options to purchase an additional
6,000 shares of common stock that will vest on March 2, 2008, options to purchase an additional 2,000 shares of common stock that will vest on March 7, 2008 and options to purchase an additional 4,000 shares of common stock that will vest
on April 26, 2008.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Includes currently-exercisable options to purchase 43,000 shares of our common stock, options to purchase an additional
10,000 shares of common stock that will vest on April 24, 2008. Mr. Simpson also holds 10,000 shares of common stock and his wife owns 157 shares of common stock as part of an individual retirement account. Mr. Simpson disclaims
beneficial ownership of all shares other than those held in his name.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Includes currently-exercisable options to purchase 56,629 shares of our common stock.
|--- | -------------------------------------------------------------------------------------

|(9) | Includes currently-exercisable options to purchase 68,800 shares of our common stock, options to purchase an additional
10,000 shares of common stock that will vest on April 24, 2008.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Includes options to purchase 10,000 shares of common stock that will vest on March 7, 2008.
|---- | -------------------------------------------------------------------------------------------

|(11) | Includes currently-exercisable options to purchase 14,440 shares of our common stock. We have been advised that
Mr. Odrich has investment control with respect to shares of our common stock held by LB I Group, Inc., a wholly-owned subsidiary of Lehman Brothers Holdings, Inc. The LB I holding includes currently-exercisable options to purchase 54,400 shares
of our common stock and options to purchase an additional 10,000 shares of common stock that will vest on April 24, 2008. Mr. Odrich disclaims beneficial ownership of all shares other than those held in his name.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | Information is derived from the Schedule 13F, filed February 8, 2008 by Gagnon Securities LLC with the Securities
and Exchange Commission. N. Gagnon beneficially owns 4,154,500 shares of our common stock, which amount includes (i) 493,172 shares beneficially owned by Mr. Gagnon over which he has sole voting power and sole dispositive power;
(ii) 72,687 shares beneficially owned by Mr. Gagnon over which he has sole voting power and shared dispositive power; (iii) 312,552 shares beneficially owned by L. Gagnon, Mr. Gagnons wife, over which Mr. Gagnon has
shared voting power and shared dispositive power; (iv) 17,370 shares beneficially owned by Mr. Gagnon and Mrs. Gagnon as Joint Tenants with Rights of Survivorship, over which he has shared voting power and shared dispositive power;
(v) 70,217 shares held by the Lois E. and Neil E. Gagnon Foundation (the Foundation), of which Mr. Gagnon is a trustee and over which he has shared voting power and shared dispositive power; (vi) 108,185 shares held by the
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



62



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| | Gagnon Family Limited Partnership (the Partnership) of which Mr. Gagnon is a partner and over which he has shared voting power and shared
dispositive power; (vii) 90,825 shares held by the Gagnon Grandchildren Trust (the Trust) over which Mr. Gagnon has shared dispositive power but no voting power; (viii) 1,017,016 shares held by four hedge funds
(collectively, the Funds), of which Mr. Gagnon is either a member of the general partner or the managing member and over which he has sole dispositive power and sole voting power; (ix) 3,207 shares held by the Gagnon Securities
LLC Profit Sharing Plan and Trust (the Plan) of which Mr. Gagnon is a Trustee and over which Mr. Gagnon has sole dispositive power and sole voting power; (x) 8,776 shares held by the Plan over which Mr. Gagnon has
shared dispositive power and sole voting power; and (xi) 1,960,493 shares held for certain customers of Gagnon Securities LLC, of which Mr. Gagnon is the managing member and the principal owner and over which he has shared dispositive
power but no voting power.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(13) | Information is derived from the Schedule 13G, filed January 4, 2008 by Kopp Investment Advisors, LLC with the
Securities and Exchange Commission. Such filing states that Mr. Kopp beneficially owns 1,969,390 common shares of our common stock, which amount includes (i) 200,000 shares over which Mr. Kopp has sole dispositive power and
(ii) 1,769,390 shares held for clients of Kopp Investment Advisors, LLC over which Mr. Kopp has shared dispositive power through his control of Kopp Investment Advisors, LLC.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(14) | Information is derived from the Schedule 13F, filed February 14, 2008 with the Securities and Exchange Commission.
|---- | ------------------------------------------------------------------------------------------------------------------

|(15) | Information is derived from the Schedule 13F filed February 14, 2008 by HealthCor Management, L.P. with the
Securities and Exchange Commission. Collectively, HealthCor, L.P., HealthCor Offshore, Ltd. and HealthCor Hybrid Offshore, Ltd. (each a HealthCor Fund and together, the HealthCor Funds) are the beneficial owners of a total of
1,700,000 shares of our common stock. By virtue of its position as the investment manager of the HealthCor Funds, HealthCor Management, L.P. may be deemed a beneficial owner of all the shares of common stock owned by the HealthCor Funds. HealthCor
Associates, LLC is the general partner of HealthCor Management, L.P. and thus may also be deemed to beneficially own the shares of common stock that are beneficially owned by the HealthCor Funds. HealthCor Group LLC is the general partner of
HealthCor Capital, L.P., which is in turn the general partner of HealthCor, L.P. Accordingly, each of HealthCor Capital L.P. and HealthCor Group, LLC may be deemed to beneficially own the shares of common stock that are beneficially owned by
HealthCor, L.P. As the Managers of HealthCor Associates, LLC, Arthur Cohen and Joseph Healey exercise both voting and investment power with respect to the shares of common stock reported herein, and therefore each may be deemed a beneficial owner of
such common stock.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(16) | Includes options to purchase 2,097,276 shares of our common stock.
|---- | ------------------------------------------------------------------



|Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|-------- | -------------------------------------------------------------------------

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 of allografts
we process for use in sports medicine surgeries, including reconstruction and repair of the knee, hip, shoulder, wrist, elbow, foot and ankle. Effective June 30, 2005, we discontinued the relationship with Stryker Endoscopy and transferred the
business to our direct distribution organization.

During the year ended December 31, 2007, the Company recognized revenues of $1,496
on distributions from Stryker, Spine Division, a division of Stryker Corporation (Stryker), representing 1.6% of our total revenues. Accounts receivable from Stryker totaled $727 at December 31, 2007. During the years ended December 31,
2007, 2006 and 2005, the Company recognized revenues of $0, $0 and $3,949, respectively, on distributions from Stryker Endoscopy, representing 0%, 0% and 5.3%, respectively, of our total revenues. Accounts payable from Stryker Endoscopy totaled
($52), ($52), and ($44) at December 31, 2007, 2006 and 2005, respectively.

A member of our board of directors previously served as a
non-executive officer of Stryker.



63



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CCI Performance Group, a sales and marketing consulting company of which a member of our board of
directors is president and sole owner, has provided sales and marketing services to the Company since 2005. During 2007 the Company paid CCI Performance Group $35,000 in consulting fees and related expenses.

Director Independence

Our board of directors has
determined that all board members, excluding Mr. Hutchison, our President, Chief Executive Officer and Chairman of the Board, are independent under the applicable NASDAQ rules. Our board of directors has also determined that the members of each
committee of the board of directors are independent under the listing standards of the NASDAQ Global Market. In making these determinations, our board of directors considered, among other things, the types and amounts of the commercial dealings
between Regeneration Technologies and the companies and organizations with which the directors are affiliated.



|Item 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES.
|-------- | ---------------------------------------

Independent Public
Accountant

The Audit Committee has appointed Deloitte & Touche LLP, independent registered public accounting firm, to audit
our accounts for the year 2008, subject to the approval of the scope of the audit engagement and the estimated audit fees. We expect a representative of Deloitte & Touche LLP to be present at the Annual Meeting with the opportunity to make
a statement if he or she desires to do so and to be available to respond to appropriate questions.

Audit Fees

The aggregate fees billed by Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates (collectively,
Deloitte) for professional services rendered for the audit of our annual financial statements for the fiscal years ended December 31, 2007 and 2006, for the Sarbanes-Oxley Section 404 audit of our internal control structure,
and for the reviews of the financial statements included in our Quarterly Reports on Form 10-Q for those fiscal years were $625,600 and $608,000, respectively.

Audit Related Fees

Deloitte rendered no professional services for audit-related services for the fiscal years ended
December 31, 2007 or 2006.

Tax Fees

The aggregate fees billed by Deloitte for professional services rendered for tax compliance, tax advice and tax planning for the fiscal years ended December 31, 2007 and 2006 totaled $174,220 and $64,000, respectively.

All Other Fees

The aggregate fees billed by
Deloitte for services rendered to us, other than the services described above under Audit Fees, Audit Related Fees, and Tax Fees, for the fiscal years ended December 31, 2007 and 2006 were $162,726 and
$41,000, respectively. All other fees principally relate to benefit plan consulting services. The Audit Committee has determined that the provision of non-audit services is compatible with maintaining the principal accountants independence.

The aggregate fees billed by Davis Monk and Company for services rendered to us, other than the services described above under Audit
Fees, Audit Related Fees, and Tax Fees, for the fiscal years ended December 31, 2007 and 2006 were $8,500 and $26,000, respectively.

The aggregate fees billed by Grant Thornton, LLP, for services rendered to us, other than the services described above under Audit Fees, Audit Related Fees, and Tax Fees, for the
fiscal years ended December 31, 2007 and 2006 were $37,593 and $10,000, respectively.

The Audit Committee pre-approves all audit and
non-audit services provided by our independent registered public accounting firm prior to the engagement of the independent registered public accounting firm with respect to such services. The Audit Committee shall pre-approve any additional audit
services and permissible non-audit services. All Audit Fees, Audit-Related Fees, Tax Fees and All Other Fees set forth above were pre-approved by the Audit Committee in accordance with its pre-approval
policy.



64



---

PART IV

Item 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.



|(a) | (1) Financial Statements:
|--- | -------------------------

See Index to
Consolidated Financial Statements and Consolidated Financial Statement Schedule on page 65, the Independent Registered Public Accounting Firms Report on page 66 and the Consolidated Financial Statements on pages 68 to 71, all of which
are incorporated herein by reference.

(2)  Financial Statement Schedule:

The following consolidated financial statement schedule is filed as part of this Report:

Schedule II, Valuation and Qualifying Accounts for the years ended December 31, 2007, 2006 and 2005.

(3)   Exhibits:

The
following exhibits are filed as part of this report or incorporated herein by reference.



|     |  |                                                                                                                                                                                                                                                                                                                         
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|2.1  |  | Asset Purchase Agreement by and among University of Alabama Health Services Foundation, P.C., Alabama Tissue Center, Inc. and Regeneration Technologies, Inc., dated April 27,
2000.1*                                                                                                                                  
|     | 
|2.2  |  | Agreement and Plan of Merger between Regeneration Technologies, Inc. and Tutogen Medical, Inc., dated November 12, 200713                                                                                                                                                                                               
|     | 
|3.1  |  | Certificate of Incorporation of Regeneration Technologies, Inc.1                                                                                                                                                                                                                                                        
|     | 
|3.2  |  | Bylaws.1                                                                                                                                                                                                                                                                                                                
|     | 
|3.3  |  | Certificate of Designation of Rights and Preferences of Class A Preferred Stock, Class B Preferred Stock and Class C Preferred Stock of Regeneration Technologies, Inc.1                                                                                                                                                
|     | 
|4.1  |  | Amended and Restated Registration Rights Agreement dated as of October 11, 1999, by and among Regeneration Technologies, Inc., the investors set forth on Exhibit A to the Class C Preferred Stock
and Warrant Purchase Agreement dated as of October 11, 1999 and the Stockholders listed on Exhibits A and B thereto.1
|     | 
|4.2  |  | Stockholders Agreement dated as of October 11, 1999, by and among Regeneration Technologies, Inc., the investors set forth on Exhibit A to the Class C Preferred Stock and Warrant Purchase
Agreement dated as of October 11, 1999 and the Stockholders listed on Exhibits A, B and C thereto.1                        
|     | 
|4.3  |  | Specimen Stock Certificate.1                                                                                                                                                                                                                                                                                            
|     | 
|4.4  |  | Purchase Agreement, dated November 26, 2002, among the Regeneration Technologies, Inc. and the Investors listed on the signature page thereto.5                                                                                                                                                                         
|     | 
|4.5  |  | Registration Rights Agreement, dated November 26, 2002, among Regeneration Technologies, Inc. and the Investors listed on the signature page thereto.5                                                                                                                                                                  
|     | 
|10.1 |  | Program Transfer Agreement between Regeneration Technologies, Inc. and the University of Florida Tissue Bank, Inc. dated April 15, 1999.1*                                                                                                                                                                              
|     | 
|10.2 |  | Tissue Recovery Agreement between Regeneration Technologies, Inc. and the University of Florida Tissue Bank, Inc. dated April 15, 1999.1*                                                                                                                                                                               
|     | 
|10.3 |  | Exclusive Distributorship Agreement between Regeneration Technologies, Inc. and C.R. Bard, Inc., dated June 6, 1998.1*                                                                                                                                                                                                  
|     | 
|10.4 |  | Exclusive License Agreement between Regeneration Technologies, Inc., as successor in interest to the University of Florida Tissue Bank, Inc. and Exactech, Inc., dated April 22, 1997, as amended.1*                                                                                                                    



65



---

|      |  |                                                                                                                                                                                                         
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.5  |  | Master Lease Agreement between Regeneration Technologies, Inc., as successor in interest to the University of Florida Tissue Bank, Inc., and American Equipment Leasing, dated January 23, 1998.1       
|      | 
|10.6  |  | Purchase Contract between Regeneration Technologies, Inc. and Echelon International Corp., dated January 31, 2000, as amended.1                                                                         
|      | 
|10.7  |  | Lease between Echelon International Corp. and Regeneration Technologies, Inc., dated February 4, 2000.1                                                                                                 
|      | 
|10.8  |  | Lease between Regeneration Technologies, Inc. and First Street Group L.C., dated June 14, 1999.1                                                                                                        
|      | 
|10.9  |  | Omnibus Stock Option Plan.1                                                                                                                                                                             
|      | 
|10.10 |  | Year 2000 Compensation Plan.1                                                                                                                                                                           
|      | 
|10.11 |  | Form of Indemnification Agreement between Regeneration Technologies, Inc. and its directors and executive officers.1                                                                                    
|      | 
|10.12 |  | Employment Agreement between Regeneration Technologies, Inc. and Brian K. Hutchison, dated November 30, 2001.2                                                                                          
|      | 
|10.13 |  | Employment Agreement between Regeneration Technologies, Inc. and Thomas F. Rose, dated May 1, 2002.7                                                                                                    
|      | 
|10.14 |  | Incentive Stock Option Grant Agreement between Regeneration Technologies, Inc. and Brian K. Hutchison, dated December 3, 2001.2                                                                         
|      | 
|10.15 |  | Separation Agreement and Release between Regeneration Technologies, Inc. and Jamie M. Grooms, dated June 17, 2002.3                                                                                     
|      | 
|10.16 |  | $25,000,000 Loan Agreement, dated as of February 20, 2004, by and among Regeneration Technologies, Inc. and certain of its subsidiaries and Merrill Lynch Business Financial Services,
Inc.7            
|      | 
|10.17 |  | Employment Agreement between Regeneration Technologies, Inc. and Roger W. Rose, dated October 21, 2002.8                                                                                                
|      | 
|10.18 |  | First Amended Exclusive Distribution and License Agreement, effective as of April 15, 2004, between Regeneration Technologies, Inc. and Medtronic Sofamor Danek USA, Inc.9*                             
|      | 
|10.19 |  | Regeneration Technologies, Inc. 2004 Equity Incentive Plan.9                                                                                                                                            
|      | 
|10.20 |  | Form of Nonqualified Stock Option Grant Agreement.10                                                                                                                                                    
|      | 
|10.21 |  | Form of Incentive Stock Option Grant Agreement.10                                                                                                                                                       
|      | 
|10.22 |  | Second Amendment to the First Amended Exclusive Distribution and License Agreement, effective as of December 15, 2005, between Regeneration Technologies, Inc. and Medtronic Sofamor Danek USA,
Inc.11 
|      | 
|10.23 |  | Third Amendment to the First Amended Exclusive Distribution and License Agreement, effective as of December 15, 2005, between Regeneration Technologies, Inc. and Medtronic Sofamor Danek USA,
Inc.11  
|      | 
|10.24 |  | First Amended Exclusive License and Distribution Agreement, effective as of December 19, 2005, between Regeneration Technologies, Inc. and Exactech, Inc.11                                            
|      | 
|10.25 |  | Fourth Amendment to the First Amended Exclusive Distribution and License Agreement, effective as of September 12, 2006, between Regeneration Technologies, Inc. and Medtronic Sofamor Danek USA,
Inc.12
|      | 
|10.26 |  | Exchange and Service Agreement, dated December 15, 2006, between Regeneration Technologies, Inc. and CryoLife, Inc.14                                                                                  



66



---

|     |  |                                                                                                                                                                                                                                                                                             
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|21   |  | Subsidiaries of the Registrant.2                                                                                                                                                                                                                                                            
|     | 
|23.1 |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                   
|     | 
|31.1 |  | Certification of Brian K. Hutchison, Chairman, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                            
|     | 
|31.2 |  | Certification of Thomas F. Rose, Vice President, Chief Financial Officer and Secretary, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                          
|     | 
|32.1 |  | Certification of Brian K. Hutchison, Chairman, President and Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, regarding the information contained in
Regeneration Technologies, Inc.s Annual Report on Form 10-K for the year ended December 31, 2004.  
|     | 
|32.2 |  | Certification of Thomas F. Rose, Vice President, Chief Financial Officer and Secretary, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, regarding the information contained in
Regeneration Technologies, Inc.s Annual Report on Form 10-K for the year ended December 31, 2004.



|1 | Incorporated by reference to our Registration Statement on Form S-1 (File No. 333-35756).
|- | -----------------------------------------------------------------------------------------

|2 | Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2001.
|- | -------------------------------------------------------------------------------------------------

|3 | Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
|- | ---------------------------------------------------------------------------------------------------

|4 | Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.
|- | --------------------------------------------------------------------------------------------------------

|5 | Incorporated by reference to our Current Report on Form 8-K filed on December 2, 2002.
|- | --------------------------------------------------------------------------------------

|6 | Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2002.
|- | -------------------------------------------------------------------------------------------------

|7 | Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2003.
|- | -------------------------------------------------------------------------------------------------

|8 | Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.
|- | ----------------------------------------------------------------------------------------------------

|9 | Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.
|- | ---------------------------------------------------------------------------------------------------

|10 | Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2004.
|-- | -------------------------------------------------------------------------------------------------

|11 | Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2005.
|-- | -------------------------------------------------------------------------------------------------

|12 | Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.
|-- | --------------------------------------------------------------------------------------------------------

|13 | Incorporated by reference to our Current Report on Form 8-K filed on November 16, 2007.
|-- | ---------------------------------------------------------------------------------------

|14 | Incorporated by reference to our Annual Report on Form 10-K for
the year ended December 31, 2006.
|-- | -------------------------------------------------------------------------------------------------

|* | Confidential treatment granted as to certain portions, which portions were omitted and filed separately with the
Commission.
|- | ----------------------------------------------------------------------------------------------------------------------------

| | Confidential treatment requested as to certain portions, which portions were omitted and filed separately with the
Commission.
|- | ------------------------------------------------------------------------------------------------------------------------------



67



---

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                               |  |         
|---------------------------------------------------------------------------------------------- |  | --------
|                                                                                               |  | Page    
|Consolidated Financial Statements of Regeneration Technologies, Inc. and Subsidiaries          |  |         
|                                                                                               | 
|Report of Independent Registered Public Accounting Firm                                        |  | 69      
|Consolidated Balance SheetsDecember 31, 2007 and 2006                                         |  | 71      
|Consolidated Statements of Operations Years Ended December 31, 2007, 2006 and 2005            |  | 72      
|Consolidated Statements of Stockholders Equity  Years Ended December 31, 2007, 2006 and 2005 |  | 73      
|Consolidated Statements of Cash Flows Years Ended December 31, 2007, 2006 and 2005            |  | 74      
|Notes to Consolidated Financial StatementsYears Ended December 31, 2007, 2006 and 2005        |  | 75 to 96



68



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Regeneration Technologies,
Inc.

Alachua, Florida

We have audited the accompanying
consolidated balance sheets of Regeneration Technologies, Inc. and subsidiaries (the Company) as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders equity, and cash flows for
each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedule listed in Item 15(a)(2). We also have audited the Companys internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for these
financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal controls over financial reporting, included in the accompanying
Managements Report on Effectiveness of Internal Controls. Our responsibility is to express an opinion on the financial statements and financial statement schedule and an opinion on the Companys internal control over financial reporting
based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that
our audits provide a reasonable basis for our opinions.

A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors, management, and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As discussed in Note 2 to the consolidated financial
statements, on January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R, Share-Based Payment.



69



---

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Regeneration Technologies, Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in
conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria
established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

/s/
DELOITTE & TOUCHE LLP

Certified Public Accountants

Tampa, Florida

February 27, 2008



70



---

REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In
thousands, except share data)



|                                                                                                                                  |  |              |         |   |      |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                                                                                                                  |  | December 31, |        
|                                                                                                                                  |  | 2007         |         |   | 2006 |  
|Assets                                                                                                                            |  |              |         |   |      |   |         |  
|Current Assets:                                                                                                                   |  |              |         |   |      |   |         |  
|Cash and cash equivalents                                                                                                         |  | $            | 18,560  |   |      | $ | 15,509  |  
|Accounts receivableless allowances of $595 in 2007 and $248 in 2006                                                              |  |              | 9,754   |   |      |   | 9,337   |  
|Inventoriesnet                                                                                                                   |  |              | 39,847  |   |      |   | 37,026  |  
|Prepaid and other current assets                                                                                                  |  |              | 5,267   |   |      |   | 941     |  
|Assets held for sale                                                                                                              |  |              | 288     |   |      |   |        |  
|Deferred tax assetscurrent                                                                                                       |  |              | 14,726  |   |      |   | 10,488  |  
|                                                                                                                                  |  |              |         |   |      |   |         |  
|Total current assets                                                                                                              |  |              | 88,442  |   |      |   | 73,301  |  
|Property, plant and equipmentnet                                                                                                 |  |              | 35,549  |   |      |   | 41,047  |  
|Deferred tax assets                                                                                                               |  |              | 1,782   |   |      |   | 4,893   |  
|Goodwill                                                                                                                          |  |              | 151     |   |      |   | 2,863   |  
|Other intangible assets                                                                                                           |  |              | 8,461   |   |      |   | 5,997   |  
|Other assetsnet                                                                                                                  |  |              | 1,581   |   |      |   | 1,707   |  
|                                                                                                                                  |  |              |         |   |      |   |         |  
|Total assets                                                                                                                      |  | $            | 135,966 |   |      | $ | 129,808 |  
|                                                                                                                                  |  |              |         |   |      |   |         |  
|Liabilities and Stockholders Equity                                                                                              |  |              |         |   |      |   |         |  
|Current Liabilities:                                                                                                              |  |              |         |   |      |   |         |  
|Accounts payable                                                                                                                  |  | $            | 7,631   |   |      | $ | 7,949   |  
|Accrued expenses                                                                                                                  |  |              | 8,190   |   |      |   | 6,293   |  
|Current portion of deferred revenue                                                                                               |  |              | 500     |   |      |   |        |  
|Current portion of long-term obligations                                                                                          |  |              | 1,500   |   |      |   | 2,275   |  
|                                                                                                                                  |  |              |         |   |      |   |         |  
|Total current liabilities                                                                                                         |  |              | 17,821  |   |      |   | 16,517  |  
|Long-term obligationsless current portion                                                                                        |  |              | 1,875   |   |      |   | 3,401   |  
|Other long-term liabilities                                                                                                       |  |              | 460     |   |      |   |        |  
|Deferred revenue                                                                                                                  |  |              | 4,167   |   |      |   |        |  
|                                                                                                                                  |  |              |         |   |      |   |         |  
|Total liabilities                                                                                                                 |  |              | 24,323  |   |      |   | 19,918  |  
|                                                                                                                                  |  |              |         |   |      |   |         |  
|Commitments and contingencies                                                                                                     |  |              |         |   |      |   |         |  
|                                                                                                                                  |  |             
|Stockholders equity:                                                                                                             |  |              |         |   |      |   |         |  
|Common stock, $.001 par value: 50,000,000 shares authorized;29,880,296 and 29,773,515 shares issued and outstanding,
respectively |  |              | 30      |   |      |   | 30      |  
|Additional paid-in capital                                                                                                        |  |              | 133,621 |   |      |   | 129,772 |  
|Accumulated deficit                                                                                                               |  |              | (21,994 | ) |      |   | (19,898 | )
|Less treasury stock, 133,296 shares, at cost                                                                                      |  |              | (14     | ) |      |   | (14     | )
|                                                                                                                                  |  |              |         |   |      |   |         |  
|Total stockholders equity                                                                                                        |  |              | 111,643 |   |      |   | 109,890 |  
|                                                                                                                                  |  |              |         |   |      |   |         |  
|Total liabilities and stockholders equity                                                                                        |  | $            | 135,966 |   |      | $ | 129,808 |  
|                                                                                                                                  |  |              |         |   |      |   |         |  

See notes to consolidated financial statements.



71



---

REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except share and per share data)



|                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|------------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                            |  | Year Ended December 31, |           
|                                            |  | 2007                    |            |   | 2006 |   |            | 2005 | 
|Revenues:                                   |  |                         |            |   |      |   |            |      |  |   |            |  
|Fees from tissue distribution               |  | $                       | 88,708     |   |      | $ | 70,158     |      |  | $ | 72,337     |  
|Other revenues                              |  |                         | 5,499      |   |      |   | 3,812      |      |  |   | 2,862      |  
|                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Total revenues                              |  |                         | 94,207     |   |      |   | 73,970     |      |  |   | 75,199     |  
|Costs of processing and distribution        |  |                         | 56,557     |   |      |   | 54,647     |      |  |   | 55,457     |  
|                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Gross profit                                |  |                         | 37,650     |   |      |   | 19,323     |      |  |   | 19,742     |  
|                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Expenses:                                   |  |                         |            |   |      |   |            |      |  |   |            |  
|Marketing, general and administrative       |  |                         | 31,040     |   |      |   | 27,252     |      |  |   | 23,350     |  
|Research and development                    |  |                         | 5,190      |   |      |   | 5,403      |      |  |   | 5,003      |  
|Gain on business exchange                   |  |                         | (197       | ) |      |   |           |      |  |   |           |  
|Asset impairments and abandonments          |  |                         | 4,185      |   |      |   | 4,202      |      |  |   | 336        |  
|                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Total expenses                              |  |                         | 40,218     |   |      |   | 36,857     |      |  |   | 28,689     |  
|                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Operating loss                              |  |                         | (2,568     | ) |      |   | (17,534    | )    |  |   | (8,947     | )
|                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Other (expense) income:                     |  |                         |            |   |      |   |            |      |  |   |            |  
|Interest expense                            |  |                         | (753       | ) |      |   | (898       | )    |  |   | (862       | )
|Interest income                             |  |                         | 849        |   |      |   | 934        |      |  |   | 361        |  
|                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Total other income (expense)net            |  |                         | 96         |   |      |   | 36         |      |  |   | (501       | )
|                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Loss before income tax benefit              |  |                         | (2,472     | ) |      |   | (17,498    | )    |  |   | (9,448     | )
|Income tax benefit                          |  |                         | 376        |   |      |   | 6,373      |      |  |   | 3,897      |  
|                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Net loss                                    |  | $                       | (2,096     | ) |      | $ | (11,125    | )    |  | $ | (5,551     | )
|                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|                                            |  |                         |           
|Net loss per common sharebasic             |  | $                       | (0.07      | ) |      | $ | (0.37      | )    |  | $ | (0.20      | )
|                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Net loss per common sharediluted           |  | $                       | (0.07      | ) |      | $ | (0.37      | )    |  | $ | (0.20      | )
|                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Weighted average shares outstandingbasic   |  |                         | 29,824,816 |   |      |   | 29,753,166 |      |  |   | 27,754,003 |  
|                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Weighted average shares outstandingdiluted |  |                         | 29,824,816 |   |      |   | 29,753,166 |      |  |   | 27,754,003 |  
|                                            |  |                         |            |   |      |   |            |      |  |   |            |  



See notes to consolidated
financial statements.



72



---

REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders Equity

(In thousands)



|                                                            |  |             |    |                          |   |         |                    |  |   |                      |   |  |               |     |   |       |   |     |   |  |   |         |  
|----------------------------------------------------------- |  | ----------- | -- | ------------------------ | - | ------- | ------------------ |  | - | -------------------- | - |  | ------------- | --- | - | ----- | - | --- | - |  | - | ------- | -
|                                                            |  | CommonStock |    | AdditionalPaid-inCapital |   |         | AccumulatedDeficit |  |   | DeferredCompensation |   |  | TreasuryStock |     |   | Total |  
|Balance, January 1, 2005                                    |  | $           | 27 |                          | $ | 102,847 |                    |  | $ | (3,222               | ) |  | $             | (36 | ) |       | $ | (14 | ) |  | $ | 99,602  |  
|Issuance of common stock                                    |  |             | 3  |                          |   | 23,937  |                    |  |   |                     |   |  |               |    |   |       |   |    |   |  |   | 23,940  |  
|Stock issuance costs                                        |  |             |   |                          |   | (1,565  | )                  |  |   |                     |   |  |               |    |   |       |   |    |   |  |   | (1,565  | )
|Exercise of common stock options                            |  |             |   |                          |   | 1,296   |                    |  |   |                     |   |  |               |    |   |       |   |    |   |  |   | 1,296   |  
|Vested deferred compensation                                |  |             |   |                          |   |        |                    |  |   |                     |   |  |               | 36  |   |       |   |    |   |  |   | 36      |  
|Income tax benefit from nonqualified stock option exercises |  |             |   |                          |   | 55      |                    |  |   |                     |   |  |               |    |   |       |   |    |   |  |   | 55      |  
|Net loss                                                    |  |             |   |                          |   |        |                    |  |   | (5,551               | ) |  |               |    |   |       |   |    |   |  |   | (5,551  | )
|                                                            |  |             |    |                          |   |         |                    |  |   |                      |   |  |               |     |   |       |   |     |   |  |   |         |  
|Balance, December 31, 2005                                  |  |             | 30 |                          |   | 126,570 |                    |  |   | (8,773               | ) |  |               |    |   |       |   | (14 | ) |  |   | 117,813 |  
|Exercise of common stock options                            |  |             |   |                          |   | 47      |                    |  |   |                     |   |  |               |    |   |       |   |    |   |  |   | 47      |  
|Vested deferred compensation                                |  |             |   |                          |   | 3,138   |                    |  |   |                     |   |  |               |    |   |       |   |    |   |  |   | 3,138   |  
|Income tax benefit from nonqualified stock option exercises |  |             |   |                          |   | 17      |                    |  |   |                     |   |  |               |    |   |       |   |    |   |  |   | 17      |  
|Net loss                                                    |  |             |   |                          |   |        |                    |  |   | (11,125              | ) |  |               |    |   |       |   |    |   |  |   | (11,125 | )
|                                                            |  |             |    |                          |   |         |                    |  |   |                      |   |  |               |     |   |       |   |     |   |  |   |         |  
|Balance, December 31, 2006                                  |  |             | 30 |                          |   | 129,772 |                    |  |   | (19,898              | ) |  |               |    |   |       |   | (14 | ) |  |   | 109,890 |  
|Exercise of common stock options                            |  |             |   |                          |   | 725     |                    |  |   |                     |   |  |               |    |   |       |   |    |   |  |   | 725     |  
|Vested deferred compensation                                |  |             |   |                          |   | 2,974   |                    |  |   |                     |   |  |               |    |   |       |   |    |   |  |   | 2,974   |  
|Income tax benefit from nonqualified stock option exercises |  |             |   |                          |   | 150     |                    |  |   |                     |   |  |               |    |   |       |   |    |   |  |   | 150     |  
|Net loss                                                    |  |             |   |                          |   |        |                    |  |   | (2,096               | ) |  |               |    |   |       |   |    |   |  |   | (2,096  | )
|                                                            |  |             |    |                          |   |         |                    |  |   |                      |   |  |               |     |   |       |   |     |   |  |   |         |  
|Balance, December 31, 2007                                  |  | $           | 30 |                          | $ | 133,621 |                    |  | $ | (21,994              | ) |  | $             |    |   |       | $ | (14 | ) |  | $ | 111,643 |  
|                                                            |  |             |    |                          |   |         |                    |  |   |                      |   |  |               |     |   |       |   |     |   |  |   |         |  



See notes to consolidated
financial statements.



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REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)



|                                                                                          |  |                         |        |   |      |   |         |      |  |   |        |  
|----------------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                                                          |  | Year Ended December 31, |       
|                                                                                          |  | 2007                    |        |   | 2006 |   |         | 2005 | 
|Cash flows from operating activities:                                                     |  |                         |        |   |      |   |         |      |  |   |        |  
|Net loss                                                                                  |  | $                       | (2,096 | ) |      | $ | (11,125 | )    |  | $ | (5,551 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                         |        |   |      |   |         |      |  |   |        |  
|Depreciation and amortization expense                                                     |  |                         | 5,586  |   |      |   | 5,235   |      |  |   | 4,591  |  
|Amortization of deferred financing costs                                                  |  |                         | 170    |   |      |   | 170     |      |  |   | 173    |  
|Provision for bad debts                                                                   |  |                         | 73     |   |      |   | 14      |      |  |   | 26     |  
|Provision for inventory writedowns                                                        |  |                         | 1,479  |   |      |   | 3,855   |      |  |   | 3,673  |  
|Provision for (reduction of) product returns                                              |  |                         | 313    |   |      |   | (40     | )    |  |   |       |  
|Amortization of deferred revenue                                                          |  |                         | (333   | ) |      |   | (71     | )    |  |   | (438   | )
|Deferred income tax benefit                                                               |  |                         | (1,127 | ) |      |   | (6,373  | )    |  |   | (3,873 | )
|Tax benefit attributable from exercise of stock options                                   |  |                         | 150    |   |      |   |        |      |  |   |       |  
|Excess tax benefit from exercise of stock options                                         |  |                         | (150   | ) |      |   |        |      |  |   |       |  
|Deferred stock-based compensation and nonqualified option expense                         |  |                         | 2,974  |   |      |   | 3,138   |      |  |   | 36     |  
|Asset impairments                                                                         |  |                         | 4,094  |   |      |   | 4,100   |      |  |   |       |  
|Gain on business exchange                                                                 |  |                         | (197   | ) |      |   |        |      |  |   |       |  
|Gain (loss) on asset abandonments                                                         |  |                         | 11     |   |      |   | 33      |      |  |   | (142   | )
|Write-off of capitalized patent and trademark expenses                                    |  |                         | 80     |   |      |   | 69      |      |  |   | 478    |  
|Changes in assets and liabilities:                                                        |  |                         |        |   |      |   |         |      |  |   |        |  
|Accounts receivable                                                                       |  |                         | (802   | ) |      |   | (491    | )    |  |   | 697    |  
|Inventories                                                                               |  |                         | (4,300 | ) |      |   | (2,347  | )    |  |   | (1,776 | )
|Goodwill                                                                                  |  |                         | 2,712  |   |      |   |        |      |  |   |       |  
|Other intangible assets                                                                   |  |                         | (3,433 | ) |      |   | (2,841  | )    |  |   | (432   | )
|Prepaid and other current assets                                                          |  |                         | (4,326 | ) |      |   | (109    | )    |  |   | 559    |  
|Other assets                                                                              |  |                         | 242    |   |      |   | 63      |      |  |   | (90    | )
|Accounts payable                                                                          |  |                         | (1,416 | ) |      |   | 679     |      |  |   | (1,165 | )
|Accrued expenses                                                                          |  |                         | 1,898  |   |      |   | 104     |      |  |   | 1,553  |  
|Other non-current liabilities                                                             |  |                         | 460    |   |      |   | (250    | )    |  |   |       |  
|Deferred revenue                                                                          |  |                         | 5,000  |   |      |   | (556    | )    |  |   |       |  
|                                                                                          |  |                         |        |   |      |   |         |      |  |   |        |  
|Net cash provided by (used in) operating activities                                       |  |                         | 7,062  |   |      |   | (6,743  | )    |  |   | (1,681 | )
|                                                                                          |  |                         |        |   |      |   |         |      |  |   |        |  
|Cash flows from investing activities:                                                     |  |                         |        |   |      |   |         |      |  |   |        |  
|Purchases of property, plant and equipment                                                |  |                         | (2,173 | ) |      |   | (1,328  | )    |  |   | (3,999 | )
|Proceeds from sale of property, plant and equipment                                       |  |                         | 80     |   |      |   | 200     |      |  |   |       |  
|Business combination                                                                      |  |                         | (492   | ) |      |   |        |      |  |   |       |  
|Purchase of intellectual property                                                         |  |                         |       |   |      |   |        |      |  |   | (1,600 | )
|                                                                                          |  |                         |        |   |      |   |         |      |  |   |        |  
|Net cash used in investing activities                                                     |  |                         | (2,585 | ) |      |   | (1,128  | )    |  |   | (5,599 | )
|                                                                                          |  |                         |        |   |      |   |         |      |  |   |        |  
|Cash flows from financing activities:                                                     |  |                         |        |   |      |   |         |      |  |   |        |  
|Proceeds from stock issuance                                                              |  |                         |       |   |      |   |        |      |  |   | 23,940 |  
|Stock issuance costs                                                                      |  |                         |       |   |      |   |        |      |  |   | (1,565 | )
|Proceeds from exercise of stock options                                                   |  |                         | 725    |   |      |   | 47      |      |  |   | 1,296  |  
|Excess tax benefit from exercise of stock options                                         |  |                         | 150    |   |      |   |        |      |  |   |       |  
|Payments on long-term obligations                                                         |  |                         | (2,301 | ) |      |   | (2,226  | )    |  |   | (2,316 | )
|Proceeds from revolving line of credit                                                    |  |                         |       |   |      |   |        |      |  |   | 3,000  |  
|Payment on revolving line of credit                                                       |  |                         |       |   |      |   |        |      |  |   | (3,000 | )
|                                                                                          |  |                         |        |   |      |   |         |      |  |   |        |  
|Net cash (used in) provided by financing activities                                       |  |                         | (1,426 | ) |      |   | (2,179  | )    |  |   | 21,355 |  
|                                                                                          |  |                         |        |   |      |   |         |      |  |   |        |  
|Net increase (decrease) in cash and cash equivalents                                      |  |                         | 3,051  |   |      |   | (10,050 | )    |  |   | 14,075 |  
|Cash and cash equivalents, beginning of year                                              |  |                         | 15,509 |   |      |   | 25,559  |      |  |   | 11,484 |  
|                                                                                          |  |                         |        |   |      |   |         |      |  |   |        |  
|Cash and cash equivalents, end of year                                                    |  | $                       | 18,560 |   |      | $ | 15,509  |      |  | $ | 25,559 |  
|                                                                                          |  |                         |        |   |      |   |         |      |  |   |        |  

See notes to consolidated financial statements.



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REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2007, 2006 and 2005

(In thousands, except share and per share data)

1.    Business

Regeneration
Technologies, Inc. (RTI), and its subsidiaries (collectively, the Company) process human and animal tissue. The processing transforms the tissue into either conventional or precision machined allograft implants (human)
or xenograft implants (animal), for orthopedic and other surgical applications to promote the natural healing of human bone and other human tissue. These implants are distributed domestically and internationally, for use in reconstruction and
fracture repair.

2.    Summary of Significant Accounting Policies

Principles of ConsolidationThe consolidated financial statements include the accounts of RTI and its wholly owned subsidiaries,
Regeneration Technologies, Inc.  Cardiovascular (inactive), Biological Recovery Group (inactive), and RTI Services, Inc. The consolidated financial statements also include the accounts of RTI Donor Services, Inc. (RTIDS), which is
a controlled entity. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. All intercompany balances and transactions have been eliminated in
consolidation.

RTIDS is a taxable not-for-profit entity organized and controlled by the Company. RTIDS is the corporate entity that is
responsible for procuring 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.

Cash and Cash EquivalentsThe Company considers all funds in
banks and short-term investments with an original maturity of three months or less to be cash and cash equivalents.

Inventories Implantable donor tissue inventories are stated at the lower of cost or market, with cost determined using the first-in, first-out method. Inventory writedowns are recorded for unprocessed donor tissue based
on the estimated amount of inventory that will not pass the quality control process based on historical data, and the amount of inventory that is not readily distributable or unusable. In addition, provisions for inventory writedowns are estimated
for tissue in process inventory that is not readily distributable or unusable. Any implantable donor tissue deemed to be obsolete is included in the writedown at the time the determination is made.

Property, Plant and EquipmentProperty, plant, and equipment are stated at cost less accumulated depreciation and amortization. The
cost of equipment under capital leases and leasehold improvements is amortized on the straight-line method over the shorter of the lease term or the estimated useful life of the asset. Depreciation is computed on the straight-line method over the
following estimated useful lives of the assets:



|                                                 |  |              
|------------------------------------------------ |  | -------------
|Buildings                                        |  | 25 years     
|Building improvements and leasehold improvements |  | 8 to 10 years
|Processing equipment                             |  | 8 to 10 years
|Office equipment, furniture and fixtures         |  | 5 to 7 years 
|Computer hardware and software                   |  | 3 years      

Software Development Costs Included in property, plant and equipment are costs
related to internally-developed and purchased software that are capitalized. Capitalized costs include direct costs of materials and



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services incurred in developing or obtaining internal-use software and payroll and payroll-related costs for employees directly involved in the development
of internal-use software.

Debt Issuance CostsDebt issuance costs include costs incurred to obtain financing. Upon
funding of debt offerings, deferred financing costs are capitalized as debt issuance costs and are amortized using the straight-line method, which approximates the effective interest method, over the life of the related debt. At December 31,
2007 and 2006, gross debt issuance costs were $852 net of accumulated amortization of $653, and of $483, respectively, and are included in other assetsnet in the accompanying consolidated balance sheets.

Investment in Lifeline Scientific, Inc. (formerly Organ Recovery Systems, Inc.) The Company accounts for its investment in preferred
shares of stock issued by Lifeline Scientific, Inc. (formerly Organ Recovery Systems, Inc.) (LSI) under the cost method as the Company does not exert control over LSI. Management monitors the performance of LSI and evaluates the
assumptions and methods used to assess the fair value of its investment in LSI at each reporting period and records an impairment if fair value is less than cost. The net book value of this investment was $1 and $1,150 at December 31, 2007 and
2006, respectively.

Research and Development CostsResearch and development costs, including the cost of research and
development conducted for others and the cost of contracted research and development, are expensed as incurred. Research and development costs for the years ended December 31, 2007, 2006 and 2005 were $5,190, $5,403 and $5,003, respectively.

Revenue Recognition Revenue is recognized upon shipping, or receipt by the Companys customers of the processed
tissue for implantation, depending on the Companys distribution agreements with the Companys customers or distributors. Revenue from consignment inventory is recognized when the tissue is transferred from the Companys consignment
inventory locations to the Companys customers for implantation. Other revenues are recognized when all significant contractual obligations have been satisfied.

The Company permits 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. Allowances for returns are provided based upon analysis of the Companys historical patterns of returns matched against the revenues from which they originated.

On May 14, 2007, the Company entered into an exclusive distribution agreement with Zimmer, Inc. (Zimmer) with an initial term of 10
years. The distribution agreement relates to certain new products currently in production. As part of the agreement, Zimmer agreed to pay the Company $5,000 for the aforementioned exclusive distribution rights, and maintain certain minimum order
volumes. The $5,000 exclusivity payment has been deferred and is being recognized as other revenue on a straight-line basis over ten years, the initial term of the contract.

Deferred revenue consisting of up-front fees received from Medtronic Sofamor Danek (MSD) in 1998 was deferred and is being recognized as
revenue on a straight-line basis over the 12 year life of the exclusive management services agreement with MSD. This revenue is recorded in other revenues in the consolidated statements of operations. As a result of the amended agreement with
MSD, there is no remaining deferred revenue as of December 31, 2006. (See Note 7)

Other Revenues
Other revenues consists of tissue recovery fees, biomedical laboratory fees, deferred revenues, shipping fees, grants, distribution of reproductions of our allografts to distribute for demonstration purposes, and restocking fees.

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 on future years for differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and



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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.

Stock-Based Compensation
Plans Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment (SFAS 123R), which established the
financial accounting and reporting standards for stock-based compensation plans. SFAS 123R requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors, including employee stock options
and restricted stock. Under the provisions of SFAS 123R, and Staff Accounting Bulletin No. 107 (SAB 107), stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is
recognized as an expense on a straight-line basis over the requisite service period of the entire award (generally the vesting period of the award).

In November 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 123(R)-3, Transition Election Related to Accounting for Tax Effects of
Share-Based Payment Awards (FSP 123R-3). The Company has elected to adopt the alternative transition method provided in the FSP 123R-3 for calculating the tax effects of stock-based compensation pursuant to SFAS 123R. The
alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee stock-based compensation, and to determine the
subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123R.

The Company elected to use the modified prospective transition method as permitted by SFAS 123R and, therefore, financial results for prior periods have
not been restated. Under this transition method, stock-based compensation expense for the year ended December 31, 2007 and 2006 includes expense for all equity awards granted prior to, but not yet vested as of January 1, 2006, based on the
grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123,) as amended by SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure. Since the adoption of SFAS 123R, there have been no changes to the Companys stock compensation plans or modifications to outstanding stock-based awards which would increase the value of any
awards outstanding. Compensation expense for all stock-based compensation awards granted subsequent to January 1, 2006 was based on the grant-date fair value determined in accordance with the provisions of SFAS 123R.

SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow,
rather than as an operating cash flow as previously required.

Earnings Per ShareBasic earnings per share
(EPS) is computed by dividing earnings attributable to common stockholders by the weighted average number of common shares outstanding for the periods. Diluted EPS reflects the potential dilution of securities that could share in the
earnings. A reconciliation of the number of common shares used in the calculation of basic and diluted EPS is presented below:



|                               |  |                         |  |            |  |           
|------------------------------ |  | ----------------------- |  | ---------- |  | ----------
|                               |  | Year Ended December 31,
|                               |  | 2007                    |  | 2006       |  | 2005      
|Basic shares                   |  | 29,824,816              |  | 29,753,166 |  | 27,754,003
|Effect of dilutive securities: |  |                         |  |            |  |           
|Stock options                  |  |                        |  |           |  |          
|                               |  |                         |  |            |  |           
|Diluted shares                 |  | 29,824,816              |  | 29,753,166 |  | 27,754,003
|                               |  |                         |  |            |  |           

Options to purchase 3,727,739 and 3,367,333, and 3,118,039 shares of common stock at prices
ranging from $1.30 to $14.95 per share were outstanding as of December 31, 2007, 2006 and 2005, respectively, and were not



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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.

Use of EstimatesThe preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions relating to inventories, receivables, long-lived assets, investment valuations and litigation are made at the end of each
financial reporting period by management. Actual results could differ from those estimates.

Impairment of Long-Lived
AssetsPeriodically, the Company evaluates the recoverability of the net carrying amount of its property, plant and equipment and its intangible assets by comparing the carrying amounts to the estimated future undiscounted cash flows
generated by those assets. If the sum of the estimated future undiscounted cash flows were less than the carrying amount of the asset, a loss would be recognized for the difference between the fair value and the carrying amount.

In the event that facts and circumstances indicate that the cost of long-lived assets, primarily property, plant and equipment and certain identifiable
intangible assets may be impaired, the Company performs a recoverability evaluation. If an evaluation is required, the undiscounted estimated future cash flows associated with the assets are compared to the assets carrying amount to determine
whether a write-down to fair value is required.

Impairment losses are measured as the amount by which the carrying amount of the assets
exceeds the fair value of the assets. When fair values are not available, the Company estimates fair value using the expected future cash flows discounted at a rate commensurate with the risks associated with the recovery of the assets. Assets to be
disposed of are reported at the lower of carrying amount or fair value less costs of disposal.

Fair Value of Financial
InstrumentsThe estimated fair value of financial instruments disclosed in the consolidated financial statements has been determined by using available market information and appropriate valuation methodologies. The carrying value of
all current assets and current liabilities approximates fair value because of their short-term nature. The fair value of the long-term debt obligations approximates the carrying value based on its variable interest rate component. The fair value of
capital lease obligations approximates the carrying value, based on current market prices.

New Accounting StandardsIn
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company completed its evaluation of the
effect of the adoption of SFAS 157 on its consolidated results of operations, financial condition and cash flows and determined that the impact was immaterial.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 expands opportunities to use fair value measurement in
financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company completed its evaluation of
the effect of the adoption of SFAS 159 on its consolidated results of operations, financial condition and cash flows and determined that the impact was immaterial.

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 requires a new evaluation
process for all tax positions taken. If the probability for sustaining said tax position is greater than 50%, then the tax position is



78



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warranted and recognition should be at the highest amount which would be expected to be realized upon ultimate settlement. FIN 48 requires expanded
disclosure at each annual reporting period unless a significant change occurs in an interim period. For interim periods in the year of initial adoption, all disclosures required by FIN 48 will be presented. Differences between the amounts recognized
in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption are to be accounted for as an adjustment to the beginning balance of retained earnings. FIN 48 was adopted by the Company on
January 1, 2007. In connection with the Companys evaluation of the effect that FIN 48 had on the consolidated financial statements, the Company reclassified a valuation allowance recorded in noncurrent deferred tax assets in the amount of
$717 to other long-term liabilities in the accompanying consolidated balance sheet. Other than this reclassification, there was no impact on the Companys financial position, results of operations or its cash flows.

In September 2006, the SEC issued SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements (SAB 108). SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 establishes an
approach that requires quantification of financial statement errors based on the effects of each of the companys balance sheets and statement of operations and the related financial statement disclosures. Early application of the guidance in
SAB 108 is encouraged in any report for an interim period of the first year ending after November 15, 2006, and was adopted by the Company in the first quarter of 2007. The Company completed its evaluation of the effect of the adoption of SFAS
108 on its consolidated results of operations, financial condition and cash flows and determined that the impact was immaterial.

ReclassificationsCertain amounts in the 2006 and 2005 consolidated financial statements, as previously reported, have been reclassified to conform to the 2007 presentation as is more fully described below.

The segment data included in Note 22 for the years ending December 31, 2007, 2006 and 2005, the Company expanded the classifications of product
revenues from tissue distribution to spinal constructs, sports medicine, bone graft substitutes, cardiovascular and general orthopedic revenues. The Company previously classified revenues from tissue distribution as spinal, sports medicine,
cardiovascular and general orthopedic revenues. The bone graft substitutes product revenues consists of all moldable and flowable bone pastes, as well as all cortical and cancellous chips and cubes. These implants were previously classified within
spinal implants and general orthopedics.

Certain amounts in the consolidated financial statements for the years ended December 31,
2006, as previously reported, have been reclassified to conform to the 2007 presentation. In our consolidated balance sheets for the year ended December 31, 2007, the Company reclassified patents, trademarks, and acquired exclusivity rights to
other intangible assets from other assets. The Company previously presented such assets as a component of other assets.

3.    Stock
Based Compensation

The Company has two stock-based compensation plans under which employees, consultants and outside directors receive
stock options and other equity-based awards. At December 31, 2007, awards relating to 3,727,739 shares were outstanding, and 1,226,551 shares remained available for the grant of awards under our plans. For the year ended December 31, 2007,
employees and outside directors of the Company were granted 642,000 stock options under the plans. Stock options are granted with an exercise price equal to 100% of the market value of a share of common stock on the date of the grant, generally have
ten-year contractual terms, and vest no later than five years from the date of grant.

2004 Equity Incentive PlanIn
2004, the Company adopted an equity incentive plan (the 2004 Plan) which provides for the grant of incentive and nonqualified stock options and restricted stock to key employees, including officers and directors of the Company, and
consultants and advisors. The option or grant of restricted



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stock price per share may not be less than 100% of the fair market value of such shares on the date granted. The 2004 Plan allows for up to 2,000,000 shares
of common stock to be issued with respect to awards granted. Awards or shares which are forfeited, surrendered or otherwise terminated are available for further awards; provided, however, that any such shares that are surrendered in connection with
any award or that are otherwise forfeited after issuance shall not be available for purchase pursuant to incentive stock options intended to qualify under Code Section 422.

1998 Stock Option PlanIn July 1998, the Company adopted a stock option plan (the 1998 Plan) which provides for the
grant of incentive and nonqualified stock options to key employees, including officers and directors of the Company, and consultants and advisors. The option price per share may not be less than 100% of the fair market value of such shares on the
date such option is granted. The 1998 Plan allows for up to 4,406,400 shares of common stock to be issued with respect to awards granted. Awards or shares which are forfeited, surrendered or otherwise terminated are available for further awards;
provided, however, that any such shares that are surrendered in connection with any award or that are otherwise forfeited after issuance shall not be available for purchase pursuant to incentive stock options intended to qualify under Code
Section 422.

Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123R . For the year ended
December 31, 2007, the Company recognized compensation of $2,846 for stock options and $128 for restricted stock awards, of which $10 was relieved from inventory costs.

As a result of adopting SFAS 123R, the Companys net loss before income taxes and net loss for the year ended December 31, 2007 was $2,984 and
$2,346, respectively, greater than if the Company had continued to account for stock-based compensation under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and its related
interpretations. Basic and diluted net loss per share for the year ended December 31, 2007 of $(0.07) was $(0.08) greater than if the Company had not adopted SFAS 123R.

As a result of adopting SFAS 123R, the Companys net loss before income taxes and net loss for the year ended December 31, 2006 was $3,009 and
$2,311, respectively, greater than if the Company had continued to account for stock-based compensation under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and its related
interpretations. Basic and diluted net loss per share for the year ended December 31, 2006 of $(0.37) was $(0.08) greater than if the Company had not adopted SFAS 123R.



80



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Prior to January 1, 2006, stock-based compensation was accounted for in accordance with APB 25 and
also followed the disclosure requirements of SFAS 123. Under APB 25, stock-based awards to employees and directors were accounted for using the intrinsic value method as allowed under SFAS 123. Under the intrinsic value method, no stock-based
compensation expense had been recognized in the Companys Statement of Operations (other than minimal amounts for non-qualified options to consultants) because the exercise price of the Companys stock options granted to employees and
directors equaled the fair market value of the underlying stock at the date of grant. The following table sets forth the computation of basic and diluted loss per share for the year ended December 31, 2005 and illustrates the effect on net loss
and loss per share as if the Company had applied the fair value recognition provisions of SFAS 123 to its stock plans:



|                                                                                                                                                |  |                            |        |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | -
|                                                                                                                                                |  | Year EndedDecember 31,2005 |       
|Net loss:                                                                                                                                       |  |                            |        |  
|As reported                                                                                                                                     |  | $                          | (5,551 | )
|Add: stock-based employee compensation expense included in reported net loss net of related tax effects                                         |  |                            |       |  
|Deduct: total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax
effects |  |                            | (1,473 | )
|                                                                                                                                                |  |                            |        |  
|Pro forma net loss                                                                                                                              |  | $                          | (7,024 | )
|                                                                                                                                                |  |                            |        |  
|Net loss per common share:                                                                                                                      |  |                            |        |  
|Basic, as reported                                                                                                                              |  | $                          | (0.20  | )
|Basic, pro forma                                                                                                                                |  | $                          | (0.25  | )
|Diluted, as reported                                                                                                                            |  | $                          | (0.20  | )
|Diluted, pro forma                                                                                                                              |  | $                          | (0.25  | )

The Company uses the Black-Scholes model to value its stock option grants under SFAS 123R and
expenses the related compensation cost using the straight-line method over the vesting period. The fair value of stock options is determined on the grant date using assumptions for the expected term, expected volatility, dividend yield, and the risk
free interest rate. The term assumption is primarily based on the contractual vesting term of the option and historic data related to exercise and post-vesting cancellation history experienced by the Company. The expected term is determined
separately for options issued to the Companys directors and to employees. The Companys anticipated volatility level is primarily based on the historic volatility of the Companys common stock. The Companys model includes a
zero dividend yield assumption, as the Company has not historically paid nor does it anticipate paying dividends on its common stock. The risk free interest rate approximates recent U.S. Treasury note auction results with a similar life to that of
the option. The Companys model does not include a discount for post-vesting restrictions, as the Company has not issued awards with such restrictions. The period expense is then determined based on the valuation of the options, and at that
time an estimated forfeiture rate is used to reduce the expense recorded. The Companys estimate of pre-vesting forfeitures is primarily based on the recent historical experience of the Company, and is adjusted to reflect actual forfeitures as
the options vest.

The following weighted-average assumptions were used to determine the fair value of options under SFAS 123R:



|                        |  |                         |   |  |       |   |  |       |  
|----------------------- |  | ----------------------- | - |  | ----- | - |  | ----- | -
|                        |  | Year Ended December 31, |  
|                        |  | 2007                    |   |  | 2006  |   |  | 2005  |  
|Expected term (years)   |  | 6.38                    |   |  | 5.00  |   |  | 5.00  |  
|Risk free interest rate |  | 4.71                    | % |  | 4.25  | % |  | 4.25  | %
|Volatility factor       |  | 61.30                   | % |  | 62.78 | % |  | 60.19 | %
|Dividend yield          |  |                        |   |  |      |   |  |      |  

During 2007, the Company adopted the simplified method for estimating the expected term used to
determine the fair value of options under SFAS 123R. The Company adopted the simplified method as a result of the Company expecting to have significant structural changes in 2008.



81



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Stock Options

Stock option activity for both the 2004 and 1998 option plans are summarized as follows for the years ended December 31, 2007, 2006 and 2005:



|                                    |  |                 |   |      |                              |      |                 |           |   |                              |   |                 |  |           |                              |  |   |      
|----------------------------------- |  | --------------- | - | ---- | ---------------------------- | ---- | --------------- | --------- | - | ---------------------------- | - | --------------- |  | --------- | ---------------------------- |  | - | -----
|                                    |  | 2007            |   | 2006 |                              | 2005
|                                    |  | Number ofShares |   |      | WeightedAverageExercisePrice |      | Number ofShares |           |   | WeightedAverageExercisePrice |   | Number ofShares |  |           | WeightedAverageExercisePrice
|Outstanding at January 1,           |  | 3,367,333       |   |      | $                            | 7.58 |                 | 3,118,039 |   |                              | $ | 7.64            |  | 3,095,039 |                              |  | $ | 7.91 
|Granted                             |  | 642,000         |   |      |                              | 7.65 |                 | 420,000   |   |                              |   | 6.97            |  | 535,500   |                              |  |   | 6.18 
|Exercised                           |  | (106,781        | ) |      |                              | 6.79 |                 | (16,152   | ) |                              |   | 2.93            |  | (240,176  | )                            |  |   | 5.13 
|Canceled                            |  | (174,813        | ) |      |                              | 8.10 |                 | (154,554  | ) |                              |   | 7.67            |  | (272,324  | )                            |  |   | 10.09
|                                    |  |                 |   |      |                              |      |                 |           |   |                              |   |                 |  |           |                              |  |   |      
|Outstanding at December 31,         |  | 3,727,739       |   |      | $                            | 7.59 |                 | 3,367,333 |   |                              | $ | 7.58            |  | 3,118,039 |                              |  | $ | 7.64 
|                                    |  |                 |   |      |                              |      |                 |           |   |                              |   |                 |  |           |                              |  |   |      
|Exercisable at December 31,         |  | 2,466,646       |   |      | $                            | 7.69 |                 | 2,156,139 |   |                              | $ | 7.84            |  | 1,602,435 |                              |  | $ | 7.86 
|                                    |  |                 |   |      |                              |      |                 |           |   |                              |   |                 |  |           |                              |  |   |      
|Available for grant at December 31, |  | 1,226,551       |   |      |                              |      |                 | 1,693,738 |   |                              |   |                 |  | 2,029,232 |                              |  |   |      
|                                    |  |                 |   |      |                              |      |                 |           |   |                              |   |                 |  |           |                              |  |   |      

Outstanding options under both option plans vest over a three to five year period. Options expire
ten years from the date of grant. The weighted-average grant-date fair value of options granted for the year ended December 31, 2007 was $5.73. The total intrinsic value of options exercised for the year ended December 31, 2007 was $411.
The intrinsic value of a stock option is the difference between the Companys closing stock price on the last trading day of 2007 and the exercise price, multiplied by the number of in-the-money options that would have been received by the
option holders had all option holders exercised their options on December 31, 2007. This amount changes based on the fair market value of the Companys stock. Cash received from option exercises for the year ended December 31, 2007
was $699. The weighted-average grant-date fair value of options granted for the year ended December 31, 2006 was $5.06. The total intrinsic value of options exercised for the year ended December 31, 2006 was $43. The intrinsic value of a
stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. Cash received from option exercises for the year ended December 31, 2006 was $47.

As of December 31, 2007, there was $5,495 of total unrecognized compensation cost related to nonvested stock options. That cost is expected to be
recognized over a weighted-average period of 1.7 years.



82



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Stock options outstanding and exercisable at December 31, 2007 for both option plans are summarized
as follows:



|                          |  |                     |  |                                                 |  |                              |       |                                      |           |                              |   |      
|------------------------- |  | ------------------- |  | ----------------------------------------------- |  | ---------------------------- | ----- | ------------------------------------ | --------- | ---------------------------- | - | -----
|                          |  | Options Outstanding |  | Options Outstanding andCurrently
Exercisable   
|Range of Exercise Prices: |  | NumberOutstanding   |  | WeightedAverageRemainingContractualLife (Years) |  | WeightedAverageExercisePrice |       | NumberExercisable atDecember 31,2007 |           | WeightedAverageExercisePrice
|$1.30 to $3.80            |  | 161,727             |  | 1.63                                            |  | $                            | 2.95  |                                      | 161,727   |                              | $ | 2.95 
|$4.80 to $5.65            |  | 838,600             |  | 4.68                                            |  |                              | 4.83  |                                      | 794,600   |                              |   | 4.81 
|$6.18 to $7.97            |  | 1,217,200           |  | 8.29                                            |  |                              | 6.88  |                                      | 248,205   |                              |   | 6.54 
|$8.55 to $8.70            |  | 194,500             |  | 6.88                                            |  |                              | 8.58  |                                      | 104,500   |                              |   | 8.70 
|$9.01 to $9.95            |  | 300,101             |  | 5.76                                            |  |                              | 9.42  |                                      | 217,903   |                              |   | 9.41 
|$10.00 to $10.81          |  | 816,100             |  | 4.71                                            |  |                              | 10.10 |                                      | 751,700   |                              |   | 10.11
|$11.04 to $12.07          |  | 42,215              |  | 3.21                                            |  |                              | 11.94 |                                      | 42,215    |                              |   | 11.94
|$12.63 to $12.88          |  | 2,900               |  | 3.24                                            |  |                              | 12.68 |                                      | 2,900     |                              |   | 12.68
|$13.15 to $13.99          |  | 132,716             |  | 3.73                                            |  |                              | 13.40 |                                      | 121,216   |                              |   | 13.42
|$14.00 to $14.95          |  | 21,680              |  | 3.27                                            |  |                              | 14.88 |                                      | 21,680    |                              |   | 14.88
|                          |  |                     |  |                                                 |  |                              |       |                                      |           |                              |   |      
|$1.30 to $14.95           |  | 3,727,739           |  | 5.87                                            |  | $                            | 7.59  |                                      | 2,466,646 |                              | $ | 7.69 
|                          |  |                     |  |                                                 |  |                              |       |                                      |           |                              |   |      



|                                                |  |                 |   |  |                              |      |                                                 |      |                         |   |      
|----------------------------------------------- |  | --------------- | - |  | ---------------------------- | ---- | ----------------------------------------------- | ---- | ----------------------- | - | -----
|                                                |  | Number ofShares |   |  | WeightedAverageExercisePrice |      | WeightedAverageRemainingContractualLife (Years) |      | AggregateIntrinsicValue
|Outstanding at January 1, 2007                  |  | 3,367,333       |   |  | $                            | 7.58 |                                                 |      |                         |   |      
|Granted                                         |  | 642,000         |   |  |                              | 7.65 |                                                 |      |                         |   |      
|Exercised                                       |  | (106,781        | ) |  |                              | 6.78 |                                                 |      |                         |   |      
|Canceled                                        |  | (174,813        | ) |  |                              | 8.10 |                                                 |      |                         |   |      
|                                                |  |                 |   |  |                              |      |                                                 |      |                         |   |      
|Outstanding at December 31, 2007                |  | 3,727,739       |   |  | $                            | 7.59 |                                                 | 5.87 |                         | $ | 6,367
|                                                |  |                 |   |  |                              |      |                                                 |      |                         |   |      
|Vested or expected to vest at December 31, 2007 |  | 3,660,205       |   |  | $                            | 7.59 |                                                 | .53  |                         | $ | 6,267
|                                                |  |                 |   |  |                              |      |                                                 |      |                         |   |      
|Exercisable at December 31, 2007                |  | 2,466,646       |   |  | $                            | 7.69 |                                                 | 4.63 |                         | $ | 4,534
|                                                |  |                 |   |  |                              |      |                                                 |      |                         |   |      

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value.

Other information concerning stock options for the years ended December 31 is as follows:



|                                               |  |      |      |      |   |      |  |   |     
|---------------------------------------------- |  | ---- | ---- | ---- | - | ---- |  | - | ----
|                                               |  | 2007 |      | 2006 |   | 2005
|Weighted average fair value of options granted |  | $    | 5.73 |      | $ | 5.06 |  | $ | 4.49
|Intrinsic value of options exercised           |  | $    | 411  |      | $ | 43   |  | $ | 871 

Restricted Stock

For the year ended December 31, 2007, the Company granted no additional shares of restricted stock. For the year ended December 31, 2006, the Company granted 69,000 shares of restricted stock with a
weighted-average grant date fair value of $7.28 which vest over a three year period. As of December 31, 2007 and 2006, there was $187 and $342, respectively, of total unrecognized compensation cost related to time-based, nonvested restricted
stock. That cost is expected to be recognized over a weighted-average period of 0.7 and 1.2 years, respectively. As of December 31, 2007 and 2006, the Company had outstanding restricted stock of 56,000 shares.



83



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4.    Inventories

Inventories by stage of completion are as follows:



|                         |  |              |        |      |   |       
|------------------------ |  | ------------ | ------ | ---- | - | ------
|                         |  | December 31,
|                         |  | 2007         |        | 2006
|Unprocessed donor tissue |  | $            | 9,084  |      | $ | 8,784 
|Tissue in process        |  |              | 23,755 |      |   | 19,365
|Implantable donor tissue |  |              | 5,264  |      |   | 7,352 
|Supplies                 |  |              | 1,744  |      |   | 1,525 
|                         |  |              |        |      |   |       
|                         |  | $            | 39,847 |      | $ | 37,026
|                         |  |              |        |      |   |       

For the years ended December 31, 2007, 2006 and 2005, the Company had inventory write-downs
$1,479, $3,855 and $3,673, respectively. In 2006 cardiovascular inventories were written-down to net realizable value by $2,873 for anticipated product discounts and increased distributor commissions relating to our plans to dispose of remaining
product inventories as a result of the Company exiting the cardiovascular business. The inventory write-downs during 2005 were primarily a result of certain undistributable allograft inventories written down to zero as the result of a product recall
announced in October 2005.

5.    Prepaid and Other Current Assets

Prepaid and other current assets are as follows:



|                               |  |              |       |      |   |    
|------------------------------ |  | ------------ | ----- | ---- | - | ---
|                               |  | December 31,
|                               |  | 2007         |       | 2006
|Distribution rights receivable |  | $            | 4,000 |      | $ |   
|Other                          |  |              | 1,267 |      |   | 941
|                               |  |              |       |      |   |    
|                               |  | $            | 5,267 |      | $ | 941
|                               |  |              |       |      |   |    

On May 14, 2007, the Company entered into an exclusive distribution agreement with Zimmer
with an initial term of 10 years. The distribution agreement relates to certain new products currently in production. As part of the agreement, Zimmer agreed to make two payments to the Company totaling $5,000 for the aforementioned exclusive
distribution rights, and maintain certain minimum order volumes. The first payment of $1,000 was made at the time of entering the agreement. The remaining payments of $4,000 are expected to be paid in the first half of 2008. The $5,000 exclusivity
payment has been deferred and is being recognized as other revenue on a straight-line basis over the initial term of the contract. The contract provides for repayment, on a pro rata basis, of the exclusivity payments during the initial contract term
for specific events of non-performance, as defined in the agreement. The agreement also includes automatic two-year renewal terms, as well as buy-out provisions by both parties upon proper notice of cancellation.

6.    Assets Held for Sale

Effective January 1, 2007, the Company entered into an exchange and service agreement with Cryolife and exited the cardiovascular business. During the third quarter of 2007, the Company completed its plans to dispose of the
cardiovascular facility within the next year and retained a real estate broker to actively market the property. Depreciation ceased when the assets were classified as assets held for sale.

The carrying value of our assets held for sale reflects the lower of the depreciated cost basis or estimated fair value after consideration of selling
costs.

During the fourth quarter of 2007, the Company evaluated the recoverability of the net carrying amount of its assets held for sale
by comparing the carrying amounts to estimated future undiscounted cash flows generated



84



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by those assets. The Company determined that the carrying amount was in excess of the future undiscounted cash flows. The Company believes that there has
been an other than temporary impairment of the assets held for sale and has recorded an other than temporary impairment charge of $2,945 against the assets held for sale. During the fourth quarter of 2007 the commercial real estate market conditions
in Birmingham, Alabama declined. The impact to the assets held for sale was significant because of the specialized nature of the assets. The following table presents the assets that are classified as assets held for sale, which are included in total
current assets in the accompanying consolidated balance sheets and is included in asset impairments and abandonments in the consolidated statement of operations.



|                                         |  |              |     |      |   |  
|---------------------------------------- |  | ------------ | --- | ---- | - | -
|                                         |  | December 31,
|                                         |  | 2007         |     | 2006
|Processing equipment                     |  | $            | 228 |      | $ | 
|Office equipment, furniture and fixtures |  |              | 60  |      |   | 
|                                         |  |              |     |      |   |  
|Total assets held for sale               |  | $            | 288 |      | $ | 
|                                         |  |              |     |      |   |  



|7. | Property, Plant and Equipment
|-- | -----------------------------

Property, plant and
equipment are as follows:





|                                               |  |              |         |   |      |   |         |  
|---------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                               |  | December 31, |        
|                                               |  | 2007         |         |   | 2006 |  
|Land                                           |  | $            | 625     |   |      | $ | 625     |  
|Buildings and improvements                     |  |              | 35,972  |   |      |   | 35,972  |  
|Construction in process                        |  |              | 210     |   |      |   | 210     |  
|Processing equipment                           |  |              | 12,138  |   |      |   | 11,716  |  
|Leasehold improvements                         |  |              | 782     |   |      |   | 3,785   |  
|Office equipment, furniture and fixtures       |  |              | 774     |   |      |   | 1,135   |  
|Computer hardware and software                 |  |              | 4,487   |   |      |   | 3,960   |  
|Equipment under capital leases:                |  |              |         |   |      |   |         |  
|Processing equipment                           |  |              | 6,509   |   |      |   | 6,588   |  
|Computer equipment                             |  |              | 886     |   |      |   | 914     |  
|                                               |  |              |         |   |      |   |         |  
|                                               |  |              | 62,383  |   |      |   | 64,905  |  
|Less accumulated depreciation and amortization |  |              | (26,834 | ) |      |   | (23,858 | )
|                                               |  |              |         |   |      |   |         |  
|                                               |  | $            | 35,549  |   |      | $ | 41,047  |  
|                                               |  |              |         |   |      |   |         |  

Depreciation expense for the years ended December 31, 2007, 2006 and 2005 was $4,698, $4,921
and $4,389, respectively.

8.    Goodwill

The carrying value of goodwill was $151 and $2,863 at December 31, 2007 and 2006.

The Company
accounts for its goodwill in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. (SFAS No. 142) requires goodwill and other intangible assets determined to have an indefinite useful life to be assessed at
least annually for impairment. The Company has one reporting unit, and therefore, utilizes the fair value of its common stock for estimating the fair value of its reporting unit. The Company performs an annual impairment test for goodwill during the
fourth quarter of each fiscal year unless indicators of impairment are present and require more frequent testing.

On December 15,
2006 the Company entered into an Exchange and Service Agreement with CryoLife, Inc., whereby on January 1, 2007 the Company exchanged certain rights of its cardiovascular business for certain



85



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rights of CryoLifes orthopedic sports medicine business. No cash was exchanged in the transaction. The transaction has been treated as a non-monetary
exchange and the fair value of certain assets in the Companys cardiovascular business, including the Companys goodwill of $2,863, has been exchanged for goodwill of $151 and for intangibles related to CryoLifes orthopedic sports
medicine business which are recorded in other intangible assets. The Company recognized a pretax gain of $197 on the exchange.

9.    Other Intangible Assets

The Company accounts for its other intangible assets in accordance with
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires goodwill and other intangible assets determined to have an indefinite useful life to be assessed at least annually for impairment. The Company has one
reporting unit, and therefore, utilizes the fair value of its common stock for estimating the fair value of its reporting unit. The Company performs an annual impairment test for other intangible assets during the fourth quarter of each fiscal year
unless indicators of impairment are present and require more frequent testing.



|                            |  |                     |       |                         |   |                     |  |                         |       |  |   |    
|--------------------------- |  | ------------------- | ----- | ----------------------- | - | ------------------- |  | ----------------------- | ----- |  | - | ---
|                            |  | December 31, 2007   |       | December 31, 2006      
|                            |  | GrossCarryingAmount |       | AccumulatedAmortization |   | GrossCarryingAmount |  | AccumulatedAmortization
|Patents                     |  | $                   | 4,020 |                         | $ | 564                 |  | $                       | 3,577 |  | $ | 370
|Trademarks                  |  |                     | 58    |                         |   | 28                  |  |                         | 58    |  |   | 25 
|Procurement contracts       |  |                     | 1,296 |                         |   | 52                  |  |                         |      |  |   |   
|Customer lists              |  |                     | 835   |                         |   | 167                 |  |                         |      |  |   |   
|Non-compete agreement       |  |                     | 275   |                         |   | 27                  |  |                         |      |  |   |   
|Distribution agreements     |  |                     | 502   |                         |   | 72                  |  |                         |      |  |   |   
|Acquired exclusivity rights |  |                     | 2,941 |                         |   | 556                 |  |                         | 2,941 |  |   | 184
|                            |  |                     |       |                         |   |                     |  |                         |       |  |   |    
|Total                       |  | $                   | 9,927 |                         | $ | 1,466               |  | $                       | 6,576 |  | $ | 579
|                            |  |                     |       |                         |   |                     |  |                         |       |  |   |    

During the year ended December 31, 2006, the Company and MSD entered into an amended
distribution agreement which allows the Company among other things the ability to distribute spinal allografts through other distributors. In conjunction with the amendment, the Company paid MSD $3,000 to buyout exclusivity provisions under the
former distribution agreement. Of this payment, $2,444 relates to the acquired exclusivity rights and has been recorded as an intangible asset and the remaining $556 reduced deferred revenue.

As previously disclosed in Note 8, on December 15, 2006 the Company entered into an Exchange and Service Agreement with CryoLife, whereby on
January 1, 2007 the Company exchanged certain rights of its cardiovascular business for certain rights of CryoLifes orthopedic sports medicine business. No cash was exchanged in the transaction. The transaction has been treated as a
non-monetary exchange and the fair value of certain assets in the Companys cardiovascular business, including the Companys goodwill, has been exchanged for goodwill and for $2,908 in intangibles related to CryoLifes orthopedic
sports medicine business which are recorded in other intangible assets.

Patents and trademarks are amortized on the straight-line method
over the shorter of the remaining protection period or estimated useful life. The acquired exclusivity rights are being amortized over eight years, the remaining term of the amended distribution agreement. Procurement contracts, customer lists,
non-compete agreements and distribution agreements are amortized over estimated useful lives of between 5 to 25 years. Amortization expense for the years ended December 31, 2007, 2006 and 2005 was $887, $313 and $202, respectively. Management
estimates amortization expense of $884 per year for the next five years.



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10.    Other Assets

Other assets are as follows:



|                                                                                |  |              |       |   |      |   |       |  
|------------------------------------------------------------------------------- |  | ------------ | ----- | - | ---- | - | ----- | -
|                                                                                |  | December 31, |      
|                                                                                |  | 2007         |       |   | 2006 |  
|Investment in Lifeline Scientific, Inc. (formerly Organ Recovery Systems, Inc.) |  | $            | 1     |   |      | $ | 1,150 |  
|Business combination costs                                                      |  |              | 1,238 |   |      |   |      |  
|Debt issuance costs                                                             |  |              | 852   |   |      |   | 852   |  
|Deposits                                                                        |  |              | 57    |   |      |   | 61    |  
|Other                                                                           |  |              | 86    |   |      |   | 126   |  
|                                                                                |  |              |       |   |      |   |       |  
|                                                                                |  |              | 2,234 |   |      |   | 2,189 |  
|Less accumulated amortization                                                   |  |              | (653  | ) |      |   | (482  | )
|                                                                                |  |              |       |   |      |   |       |  
|                                                                                |  | $            | 1,581 |   |      | $ | 1,707 |  
|                                                                                |  |              |       |   |      |   |       |  

Debt issuance costs are amortized on the straight-line method to interest expense over the term of
the associated debt instrument, which is five years. The straight-line method approximates the effective interest method. The Company recognized interest expense associated with the amortization of its debt issuance costs for the years ended
December 31, 2007 and 2006 of $171 and $170, respectively.

Business combination costs represent direct acquisition costs associated
with the pending merger with Tutogen.

11.    Accrued Expenses

Accrued expenses are as follows:



|                                      |  |              |       |      |   |      
|------------------------------------- |  | ------------ | ----- | ---- | - | -----
|                                      |  | December 31,
|                                      |  | 2007         |       | 2006
|Accrued donor recovery fees           |  | $            | 1,679 |      | $ | 1,483
|Accrued payroll                       |  |              | 1,283 |      |   | 944  
|Matching 401(k)employer contribution |  |              |      |      |   | 762  
|Accrued incentive                     |  |              | 950   |      |   | 150  
|Accrued vacation                      |  |              | 609   |      |   | 586  
|Other                                 |  |              | 3,669 |      |   | 2,368
|                                      |  |              |       |      |   |      
|                                      |  | $            | 8,190 |      | $ | 6,293
|                                      |  |              |       |      |   |      

The Company accrues for the estimated recovery fees due to third party recovery agencies as tissue
is received.

For the year ended December 31, 2007, the Company began funding its matching 401(k) contribution for each pay period.
For the year ended December 31, 2006, the Company funded its matching 401(k) annually in the first quarter of the following year.

12.    Investment in Lifeline Scientific, Inc. (formerly Organ Recovery Systems, Inc.)

As of
December 31, 2007 the Company owned 1,285,347 shares of convertible preferred stock issued by Organ Recovery Systems, Inc., a privately held company, for which the purchase price was $5,250. Organ



87



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Recovery Systems, Inc. changed its name to Lifeline Scientific, Inc. (LSI), and offered shares on the Alternative Investment Market,
(AIM), of the London Stock Exchange as of January 7, 2008. The trading started at the equivalent of $3.00 per share. LSI is organized for the purpose of advancing organ transplantation technology. As a result of the AIM offering the
Companys convertible preferred stock was converted to common stock in LSI. The conversion resulted in significant dilution of the Companys ownership in the equity of LSI. The dilutive impact and the share price of $3.00 per share
resulted in the Companys investment being valued at $1. The Company consequently wrote down the Companys investment in LSI by an additional $1,149 due to an other than temporary impairment in the asset in the fourth quarter of 2007, and
is included in asset impairments and abandonments in the consolidated statement of operations.

In the fourth quarter of 2006 the Company
wrote down the Companys investment in LSI by $4,100 due to an other than temporary impairment in the asset, as a result of LSI not successfully executing its operational strategies in 2006.

13.    Long-Term Obligations

Long-term obligations, excluding interest on capital lease obligations, are as follows:



|                     |  |              |        |   |      |   |        |  
|-------------------- |  | ------------ | ------ | - | ---- | - | ------ | -
|                     |  | December 31, |       
|                     |  | 2007         |        |   | 2006 |  
|Term loan            |  | $            | 3,375  |   |      | $ | 4,875  |  
|Capital leases       |  |              |       |   |      |   | 801    |  
|                     |  |              |        |   |      |   |        |  
|                     |  |              | 3,375  |   |      |   | 5,676  |  
|Less current portion |  |              | (1,500 | ) |      |   | (2,275 | )
|                     |  |              |        |   |      |   |        |  
|Long-term portion    |  | $            | 1,875  |   |      | $ | 3,401  |  
|                     |  |              |        |   |      |   |        |  

On February 20, 2004, the Company entered into a long-term financing agreement with a major
financial institution. The 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 term loan agreement is paid monthly at
LIBOR plus 4.25% (8.85% at December 31, 2007). Under the $16,000 revolving line of credit, the Company can borrow up to the maximum eligible amount, based on certain eligible outstanding receivables of which $7,206 is available at
December 31, 2007. 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, 2007. The term loan and revolving line of credit are fully collateralized by substantially all of the assets of the
Company, including accounts receivable and certain property and equipment.

The credit agreement also contains various restrictive
covenants which limit, among other things, indebtedness, liens and business combination transactions. The original credit agreement included a requirement to maintain certain financial covenant ratios computed on a four-quarter rolling average,
including operating cash flows to fixed charges, senior debt to earnings before interest, taxes, depreciation and amortization (EBITDA), and total debt to EBITDA, as defined in the agreement. In the second quarter of 2006, the lender
replaced all financial covenants with a minimum liquidity requirement of $6.0 million. Minimum liquidity is defined as the amount available under the revolving line of credit plus unrestricted cash. The Company exceeded the $6.0 million minimum
liquidity requirement as of December 31, 2007 and 2006.

Contractual maturities of long-term obligations, are as follows:



|     |  |           |      
|---- |  | --------- | -----
|     |  | Term Loan
|2008 |  | $         | 1,500
|2009 |  |           | 1,875
|     |  |           |      
|     |  | $         | 3,375
|     |  |           |      



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14.    Income Taxes

The Companys income tax benefit consists of the following components:



|                         |  |                         |      |   |      |   |       |  |   |      
|------------------------ |  | ----------------------- | ---- | - | ---- | - | ----- |  | - | -----
|                         |  | Year Ended December 31,
|                         |  | 2007                    |      |   | 2006 |   | 2005 
|Current:                 |  |                         |      |   |      |   |       |  |   |      
|Federal                  |  | $                       | (140 | ) |      | $ |       |  | $ |      
|State                    |  |                         |     |   |      |   |      |  |   |     
|                         |  |                         |      |   |      |   |       |  |   |      
|Total current            |  |                         | (140 | ) |      |   |      |  |   |     
|                         |  |                         |      |   |      |   |       |  |   |      
|Deferred:                |  |                         |      |   |      |   |       |  |   |      
|Federal                  |  |                         | 479  |   |      |   | 5,738 |  |   | 3,509
|State                    |  |                         | 37   |   |      |   | 635   |  |   | 388  
|                         |  |                         |      |   |      |   |       |  |   |      
|Total deferred           |  |                         | 516  |   |      |   | 6,373 |  |   | 3,897
|                         |  |                         |      |   |      |   |       |  |   |      
|Total income tax benefit |  | $                       | 376  |   |      | $ | 6,373 |  | $ | 3,897
|                         |  |                         |      |   |      |   |       |  |   |      

The components of the deferred tax assets and liabilities consisted of the following at
December 31:



|                                |  |                     |        |   |                     |   |        |       |  |   |           |   |  |   |        |  
|------------------------------- |  | ------------------- | ------ | - | ------------------- | - | ------ | ----- |  | - | --------- | - |  | - | ------ | -
|                                |  | 2007                |        |   | 2006                |  
|                                |  | Deferred Income Tax |        |   | Deferred Income Tax |  
|                                |  | Asset               |        |   | Liability           |   |        | Asset |  |   | Liability |  
|Current:                        |  |                     |        |   |                     |   |        |       |  |   |           |   |  |   |        |  
|Allowance for bad debts         |  | $                   | 156    |   |                     | $ |       |       |  | $ | 75        |   |  | $ |       |  
|CV impairment                   |  |                     | 1,112  |   |                     |   |       |       |  |   |          |   |  |   |       |  
|Inventory reserves              |  |                     | 5,598  |   |                     |   |       |       |  |   | 7,038     |   |  |   |       |  
|Net operating losses            |  |                     | 5,664  |   |                     |   |       |       |  |   | 2,039     |   |  |   |       |  
|Accrued liabilities             |  |                     | 2,194  |   |                     |   |       |       |  |   | 1,334     |   |  |   |       |  
|Charitable contributions        |  |                     |       |   |                     |   |       |       |  |   |          |   |  |   |       |  
|State taxes                     |  |                     | 2      |   |                     |   |       |       |  |   | 2         |   |  |   |       |  
|                                |  |                     |        |   |                     |   |        |       |  |   |           |   |  |   |        |  
|Total current                   |  |                     | 14,726 |   |                     |   |       |       |  |   | 10,488    |   |  |   |       |  
|                                |  |                     |        |   |                     |   |        |       |  |   |           |   |  |   |        |  
|Noncurrent:                     |  |                     |        |   |                     |   |        |       |  |   |           |   |  |   |        |  
|Depreciation                    |  |                     |       |   |                     |   | (4,573 | )     |  |   |          |   |  |   | (4,783 | )
|Amortization                    |  |                     |       |   |                     |   | (818   | )     |  |   |          |   |  |   | (1,011 | )
|LSI (formerly ORS) impairment   |  |                     | 1,982  |   |                     |   |       |       |  |   | 1,548     |   |  |   |       |  
|Unearned revenue                |  |                     | 1,762  |   |                     |   |       |       |  |   |          |   |  |   |       |  
|Intangible assets               |  |                     | 183    |   |                     |   |       |       |  |   | 203       |   |  |   |       |  
|Net operating losses            |  |                     | 338    |   |                     |   |       |       |  |   | 6,694     |   |  |   |       |  
|Research and development credit |  |                     | 2,833  |   |                     |   |       |       |  |   | 2,791     |   |  |   |       |  
|Charitable contributions        |  |                     | 217    |   |                     |   |       |       |  |   | 156       |   |  |   |       |  
|AMT credit                      |  |                     | 266    |   |                     |   |       |       |  |   | 126       |   |  |   |       |  
|Valuation allowance             |  |                     | (408   | ) |                     |   |       |       |  |   | (831      | ) |  |   |       |  
|                                |  |                     |        |   |                     |   |        |       |  |   |           |   |  |   |        |  
|Total noncurrent                |  |                     | 7,173  |   |                     |   | (5,391 | )     |  |   | 10,687    |   |  |   | (5,794 | )
|                                |  |                     |        |   |                     |   |        |       |  |   |           |   |  |   |        |  
|Total                           |  | $                   | 21,899 |   |                     | $ | (5,391 | )     |  | $ | 21,175    |   |  | $ | (5,794 | )
|                                |  |                     |        |   |                     |   |        |       |  |   |           |   |  |   |        |  

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



89



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not to be realized. As such, valuation allowances of $408 and $831 have been established at December 31, 2007 and 2006 respectively against a portion of
the deferred tax assets based on the characteristics of the research and experimentation tax credits claimed and on the nature of the credits claimed for certain state net operating loss carryforwards.

The Company recorded a non-cash tax benefit from the exercise of incentive stock options as an addition to its deferred income tax assets in the amount
of $150 and $17 for the years ended December 31, 2007 and 2006, respectively.

As of December 31, 2007, the Company has federal
net operating loss carryforwards of $14,603 that will expire in the years 2022, 2025 and 2026, as well as state net operating loss carryforwards of $27,566 that will expire in the years 2021, 2022, 2025 and 2026.

As of December 31, 2007, the Company has research and experimentation tax credit carryforwards of $3,193 that will expire in years 2018 through
2027, as well as alternative minimum tax credit carryforwards of $266 that are carried forward indefinitely.

The Company expects the
deferred tax assets of approximately $16,508, net of the valuation allowance at December 31, 2007 of $408, to be realized through the generation of future taxable income and the reversal of existing taxable temporary differences. The Company
has considered the impact of recent losses as it relates to the realization of net deferred tax assets. Based on the weight of the evidence, including various strategic initiatives and forecasted taxable income, management has determined that is
more likely than not that such net deferred tax assets will be realized.

At the date of the adoption of FIN No. 48, the Company
reclassified a valuation allowance recorded in noncurrent deferred tax assets in the amount of $717 to unrecognized tax benefits included in other long-term liabilities in the accompanying consolidated balance sheet. The unrecognized tax benefits
increased by $103 during 2007 resulting from our income tax positions in 2007. The Company reclassified $360 of unrecognized tax benefits in other long-term liabilities against prior year net operating losses. These changes in unrecognized tax
benefits resulted in an ending balance of $460 in other long-term liabilities. If these tax benefits were recognized by the Company our effective tax rate would be favorably impacted. The Company does not expect that the amounts of unrecognized tax
benefits will change significantly within the next 12 months.



|                                                             |  |   |    
|------------------------------------------------------------ |  | - | ---
|Balance at January 1, 2007                                   |  | $ | 717
|Additions based on tax positions related to the current year |  |   | 103
|Additions for tax positions of prior years                   |  |   |   
|Reductions for tax positions of prior years                  |  |   |   
|Settlements                                                  |  |   |   
|                                                             |  |   |    
|                                                             |  | $ | 820
|                                                             |  |   |    

The Companys policy is to recognize interest accrued related to unrecognized benefits in
interest expense and penalties in the provision for income taxes. There are no interest and penalties deducted in the current period and no interest and penalties accrued at December 31, 2007 and December 31, 2006, respectively.

The Company files income tax returns in the U.S. federal jurisdiction and various states. With few exceptions, the Company is no longer
subject to U.S. federal, state and local income tax examinations for years before 2000. The Companys U.S. federal filings for the years 2001 and 2002 are under examination and that process is anticipated to be completed before the end of the
first quarter in 2008.



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The effective tax rate differs from the statutory federal income tax rate for the following reasons:



|                                              |  |                         |    |  |       |    |  |       |   
|--------------------------------------------- |  | ----------------------- | -- |  | ----- | -- |  | ----- | --
|                                              |  | Year Ended December 31, |   
|                                              |  | 2007                    |    |  | 2006  |    |  | 2005  |   
|Statutory federal rate                        |  | 34.00                   | %  |  | 34.00 | %  |  | 34.00 | % 
|State income taxesnet of federal tax benefit |  | 3.76                    | %  |  | 3.76  | %  |  | 3.76  | % 
|Research and development credit               |  | 16.27                   | %  |  | 2.10  | %  |  | 3.63  | % 
|Exercise of incentive stock options           |  | (19.78                  | %) |  | (2.78 | %) |  | 0.00  | % 
|Valuation allowance                           |  | (16.12                  | %) |  | (0.37 | %) |  | (1.18 | %)
|Miscellaneous                                 |  | (2.98                   | %) |  | (0.28 | %) |  | 1.04  | % 
|                                              |  |                         |    |  |       |    |  |       |   
|Effective tax rate                            |  | 15.15                   | %  |  | 36.43 | %  |  | 41.25 | % 
|                                              |  |                         |    |  |       |    |  |       |   

15.    Stockholders Equity

Preferred StockThe Company has 5,000,000 shares of preferred stock authorized under its Certificate of Incorporation, none of which
currently is outstanding. These shares may be issued in one or more series having such terms as may be determined by the Companys Board of Directors.

Common StockThe common stocks voting, dividend, and liquidation rights presently are not subject to or qualified by the rights of the holders of any outstanding shares of preferred stock, as
the Company presently does not have any shares of preferred stock outstanding. Holders of common stock are entitled to one vote for each share held at all stockholder meetings. Shares of common stock do not have redemption rights.

On August 29, 2005, the Company completed a private placement of 2,800,000 shares of common stock for $23,940. Transaction costs totaled $1,565. As
part of the private placement transaction, the Company entered into a registration rights agreement with the stockholders who purchased these shares. The registration rights agreement required the shares to be registered for resale and that the
registration statement be declared effective by the SEC within a specified amount of time or the Company would have been required to pay liquidating damages to the purchasers. These requirements under the registration rights agreement were met.

16.    Retirement Benefits

The Company has a qualified 401(k) plan available to all employees who meet certain eligibility requirements. The 401(k) plan allows each employee to contribute 100% of the employees salary up to the annual maximum allowed under the
Internal Revenue Code. The Company has the discretion to make matching contributions up to 6% of the employees earnings. For the years ended December 31, 2007, 2006 and 2005, the Companys contributions to the plan were $777, $719,
and $679, respectively.

17.    Concentrations of Risk

DistributionThe Companys principal concentration of risk is related to its limited distribution channels. The Companys
revenues are primarily related to the distribution efforts of four independent companies with the majority of its revenues coming from one of the distribution companies, MSD. For years ended December 31, 2007, 2006, and 2005, the amount of
revenues deriving from MSD were approximately 47%, 54%, and 60%, respectively.

The Companys distribution agreements are subject to
termination by either party for a variety of causes. No assurance can be given that such distribution agreements will be renewed beyond their expiration dates, continue in their current form or at similar rate structures. Any termination or
interruption in the distribution of the Companys products through one of its major distributors could have a material adverse effect on the Companys operations.

Tissue SupplyThe Companys operations are dependent on the availability of tissue from human donors. For the majority of the
tissue recoveries, the Company relies on the efforts of independent procurement agencies



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to educate the public and increase the willingness to donate bone tissue. These procurement agencies may not be able to obtain sufficient tissue to meet
present or future demands. Any interruption in the supply of tissue from these procurement agencies could have a material adverse effect on the Companys operations.

18.    Commitments and Contingencies

New Distribution Agreement with
ZimmerOn May 14, 2007, the Company entered into an exclusive distribution agreement with Zimmer, Inc. (Zimmer) with an initial term of 10 years. The distribution agreement relates to certain new products currently in
production. As part of the agreement, Zimmer agreed to make two payments to the Company totaling $5,000 for the aforementioned exclusive distribution rights, and maintain certain minimum order volumes. The first payment of $1,000 was made at the
time of entering the agreement. The remaining payments of $4,000 are expected to be paid in the first half of 2008. The $5,000 exclusivity payment has been deferred and is being recognized as other revenue on a straight-line basis over the initial
term of the contract. The contract provides for repayment, on a pro rata basis, of the exclusivity payments during the initial contract term for specific events of non-performance, as defined in the agreement. The agreement also includes automatic
two-year renewal terms, as well as buy-out provisions by both parties upon proper notice of cancellation.

Exchange and Service
Agreement with CryoLifeOn December 15, 2006, the Company and CryoLife entered an agreement where the Company, effective January 1, 2007, transferred certain rights to its cardiovascular business for certain rights of
CryoLifes orthopedic sports medicine business. Under the agreement the Company will continue to distribute its existing cardiovascular tissue inventory and CryoLife will continue to distribute its existing orthopedic tissue inventory through
June 30, 2008. After that date, CryoLife will become entitled to distribute the Companys remaining cardiovascular tissue inventory and the Company will become entitled to distribute CryoLifes remaining orthopedic tissue inventory
through December 31, 2008. Under the agreement, from July 1, 2008 through December 31, 2016, CryoLife has agreed not to market or solicit orders for certain human orthopedic tissues for sports injuries and the Company has agreed not
to market or solicit orders for human cardiac and vascular tissues.

Distribution agreement with MSDOn
December 15, 2005, the Company and MSD entered into an amended license and distribution agreement which now allows the Company to distribute spinal paste allografts in the United States, Canada and Puerto Rico. As a result of the Companys
ability to now distribute spinal paste allografts in the United States, Canada and Puerto Rico, up to $500 will be paid to MSD for such distribution rights. The payment will be made in equal installments over the next eight quarters. Each
installment is contingent upon MSD achieving certain distribution levels.

On September 12, 2006, the Company entered into a Fourth
Amendment to the First Amended Exclusive Distribution and License Agreement with MSD, providing among other things for the Company to supply MSD with human allograft tissue and bone paste for spine surgery. Among other things, the amended MSD
distribution agreement: 1) modifies the exclusivity provisions of the MSD distribution agreement to permit the Company to distribute spinal allograft implants in the United States through channels other than MSD, 2) provides that the Company will
set priority on processing the implants ordered by MSD, using its best efforts to meet the needs of MSD and its surgeons, 3) ends the requirement that MSD make minimum purchases of exclusive products, 4) modifies the product and transfer fee
schedules between the Company and MSD, and 5) provides the Company with certain development and processing rights relating to jointly-owned intellectual property.

The Company paid MSD a fee of $3,000 upon execution of the Fourth Amendment to buyout exclusivity provisions under the former distribution agreement. The Fourth Amendment requires the Company to pay MSD a royalty of
5% on any transfer fees from new U.S. spinal allograft distributors. In addition to other changes in the fee schedules, the Fourth Amendment provides for MSD to pay the Company a processing fee surcharge related to allograft processed and shipped
during the months of June, 2006 through September, 2006 as follows: June,



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2006, $672, July, 2006, $500, August, 2006, $500, and September 2006, $328. The agreement includes increases to transfer fees of approximately 10%. The fees
became effective October 1, 2006.

LeasesThe Company leases various buildings, office equipment and fixtures under
non-cancelable operating leases for various periods.

Future minimum lease commitments under non-cancelable operating leases as of
December 31, 2007 are as follows:



|     |  |                 |      
|---- |  | --------------- | -----
|     |  | OperatingLeases
|2008 |  | $               | 581  
|2009 |  |                 | 277  
|2010 |  |                 | 158  
|2011 |  |                 | 64   
|     |  |                 |      
|     |  | $               | 1,080
|     |  |                 |      

Rent expense for the periods ended December 31, 2007, 2006 and 2005 was $926, $744, and $820,
respectively, and is included as a component of marketing, general and administrative expenses.

19.    Related Parties

During the year ended December 31, 2007, the Company recognized revenues of $1,496 on distributions from Stryker, Spine Division,
a division of Stryker Corporation (Stryker), representing 1.6% of our total revenues. Accounts receivable from Stryker totaled $727 at December 31, 2007. A member of our board of directors previously served as a non-executive officer of
Stryker. During the years ended December 31, 2007, 2006 and 2005, the Company recognized revenues of $0, $0 and $3,949, respectively, on distributions from Stryker Endoscopy, representing 0%, 0% and 5.3%, respectively, of our total revenues.
Accounts payable from Stryker Endoscopy totaled ($52), ($52), and ($44) at December 31, 2007, 2006 and 2005, respectively.

On
November 12, 2007 the Company entered into an Agreement and Plan of Merger with Tutogen and Rockets FL Corp., a newly formed, wholly owned subsidiary of the Company (See Note 24). During the year ended December 31, 2007, the Company
recognized revenues of $2,505 on distributions to Tutogen, representing 2.7% of our total revenues. Accounts receivable from Tutogen totaled $650 at December 31, 2007.

20.    Legal and Regulatory 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 these claims that were outstanding as of December 31, 2007 will have a material adverse impact on its financial
position or results of operations.

On October 14, 2005, the Company issued a voluntary recall of certain allograft implants processed
from donated tissue recovered by Biomedical Tissue Service, Ltd., an unaffiliated recovery agency (BTS). The recall was initiated as a result of questions raised by the processors and the Food and Drug Administration in relation to the
accuracy of documentation provided by BTS. The recall resulted in write-downs of tissue inventories of $2,084 and replacement of distributor inventories of $1,442 in the third and fourth quarter of 2005, respectively. The Company has been named as a
party, along with a number of other defendants, in tort based lawsuits relating to the recall of tissue recovered by BTS. As of January 31 2008, there have been 831 law suits filed related to the recall of which 13 law suits have been
dismissed.

These lawsuits generally allege that the company was negligent in not discovering deficiencies in recovery practices at BTS and
include related claims for matters such as misrepresentation and breach of warranty. On



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October 20, 2006, the Company filed a joint motion in federal court to dismiss the claims based on scientific evidence that it is impossible for
sterilized tissue to transmit infections to implant recipients. This science first motion has been updated to reflect that no freeze dried allograft has ever transmitted disease or infection from a donor to a patient. Where specific
damages have been identified, the actions seek compensatory damages in ranges of $15,000 to $5 million and punitive damages in ranges of $75,000 to $10 million.

The Company believes that it has meritorious defenses to these claims, and is defending them vigorously. In addition, the Company believes its existing insurance should cover all litigation expenses and damage awards,
if any. However, the existing insurance coverage may not be adequate if the Company is not successful in its defenses and certain lawsuits may not be eligible for such insurance coverage. If the Company is not successful in its defenses to lawsuits
not covered by insurance the legal fees, or if existing insurance coverage is not adequate, the legal fees and settlements for such lawsuits could have a material adverse effect on quarterly results of its operations and its financial position.

On September 11, 2006, Osteotech, Inc. filed a lawsuit in the United States
District Court for the District of New Jersey claiming infringement of one of their patents by our BioCleanse® process. The suit requests (i) that the Company be enjoined permanently
from infringing the patent, (ii) damages, along with treble damages as a result of alleged willful infringement, and (iii) reimbursement of costs and expenses and reasonable attorney fees. The Company believes the suit is without merit and
the Company has, and the Company will continue to, vigorously defend its position. The parties have exchanged substantial written discovery, much of which has been filed under seal in accordance with a stipulated Discovery Confidentiality Order. The
Company has filed a motion for partial summary judgment, on which a hearing is pending. However, a finding of infringement could have a material adverse effect upon the Companys revenues.

The Companys accounting policy is to accrue for legal costs as they are incurred.

21.    Supplemental Cash Flow Information

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



|                                                       |  |                         |     |      |   |      |  |   |    
|------------------------------------------------------ |  | ----------------------- | --- | ---- | - | ---- |  | - | ---
|                                                       |  | Year Ended December 31,
|                                                       |  | 2007                    |     | 2006 |   | 2005
|Cash paid for interest                                 |  | $                       | 595 |      | $ | 735  |  | $ | 683
|Income taxes payments                                  |  |                         |    |      |   |     |  |   | 40 
|Noncash investing activities in accounts receivable    |  |                         |    |      |   |     |  |   | 200
|Accrual for purchases of property, plant and equipment |  |                         | 351 |      |   | 161  |  |   | 553
|Accrual for business combination costs                 |  |                         | 746 |      |   |     |  |   |   

22.    Segment Data

The Company processes human and animal tissue and distributes the tissue through various channels. This one line of business is comprised primarily of
four product categories: spinal constructs, sports medicine, bone graft substitutes, and general orthopedic. The following table presents revenues from tissue distribution, and other revenues:



|                               |  |                         |        |      |   |        |  |   |       
|------------------------------ |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------
|                               |  | Year Ended December 31,
|                               |  | 2007                    |        | 2006 |   | 2005  
|Fees from tissue distribution: |  |                         |        |      |   |        |  |   |       
|Spinal constructs              |  | $                       | 41,067 |      | $ | 35,085 |  | $ | 35,084
|Sports medicine                |  |                         | 27,685 |      |   | 14,959 |  |   | 10,545
|Bone graft substitutes         |  |                         | 17,011 |      |   | 13,506 |  |   | 18,055
|General orthopedic             |  |                         | 993    |      |   | 969    |  |   | 1,000 
|Cardiovascular                 |  |                         | 1,952  |      |   | 5,639  |  |   | 7,653 
|Other revenues                 |  |                         | 5,499  |      |   | 3,812  |  |   | 2,862 
|                               |  |                         |        |      |   |        |  |   |       
|Total                          |  | $                       | 94,207 |      | $ | 73,970 |  | $ | 75,199
|                               |  |                         |        |      |   |        |  |   |       



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Effective January 1, 2007, the Company exited the cardiovascular business which is a product
category in the Companys one line of business. However, the Company continued to distribute existing cardiovascular tissue inventory through December 31, 2007. The Company has completed the exit from the cardiovascular business as of
December 31, 2007.

For the years ended December 31, 2007, 2006, and 2005, the Company derived approximately 46.8%, 54.3%, and
60.1%, respectively, of its total revenues from a single customer, MSD.

For the years ended December 31, 2007, 2006, and 2005, the
Company derived approximately 6.5%, 7.2%, and 6.3%, respectively, of its total revenues from foreign distribution, primarily in Europe and Korea.

23.    Quarterly Results of Operations (Unaudited)

The following table sets forth the results of
operations for the periods indicated:



|                                    |  |               |        |              |   |                   |  |                  |        |  |   |        |  
|----------------------------------- |  | ------------- | ------ | ------------ | - | ----------------- |  | ---------------- | ------ |  | - | ------ | -
|                                    |  | March 31,2007 |        | June 30,2007 |   | September 30,2007 |  | December 31,2007 |       
|Quarter Ended:                      |  |               |        |              |   |                   |  |                  |        |  |   |        |  
|Revenues                            |  | $             | 22,015 |              | $ | 22,923            |  | $                | 23,768 |  | $ | 25,501 |  
|Gross profit                        |  |               | 8,101  |              |   | 8,823             |  |                  | 9,547  |  |   | 11,179 |  
|Net income (loss)                   |  |               | 134    |              |   | 195               |  |                  | 177    |  |   | (2,603 | )
|Net income (loss) per common share: |  |               |        |              |   |                   |  |                  |        |  |   |        |  
|Basic                               |  | $             | 0.00   |              | $ | 0.01              |  | $                | 0.01   |  | $ | (0.09  | )
|Diluted                             |  | $             | 0.00   |              | $ | 0.01              |  | $                | 0.01   |  | $ | (0.09  | )

During 2007 the Company experienced an increase in revenues in the spinal and sports medicine
product categories, and a decrease in our cardiovascular product category. The sports medicine product category was positively impacted by the Companys distribution network delivering additional tendons to meet the demand for knee surgeries.
The cardiovascular revenues were impacted by our exit from this business. Gross margins increased as a result of higher revenues, increased processing efficiencies due to higher volume and changes in the mix of implants distributed. During the
fourth quarter, the Company recognized an other than temporary impairment charge of $1,149 on the Companys investment in LSI, as disclosed in Note 12, as well as an impairment to its cardiovascular assets held for sale of $2,945, as disclosed
in Note 6, and included in asset impairments and abandonments in the consolidated statement of operations.

The following table sets forth
the results of operations for the periods indicated:



|                           |  |               |        |   |              |   |        |                   |  |   |                  |   |  |   |        |  
|-------------------------- |  | ------------- | ------ | - | ------------ | - | ------ | ----------------- |  | - | ---------------- | - |  | - | ------ | -
|                           |  | March 31,2006 |        |   | June 30,2006 |   |        | September 30,2006 |  |   | December 31,2006 |  
|Quarter Ended:             |  |               |        |   |              |   |        |                   |  |   |                  |   |  |   |        |  
|Revenues                   |  | $             | 18,425 |   |              | $ | 18,343 |                   |  | $ | 18,111           |   |  | $ | 19,091 |  
|Gross profit               |  |               | 5,493  |   |              |   | 5,993  |                   |  |   | 5,701            |   |  |   | 2,136  |  
|Net loss                   |  |               | (1,296 | ) |              |   | (1,613 | )                 |  |   | (1,527           | ) |  |   | (6,689 | )
|Net loss per common share: |  |               |        |   |              |   |        |                   |  |   |                  |   |  |   |        |  
|Basic                      |  | $             | (0.04  | ) |              | $ | (0.05  | )                 |  | $ | (0.05            | ) |  | $ | (0.22  | )
|Diluted                    |  | $             | (0.04  | ) |              | $ | (0.05  | )                 |  | $ | (0.05            | ) |  | $ | (0.22  | )

During 2006 the Company experienced a decrease in revenues in the bone graft substitutes and
cardiovascular product categories offset by an increase in the sports medicine product category. Bone graft substitutes were negatively impacted by our largest distributor reducing their orders of our bone paste products. The cardiovascular revenues
were impacted by decreased levels of donated tissue available for processing to meet customer demand. The sports medicine product category was positively impacted by the Companys



95



---

distribution network delivering additional tendons to meet the demand for knee surgeries. Gross margins decreased as a result of lower revenues, processing
inefficiencies due to lower volume levels and high percentage of fixed costs, and a $2,873 write-down of our cardiovascular inventories in the fourth quarter. During the fourth quarter, the Company also recognized a loss on asset abandonments of $69
which consisted of a charge off of deferred patent costs and abandoned fixed assets, and an other than temporary impairment charge of $4,100 on the Companys investment in LSI. Lastly, operating expenses increased primarily due to our change in
distribution model resulting in higher distribution costs, and an increase in stock based compensation of $3,009 arising from our adoption SFAS 123(R). The combination of these factors resulted in operating losses throughout 2006.

24.    Subsequent Events

Proposed Merger with Tutogen Medical, Inc.On November 12, 2007, the Company entered into an Agreement and Plan of Merger with Tutogen and Rockets FL Corp., a newly formed, wholly owned subsidiary of the
Company. Under the terms of the Agreement, Rockets FL Corp. shall be merged with and into Tutogen, with Tutogen being the surviving corporation. As a result, Tutogen will become a wholly owned subsidiary of the Company. The proposed
merger is structured as a tax-free stock-for-stock exchange pursuant to which Tutogens shareholders will receive 1.22 shares of the Companys common stock for each share of Tutogens common stock.

The proposed merger is subject to approval by the respective shareholders of Tutogen and the Company, as well as customary closing conditions and
regulatory approvals. If the Company terminates the proposed Agreement and Plan of Merger, under certain limited conditions, the Company could owe a termination fee of $6.5 million. The proposed merger will be voted on at the special
meeting of stockholders on February 27, 2008. Upon completion of the merger, the Company will change its name to RTI Biologics, Inc.

Stock Option GrantOn January 28, 2008, employees, officers, and outside directors of the Company were granted 300,000 stock options at an exercise price of $7.45.



96



---

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.



|                  |  |  |  |                                 |  |     |  |                                                
|----------------- |  |  |  | ------------------------------- |  | --- |  | -----------------------------------------------
|February 27, 2008 |  |  |  | REGENERATION TECHNOLOGIES, INC.
|                  |  |  |  |                                
|                  |  |  |  |                                 |  | By: |  | /s/ Brian K. Hutchison                         
|                  |  |  |  |                                 |  |     |  | Brian K. Hutchison                             
|                  |  |  |  |                                 |  |     |  | Chairman, President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|                                          |  |                                                                               |  |                  
|----------------------------------------- |  | ----------------------------------------------------------------------------- |  | -----------------
|Signature                                 |  | Title                                                                         |  | Date             
|                                          |  |                                                                              
|/s/ Brian K. Hutchison Brian K. Hutchison |  | Chairman, President and Chief Executive Officer (Principal Executive Officer) |  | February 27, 2008
|                                          |  |                                                                              
|/s/ Thomas F. Rose Thomas F. Rose         |  | Vice President, Chief Financial Officer and Secretary                         |  | February 27, 2008
|                                          |  |                                                                              
|/s/ Philip R. Chapman Philip R. Chapman   |  | Director                                                                      |  | February 27, 2008
|                                          |  |                                                                              
|/s/ Peter F. Gearen Peter F. Gearen       |  | Director                                                                      |  | February 27, 2008
|                                          |  |                                                                              
|/s/ Michael J. Odrich Michael J. Odrich   |  | Director                                                                      |  | February 27, 2008
|                                          |  |                                                                              
|/s/ Gregory P. Rainey Gregory P. Rainey   |  | Director                                                                      |  | February 27, 2008
|                                          |  |                                                                              
|/s/ David J. Simpson David J. Simpson     |  | Director                                                                      |  | February 27, 2008
|                                          |  |                                                                              
|/s/ Julianne M. Bowler Julianne M. Bowler |  | Director                                                                      |  | February 27, 2008



---

REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARIES

Schedule II

Valuation and Qualifying
Accounts

Years Ended December 31, 2007, 2006 and 2005

(Dollars in thousands)



|                                      |  |                              |        |                             |       |   |                                                     |        |   |                        |   |       
|------------------------------------- |  | ---------------------------- | ------ | --------------------------- | ----- | - | --------------------------------------------------- | ------ | - | ---------------------- | - | ------
|Description                           |  | Balance atBeginning ofPeriod |        | Charged toCosts andExpenses |       |   | Deductions Write-offs,Payments,or OtherAdjustments |        |   | Balance atEnd ofPeriod
|For the year ended December 31, 2007: |  |                              |        |                             |       |   |                                                     |        |   |                        |   |       
|Allowance for doubtful accounts       |  | $                            | 197    |                             | 73    |   |                                                     | 38     |   |                        | $ | 232   
|Allowance for product returns         |  |                              | 50     |                             | 313   |   |                                                     |       |   |                        |   | 363   
|Allowance for obsolescence            |  |                              | 14,742 |                             | 1,479 |   |                                                     | 5,487  |   |                        |   | 10,734
|                                      |  |                              |        |                            
|For the year ended December 31, 2006: |  |                              |        |                             |       |   |                                                     |        |   |                        |   |       
|Allowance for doubtful accounts       |  |                              | 919    |                             | 14    |   |                                                     | 736    |   |                        |   | 197   
|Allowance for product returns         |  |                              | 90     |                             | (40   | ) |                                                     |       |   |                        |   | 50    
|Allowance for obsolescence            |  |                              | 9,495  |                             | 3,855 |   |                                                     | (1,392 | ) |                        |   | 14,742
|                                      |  |                              |        |                            
|For the year ended December 31, 2005: |  |                              |        |                             |       |   |                                                     |        |   |                        |   |       
|Allowance for doubtful accounts       |  |                              | 947    |                             | 26    |   |                                                     | 54     |   |                        |   | 919   
|Allowance for product returns         |  |                              | 90     |                             |      |   |                                                     |       |   |                        |   | 90    
|Allowance for obsolescence            |  |                              | 6,358  |                             | 3,673 |   |                                                     | 536    |   |                        |   | 9,495 



---

|              |  |                                                                                                                                                                                                                                                                                                                         
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                             
|2.1           |  | Asset Purchase Agreement by and among University of Alabama Health Services Foundation, P.C., Alabama Tissue Center, Inc. and Regeneration Technologies, Inc., dated April 27, 2000.1*                                                                                                                                  
|              | 
|2.2           |  | Agreement and Plan of Merger between Regeneration Technologies, Inc. and Tutogen Medical, Inc., dated November 12, 200713                                                                                                                                                                                               
|              | 
|3.1           |  | Certificate of Incorporation of Regeneration Technologies, Inc.1                                                                                                                                                                                                                                                        
|              | 
|3.2           |  | Bylaws.1                                                                                                                                                                                                                                                                                                                
|              | 
|3.3           |  | Certificate of Designation of Rights and Preferences of Class A Preferred Stock, Class B Preferred Stock and Class C Preferred Stock of Regeneration Technologies, Inc.1                                                                                                                                                
|              | 
|4.1           |  | Amended and Restated Registration Rights Agreement dated as of October 11, 1999, by and among Regeneration Technologies, Inc., the investors set forth on Exhibit A to the Class C Preferred Stock
and Warrant Purchase Agreement dated as of October 11, 1999 and the Stockholders listed on Exhibits A and B thereto.1
|              | 
|4.2           |  | Stockholders Agreement dated as of October 11, 1999, by and among Regeneration Technologies, Inc., the investors set forth on Exhibit A to the Class C Preferred Stock and Warrant Purchase
Agreement dated as of October 11, 1999 and the Stockholders listed on Exhibits A, B and C thereto.1                        
|              | 
|4.3           |  | Specimen Stock Certificate.1                                                                                                                                                                                                                                                                                            
|              | 
|4.4           |  | Purchase Agreement, dated November 26, 2002, among the Regeneration Technologies, Inc. and the Investors listed on the signature page thereto.5                                                                                                                                                                         
|              | 
|4.5           |  | Registration Rights Agreement, dated November 26, 2002, among Regeneration Technologies, Inc. and the Investors listed on the signature page thereto.5                                                                                                                                                                  
|              | 
|10.1          |  | Program Transfer Agreement between Regeneration Technologies, Inc. and the University of Florida Tissue Bank, Inc. dated April 15, 1999.1*                                                                                                                                                                              
|              | 
|10.2          |  | Tissue Recovery Agreement between Regeneration Technologies, Inc. and the University of Florida Tissue Bank, Inc. dated April 15, 1999.1*                                                                                                                                                                               
|              | 
|10.3          |  | Exclusive Distributorship Agreement between Regeneration Technologies, Inc. and C.R. Bard, Inc., dated June 6, 1998.1*                                                                                                                                                                                                  
|              | 
|10.4          |  | Exclusive License Agreement between Regeneration Technologies, Inc., as successor in interest to the University of Florida Tissue Bank, Inc. and Exactech, Inc., dated April 22, 1997, as amended.1*                                                                                                                    
|              | 
|10.5          |  | Master Lease Agreement between Regeneration Technologies, Inc., as successor in interest to the University of Florida Tissue Bank, Inc., and American Equipment Leasing, dated January 23, 1998.1                                                                                                                       
|              | 
|10.6          |  | Purchase Contract between Regeneration Technologies, Inc. and Echelon International Corp., dated January 31, 2000, as amended.1                                                                                                                                                                                         
|              | 
|10.7          |  | Lease between Echelon International Corp. and Regeneration Technologies, Inc., dated February 4, 2000.1                                                                                                                                                                                                                 
|              | 
|10.8          |  | Lease between Regeneration Technologies, Inc. and First Street Group L.C., dated June 14, 1999.1                                                                                                                                                                                                                        
|              | 
|10.9          |  | Omnibus Stock Option Plan.1                                                                                                                                                                                                                                                                                             
|              | 
|10.10         |  | Year 2000 Compensation Plan.1                                                                                                                                                                                                                                                                                           
|              | 
|10.11         |  | Form of Indemnification Agreement between Regeneration Technologies, Inc. and its directors and executive officers.1                                                                                                                                                                                                    
|10.12         |  | Employment Agreement between Regeneration Technologies, Inc. and Brian K. Hutchison, dated November 30, 2001.2                                                                                                                                                                                                          



---

|              |  |                                                                                                                                                                                                                                                                                             
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                 
|10.13         |  | Employment Agreement between Regeneration Technologies, Inc. and Thomas F. Rose, dated May 1, 2002.7                                                                                                                                                                                        
|              | 
|10.14         |  | Incentive Stock Option Grant Agreement between Regeneration Technologies, Inc. and Brian K. Hutchison, dated December 3, 2001.2                                                                                                                                                             
|              | 
|10.15         |  | Separation Agreement and Release between Regeneration Technologies, Inc. and Jamie M. Grooms, dated June 17, 2002.3                                                                                                                                                                         
|              | 
|10.16         |  | $25,000,000 Loan Agreement, dated as of February 20, 2004, by and among Regeneration Technologies, Inc. and certain of its subsidiaries and Merrill Lynch Business Financial Services,
Inc.7                                                                                                
|              | 
|10.17         |  | Employment Agreement between Regeneration Technologies, Inc. and Roger W. Rose, dated October 21, 2002.8                                                                                                                                                                                    
|              | 
|10.18         |  | First Amended Exclusive Distribution and License Agreement, effective as of April 15, 2004, between Regeneration Technologies, Inc. and Medtronic Sofamor Danek USA, Inc.9*                                                                                                                 
|              | 
|10.19         |  | Regeneration Technologies, Inc. 2004 Equity Incentive Plan.9                                                                                                                                                                                                                                
|              | 
|10.20         |  | Form of Nonqualified Stock Option Grant Agreement.10                                                                                                                                                                                                                                        
|              | 
|10.21         |  | Form of Incentive Stock Option Grant Agreement.10                                                                                                                                                                                                                                           
|              | 
|10.22         |  | Second Amendment to the First Amended Exclusive Distribution and License Agreement, effective as of December 15, 2005, between Regeneration Technologies, Inc. and Medtronic Sofamor Danek USA,
Inc.11                                                                                     
|              | 
|10.23         |  | Third Amended to the First Amended Exclusive Distribution and License Agreement, effective as of December 15, 2005, between Regeneration Technologies, Inc. and Medtronic Sofamor Danek USA,
Inc.11                                                                                        
|              | 
|10.24         |  | Amended Exclusive Distribution and License Agreement, effective as of December 15, 2005, between Regeneration Technologies, Inc. and Exactech, Inc.11                                                                                                                                      
|              | 
|10.25         |  | Fourth Amendment to the First Amended Exclusive Distribution and License Agreement, effective as of September 12, 2006, between Regeneration Technologies, Inc. and Medtronic Sofamor Danek USA,
Inc.12                                                                                    
|              | 
|10.26         |  | Exchange and Service Agreement, dated December 15, 2006, between Regeneration Technologies, Inc. and CryoLife, Inc.14                                                                                                                                                                      
|              | 
|21            |  | Subsidiaries of the Registrant.2                                                                                                                                                                                                                                                            
|              | 
|23.1          |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                   
|              | 
|31.1          |  | Certification of Brian K. Hutchison, Chairman, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                            
|              | 
|31.2          |  | Certification of Thomas F. Rose, Vice President, Chief Financial Officer and Secretary, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                          
|              | 
|32.1          |  | Certification of Brian K. Hutchison, Chairman, President and Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, regarding the information contained in
Regeneration Technologies, Inc.s Annual Report on Form 10-K for the year ended December 31, 2004.  
|32.2          |  | Certification of Thomas F. Rose, Vice President, Chief Financial Officer and Secretary, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, regarding the information contained in
Regeneration Technologies, Inc.s Annual Report on Form 10-K for the year ended December 31, 2004.



|1 | Incorporated by reference to our Registration Statement on Form S-1 (File No. 333-35756).
|- | -----------------------------------------------------------------------------------------

|2 | Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2001.
|- | -------------------------------------------------------------------------------------------------

|3 | Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
|- | ---------------------------------------------------------------------------------------------------



---

|4 | Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.
|- | --------------------------------------------------------------------------------------------------------

|5 | Incorporated by reference to our Current Report on Form 8-K filed on December 2, 2002.
|- | --------------------------------------------------------------------------------------

|6 | Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2002.
|- | -------------------------------------------------------------------------------------------------

|7 | Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2003.
|- | -------------------------------------------------------------------------------------------------

|8 | Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.
|- | ----------------------------------------------------------------------------------------------------

|9 | Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.
|- | ---------------------------------------------------------------------------------------------------

|10 | Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2004.
|-- | -------------------------------------------------------------------------------------------------

|11 | Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2005.
|-- | -------------------------------------------------------------------------------------------------

|12 | Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.
|-- | --------------------------------------------------------------------------------------------------------

|13 | Incorporated by reference to our Current Report on Form 8-K filed November 16, 2007.
|-- | ------------------------------------------------------------------------------------

|14 | Incorporated by reference to our Annual Report on Form 10-K for
the year ended December 31, 2006.
|-- | -------------------------------------------------------------------------------------------------

|* | Confidential treatment granted as to certain portions, which portions were omitted and filed separately with the
Commission.
|- | ----------------------------------------------------------------------------------------------------------------------------

| | Confidential treatment requested as to certain portions, which portions were omitted and filed separately with the
Commission.
|- | ------------------------------------------------------------------------------------------------------------------------------