Summary of RTI BIOLOGICS, INC.

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

Cautionary Statement Relating to Forward Looking Statements

Information contained in this filing contains "forward-looking statements" which can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "anticipates" or comparable terminology, or by discussions of strategy. There can be no assurance that the future results covered by these forward-looking statements will be achieved. Some of the matters described in the "Risk Factors" section of our Form 10-K constitute cautionary statements which identify factors regarding these forward-looking statements, including certain risks and uncertainties, that could cause actual results to vary materially from the future results indicated in these forward-looking statements. Other factors could also cause actual results to vary materially from the future results indicated in such forward-looking statements.

Management Overview

RTI Biologics, Inc., together with its subsidiaries, produces orthopedic and other surgical implants that repair and promote the natural healing of human bone and other human tissues. We process donated human musculoskeletal and other tissues, including bone, cartilage, tendon, ligament, fascia lata, pericardium, sclera, and dermal tissues, as well as bovine animal tissues to produce allograft and xenograft implants by utilizing our proprietary BIOCLEANSE Ž and TUTOPLASTŽ sterilization processes. We process and distribute human and bovine animal tissues for use in the fields of sports medicine, spine, surgical specialties, bone graft substitutes, and general orthopedic and dental. We market our implants through a direct distribution organization, as well as through a network of independent distributors to hospitals and surgeons in the United States and internationally. We were founded in 1997 and are headquartered in Alachua, Florida

Domestic sales and services accounted for 87% of total revenues in the first six months of 2012. Most of our implants are distributed directly to doctors, hospitals and other healthcare facilities through a direct distribution force and through various strategic relationships.

International sales and services accounted for 13% of total revenues in the first six months of 2012. Our implants are distributed in over 30 countries through a direct distribution force in Germany and through stocking distributors in the rest of the world outside of Germany and the U.S.

Our business is generally not seasonal in nature; however, the number of orthopedic implant surgeries and elective procedures generally declines during the summer months.

Our principal goals are to honor the gift of donated tissue, donor families, and patients while building our competitive strength in the marketplace to increase revenues, profitability and cash flow as we focus on improved operational efficiency, productivity and asset management. We are making investments in new implant and product development and our U.S. direct distribution network to promote growth in 2012 and beyond. In addition, we actively look externally for new implants and technologies to augment our existing implant offerings.

We continue to maintain our commitment to research and development and the introduction of new strategically targeted allograft and xenograft implants as well as focused clinical efforts to support their acceptance in the marketplace.

Table of Contents

Three and Six Months Ended June 30, 2012 Compared With Three and Six Months
Ended June 30, 2011



                                           Three Months Ended          Six Months Ended
                                                June 30,                   June 30,
                                            2012          2011         2012         2011
                                                          (In Thousands)
    Revenues from tissue distribution:
    Sports medicine                      $   13,337     $ 12,120     $ 26,762     $ 23,809
    Spine                                     9,785       11,028       18,345       20,738
    Surgical specialties                      8,459        7,153       16,256       15,064
    BGS and general orthopedic                7,016        6,241       14,031       12,348
    Dental                                    5,114        4,962       10,438        9,064
    Other revenues                            1,486        1,978        3,108        3,105

    Total revenues                       $   45,197     $ 43,482     $ 88,940     $ 84,128

    Domestic revenues                        39,191       37,980       77,064       73,225
    International revenues                    6,006        5,502       11,876       10,903

    Total revenues                       $   45,197     $ 43,482     $ 88,940     $ 84,128

Three Months Ended June 30, 2012 Compared With Three Months Ended June 30, 2011

Revenues. Our total revenues increased $1.7 million, or 3.9%, to $45.2 million for the three months ended June 30, 2012 compared to $43.5 million for the three months ended June 30, 2011.

Sports Medicine-Revenues from sports medicine allografts increased $1.2 million, or 10.0%, to $13.3 million for the three months ended June 30, 2012 compared to $12.1 million for the three months ended June 30, 2011. Sports medicine revenues increased primarily as a result of higher unit volumes of 14.6%, partially offset by lower average revenues per unit of 3.9%, primarily due to changes in distribution mix.

Spine-Revenues from spinal allografts decreased $1.2 million, or 11.3%, to $9.8 million for the three months ended June 30, 2012 compared to $11.0 million for the three months ended June 30, 2011. Spine revenues decreased primarily as a result of lower unit volumes of 8.8% and lower average revenues per unit of 2.7%, primarily due to changes in distribution mix.

Surgical Specialties-Revenues from surgical specialty allografts increased $1.3 million, or 18.3%, to $8.5 million for the three months ended June 30, 2012 compared to $7.2 million for the three months ended June 30, 2011. Surgical specialties revenues increased as a result of higher unit volumes of 18.4%.

Bone Graft Substitutes (BGS) and General Orthopedic-Revenues from BGS and general orthopedic allografts increased $775,000, or 12.4%, to $7.0 million for the three months ended June 30, 2012 compared to $6.2 million for the three months ended June 30, 2011. BGS and general orthopedic revenue increases were primarily the result of higher unit volumes of 18.0%, partially offset by lower revenues per unit of 4.7% primarily due to changes in distribution mix.

Dental-Revenues from dental allografts increased $152,000, or 3.1%, to $5.1 million for the three months ended June 30, 2012 compared to $5.0 million for the three months ended June 30, 2011. Dental revenues increased primarily as a result of higher unit volumes of 2.4% and higher revenues per unit of 0.7%.

Other Revenues-Revenues from other sources consisting of tissue recovery fees, biomedical laboratory fees, recognition of previously deferred revenues, shipping fees, distribution of reproductions of our allografts to distributors for demonstration purposes and restocking fees decreased by $492,000 to $1.5 million for the three months ended June 30, 2012 compared to $2.0 million for the three months ended June 30, 2011. The decrease was primarily due to lower tissue recovery fees related to tissue recovered for other tissue processors in the current period.

Table of Contents

International revenues-International revenues include distributions from our foreign affiliates as well as domestic export revenues. International revenues increased $504,000, or 9.2% %, to $6.0 million for the three months ended June 30, 2012 compared to $5.5 million for the three months ended June 30, 2011. International revenues increased primarily as a result of higher domestic export revenues of $1.0 million, offset by a decrease in total international revenues of $527,000 due to a 10.7% increase in the value of the U.S. dollar versus the Euro, as compared to the prior year period.

Costs of Processing and Distribution. Costs of processing and distribution decreased $237,000, or 1.0%, to $23.5 million for the three months ended June 30, 2012 compared to $23.8 million for the three months ended June 30, 2011.

Costs of processing and distribution decreased as a percentage of revenues from 54.7% for the three months ended June 30, 2011 to 52.1% for the three months ended June 30, 2012. The decrease was primarily the result of higher production levels and operating efficiencies for the three months ended June 30, 2012 as compared to the prior year period.

Marketing, General and Administrative Expenses. Marketing, general and administrative expenses increased $108,000, or 0.8%, to $14.3 million for the three months ended June 30, 2012 from $14.2 million for the three months ended June 30, 2011. Marketing, general and administrative expenses decreased as a percentage of revenues from 32.6% for the three months ended June 30, 2011 to 31.6% for the three months ended June 30, 2012. The increase in expense was primarily due to an increase in variable compensation expense of $550,000, partially offset by decreases in legal expenses of $105,000 and $250,000 favorable foreign currency exchange fluctuations due to a 10.7% increase in the value of the U.S. dollar versus the Euro, as compared to the prior year period.

Research and Development Expenses. Research and development expenses increased by $864,000, or 34.9%, to $3.3 million for the three months ended June 30, 2012 from $2.5 million for the three months ended June 30, 2011. As a percentage of revenues, research and development expenses increased from 5.7% for the three months ended June 30, 2011 to 7.4% for the three months ended June 30, 2012. The increase was primarily due to higher research study related expenses of $739,000.

Asset Abandonments. Asset abandonments were $2,000 for the three months ended June 30, 2012 with no comparable expense in the prior year period.

Litigation settlement. As of June 30, 2012, there are 78 lawsuits pending against us related to the misconduct of Biomedical Tissue Services, Ltd. ("BTS") and BTS's owner, Michael Mastromarino, as well as several funeral homes and their owners with which BTS conducted its affairs. An agreement has been reached in principle to settle 29 of the lawsuits, and the parties are preparing documentation to effect such agreement. Pursuant to the proposed settlement of these lawsuits, we have recorded a litigation settlement charge of $2.4 million for the three months ended June 30, 2012.

Net Other Income (Expense). Net other income was $51,000 for the three months ended June 30, 2012 compared to net other expense of $55,000 for the three months ended June 30, 2011. The increase in net other income is primarily attributable to lower interest expense incurred on long term debt and favorable foreign currency exchange changes due to fluctuations in the value of the U.S. dollar versus the Euro and the timing of payments on foreign currency liabilities.

Income Tax Provision. Income tax provision for the three months ended June 30, 2012 was $412,000 compared to $1.0 million for the three months ended June 30, 2011. Our effective tax rate for the three months ended June 30, 2012 and 2011 was 23.8% and 32.7% respectively. Our effective tax rate for the three months ended June 30, 2012 compared to the three months ended June 30, 2011 decreased primarily as a result of the litigation settlement lowering domestic profitability with higher associated tax rates.

Table of Contents

Six Months Ended June 30, 2012 Compared With Six Months Ended June 30, 2011

Revenues. Our total revenues increased $4.8 million, or 5.7%, to $88.9 million for the six months ended June 30, 2012 compared to $84.1 million for the six months ended June 30, 2011.

Sports Medicine-Revenues from sports medicine allografts increased $3.0 million, or 12.4%, to $26.8 million for the six months ended June 30, 2012 compared to $23.8 million for the six months ended June 30, 2011. Sports medicine revenues increased primarily as a result of higher unit volumes of 13.8%, partially offset by lower average revenues per unit of 1.2%, primarily due to changes in distribution mix.

Spine-Revenues from spinal allografts decreased $2.4 million, or 11.5%, to $18.3 million for the six months ended June 30, 2012 compared to $20.7 million for the six months ended June 30, 2011. Spine revenues decreased primarily as a result of lower unit volumes of 10.2% and lower average revenue per unit of 1.5%, primarily due to changes in distribution mix.

Surgical Specialties-Revenues from surgical specialty allografts increased $1.2 million, or 7.9%, to $16.3 million for the six months ended June 30, 2012 compared to $15.1 million for the six months ended June 30, 2011. Surgical specialties revenues increased primarily as a result of higher unit volumes of 12.4%, partially offset by lower revenues per unit of 3.7%, primarily due to changes in distribution mix.

Bone Graft Substitutes (BGS) and General Orthopedic-Revenues from BGS and general orthopedic allografts increased $1.7 million, or 13.6%, to $14.0 million for the six months ended June 30, 2012 compared to $12.3 million for the six months ended June 30, 2011. BGS and general orthopedic revenue increases were primarily the result of higher unit volumes of 20.4%, partially offset by lower revenues per unit of 5.4%, primarily due to changes in distribution mix.

Dental-Revenues from dental allografts increased $1.4 million, or 15.2%, to $10.4 million for the six months ended June 30, 2012 compared to $9.1 million for the six months ended June 30, 2011. Dental revenues increased primarily as a result of higher unit volumes of 19.4%, partially offset by lower revenues per unit of 3.2%, primarily due to changes in distribution mix.

International revenues-International revenues include distributions from our foreign affiliates as well as domestic export revenues. International revenues increased $1.0 million, or 8.9%, to $11.9 million for the six months ended June 30, 2012 compared to $10.9 million for the six months ended June 30, 2011. International revenues increased primarily as a result of higher domestic export revenues of $1.4 million, offset by a decrease in total international revenues of $733,000 due to a 7.5% increase in the value of the U.S. dollar versus the Euro, as compared to the prior year period.

Costs of Processing and Distribution. Costs of processing and distribution increased $1.1 million, or 2.4%, to $47.2 million for the six months ended June 30, 2012 compared to $46.1 million for the six months ended June 30, 2011.

Costs of processing and distribution decreased as a percentage of revenues from 54.8% for the six months ended June 30, 2011 to 53.0% for the six months ended June 30, 2012. The decrease was primarily the result of higher production levels and operating efficiencies for the six months ended June 30, 2012 as compared to the prior year period.

Table of Contents

Marketing, General and Administrative Expenses. Marketing, general and administrative expenses increased $573,000, or 2.0%, to $28.7 million for the six months ended June 30, 2012 from $28.1 million for the six months ended June 30, 2011. Marketing, general and administrative expenses decreased as a percentage of revenues from 33.4% for the six months ended June 30, 2011 to 32.2% for the six months ended June 30, 2012. The increase in expense was primarily due to an increase in variable compensation expense of $1.3 million, partially offset by decreases in legal of $323,000 and lower expenses related to our foreign operations of $620,000 of which $327,000 is due to favorable foreign currency exchange fluctuations due to a 7.5% increase in the value of the U.S. dollar versus the Euro, as compared to the prior year period.

Research and Development Expenses. Research and development expenses increased by $1.3 million, or 26.0%, to $6.2 million for the six months ended June 30, 2012 from $4.9 million for the six months ended June 30, 2011. As a percentage of revenues, research and development expenses increased from 5.8% for the six months ended June 30, 2011 to 6.9% for the six months ended June 30, 2012. The increase was primarily due to higher research study related expenses of $1.0 million.

Asset Abandonments. Asset abandonments decreased by $39,000 to $18,000 for the six months ended June 30, 2012 from $57,000 for the six months ended June 30, 2011.

Net Other Income (Expense). Net other income was $106,000 for the six months ended June 30, 2012 compared to net other expense of $139,000 for the six months ended June 30, 2011. The increase in net other income is primarily attributable to lower interest expense incurred on long term debt and favorable foreign currency exchange changes due to fluctuations in the value of the U.S. dollar versus the Euro and the timing of payments on foreign currency liabilities.

Income Tax Provision. Income tax provision for the six months ended June 30, 2012 was $1.4 million compared to $1.6 million for the six months ended June 30, 2011. Our effective tax rate for the six months ended June 30, 2012 and 2011 was 29.0% and 32.9% respectively. Our effective tax rate for the six months ended June 30, 2012 compared to the six months ended June 30, 2011 decreased primarily as a result of the litigation settlement lowering domestic profitability with higher associated tax rates.

Liquidity and Capital Resources

Our working capital at June 30, 2012 increased $3.2 million to $127.3 million from $124.1 million at December 31, 2011. The increase in working capital was primarily due to the increase in cash and cash equivalents on hand and a decrease in accounts payable and accrued expenses. At June 30, 2012, we had 47 days of revenues outstanding in trade accounts receivable, an increase of 2 days compared to December 31, 2011. The increase was due to lower cash receipts from customers than shipments and corresponding billings to customers during the first six months of 2012. At June 30, 2012 we had 285 days of inventory on hand, a decrease of 15 days compared to December 31, 2011. The planned decrease was primarily due to a continued inventory management focus. We believe that our inventory levels will be adequate to support our on-going operations for the next twelve months. We had $50.2 million of cash and cash equivalents at June 30, 2012.

Our long term obligations at June 30, 2012 decreased $294,000 to $297,000 from $591,000 at December 31, 2011. The decrease in long term obligations was primarily due to our paying down of our term loans and capital leases. At June 30, 2012, we have $13.7 million of borrowing capacity available under our revolving credit facilities. On July 21, 2012, we entered into an amended credit agreement with Toronto-Dominion Bank. Under the amended agreement there were no substantial changes to the credit facility agreement terms, other than the revolving credit facility's maturity date being extended from July 21, 2012 to July 21, 2014.

Table of Contents

As of June 30, 2012, we believe that our working capital, together with our borrowing ability under our revolving credit facilities, will be adequate to fund our on-going operations for the next twelve months.

Certain Commitments.

The Company's short-term and long-term obligations and availability of credit as
of June 30, 2012 are as follows:



                                             Outstanding       Available
                                               Balance          Credit
                                                   (In thousands)
             Short-term obligations:
             Credit facilities              $          -      $     2,138
             Credit facility                           -           11,536

             Total short-term obligations              -           13,674

             Long-term obligations:
             Long-term obligations                     16              -
             Capital leases                           281              -

             Total long-term obligations              297              -

             Total obligations              $         297     $    13,674

The following table provides a summary of our debt obligations, operating lease obligations, and other significant obligations as of June 30, 2012.

                                                             Contractual Obligations Due by Period
                                              Total        2012        2013       2014      2015       After 2015
                                                                        (In thousands)

Debt obligations                             $    297     $   126     $   163     $   8     $  -      $         -
Operating leases                                2,500         930         987       449        96               38
Other significant obligations (1)               7,098       6,916         182        -         -                -
Unrecognized tax benefits                         670         163          19        13       372              103

Total                                        $ 10,565     $ 8,135     $ 1,351     $ 470     $ 468     $        141

(1) These amounts consist of contractual obligations for tissue recovery development grants and licensing fees.

The Company was in compliance with all covenants related to its revolving credit facilities and term loans as of June 30, 2012.

Table of Contents