Exhibit 10.39

Richard W. Bauer
President and CEO
Osteotech, Inc.
51 Jamesway
Eatontown, NJ  07724                                            October 27, 2002

American Red Cross-Tissue Services
National Headquarters
Attn: Henry Korent, Chief Executive Officer
1621 North Kent St.
Arlington, VA 22209

Re: Letter agreement to amend, modify and restate certain provisions of the
    processing agreement (the "Amendment")

Ladies and Gentlemen:

Reference is made herein to that certain Agreement dated December 10, 1996 by
and between the American Red Cross, operating through the Tissue Services unit
of its Biomedical Services division ("ARC"), and Osteotech, Inc. ("Osteotech"),
as amended (the "Agreement"). Unless otherwise defined herein, initially
capitalized terms used herein shall have the meaning ascribed to them in the
Agreement.

Pursuant to Section 13 of the Agreement, we submit this letter to you for your
review and consent to the following amended and restated provisions which shall
apply in full force and effect until the earlier of (i) the expiration or
termination of the Agreement, or (ii) the execution of a new definitive
processing agreement between ARC and Osteotech:

      1.    The following terms used in this Amendment shall have the following
            definitions:

      (a) "Donor" shall mean a Standard Donor or Non-Standard Donor from whom
      Tissue is to be (or has been) procured and


                                      E-77
<PAGE>


Richard W. Bauer
October 27, 2002
Page 2

      delivered by ARC in accordance with the provisions of this Agreement.

      (b) "Proprietary Products" shall mean those products which exist as of the
      date of this Amendment, are processed by Osteotech from Tissue and are
      covered by patents owned or licensed by Osteotech or are otherwise
      produced by Osteotech using its trade secrets or other proprietary
      information. For purposes of this Agreement, the Proprietary Products in
      existence as of the date of this Amendment are all forms of Osteotech's
      Grafton(R) DBM, Grafton Plus(TM) and Graftech(TM) Bioimplant products.
      Additional Proprietary Products may be added to the Agreement from time to
      time upon the mutual agreement of Osteotech and ARC.

      (c) "Standard Donor" shall mean: (i) a human male not less than *** years
      of age and not greater than *** years of age at date of death; or (ii) a
      human female not less than *** years of age and not greater than *** years
      of age at date of death. "Non-Standard Donor" shall mean: (i) a human male
      not less than *** years of age and not greater than *** years of age at
      date of death; or (ii) a human female not less than *** years of age and
      not greater than *** years of age at date of death.

2.    The third recital following the introductory paragraph of the Agreement
      shall be amended and restated in its entirety to read as follows:

      "WHEREAS, ARC wishes to ensure its ability to obtain processing services
      as well as distribution, education and marketing and, from time to time,
      other services and Osteotech desires to perform such services and to
      process Tissue for ARC."

*** Indicates the omission of confidential material pursuant to a request for
confidential treatment made in accordance with Rule 24b-2 under the Securities
Exchange Act of 1934, as amended. The confidential material is being filed
separately with the Secretary to the Securities and Exchange Commission.


                                      E-78
<PAGE>


Richard W. Bauer
October 27, 2002
Page 3

      3. Section 1.1.1 shall be amended and restated in its entirety to read as
      follows:

      "(a) Commencing as of January 1, 2003 and through the remaining term of
      the Agreement, ARC shall not be required to supply all of the Tissue that
      it procures to Osteotech for Processing, but will instead exercise its
      best efforts to provide to Osteotech for Processing no less than the
      minimum number of Standard Donors and Non-Standard Donors set forth below
      during each month of the time periods set forth below (the "Minimum Donor
      Requirement")".

                                              MONTHLY MINIMUM NUMBER
                                              ----------------------
       TIME PERIOD                  STANDARD DONORS          NON-STANDARD DONORS
       -----------                  ---------------          -------------------
 1/1/03 through 12/31/03                  ***                        ***
 1/1/04 through 12/31/04                  ***                        ***
 1/1/05 through 12/31/05                  ***                        ***
 1/1/06 through 12/31/06                  ***                        ***

      (b) No later than the fifteenth (15th) business day of each of January
      2003, 2004, 2005 and 2006 an authorized officer of ARC shall deliver to
      Osteotech a certification of the Average Donor Profile (as defined below)
      of all of the Standard Donors and all of the Non-Standard Donors (as
      independent groups) procured by ARC during the immediately preceding
      calendar year, provided that the Average Donor Profile to be delivered in
      January 2003 shall be based upon the Donors delivered by ARC to Osteotech
      during the twelve (12) months ended August 31, 2002. The "Average Donor
      Profile" shall mean that certain description of the average number and
      types of Tissue procured, the average age of the Donors and the male to
      female ratio of the Donors procured by ARC.

*** Indicates the omission of confidential material pursuant to a request for
confidential treatment made in accordance with Rule 24b-2 under the Securities
Exchange Act of 1934, as amended. The confidential material is being filed
separately with the Secretary to the Securities and Exchange Commission.


                                      E-79
<PAGE>


Richard W. Bauer
October 27, 2002
Page 4


                  The Donors delivered by ARC to Osteotech during each of the
                  remaining years of the Agreement in order to satisfy the
                  Minimum Donor Requirement shall conform to the Average Donor
                  Profile delivered by ARC to Osteotech during the January of
                  that year. Osteotech shall receive all of the Tissue procured
                  from each Donor that is delivered by ARC to Osteotech in order
                  to satisfy the Minimum Donor Requirement and ARC shall use its
                  best efforts to ensure that the Donors it delivers to
                  Osteotech shall come proportionally from geographic regions
                  which are consistent with the proportion of releasable Donors
                  procured in geographic regions ARC procures Donors from.

                  (c) Notwithstanding anything to the contrary contained in the
                  Agreement, for the year commencing January 1, 2003, ARC shall
                  be responsible for planning Donors for Processing that are
                  delivered by ARC to Osteotech and shall plan such Donors in a
                  manner and method (which is generally understood to be the
                  Donor master production plan) which is consistent with the
                  manner in which ARC planned Donors it delivered to Osteotech
                  during 2002. Notwithstanding anything to the contrary
                  contained in the Agreement, commencing January 1, 2004 and for
                  the remaining term of the Agreement, Osteotech shall be
                  responsible for planning Donors for Processing that are
                  delivered by ARC to Osteotech in order to satisfy the Minimum
                  Donor Requirement, as needed to produce Proprietary Products.
                  Such planning shall be based upon Osteotech's forecasted
                  market needs solely with respect to Donors delivered in
                  accordance with the Minimum Donor Requirement, and such plans
                  shall be provided to ARC in good faith and on a quarterly
                  basis thirty (30) days prior to the quarter in which such
                  forecast shall apply. ARC acknowledges that such planning by
                  Osteotech shall be prepared with a priority on meeting the
                  forecasted market demand of Proprietary Products first, with
                  base Tissue products or non-proprietary products a secondary
                  consideration. Unless and until another agreement is mutually
                  agreed to between the parties, once the Minimum Donor
                  Requirement threshold is satisfied, for each Donor that is
                  delivered to Osteotech that exceeds such requirement,
                  Osteotech shall use its best efforts to follow the Donor
                  master production plan submitted by ARC with respect to any
                  such Donor(s) with the goal of prioritizing its efforts so
                  that such Donors shall be processed into


                                      E-80
<PAGE>


Richard W. Bauer
October 27, 2002
Page 5

                  base Tissue or non-proprietary products first, and Proprietary
                  Products second; and provided, further that the average yield
                  of Tissue products processed from such Donors in each of the
                  years 2003, 2004, 2005 and 2006 shall not differ from the
                  average yield of the same received by ARC during the
                  immediately preceding year (except that for 2003 the required
                  yield shall be based on the 12 months ended August 31, 2002),
                  provided, further, that such Donors comply with the Average
                  Donor Profile for the immediately preceding year (except that
                  for 2003 the Average Donor Profile shall be based on the 12
                  months ended August 31, 2002).

                  (d) Osteotech shall use its best efforts to process the soft
                  Tissue associated with any and all Donors delivered to
                  Osteotech in accordance with specifications for such soft
                  Tissue that are in place as of the date of this Amendment
                  based upon the donor master production plan submitted by ARC
                  to Osteotech. In the event any such specifications are changed
                  in a manner which would cause Osteotech to incur additional
                  processing expenses that are reasonably considered to be
                  material, Osteotech will not be required to process soft
                  Tissue in accordance with such changed specifications unless
                  ARC shall reimburse Osteotech for such additional processing
                  expenses, plus a reasonable profit.

                  (e) ARC may, at its option, deliver to Osteotech for
                  Processing more Standard Donors or more Non-Standard Donors
                  than it is required to deliver to meet the Minimum Donor
                  Requirement, provided that commencing as of January 1, 2003
                  and for the remaining term of the Agreement, the number of
                  such additional Non-Standard Donors delivered in any month
                  shall not exceed *** of the number of Non-Standard Donors
                  required to be delivered in such month in order to satisfy the
                  Minimum Donor Requirement for Non-Standard Donors in such
                  month.

*** Indicates the omission of confidential material pursuant to a request for
confidential treatment made in accordance with Rule 24b-2 under the Securities
Exchange Act of 1934, as amended. The confidential material is being filed
separately with the Secretary to the Securities and Exchange Commission.


                                      E-81
<PAGE>


Richard W. Bauer
October 27, 2002
Page 6


                  Notwithstanding anything to the contrary contained herein, the
                  number of Donors required to be delivered by ARC to Osteotech
                  in order to satisfy the Minimum Donor Requirement in any month
                  may be reduced in the event an authorized officer of ARC
                  provides a written certification to Osteotech that ARC was
                  unable to procure the number of Donors required to be
                  delivered to Osteotech in such month in order to satisfy the
                  Minimum Donor Requirement for such month. Such certification
                  must be delivered no later than the end of the third month
                  after any such shortfall in Donors shall occur and shall
                  certify (i) that the number of Donors available for Processing
                  was insufficient to satisfy the Minimum Donor Requirement for
                  such month, (ii) that the ratio of the number of Donors being
                  provided to Osteotech for Processing compared to the total
                  number of donors procured by ARC is no less than the ratio of
                  Donors provided to Osteotech for Processing compared to the
                  total number of donors procured by ARC during the preceding
                  six (6) months and (iii) the reasons why ARC was unable to
                  procure a number of Donors sufficient to satisfy the Minimum
                  Donor Requirement. In addition, in the event ARC is unable to
                  satisfy the Minimum Donor Requirement as a result of Osteotech
                  or any of Osteotech's affiliates, as defined in the Securities
                  Exchange Act of 1934, as amended, (but not including any
                  processing customer of Osteotech) obtaining Donors directly
                  from any of ARC's donor accounts existing as of the date of
                  this Amendment as set forth in a letter which will be provided
                  by ARC to Osteotech within 30 days after the date of this
                  Agreement (the "Existing Account Letter"), the number of
                  Donors required to be delivered by ARC each month in order to
                  satisfy the Minimum Donor Requirement shall be reduced by the
                  number of Donors procured by Osteotech from any such existing
                  donor account(s) during such month. Within 30 days of its
                  receipt of the Existing Account Letter Osteotech shall advise
                  ARC in writing of those accounts on the Existing Account
                  Letter with which Osteotech has an existing arrangement to
                  receive donors. Within 30 days of its receipt of such written
                  notice from Osteotech, ARC shall revise the Existing Account
                  Letter to set forth the minimum monthly or annual, as the case
                  may be, number of donors ARC is entitled to receive, from such
                  accounts with which Osteotech has an existing relationship, in
                  accordance with any contract ARC may have with such accounts.
                  If ARC's contract with any of the accounts listed


                                      E-82
<PAGE>


Richard W. Bauer
October 27, 2002
Page 7

                  on the Existing Account Letter shall terminate and not be
                  renewed, ARC shall so advise Osteotech in writing and such
                  account shall be removed from the Existing Account Letter.
                  Osteotech shall have the right to audit ARC's donor
                  procurement activities to determine the accuracy of any such
                  certification provided to it by ARC. The Existing Account
                  Letter shall be treated as Confidential Information under the
                  Agreement.

                  (g) ARC shall pay Osteotech the Processing fees set forth in
                  Exhibits 3.1, and 3.2 of the Agreement and all applicable
                  pricing amendments to the Agreement with respect to all Donors
                  delivered by ARC to Osteotech and Processed by Osteotech and
                  for all Proprietary Products Processed from Donors delivered
                  by ARC to Osteotech. The fee payable for "Base Donor Charge (7
                  or greater tissues)" on Exhibit 3.1 shall be the fee payable
                  for Processing Standard Donors and the fee payable for
                  "Exception Donor Charge" on Exhibit 3.1 shall be the fee
                  payable for Processing Non-Standard Donors. If any new
                  Proprietary Products are added to the Agreement the Processing
                  fees for such products will be agreed upon by the parties. ***
                  Notwithstanding anything to the contrary contained in this
                  Amendment or the Agreement, including without limitation,
                  Exhibit 3.1 thereof, as amended, Osteotech shall be entitled
                  to increase the base Tissue Processing fees set forth in
                  Exhibit 3.1, as amended, charged to ARC by up to *** on each
                  of January 1, 2003, 2004, 2005 and 2006 and notes 1, 2 and 3
                  of Exhibit 3.1 are hereby deleted.

*** Indicates the omission of confidential material pursuant to a request for
confidential treatment made in accordance with Rule 24b-2 under the Securities
Exchange Act of 1934, as amended. The confidential material is being filed
separately with the Secretary to the Securities and Exchange Commission.


                                      E-83
<PAGE>


Richard W. Bauer
October 27, 2002
Page 8


                  (h) The Donors shall be delivered to Osteotech, at ARC's
                  expense. The Tissue from such Donors delivered by ARC and
                  processed by Osteotech shall conform to all standards,
                  guidelines, rules, regulations and laws of (i) the United
                  States Food and Drug Administration (FDA); (ii) the American
                  Association of Tissue Banks (AATB); (iii) other applicable
                  U.S. federal, state and local government agencies; (iv) any
                  non-U.S. jurisdiction where Tissue may be procured or
                  distributed for purposes of this Agreement; (v) ARC's standard
                  operating procedures ("SOPs") as may be amended from time to
                  time by ARC; (vi) Osteotech's processing standards as
                  specified in Osteotech's SOPs, as may be amended from time to
                  time by Osteotech (collectively, the foregoing is hereinafter
                  referred to as the "Processing Standards"). If interpretation
                  of the Processing Standards is required, or if there is a
                  disagreement about the interpretation of the Processing
                  Standards, ARC and Osteotech will enter into good faith
                  negotiations to resolve such issues with thirty (30) days of
                  notice by one party to the other. If such issues are not
                  resolved within the thirty (30) day period, within five (5)
                  business days thereafter, an independent third party will be
                  mutually selected from a list of six (6) with three (3)
                  provided by ARC and three (3) provided by Osteotech and such
                  third party will assist the parties in arriving at a
                  resolution. In the event no resolution is reached within sixty
                  (60) days after such third party is appointed, either party
                  may seek relief from the courts or as otherwise mutually
                  agreed. "Recovery Standards" shall mean all applicable laws,
                  standards, rules, regulations, procedures and guidelines
                  related to the donation, recovery and suitability
                  determination of Tissue, including donor referral, informed
                  consent, tissue recovery, pre-processing storage, packaging
                  and shipping and all records, activities and standards related
                  to obtaining, testing, documenting and evaluating serological
                  test results, medical history and lifestyle data; and related
                  organizational, management and quality assurance activities.

                  (i) ARC and Osteotech shall provide each other a copy of its
                  SOPs and copies of any amendments to its SOPs promptly after
                  such amendments are adopted; provided, however, that doing so
                  will not require such party to disclose any trade secrets,
                  technical know how or unpublished scientific data or technical
                  art. Upon reasonable notice and at its own expense, each of
                  Osteotech and ARC shall have the right to conduct an annual
                  audit of the other party's facilities and records related to
                  regulatory compliance. Upon


                                      E-84
<PAGE>


Richard W. Bauer
October 27, 2002
Page 9

                  reasonable notice and at its own expense, each of Osteotech
                  and ARC shall have the right to conduct additional audits of
                  the other party's facilities and records related to regulatory
                  compliance in the event there are repeated significant defects
                  in such other party's SOPs, or in such other party's
                  compliance with its SOPs or any applicable Processing
                  Standards."

                  ARC shall reimburse Osteotech on a monthly basis for all of
                  Osteotech's direct costs, including without limitation, rent
                  and utilities, related to the use of Osteotech's facilities by
                  ARC personnel.

         3.       With regard to Section 1.1.2(c) we hereby agree to strike and
                  delete the following sentence which is the last sentence of
                  such subsection so that it shall have no further force or
                  effect:

                  "If the parties cannot agree upon a forecast for any month,
                  the forecast for such month shall be the average of the
                  forecasts of the parties for the immediately preceding three
                  months."

         4.       With regard to Section 1.1.3 we hereby agree to strike and
                  delete the following two sentences which are the last two
                  sentences of the first paragraph of Section 1.1.3 so that it
                  shall have no further force or effect:

                  "ARC shall provide to Osteotech, within 15 days of the end of
                  each calendar quarter, data on the tissue procurement activity
                  of ARC occurring during the quarter. Osteotech shall have the
                  right to audit ARC Tissue donor data upon reasonable prior
                  written notice to ARC."

         5.       With regard to Section 1.2.2(b) we hereby agree that the
                  second sentence of Section 1.2.2(b) shall be amended and
                  restated in its entirety as follows:

                  "In the event either party is unable or unwilling to implement
                  such changes, the other party shall have the remedy set forth
                  in Section 6.5"

         6.       With regard to Section 3.1(c) we hereby agree to strike and
                  delete the entire provision so that it shall have no further
                  force or effect.


                                      E-85
<PAGE>


Richard W. Bauer
October 27, 2002
Page 10

            7.    With regard to Section 6.5 we hereby agree that the following
                  shall be added to the end of Section 6.5:

                  "and Osteotech may terminate this Agreement at any time upon
                  30 days prior written notice to ARC if ARC is unwilling or
                  unable to comply with the provisions of Section 1.2.2(b)."

            8.    Section 8 shall be amended and restated in its entirety to
                  read as follows:

                  Neither party shall be responsible to the other for
                  nonperformance or delayed performance of the terms and
                  conditions hereof due to acts of God, acts of government,
                  wars, riots, major accidents involving lines of
                  transportation, fuel or material shortages, or other causes
                  (except strikes), in the nature of force majeure which is
                  beyond the affected party's control. Notwithstanding such
                  force majeure event, to the extent Osteotech is unable to
                  perform Processing of ARC's Tissue due to a force majeure
                  event for more than *** successive *** or *** in the aggregate
                  during any *** period, Osteotech may arrange, with ARC's
                  approval, or in the alternative, ARC may arrange, for ARC's
                  base Tissue to be processed by another processor within *** of
                  such event. In no event shall ARC have the right to cause any
                  Proprietary Product to be processed by any other processor.

*** Indicates the omission of confidential material pursuant to a request for
confidential treatment made in accordance with Rule 24b-2 under the Securities
Exchange Act of 1934, as amended. The confidential material is being filed
separately with the Secretary to the Securities and Exchange Commission.


                                      E-86
<PAGE>


Richard W. Bauer
October 27, 2002
Page 11


                  Once notice is given that the force majeure event has ended
                  all base Tissue Processing which is being performed by any
                  other processor as a result of such force majeure event shall
                  promptly revert back to Osteotech for Processing; provided
                  that, ARC may require Osteotech to reimburse ARC for the
                  difference between the Processing Fees, shipping and packaging
                  costs that would have been payable by ARC to Osteotech under
                  the Agreement for Tissue processed by such other processor and
                  the actual costs incurred by ARC to obtain substantially
                  similar services from an alternate processor, provided further
                  that Osteotech shall in no event be responsible to pay to ARC
                  an amount which is in excess of *** of such fees and costs in
                  the aggregate that would have otherwise been payable to
                  Osteotech by ARC

The Agreement shall continue in full force and effect in accordance with its
terms except as specifically amended in this Amendment. To the extent you are in
agreement with the foregoing amendments and modifications to the Agreement,
please acknowledge your consent by signing in the signature block provided
below. This Amendment may be signed in one or more counterparts, each of which
shall be deemed an original, but all of such counterparts when brought together
shall constitute one Amendment and agreement to the same.

Sincerely,                             ACKNOWLEDGED AND AGREED:

Osteotech, Inc.                        American Red Cross-Tissue Services

By:  _____________________             By:  ___________________________
        Richard W. Bauer                       Henry Korent
        President and Chief Executive          Chief Executive Officer
        Officer

*** Indicates the omission of confidential material pursuant to a request for
confidential treatment made in accordance with Rule 24b-2 under the Securities
Exchange Act of 1934, as amended. The confidential material is being filed
separately with the Secretary to the Securities and Exchange Commission.



                                      E-87