UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-Q/A
                                (Amendment No. 1)

                                   (Mark One)

|X|   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934 for the Period Ended September 30, 2003

                                       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 0-19278

                                 OSTEOTECH, INC.
             (Exact name of registrant as specified in its charter)

                Delaware                                 13-3357370
    (State or other jurisdiction of         (I.R.S. Employer Identification No.)
     incorporation or organization)

   51 James Way, Eatontown, New Jersey                      07724
 (Address of principal executive offices)                 (Zip Code)

                                 (732) 542-2800
              (Registrant's telephone number, including area code)

                                 Not Applicable
              (Former name, former address and former fiscal year,
                         if changed since last report)

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 |_|

                      Applicable Only to Corporate Issuers

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| or No |_|

The number of shares of the registrant's common stock, $.01 par value,
outstanding as of October 31, 2003 was 17,101,120.

<PAGE>

                                Explanatory Note

We are filing this amendment to our Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003, filed with the Securities and Exchange
Commission on November 13, 2003, to reflect restatement of our condensed
consolidated balance sheet as of September 30, 2003, our condensed consolidated
statements of operations for the three and nine months ended September 30, 2003
and 2002, our condensed consolidated statements of cash flows for the nine
months ended September 30, 2003 and 2002 and related footnotes. The restatement
corrects errors related to over accruals of certain expenses caused by a flaw in
the Company's computer software identified during our 2003 year-end closing
procedures. The pretax impact on results of operations of correcting the error
related to the computer flaw was a decrease of $267,000 and $194,000 for the
three and nine months ended September 30, 2003, respectively. The pretax impact
on results of operations of correcting the error related to the computer flaw
was an increase of $33,000 and $291,000 for the three and nine months ended
September 30, 2002, respectively. See Note 1 of "Notes to Condensed Consolidated
Financial Statements" for a detailed disclosure of the impacts of this
restatement.

This amendment is limited in scope to the portions of our Quarterly Report on
Form 10-Q/A for the quarter ended September 30, 2003 impacted by this
restatement and does not amend, update or change any other items or disclosures
contained in the original 10-Q filed on November 13, 2003. Changes have also
been made to the following additional items in this Quarterly Report on Form
10-Q/A as a result of the restatement:

      o     Part I, Item 1, "Financial Statements"

      o     Part I, Item 2, "Management's Discussion and Analysis of Financial
            Condition and Results of Operations"

      o     Part I, Item 4, "Controls and Procedures"

      o     Part II, Item 6, "Exhibits and Reports on Form 8-K"


                                      -2-
<PAGE>

PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements

                        OSTEOTECH, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (unaudited)
                             (dollars in thousands)
<TABLE>
<CAPTION>
                                                                          September 30,      December 31,
                                                                              2003               2002
                                                                           (Restated)
---------------------------------------------------------------------------------------------------------
<S>                                                                         <C>               <C>
ASSETS
---------------------------------------------------------------------------------------------------------
Current assets:
     Cash and cash equivalents                                              $ 12,236          $ 10,040
     Short-term investments                                                                      3,948
     Accounts receivable, net of allowance of
          $1,817 in 2003 and $943 in 2002                                     16,928            11,545
     Deferred processing costs                                                26,287            15,433
     Inventories                                                               4,393             4,820
     Income tax receivable                                                     1,688             3,357
     Deferred tax assets                                                       5,512             5,431
     Prepaid expenses and other current assets                                 1,067             1,023
                                                                            -----------------------------
               Total current assets                                           68,111            55,597

Property, plant and equipment, net                                            48,881            53,535
Goodwill, net of accumulated amortization of $404 in 2003 and 2002             1,669             1,669
Other assets                                                                   4,109             3,931
---------------------------------------------------------------------------------------------------------
               Total assets                                                 $122,770          $114,732
=========================================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------------------------------------
Current liabilities:
     Accounts payable and accrued liabilities                               $ 15,562          $ 10,489
     Current maturities of long-term debt                                      2,661             2,661
                                                                            -----------------------------
               Total current liabilities                                      18,223            13,150

Long-term debt                                                                13,927            15,922
Other liabilities                                                              1,333             1,637
---------------------------------------------------------------------------------------------------------
               Total liabilities                                              33,483            30,709
---------------------------------------------------------------------------------------------------------

Commitments and contingencies

Stockholders' equity:
     Preferred stock, $.01 par value; 5,000,000 shares
         Authorized; no shares issued or outstanding
     Common stock, $.01 par value; 70,000,000 shares
         Authorized; issued and outstanding 17,101,120
         shares in 2003 and 17,001,372 shares in 2002                            171               170
     Additional paid-in capital                                               63,956            63,368
     Accumulated other comprehensive income                                      266                78
     Retained earnings                                                        24,894            20,407
---------------------------------------------------------------------------------------------------------
               Total stockholders' equity                                     89,287            84,023
---------------------------------------------------------------------------------------------------------
               Total liabilities and stockholders' equity                   $122,770          $114,732
=========================================================================================================
</TABLE>

See accompanying notes to condensed consolidated financial statements.


                                      -3-
<PAGE>

                        OSTEOTECH, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (unaudited)
                  (dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                             Three Months                           Nine Months
                                                          Ended September 30,                   Ended September 30,
                                                    -------------------------------       -------------------------------
                                                         2003              2002               2003               2002
                                                      (Restated)        (Restated)         (Restated)         (Restated)
-------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>                <C>                <C>                <C>
Net revenues:
 Service                                            $     21,209       $     18,190       $     65,753       $     59,878
 Product                                                   1,926              1,501              4,653              4,907
                                                    ------------       ------------       ------------       ------------
                                                          23,135             19,691             70,406             64,785

Cost of services                                           9,914              9,255             26,959             26,310
Cost of products                                           1,217              3,401              3,422              5,366
                                                    ------------       ------------       ------------       ------------
                                                          11,131             12,656             30,381             31,676
                                                    ------------       ------------       ------------       ------------

Gross profit                                              12,004              7,035             40,025             33,109

Marketing, selling, general and administrative             9,806              8,309             28,873             29,849
Research and development                                   1,095              1,002              3,020              2,990
                                                    ------------       ------------       ------------       ------------
                                                          10,901              9,311             31,893             32,839

Litigation settlement charge                                                                                       (1,785)
                                                    ------------       ------------       ------------       ------------

Operating income (loss)                                    1,103             (2,276)             8,132             (1,515)
Interest expense and other, net                             (126)              (162)              (590)              (782)
Gain on sale of patents                                                                                               950
                                                    ------------       ------------       ------------       ------------

Income (loss) from continuing operations
 before income taxes                                         977             (2,438)             7,542             (1,347)
Income tax provision (benefit)                               413             (3,465)             3,055             (3,142)
                                                    ------------       ------------       ------------       ------------

Income from continuing operations                            564              1,027              4,487              1,795
Income from discontinued operations,
 net of loss on disposal of $291 in 2002                                                                               93
-------------------------------------------------------------------------------------------------------------------------
Net income                                          $        564       $      1,027       $      4,487       $      1,888
=========================================================================================================================
Earnings per share:
  Basic:
  Income from continuing operations                 $        .03       $        .06       $        .26       $        .11
  Discontinued operations                                                                                             .01
                                                    ------------       ------------       ------------       ------------
  Net income                                        $        .03       $        .06       $        .26       $        .12
                                                    ============       ============       ============       ============
  Diluted:
  Income from continuing operations                 $        .03       $        .06       $        .25       $        .11
  Discontinued operations                                                                                             .01
                                                    ------------       ------------       ------------       ------------
  Net income                                        $        .03       $        .06       $        .25       $        .12
                                                    ============       ============       ============       ============
Shares used in computing earnings per share:
  Basic                                               17,093,937         16,916,152         17,049,605         15,542,076
  Diluted                                             17,958,095         17,358,019         17,704,140         15,945,162
</TABLE>

See accompanying notes to condensed consolidated financial statements.


                                      -4-
<PAGE>

                        OSTEOTECH, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                                                 2003            2002
Nine Months Ended September 30,                                               (Restated)      (Restated)
--------------------------------------------------------------------------------------------------------
<S>                                                                            <C>            <C>
Cash Flow From Operating Activities
  Net income                                                                   $  4,487       $  1,888
  Adjustments to reconcile income to net cash
      provided by operating activities:
         Depreciation and amortization                                            6,321          5,789
         Deferred income taxes                                                                  (2,157)
         Gain on sale of patents                                                                  (950)
         Reversal of tax liability                                                              (2,557)
         Changes in current assets and liabilities:
             Accounts receivable                                                 (5,178)           467
             Deferred processing costs                                          (10,776)        (4,214)
             Inventories                                                            555          1,881
             Prepaid expenses and other current assets                            1,825            (52)
             Accounts payable and other liabilities                               4,452          1,426
--------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                         1,686          1,521

Cash Flow From Investing Activities
  Capital expenditures                                                           (1,326)        (4,253)
  Proceeds from sale of land
  Purchases of investments                                                                      (3,948)
  Proceeds from sale of investments                                               3,948
  Proceeds from sale of foreign operation                                                        1,000
  Proceeds from sale of patents                                                                  1,000
  Other, net                                                                       (507)            81
--------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities                               2,115         (6,120)

Cash Flow From Financing Activities
  Proceeds from issuance of common stock                                            589         16,204
  Principal payments on long-term debt                                           (1,995)        (1,965)
--------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities                              (1,406)        14,239

Effect of exchange rate changes on cash                                            (199)           158
--------------------------------------------------------------------------------------------------------

Net increase in cash and cash equivalents                                         2,196          9,798
Cash and cash equivalents at beginning of period                                 10,040          5,192
--------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                                     $ 12,236       $ 14,990
========================================================================================================

Supplementary cash flow data:
  Cash paid during the period for interest, excluding amounts capitalized      $    699       $    996
  Cash paid (refunded) during the period for taxes                                 (270)         1,226

Noncash investing activities:
   Note receivable from sale of foreign operation                              $              $  1,273
</TABLE>

See accompanying notes to condensed consolidated financial statements


                                      -5-
<PAGE>

                        OSTEOTECH, INC. AND SUBSIDIARIES
              Notes To Condensed Consolidated Financial Statements
                                   (unaudited)

1.    Restatement of Financial Statements

      During our 2003 year-end closing procedures, the Company identified a
      previously undetected flaw in its computer software used to maintain
      certain accounting records, resulting in over accruals of certain expenses
      in the Company's accounting records. As a result, the Company has restated
      its condensed consolidated financial statements for the interim periods
      presented herein to reflect the reversal of such over accruals. The effect
      of the restatement on the Company's condensed consolidated balance sheet
      as of September 30, 2003 and on the Company's condensed consolidated
      statements of operations for the three and nine months ended September 30,
      2003 and 2002 is shown below. Items identified with an (*) were not
      impacted in that period by the effects of the restatement.

Changes to Consolidated Balance Sheets:

                                                       As of September 30, 2003
                                                       ------------------------
                                                        Reported        Restated
                                                        --------        --------
Deferred tax assets                                    $   5,784       $   5,512
Total current assets                                      68,383          68,111
Total assets                                             123,042         122,770
Accounts payable and accrued liabilities                  16,249          15,562
Total current liabilities                                 18,910          18,223
Total liabilities                                         34,170          33,483
Retained earnings                                         24,479          24,894
Total stockholders' equity                                88,872          89,287
Total liabilities and stockholders' equity               123,042         122,770
================================================================================

Changes to Consolidated Statement of Operations:

<TABLE>
<CAPTION>
                                                    Three Months Ended                Three Months Ended
                                                    September 30, 2003                September 30, 2002
                                                -------------------------------------------------------------
                                                (Reported)       (Restated)       (Reported)       (Restated)
-------------------------------------------------------------------------------------------------------------
<S>                                               <C>            <C>                 <C>            <C>
Cost of services                                  $   9,647      $   9,914           $  9,288       $  9,255
Gross profit                                         12,271         12,004              7,002          7,035
Operating income (loss)                               1,370          1,103             (2,309)        (2,276)
Income (loss) from continuing
   operations before income taxes                     1,244            977             (2,471)        (2,438)
Income tax provision (benefit)                          525            413             (3,478)        (3,465)
Income from continuing operations                       719            564              1,007          1,027
Net income                                              719            564              1,007          1,027
Net income per share:
   Basic:
       Income from continuing operations               .04             .03                  *             *
       Net income                                      .04             .03                  *             *
   Diluted:
       Income from continuing operations               .04             .03                  *             *
       Net income                                      .04             .03                  *             *
=============================================================================================================
</TABLE>


                                      -6-
<PAGE>

                        OSTEOTECH, INC. AND SUBSIDIARIES
              Notes To Condensed Consolidated Financial Statements
                                   (unaudited)

1.    Restatement of Financial Statements (continued)

      Changes to Consolidated Statement of Operations:

<TABLE>
<CAPTION>
                                                    Nine Months Ended                Nine Months Ended
                                                    September 30, 2003              September 30, 2002
                                                 ----------------------------------------------------------
                                                 (Reported)      (Restated)     (Reported)       (Restated)
-----------------------------------------------------------------------------------------------------------
<S>                                               <C>            <C>               <C>            <C>
Cost of services                                  $   26,765     $  26,959         $ 26,601       $ 26,310
Gross profit                                          40,219        40,025           32,818         33,109
Operating income (loss)                                8,326         8,132           (1,806)        (1,515)
Income (loss) from continuing
   operations before income taxes                      7,736         7,542           (1,638)        (1,347)
Income tax provision (benefit)                         3,136         3,055           (3,258)        (3,142)
Income from continuing operations                      4,600         4,487            1,620          1,795
Net income                                             4,600         4,487            1,713          1,888
Net income per share:
   Basic:
       Income from continuing operations                .27            .26              .10           .11
       Net income                                       .27            .26              .11           .12
   Diluted:
       Income from continuing operations                .26            .25              .10           .11
       Net income                                       .26            .25              .11           .12
===========================================================================================================
</TABLE>

1A.   Basis of Presentation

      The accompanying unaudited condensed consolidated financial statements
      reflect all adjustments (consisting only of normal recurring accruals)
      considered necessary by management for a fair presentation of the
      consolidated financial position as of September 30, 2003, the consolidated
      results of operations for the three months and nine months ended September
      30, 2003 and 2002 and the consolidated cash flows for the nine months
      ended September 30, 2003 and 2002. The results of operations for the
      respective interim periods are not necessarily indicative of the results
      to be expected for the full year. The December 31, 2002 financial
      information has been derived from the audited financial statements for the
      year ended December 31, 2002. The condensed consolidated financial
      statements should be read in conjunction with the audited consolidated
      financial statements for the year ended December 31, 2002, which were
      included as part of Osteotech, Inc.'s (the "Company") Annual Report on
      Form 10-K/A.


                                      -7-
<PAGE>

                        OSTEOTECH, INC. AND SUBSIDIARIES
              Notes To Condensed Consolidated Financial Statements
                                   (unaudited)

2.    Goodwill and Other Intangible Assets

      In January, 2002, the Company adopted Statement of Financial Accounting
      Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets", and
      accordingly, no longer amortizes goodwill. In accordance with the
      provisions of SFAS No. 142, the Company completed an evaluation of the
      carrying value of its goodwill as of January 1, 2003 and determined that
      there was no impact on the Company's consolidated financial statements as
      a result of such evaluation.

      The Company's other intangibles, which principally represents patents,
      patent applications and licenses, have carrying values of $2,472,000 and
      $2,105,000 as of September 30, 2003 and December 31, 2002, respectively,
      and are being amortized over their estimated useful lives ranging from
      five to ten years.

3.    Stock Options

      The Company has adopted the "disclosure only" provisions of SFAS No. 123,
      "Accounting for Stock Based Compensation", as amended by SFAS No. 148,
      "Accounting for Stock-Based Compensation - Transition and Disclosure - an
      amendment of SFAS No. 123", and accordingly, no compensation cost has been
      recognized in the consolidated statements of operations. Pro forma
      information regarding net income and net income per share is required by
      SFAS No. 123, and has been determined as if the Company accounted for its
      stock options under the fair value method of that Statement. For purposes
      of the pro forma disclosures, the estimated fair value of the options is
      amortized on a straight-line basis to expense over the options' vesting
      period.

      The following table shows the estimated effect on earnings and per share
      data as if the Company had applied the fair value recognition provisions
      of SFAS No. 123 to stock-based employee compensation.


                                      -8-
<PAGE>

                        OSTEOTECH, INC. AND SUBSIDIARIES
              Notes To Condensed Consolidated Financial Statements
                                   (unaudited)

3.     Stock Options (continued)

<TABLE>
<CAPTION>
                                                               Three Months Ended             Nine Months Ended
                                                                  September 30,                  September 30,
                                                            ------------------------------------------------------
                                                               2003          2002            2003          2002
      (in thousands, except per share data)                 (Restated)    (Restated)      (Restated)    (Restated)
      ------------------------------------------------------------------------------------------------------------
<S>                                                         <C>            <C>            <C>            <C>
      Net income
       As reported:
         Income from continuing operations                  $     564      $   1,027      $   4,487      $   1,795
         Discontinued operations                                                                                93
                                                            ------------------------------------------------------
         Net income                                         $     564      $   1,027      $   4,487      $   1,888
                                                            ======================================================
       Impact on income from continuing
              operations and net income related
              to stock-based employee compensation
              expense, net of tax                           $     273      $      82      $     678      $     218
                                                            ======================================================
       Pro forma:
         Income from continuing operations                  $     291      $     945      $   3,809      $   1,577
         Discontinued operations                                                                                93
                                                            ------------------------------------------------------
         Net income                                         $     291      $     945      $   3,809      $   1,670
                                                            ======================================================

      Net income per share
       As reported
        Basic:
         Income from continuing operations                  $     .03      $     .06      $     .26      $     .11
         Discontinued operations                                                                               .01
                                                            ------------------------------------------------------
         Net income                                         $     .03      $     .06      $     .26      $     .12
                                                            ======================================================
        Diluted:
         Income from continuing operations                  $     .03      $     .06      $     .25      $     .11
         Discontinued operations                                                                               .01
                                                            ------------------------------------------------------
         Net income                                         $     .03      $     .06      $     .25      $     .12
                                                            ======================================================

       Pro forma
        Basic:
         Income from continuing operations                  $     .02      $     .06      $     .22      $     .10
         Discontinued operations                                                                               .01
                                                            ------------------------------------------------------
         Net income                                         $     .02      $     .06      $     .22      $     .11
                                                            ======================================================
        Diluted:
         Income from continuing operations                  $     .02      $     .05      $     .22      $     .10
         Discontinued operations                                                                               .01
                                                            ------------------------------------------------------
         Net income                                         $     .02      $     .05      $     .22      $     .11
==================================================================================================================
</TABLE>


                                      -9-
<PAGE>

                        OSTEOTECH, INC. AND SUBSIDIARIES
              Notes To Condensed Consolidated Financial Statements
                                   (unaudited)

4.    Continuing Operations - Gains/Charges

      Reduction in Workforce

      On September 24, 2003, the Company implemented a selective reduction in
      its workforce, which affected all domestic operational areas of the
      Company, except for the sales force, and resulted in the elimination of 22
      positions. As a consequence, the Company recorded a pre-tax charge of
      $379,000 for the severance costs in the third quarter of 2003.

      Provisions for Excess, Obsolescence and Rework

      In third quarter 2002, the Company recorded pre-tax charges to costs of
      service and products totaling $4,079,000 related to reserves for excess
      and obsolete metal spinal implant systems inventories of $2,145,000,
      excess and obsolete inventories for the Company's bio-d(R) Threaded
      Cortical Bone Dowel of $1,094,000, which the Company removed from the
      market in January, 2003 in connection with the settlement of a patent
      lawsuit, and an $840,000 charge for the estimated cost to rework tissue
      placed in quarantine in the third quarter of 2002.

      Income Tax Benefit

      In 1997, the Company recorded liabilities of $2,557,000 relating to
      certain tax items which were deducted in that year. In September, 2002,
      the Company determined the liabilities were no longer required, and
      therefore, recognized an income tax benefit related to releasing such
      liabilities.

      Sale of Patents

      In June, 1997, the Company entered into an exclusive worldwide License and
      Option Agreement for its proprietary PolyActive(TM) polymer biomaterials
      technology and patents (collectively, the "PolyActive technology") with
      IsoTis BV ("IsoTis"), The Netherlands. On April 8, 2002, the Company
      amended the License and Option Agreement to reset the option price for
      IsoTis to acquire the PolyActive technology to $1,000,000. In conjunction
      with the execution of the amendment, IsoTis elected to exercise its option
      to acquire the PolyActive technology. The Company recognized a pretax gain
      of $950,000 upon closing this transaction in the second quarter of 2002.

      Medtronic Settlement

      In July, 1999, Medtronic Sofamor Danek, Inc., Sofamor Danek L.P. and
      Sofamor Danek Holdings, Inc. (collectively, "Medtronic") sued the Company
      alleging that certain instruments and instrument sets relating to cortical
      bone dowel products, including the bio-d(R)Threaded Cortical Bone Dowel
      and Endodowel, manufactured, sold and/or otherwise distributed by the
      Company infringe on certain claims of patents owned by Medtronic.

      In April, 2002, Medtronic and the Company settled this lawsuit. The
      Company agreed to pay an aggregate of $1,900,000 to Medtronic in 24 equal
      monthly installments, without interest, and supported by an irrevocable
      standby letter of credit. (See Note 8 - "Debt and Financing
      Arrangements"). In accordance with the settlement, the Company ceased the
      processing, marketing, distributing, advertising and promoting of the
      bio-d(R) Threaded Cortical Bone Dowel on January 31, 2003.


                                      -10-
<PAGE>

                        OSTEOTECH, INC. AND SUBSIDIARIES
              Notes To Condensed Consolidated Financial Statements
                                   (unaudited)

4.    Continuing Operations - Gains/Charges (continued)

      The Company recorded a charge of $1,785,000 in the second quarter of 2002
      representing the present value of the amounts due to Medtronic under this
      settlement. This charge is reflected as a litigation settlement charge in
      the consolidated statements of operations.

5.    Discontinued Operations

      Effective June 30, 2002, the Company sold the business and substantially
      all of the assets, including the assumption of certain liabilities, of its
      operations located in Leiden, The Netherlands for $1,000,000 in cash and a
      non-interest bearing note with a face value of $1,500,000, which the
      Company discounted based on the acquirer's incremental borrowing rate of
      5.75%. The note is payable in increasing amounts on a quarterly basis
      beginning in March, 2003 through December, 2006. The Company has received
      the first two scheduled payments due under the note. The Company has
      retained a security interest in all assets transferred to the acquirer and
      received a second mortgage on the land and building the acquirer will
      occupy to collateralize the note. For matters arising subsequent to the
      date of closing, July 10, 2002, the Company has no on-going financial or
      operational responsibilities with respect to the acquirer.

      These operations represented the Company's ceramic and titanium plasma
      spray coating services and products, which were previously reflected in
      the Company's Other segment. The Company recorded a loss of $291,000 on
      the sale of this business in the second quarter of 2002 to reduce the
      carrying value of the assets and liabilities sold to fair value. Revenues
      and net income for these operations were $1,630,000 and $384,000,
      respectively, for the six months ended June 30, 2002. The financial
      results of these operations prior to the sale are reflected in the
      statements of operations as discontinued operations and all prior periods
      have been reclassified to conform to this presentation.

6.    Deferred Processing Costs

      Deferred processing costs consist of the following:

<TABLE>
<CAPTION>
                                                                                September 30,     December 31,
      (in thousands)                                                                2003             2002
      --------------------------------------------------------------------------------------------------------
<S>                                                                               <C>              <C>
      Donor tissue to be processed and distributed
         by the Company                                                           $ 5,529          $ 2,411
      Tissue in process                                                             6,537            5,043
      Processed implantable donor tissue to be distributed
         by the Company                                                            12,354            6,234
      Processed implantable donor tissue held for clients                           1,867            1,745
      --------------------------------------------------------------------------------------------------------
                                                                                  $26,287          $15,433
      ========================================================================================================
</TABLE>


                                      -11-
<PAGE>

                        OSTEOTECH, INC. AND SUBSIDIARIES
              Notes To Condensed Consolidated Financial Statements
                                   (unaudited)

7.    Inventories

      Inventories consist of the following:

                                                  September 30,     December 31,
      (in thousands)                                  2003              2002
      --------------------------------------------------------------------------
      Supplies                                       $  296            $  223
      Raw materials                                     771               678
      Finished goods                                  3,326             3,919
      --------------------------------------------------------------------------
                                                     $4,393            $4,820
      ==========================================================================

8.    Debt and Financing Arrangements

      In June, 2002, the Company obtained an automatically declining irrevocable
      standby letter of credit to support the $1,900,000 ($554,000 as of
      September 30, 2003) due to Medtronic Sofamor Danek, Inc. pursuant to the
      settlement agreement. The commitment under the standby letter of credit
      was $1,900,000, but such commitment decreases over time based on a
      predetermined schedule concurrent with the Company's monthly payments
      under the settlement. As of September 30, 2003, the standby letter of
      credit has been reduced to $676,000. The amount committed under the
      standby letter of credit reduces the Company's availability under its
      $5,000,000 revolving line of credit. As of September 30, 2003, no amounts
      were outstanding under the revolving line of credit and $4,324,000 was
      available.

9.    Commitments and Contingencies

      Litigation

      The following is a description of material developments that occurred in
      lawsuits reported in the Company's Annual Report on Form 10-K for the year
      ended December 31, 2002 and the Company's Quarterly Reports on Form 10-Q
      for the quarters ended March 31, 2003 and June 30, 2003. Additionally, the
      Company is party to other litigation incidental to its business, none of
      which, individually or in the aggregate, are expected to have a material
      adverse effect on the Company.

      GenSci Regeneration Laboratories, Inc. v. Osteotech, Inc.; Osteotech, Inc.
      v. GenSci Regeneration Sciences, Inc.

      In January, 1998, the Company filed a patent infringement action against
      GenSci Regeneration Laboratories, Inc. ("GenSci Labs") and GenSci
      Regeneration Sciences, Inc. ("GenSci Sciences", collectively, "GenSci")
      alleging that GenSci violated claims of one of the patents involving the
      Company's Grafton(R) Demineralized Bone Matrix (DBM) process. In December
      2001, as a result of a trial commenced in the United States District Court
      for the Central District of California, the Company was awarded damages in
      the amount of $17,533,634 for GenSci's infringement of its patents. This
      damage award will be reduced by the $3.0 million previously paid by DePuy
      in 1999 and 2000 in settlement of the Company's claims against DePuy in
      this lawsuit. The Company has not recognized any portion of the net award
      of $14,533,634 in its financial statements. On December 21, 2001, GenSci
      filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy
      Code.


                                      -12-
<PAGE>

                        OSTEOTECH, INC. AND SUBSIDIARIES
              Notes To Condensed Consolidated Financial Statements
                                   (unaudited)

9.    Commitments and Contingencies (continued)

      On May 30, 2003, the Company entered into a definitive agreement to settle
      its claims with GenSci arising out of the patent lawsuit. The settlement
      is for an aggregate of $7.5 million. In August, 2003, the parties amended
      the definitive settlement agreement to adjust the payment terms of the
      settlement. Pursuant to the amended agreement, the Company will receive
      $2.5 million from GenSci upon its exit from bankruptcy and GenSci's merger
      with IsoTis B.V. ("IsoTis") and the balance of $5.0 million in 20 equal
      payments of $250,000 plus interest at the federal judgment rate as
      measured at the end of each quarter to a maximum of 3% per annum. To
      secure the future amounts to be paid to the Company, GenSci will provide
      an irrevocable letter of credit in the amount of $5.0 million. On October
      14, 2003, the Bankruptcy Court signed an Order confirming GenSci's Plan of
      Reorganization at which time GenSci emerged from bankruptcy. GenSci's
      merger with IsoTis was consummated on October 27, 2003. On October 29,
      2003 the Company received the initial payment of $2.5 million, a
      Promissory Note in the amount of $5.0 million and the $5.0 million letter
      of credit collateralizing the Promissory Note. As a result, the Company
      will recognize pre-tax income of $7.5 million in the fourth quarter of
      2003.

      The settlement also provides that the Company covenants not to sue GenSci
      for infringing any of the Company's existing patents with respect to
      GenSci's products currently marketed under the names Accell(TM),
      DynaGraft(R) II and OrthoBlast(TM) II, as long as GenSci does not change
      the formulation and composition of such products. Additionally, the
      parties have agreed to dismiss all other litigation that is currently
      pending between them.

      GenSci Orthobiologics, Inc. v. Osteotech, Inc.

      On March 6, 2000, GenSci Orthobiologics, Inc. ("GenSci") filed a complaint
      in the United States District Court for the Central District of California
      against the Company, alleging unlawful monopolization and an attempt to
      monopolize the market for demineralized bone matrix ("DBM") and for
      entering into agreements in restraint of trade in violation of Sections 1
      and 2 of the Sherman Antitrust Act and Section 3 of the Clayton Act; and
      for unlawful and unfair business practices in violation of Section 17200
      of the California Unfair Competition Law. On December 20, 2001, GenSci
      filed a bankruptcy petition with the United States Bankruptcy Court for
      the Central District of California. GenSci did not seek relief from the
      automatic stay to pursue this action. On May 30, 2003, the Company and
      GenSci executed a Joint Settlement Agreement that, inter alia, requires
      the dismissal of this action with prejudice within ten days after the
      Bankruptcy Court's approval of GenSci's Plan of Reorganization. The
      Bankruptcy Court signed an Order on October 14, 2003 confirming GenSci's
      Plan of Reorganization. The Consent Judgment and Stipulation of Dismissal
      were filed with the Court on November 5, 2003, but have not yet been
      signed by the Court.


                                      -13-
<PAGE>

                        OSTEOTECH, INC. AND SUBSIDIARIES
              Notes To Condensed Consolidated Financial Statements
                                   (unaudited)

9.    Commitments and Contingencies (continued)

      "O" Company, Inc. v. Osteotech, Inc.,

      In July, 1998, a complaint was filed against the Company in the Second
      Judicial District Court, Bernallilo County, New Mexico, which alleges
      negligence, strict liability, breach of warranties, negligent,
      misrepresentation, fraud, and violation of the New Mexico Unfair Trade
      Practices Act arising from allegedly defective dental implant coating and
      coating services provided to plaintiffs by the Company's subsidiary,
      Osteotech Implants BV, formerly known as CAM Implants BV. In August, 1998,
      the Company removed this action to the United States District Court for
      the District of New Mexico and filed and served its answer, denying any
      and all liability in this action and moved to dismiss five of the seven
      claims alleged against it. The Company successfully moved to dismiss
      plaintiffs' claims for negligence and strict liability. Remaining are
      claims for breach of warranties, negligent misrepresentation, fraud, and
      violation of the New Mexico Unfair Trade Practices Act. Plaintiffs are
      seeking monetary damages in an amount to be determined at trial. On
      February 13, 2003, the Company filed a motion for summary judgment on the
      basis that plaintiffs sued the wrong party. On September 17, 2003, the
      court issued a memorandum opinion and order denying Osteotech's motion for
      summary judgment. On October 8, 2003, a Rule 16 Settlement Conference was
      conducted and the parties reached a tentative settlement agreement, which
      does not obligate the Company to pay monetary damages to the plaintiffs,
      but assigns certain of the Company's rights under its insurance policies
      to the plaintiffs. The parties are now in the process of negotiating and
      preparing mutually acceptable definitive agreements. On October 10, 2003,
      the Court issued an order staying all proceedings in the action and
      vacating case management deadlines. In the event the parties are unable to
      consummate a settlement within thirty days from October 8, 2003, and no
      further extension is granted, the Court will lift the stay of proceedings
      and the parties will return to active litigation. On November 10, 2003,
      the parties filed a motion for an extension to continue negotiations on
      the settlement documents. If the stay is lifted, further discovery on
      matters relating to the merits of plaintiffs' claims and the scope of
      plaintiffs' alleged damages would continue.

      Regner v. Inland Eye & Tissue Bank of Redlands; Thacker v. Inland Eye &
      Tissue Bank of Redlands; Savitt v. Doheny Eye and Tissue Bank; Sorrels,
      Decker and Blake v. Inland Eye & Tissue Bank, et al.

      The Company is a defendant with other defendants in several actions
      pending in the Superior Court for the State of California, Los Angeles
      County. The Regner case sought class action status and initially alleged
      causes of action based on a violation of the California Business and
      Professional Code Section 17200, as well as a number of common law causes
      of action, including negligence, deceit, and intentional and negligent
      infliction of emotional distress. Through dismissals, either by the Court
      or voluntarily by plaintiffs, only the California Business and
      Professional Code claims, which are based on the allegation that
      defendants are engaging in the activity of buying or selling organs or
      tissue for valuable consideration or profit, and certain negligence claims
      remain with respect to the actions. In addition, the plaintiffs through
      the Regner case sought class action status and injunctive relief and
      "restitution" with respect to their California Business and Professional
      Code claims. To the extent any of the other causes of action lie against
      the Company, plaintiffs are seeking damages in an unspecified amount.


                                      -14-
<PAGE>

                        OSTEOTECH, INC. AND SUBSIDIARIES
              Notes To Condensed Consolidated Financial Statements
                                   (unaudited)

9.    Commitments and Contingencies (continued)

      In September, 2003, a settlement was entered into by the parties in the
      Savitt case, and plaintiffs subsequently dismissed this lawsuit with
      prejudice. Also in September, 2003, a global settlement was negotiated in
      the Regner, Thacker and Sorrels cases. The settlements in the Savitt,
      Regner, Thacker and Sorrels cases had no impact on the Company's financial
      position or results of operations. Settlement documents have been
      finalized, and on November 6, 2003 the Court issued an order dismissing
      the cases, with prejudice.

      Alphatec Manufacturing v. Osteotech, Inc.

      Alphatec Manufacturing, Inc., the manufacturer of the Affirm(TM) Anterior
      Cervical Plate System ("Affirm(TM)"), filed an action on July 3, 2002
      against the Company in the United States District Court for the Southern
      District of California. The complaint sets forth causes of action for
      recovery of contractual penalty, breach of contract, fraud and trade libel
      arising out of a distribution agreement between the parties. Alphatec is
      seeking $1.4 million plus interest on the contractual penalty claim,
      $600,000 on the fraud claim and additional unspecified compensatory
      damages.

      On August 3, 2003, the Company answered the complaint and asserted
      counterclaims setting forth causes of action for breach of contract,
      breach of implied covenant of good faith and fair dealing, fraudulent
      misrepresentation, fraudulent concealment, unjust enrichment, unfair
      competition, cancellation or rescission of the contract and
      indemnification. The Company is seeking compensatory and punitive damages
      in an amount to be determined at trial as well as reasonable attorney's
      fees. Discovery has not yet commenced.

      The Company believes that Alphatec's claims are without merit and intends
      to vigorously defend against such claims. In the fourth quarter of 2002,
      the Company recorded a provision of approximately $2.5 million, which
      includes an estimate of the penalty that would be due for the expected
      shortfall in the second year purchase commitment and an amount to fully
      reserve all implant inventory and instrumentation associated with
      Affirm(TM).

      Litigation is subject to many uncertainties and management is unable to
      predict the outcome of the pending suits and claims. It is possible that
      the results of operations or liquidity and capital resources of the
      Company could be adversely affected by the ultimate outcome of the pending
      litigation or as a result of the costs of contesting such lawsuits. The
      Company is currently unable to estimate the ultimate liability, if any,
      that may result from the pending litigation and, accordingly, no material
      provision for any liability (except for accrued legal costs for services
      previously rendered) has been made for such pending litigation in the
      consolidated financial statements. When the Company is reasonably able to
      determine the probable minimum or ultimate liability, if any, that may
      result from any of the pending litigation, the Company will record a
      provision for such liability to the extent not covered by insurance.


                                      -15-
<PAGE>

                        OSTEOTECH, INC. AND SUBSIDIARIES
              Notes To Condensed Consolidated Financial Statements
                                   (unaudited)

10.   Comprehensive Income

      Comprehensive income for the three months and nine months ended September
      30, 2003 and 2002 were as follows:

<TABLE>
<CAPTION>
                                                                 Three Months Ended         Nine Months Ended
                                                                   September 30,               September 30,
                                                             ---------------------------------------------------
                                                                2003          2002          2003         2002
      (in thousands)                                         (Restated)    (Restated)    (Restated)   (Restated)
      ----------------------------------------------------------------------------------------------------------
<S>                                                            <C>           <C>           <C>          <C>
      Net income                                               $   564       $ 1,027       $ 4,487      $ 1,888

      Currency translation adjustments                            (169)          (35)          188          422
      ----------------------------------------------------------------------------------------------------------

      Comprehensive income                                     $   395       $   992       $ 4,675      $ 2,310
      ==========================================================================================================
</TABLE>

11.   Stockholders' Equity - Common Stock

      In May, 2002, the Company completed the sale of 2.8 million shares of its
      common stock representing approximately 19.8% of the then outstanding
      shares of common stock at $6.25 per share to a small group of investors in
      a private placement transaction. The resale of these shares was registered
      with the Securities and Exchange Commission in May, 2002. The Company
      recognized net proceeds of $15,756,000 after deducting the fees and
      expenses of the transaction.

12.   Foreign Net Operating Loss Carryforwards

      In the second quarter of 2002, the Company utilized approximately
      $2,000,000 of its historical net operating loss carryforwards relating to
      its subsidiary in The Netherlands. Such net operating loss carryforwards
      were utilized against the Company's tax gain on the foreign portion of the
      gain on the sale of the PolyActive(TM) polymer biomaterial technology and
      patents, the tax gain on the sale of the Company's operations in The
      Netherlands and earnings from operations in 2002. Utilization of these net
      operating loss carryforwards, which were recorded subject to a full
      valuation allowance in prior periods, resulted in a reduction of
      approximately $680,000 to income tax otherwise payable in The Netherlands,
      of which approximately $460,000 is related to discontinued operations.


                                      -16-
<PAGE>

                        OSTEOTECH, INC. AND SUBSIDIARIES
              Notes To Condensed Consolidated Financial Statements
                                   (unaudited)

13.   Earnings Per Share

      The following table sets forth the computation of basic and diluted
      earnings per share for the three months and nine months ended September
      30, 2003 and 2002:

<TABLE>
<CAPTION>
                                                               Three Months Ended                 Nine Months Ended
                                                                  September 30,                      September 30,
                                                        ------------------------------------------------------------------
                                                            2003                2002             2003             2002
      (dollars in thousands except per share data)       (Restated)          (Restated)       (Restated)       (Restated)
      --------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                 <C>              <C>              <C>
      Income from continuing operations                 $        564        $      1,027     $      4,487     $      1,795

      Discontinued operations                                                                                           93
                                                        ------------------------------------------------------------------
      Net income available to
       common shareholders                              $        564        $      1,027     $      4,487     $      1,888
                                                        ==================================================================

      --------------------------------------------------------------------------------------------------------------------
      Denominator for basic earnings
       per share, weighted average common
       shares outstanding                                 17,093,937          16,916,152       17,049,605       15,542,076
      Effect of dilutive securities, stock options           864,158             441,867          654,535          403,086
                                                        ------------------------------------------------------------------
      Denominator for diluted earnings
       per share                                          17,958,095          17,358,019       17,704,140       15,945,162
                                                        ==================================================================

      --------------------------------------------------------------------------------------------------------------------
      Basic earnings per share:
       Income from continuing operations                $        .03        $        .06     $        .26     $        .11
       Discontinued operations                                                                                         .01
                                                        ------------------------------------------------------------------
       Net income                                       $        .03        $        .06     $        .26     $        .12
                                                        ==================================================================

      --------------------------------------------------------------------------------------------------------------------
      Diluted earnings per share:
       Income from continuing operations                $        .03        $        .06     $        .25     $        .11
       Discontinued operations                                                                                         .01
                                                        ------------------------------------------------------------------
       Net income                                       $        .03        $        .06     $        .25     $        .12
                                                        ==================================================================

      --------------------------------------------------------------------------------------------------------------------
</TABLE>

      Weighted average shares issuable upon the exercise of stock options which
      were not included in the calculation of diluted earnings per share were
      418,850 and 478,300, and 1,144,288 and 1,846,580 for the three months and
      nine months ended September 30, 2003 and 2002, respectively. Such shares
      were not included because they were antidilutive.


                                      -17-
<PAGE>

                        OSTEOTECH, INC. AND SUBSIDIARIES
              Notes To Condensed Consolidated Financial Statements
                                   (unaudited)

14.   Operating Segments

      Summarized in the table below is financial information for our reportable
      segments for the three months and nine months ended September 30, 2003 and
      2002 after giving effect to the divestiture of the Company's operations in
      The Netherlands in 2002:

<TABLE>
<CAPTION>
                                                                     Three Months Ended           Nine Months Ended
                                                                       September 30,                September 30,
                                                                  -----------------------------------------------------
                                                                    2003           2002           2003           2002
      (dollars in thousands)                                     (Restated)     (Restated)     (Restated)     (Restated)
      ------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>            <C>            <C>            <C>
      Revenues:
        Demineralized Bone Matrix Segment                         $ 11,534       $ 10,917       $ 35,166       $ 34,558
        Base Tissue Segment                                          9,675          7,273         30,587         25,320
        Other, principally metal spinal implants                     1,926          1,501          4,653          4,907
      ------------------------------------------------------------------------------------------------------------------
        Consolidated                                              $ 23,135       $ 19,691       $ 70,406       $ 64,785
      ==================================================================================================================
       Operating income (loss):
         Demineralized Bone Matrix Segment                        $  2,761       $  3,647       $ 10,418       $  8,240
         Base Tissue Segment                                          (216)        (2,881)         1,666         (5,413)
         Other, principally metal spinal implants                   (1,442)        (3,042)        (3,952)        (4,342)
      ------------------------------------------------------------------------------------------------------------------
         Consolidated                                             $  1,103       $ (2,276)      $  8,132       $ (1,515)
      ==================================================================================================================
</TABLE>

      During the three months ended September 30, 2003, two of our clients,
      Musculoskeletal Transplant Foundation ("MTF") and the American Red Cross
      Tissue Services ("ARC"), from whom we receive revenues in the
      Demineralized Bone Matrix and Base Tissue Segments, each accounted for 24%
      and 25%, respectively, of consolidated net revenues and accounted for 29%
      and 26%, respectively, of consolidated net revenues for the three months
      ended September 30, 2002. For the nine months ended September 30, 2003,
      these same two clients accounted for 25% and 26%, respectively, of
      consolidated net revenues, and 30% and 30%, respectively, of consolidated
      net revenues for the nine months ended September 30, 2002.

15.   Reclassifications

      Certain prior year amounts have been reclassified to conform to the 2003
      presentation.


                                      -18-
<PAGE>

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

Information contained herein contains "forward-looking statements" which can be
identified by the use of forward-looking terminology such as "believes",
"expects", "may", "will", "should", or "anticipates" or the negative thereof or
variations thereon or comparable terminology, or by discussions of strategy. No
assurance can be given that the future results covered by the forward-looking
statements will be achieved. Some of the matters set forth in the "Risk Factors"
section of our Annual Report on Form 10-K for the year ended December 31, 2002
constitute cautionary statements identifying factors with respect to such
forward-looking statements, including certain risks and uncertainties, that
could cause actual results to vary materially from the future results indicated
in such forward-looking statements. Other factors could also cause actual
results to vary materially from the future results indicated in such
forward-looking statements.

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

Management's Discussion and Analysis of Financial Condition and Results of
Operations for the three and nine months ended September 30, 2003 and 2002
presented below has been revised to reflect the restatement of the Company's
previously reported financial statements as discussed in Note 1 of "Notes to
Condensed Consolidated Financial Statements".

Results of Operations

Critical Accounting Policies and Estimates

Critical accounting policies are those that involve subjective or complex
judgments, often as a result of the need to make estimates. The following areas
all require the use of judgments and estimates: product returns, bad debts,
inventories including purchase commitments, deferred processing costs including
rework reserves, property, plant and equipment, intangible assets, current and
deferred income taxes, contingencies and litigation. Estimates in each of these
areas are based on historical experience and various assumptions that we believe
are appropriate. Actual results may differ from these estimates. Our accounting
practices are discussed in more detail in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 2 of "Notes to
Consolidated Financial Statements" in our Annual Report on Form 10-K for the
year ended December 31, 2002.

Income from Continuing Operations

Consolidated income from continuing operations was $564,000 or $.03 diluted
earnings per share and $4,487,000 or $.26 diluted earnings per share for the
three and nine months ended September 30, 2003, respectively, compared to
consolidated income from continuing operations of $1,027,000 or $.06 diluted
earnings per share and $1,795,000 or $.11 diluted earning per share in the
respective corresponding periods in 2002. Both the three and nine months ended
September 30, 2003 include an after tax charge of $227,000 related to a
reduction in workforce implemented on September 24, 2003. The three months ended
September 30, 2002 included an after tax charge of $2,447,000 related to
provisions for excess and obsolete metal spinal implant systems and bio-d(R)
Threaded Cortical Bone Dowels, and for the rework of tissue placed in quarantine
in third quarter 2002, offset by the recognition of an income tax benefit of
$2,557,000 related to releasing income tax liabilities which were no longer
required. In addition to the items mentioned directly above, the nine months
ended September 30, 2002 included an after tax provision of $1,071,000
associated with the Medtronic litigation settlement and an after tax gain of
$830,000 related to the sale of the PolyActive(TM) polymer biomaterial
technology and patents to IsoTis BV.


                                      -19-
<PAGE>

The decline in income from continuing operations in the three months ended
September 30, 2003 from the same period in 2002 is primarily due to the
severance charges related to the reduction in workforce and increased commission
costs associated with programs aimed at stabilizing the domestic Grafton(R) DBM
business. The improvement in income from continuing operations in the nine
months ended September 30, 2003 compared to the corresponding period in 2002 is
due to a combination of increased revenues, improved gross margins, continued
cost containment and the impact in 2002 of the charges and income tax benefit
mentioned above.

Discontinued Operations

On July 10, 2002, we completed the sale of the business and substantially all of
the assets, including the assumption of certain liabilities, of our operations
in Leiden, The Netherlands for $1,000,000 in cash and a non-interest bearing
note with a face value of $1,500,000. These operations represented our ceramic
and titanium plasma spray coating services and products. We recognized a loss on
the sale of this business of $291,000 in the second quarter of 2002. Revenues
and net income from these operations were $1,630,000 and $384,000, respectively,
in the nine months ended September 30, 2002.

Net Income

Consolidated net income in the third quarter of 2003 was $564,000 or $.03
diluted net income per share compared to consolidated net income of $1,027,000
or $.06 diluted net income per share in the third quarter of 2002. Consolidated
net income for the nine months ended September 30, 2003 was $4,487,000 or $.25
diluted net income per share compared to consolidated net income of $1,888,000
or $.12 diluted net income per share for the nine months ended September 30,
2002.

The following is a discussion of factors affecting results of continuing
operations for the three months and nine months ended September 30, 2003 and
2002, after giving effect to the divestiture of the operations of our subsidiary
in The Netherlands in 2002.

Net Revenues

Consolidated net revenues increased 17% to $23,135,000 in the third quarter of
2003 compared to consolidated net revenues of $19,691,000 in the corresponding
period in 2002. Domestic net revenues increased 14% to $21,134,000 in the third
quarter of 2003 from third quarter 2002 domestic net revenues of $18,489,000.
The increase in domestic revenues was due primarily to increased base tissue
processing fees as a result of a 112% increase in donors processed, shipments of
the Optium(TM) DBM carrier product, a 64% increase in metal spinal implant
revenues and the impact of our 2003 price increases; partially offset by a 6%
decline in domestic Grafton(R) DBM revenue principally as a result of a decline
in unit sales volume. Foreign-based revenues increased 66% to $2,001,000 in the
third quarter of 2003 from $1,202,000 in the same period in 2002. The increase
in foreign-based revenues was primarily a result of increased unit sales volume
in Grafton(R) DBM and OsteoPure(TM)Allogeneic Cancellous Tissue, increased base
tissue processing fees and 2003 price increases; partially offset by a decline
in bovine tissue unit sales volume.

Consolidated net revenues increased 9% to $70,406,000 for the nine months ended
September 30, 2003 compared to consolidated revenues of $64,785,000 in the
corresponding period in 2002. Domestic net revenues increased 5% in the nine
months ended September 30, 2003 to $64,317,000 from $61,212,000 in the
corresponding period in 2002. The increase in domestic revenues was due
primarily to increased base tissue processing fees as a result of a 33% increase
in donors processed, including the release of a portion of the donors that were
subject to our 2002 tissue quarantine, increased bio-implant units shipped,
shipments of the Optium(TM) DBM carrier product, increased sales of metal spinal
implants and the impact of our 2003


                                      -20-
<PAGE>

price increases; partially offset by a decline in unit sales volume in
Grafton(R) DBM. Foreign-based revenues increased 70% to $6,089,000 for the nine
months ended September 30, 2003 from $3,573,000 for the nine months ended
September 30, 2002. The increase in foreign-based revenues was primarily a
result of increased unit sales volume in Grafton(R) DBM and OsteoPure(TM)
Allogeneic Cancellous Tissue, increased base tissue processing fees and 2003
price increases; partially offset by a decline in bovine tissue unit sales
volume.

Demineralized Bone Matrix ("DBM") Segment (formerly the Grafton(R) DBM Segment),
or DBM Segment, revenues increased 6% to $11,534,000 in the third quarter of
2003 from revenues of $10,917,000 in the corresponding period in 2002. DBM
Segment revenues of $35,166,000 for the nine months ended September 30, 2003
increased 2% from DBM Segment revenues of $34,558,000 for the nine months ended
September 30, 2002. Domestic DBM Segment revenues were relatively flat in third
quarter 2003 at $10,335,000 compared to revenues of $10,343,000 in third quarter
2002 primarily due to a 6% decline in Grafton(R) DBM revenues as a result of a
decline in unit sales volume, offset by shipments of the Optium(TM) DBM carrier
product and the effects of the 2003 price increases. Domestic Grafton(R) DBM
revenues decreased 4% to $31,609,000 for the nine months ended September 30,
2003 from $33,003,000 for the corresponding period in the prior year. The
decrease resulted primarily from a decline in Grafton(R) DBM unit sales volume
due to continuing strong competition resulting in a 9% decline in domestic
Grafton(R) DBM revenues in the nine months ended September 30, 2003, partially
offset by shipments of the Optium(TM) DBM carrier product and the effects of the
2003 price increases. To address the continued decline in domestic Grafton(R)
DBM unit volume and revenues, in third quarter 2003, we have provided additional
commission incentives to our sales force and have initiated sales and marketing
programs, which include aggressively priced contracts for fixed contractual
periods with Osteotech branded Grafton Plus(TM) DBM Paste for competitive
accounts. Foreign-based Grafton(R) DBM revenues increased 109% to $1,199,000 in
the third quarter of 2003 from revenues of $573,000 in the corresponding period
in the prior year and increased 129% to $3,557,000 for the nine months ended
September 30, 2003 from $1,554,000 for the nine months ended September 30, 2002.
These increases were primarily the result of increased unit sales volume and the
effects of the 2003 price increases.

Base Allograft Tissue Segment, or Base Tissue Segment, revenues increased 33% to
$9,675,000 in the third quarter of 2003 from $7,273,000 in the corresponding
period in 2002. The increase is principally the result of a 106% increase in
base tissue processing fees as a result of a 112% increase in the number of
donors processed for our clients, including the release of a portion of the
donors that were subject to our 2002 tissue quarantine, and the direct
distribution of Osteotech labeled base allograft tissue, a 27% increase in
OsteoPure(TM) Allogeneic Cancellous Tissue revenues and the impact of our 2003
price increases. Base Tissue Segment revenues increased 21% to $30,587,000 for
the nine months ended September 30, 2003 from $25,320,000 in the corresponding
period in 2002. The increase is principally the result of a 39% increase in base
tissue processing fees as a result of a 33% increase in the number of donors
processed for our clients, including the release of a portion of the donors that
were subject to our 2002 tissue quarantine, and the direct distribution of
Osteotech labeled base allograft tissue, an 8% increase in bio-implant revenues
as a result of increased unit sales volume, a 78% increase in OsteoPure(TM)
Allogeneic Cancellous Tissue revenues and the impact of our 2003 price
increases. As part of the settlement of a lawsuit in the second quarter of 2002,
we removed our bio-d(R) Threaded Cortical Bone Dowel, or bio-d(R) Dowel, from
the market in January, 2003. Revenues for the bio-d(R) Dowel were $192,000 in
the third quarter of 2002, and $40,000 and $1,189,000 for the nine months ended
September 30, 2003 and 2002, respectively. Base tissue processing revenues in
third quarter 2002 were negatively impacted by the effects of the temporary
suspension of Base Tissue Segment processing from which the Company placed
tissue processed in third quarter 2002 from 693 donors in quarantine.


                                      -21-
<PAGE>

Revenue from other product lines increased 28% in the third quarter of 2003 to
$1,926,000 from $1,501,000 in the same period in 2002 and declined 5% for the
nine months ended September 30, 2003 to $4,653,000 from $4,907,000 in the
corresponding period in 2002. Metal spinal implant system revenues increased 64%
in the third quarter of 2003 and 5% for the nine months ended September 30, 2003
compared to the corresponding periods in 2002, principally as a result of sales
from three product lines manufactured by SpineVision, partially offset by a
decline in revenues associated with the suspension of the sale and distribution
of the Affirm(TM) Anterior Cervical Plate System in October, 2002 due to a
higher than normal level of complaints. Revenues from the Affirm(TM) Anterior
Cervical Plating System were $404,000 and $1,133,000 for the three and nine
months ended September 30, 2002, respectively. Bovine tissue product revenues
declined 44% in the three months ended September 30, 2003 and 29% for the nine
months ended September 30, 2003 compared to the corresponding periods in 2002,
primarily as a result of lower unit sales volume. In February, 2003, we entered
into a three-year distribution agreement with SpineVision SA, which allows us to
distribute SpineVision's C3(TM) Anterior Cervical Plate System, the Plus(TM)
Pivot Link Universal System and the Uni-Thread(TM) Versatile Thoraco-Lumbar
Spinal System in the United States. The initial phase of the agreement is a
Trial Period, as defined in the agreement, which expired in October, 2003. Since
the Uni-Thread(TM) System was not introduced to the market until September,
2003, in October, 2003, the parties agreed to extend the Trial Period until
January 31, 2004 in order to allow for a sufficient period of time to complete
the evaluation of the Uni-Thread(TM) System.

During the three months ended September 30, 2003, two of our clients in the DBM
and Base Tissue Segments, the Musculoskeletal Transplant Foundation, or MTF, and
the American Red Cross, or ARC, each accounted for 24% and 25%, respectively, of
consolidated net revenues. In the three months ended September 30, 2002, MTF and
ARC accounted for 29% and 26%, respectively, of consolidated net revenues. In
the nine months ended September 30, 2003, these same clients accounted for 25%
and 26%, respectively, of consolidated revenues, and accounted for 30% and 30%,
respectively, of consolidated revenues for the nine months ended September 30,
2002. We have processing agreements with each of these clients. The MTF
agreement expires in December, 2008 and the ARC agreement expires in December,
2006.

We market Grafton(R) DBM as a human tissue-based product pursuant to an August,
1995 designation from the Food and Drug Administration, or FDA. In March, 2002,
the FDA informed us that they were changing the regulatory status of Grafton(R)
DBM and will henceforth regulate it as a medical device. We communicated to the
FDA that we believe its initial designation of Grafton(R) DBM as a human
tissue-based product was and still is correct. In this regard, we have provided
information to the FDA that we believe should cause the FDA to reconsider the
position it has expressed in its March, 2002 letter as it relates to Grafton(R)
DBM. On February 26, 2003, we met with representatives of the FDA to present our
facts and views. On October 30, 2003, we received further correspondence from
the FDA indicating that after considering the information we provided them in
the February, 2003 meeting, the FDA still believes that a 510(k) should be
submitted for Grafton(R) DBM. The Company has not submitted a 510(k) and we
continue to disagree with the FDA's opinion and we intend to continue to have a
dialog with the FDA to further present our point of view.

If we are unsuccessful in our effort, we will be required to obtain a medical
device approval or clearance for Grafton(R) DBM, and to comply with medical
device postmarketing obligations. We believe that Grafton(R) DBM will be
eligible for 510(k) clearance, but we cannot be sure that we will not be
required to obtain premarket approval, or that the FDA will issue any clearance
or approval in a timely fashion, or at all.

We also market Grafton Plus(TM) DBM as a human tissue-based product. In its
October 30, 2003 letter, the FDA indicated that its determination regarding
Grafton(R) DBM is also to be applied to Grafton Plus(TM)


                                      -22-
<PAGE>

DBM. If the FDA maintains its position that all products consisting of
demineralized bone with a carrier should be regulated as a medical device, we
would also be required to obtain FDA clearance or approval for Grafton Plus(TM)
DBM and any other DBM carrier product we may process, including the Optium(TM)
DBM carrier product we process for LifeNet(R) and which is marketed by DePuy
Spine and DePuy Orthopaedics, and to comply with other medical device
requirements for those products.

Gross Profit

Consolidated gross profit as a percentage of consolidated net revenues was 52%
in the third quarter of 2003 compared to 36% in the third quarter of 2002.
Consolidated gross profit as a percentage of consolidated net revenues was 57%
for the nine months ended September 30, 2003 compared to 51% for the nine months
ended September 30, 2002. The improvement in gross profit margin in both periods
of 2003 was primarily the result of increased revenues, which generated higher
production levels and greater absorption of the fixed costs associated with
tissue processing. The corresponding periods of 2002 were negatively impacted by
the temporary suspension of Base Tissue Segment processing operations and
provisions for excess and obsolete inventories and the estimated cost to rework
tissue placed in quarantine in third quarter 2002. We expect that consolidated
gross profit margins will decline slightly in future periods primarily as a
result of expected revenue growth in our lower gross profit margin product
lines, which will only be partially offset by revenue growth in our higher gross
profit margin product lines.

Marketing, Selling, General and Administrative Expenses

Consolidated marketing, selling, general and administrative expenses increased
18% in third quarter 2003 to $9,806,000 from $8,309,000 in the corresponding
period in 2002, and declined 3% for the nine months ended September 30, 2003 to
$28,873,000 from $29,849,000 for the nine months ended September 30, 2002. The
increase in marketing, selling, general and administrative expenses in the third
quarter of 2003 as compared to the third quarter of 2002 is primarily due to
increased commission costs associated with higher revenues and programs aimed at
stabilizing the domestic Grafton(R) DBM business, increased selling costs
associated with a shift in our domestic sales force towards more direct sales
representation from agency representation and severance costs associated with
the reduction in workforce. The decreases in marketing, selling, general and
administrative expenses in the nine months ended September 30, 2003 compared to
the corresponding period in 2002 relates mainly to decreased legal fees as a
result of the settlement of a number of our lawsuits in the first half of 2002
and the cessation of our funding of the American Tissue Services Foundation;
partially offset by increased costs for insurance coverage as a result of the
tightening of the insurance markets, increased commission costs associated with
higher revenues and programs aimed at stabilizing the domestic Grafton(R) DBM
business, increased selling costs associated with a shift in our domestic sales
force to direct sales representative from agency representation and severance
costs associated with the reduction in workforce.

Research and Development Expenses

Consolidated research and development expenses increased 9% in the third quarter
of 2003 to $1,095,000 from $1,002,000 in the corresponding period in 2002, and
increased 1% in the nine months ended September 30, 2003 to $3,020,000 from
$2,990,000 in the nine months ended September 30, 2002. The increases primarily
related to spending on certain on-going research and development projects,
including efforts for the continued development of new Grafton(R) DBM and
bio-implant tissue forms and our Plexus(TM) Technology.


                                      -23-
<PAGE>

Litigation Settlement Charge

In April, 2002, we settled a patent lawsuit and agreed to pay an aggregate of
$1,900,000 in 24 equal monthly installments, without interest. We recorded a
charge of $1,785,000 related to this settlement representing the present value
of the amounts due in the second quarter of 2002.

Operating Income

Consolidated operating income increased $3,379,000 to $1,103,000 in the third
quarter of 2003 from an operating loss of $2,276,000 in the third quarter of
2002. Consolidated operating income increased $9,647,000 for the nine months
ended September 30, 2003 to $8,132,000 from an operating loss of $1,515,000 for
the nine months ended September 30, 2002. Included in the nine months ended
September 30, 2002 is the aforementioned litigation settlement charge of
$1,785,000.

DBM Segment operating income declined to $2,761,000 in the three months ended
September 30, 2003 from $3,647,000 in the same period in 2002. The decrease
results principally from a decline in gross profit margins as a result of
increased revenues in international DBM revenues, which generate a significantly
lower gross profit margin than domestic DBM revenues, increased commission costs
associated with programs aimed at stabilizing the domestic Grafton(R) DBM
business and increased selling costs associated with a shift in our domestic
sales force to direct sales representative from agency representation. DBM
Segment operating income increased to $10,418,000 for the nine months ended
September 30, 2003 from $8,240,000 in the corresponding period in 2002. The
improvement in operating income in the nine months ended September 30, 2003
compared to the same period in 2002 is due primarily to lower operating
expenses, principally from a $2,365,000 reduction in legal fees, partially
offset by a decline in gross profit margins.

We incurred an operating loss in the Base Tissue Segment of $216,000 and
$2,881,000 for the three months ended September 30, 2003 and 2002, respectively.
Base Tissue Segment operating income improved $7,079,000 for the nine months
ended September 30, 2003 to $1,666,000 from an operating loss of $5,413,000 for
the nine months ended September 30, 2002. The improvements in both periods
resulted primarily from the increase in revenues and improved gross profit
margins. The 2002 periods were negatively impacted by the temporary suspension
of Base Tissue Segment processing operations, the provisions for excess and
obsolete bio-d(R) Dowels, the estimated cost to rework tissue placed in
quarantine in third quarter 2002 and, in the nine months ended September 20,
2002, by the litigation settlement charge of $1,785,000.

Operating losses associated with other revenues were $1,442,000 and $3,952,000
for the three months and nine months ended September 30, 2003, respectively, and
were $3,042,000 and $4,342,000 for the same respective periods in 2002. The
operating loss is generated primarily from our metal spinal implant product line
due to the costs associated with the infrastructure established to support these
product lines which were not offset by sufficient unit volume, increased costs
associated with marketing, selling and promotional activities and increased
legal fees. The operating losses in 2002 were primarily due to our metal spinal
implant product line resulting from the costs associated with the infrastructure
established to support these product lines which were not offset by sufficient
unit volume and the provisions of $2,145,000, which were recorded for excess and
obsolete metal spinal implant products.


                                      -24-
<PAGE>

Other Income (Expense)

Other income (expense), which primarily represents interest expense, net of
interest income, was $126,000 and $590,000 for the three months and nine months
ended September 30, 2003, respectively, compared to interest expense, net of
interest income, of $162,000 and $782,000 in the corresponding periods in 2002,
respectively.

In May, 2002, we completed the sale of the PolyActive(TM) polymer biomaterial
technology and patents to IsoTis BV for $1,000,000 in cash. We recognized a
$950,000 gain on this transaction after deducting costs and expenses.

Income Tax Provision

The effective income tax rate for the three months and nine months ended
September 30, 2003 was 42% and 41%, respectively, which exceeded the United
States federal statutory rate principally due to domestic state income taxes.

For the three months and nine months ended September 30, 2002, we recognized an
income tax benefit from continuing operations primarily due to losses incurred
in our domestic operation and our ability to utilize previously unrecognized net
operating loss carryforwards, which carried a full valuation allowance, to
offset foreign income and the reversal of liabilities for previously deferred
income tax benefits of $2,557,000 that are no longer required. In addition, we
did not record an income tax provision for discontinued operations due to our
ability to utilize additional foreign net operating loss carryforwards to offset
taxable income.

In the nine month period ended September 30, 2002, we utilized approximately
$2,000,000 (tax effect of approximately $680,000) of our historical net
operating loss carryforwards relating to our subsidiary in The Netherlands.

Liquidity and Capital Resources

At September 30, 2003 we had cash, cash equivalents and short-term investments
of $12,236,000 compared to $13,988,000 at December 31, 2002. We invest excess
cash in U.S. Government-backed securities and investment grade commercial paper
of major U.S. corporations. The decline in cash, cash equivalents and short-term
investments was primarily due to continued investments in deferred processing
costs as we expand our allograft tissue inventories, partially offset by
improvements in operating results and the receipt of a Federal income tax
refund. Working capital increased $7,441,000 to $49,888,000 at September 30,
2003 compared to $42,447,000 at December 31, 2002. The increase in working
capital resulted primarily from an increase in accounts receivables from clients
and customers as a result of the increase in revenues in 2003 as compared to
fourth quarter 2002 and additional investments in deferred processing costs,
partially offset by an increase in accounts payable and accrued expenses.

Net cash provided by operating activities was $1,686,000 and $1,521,000 in the
nine months ended September 30, 2003 and 2002, respectively. The increase
resulted primarily from improved profitability compared to the prior year, an
increase in accounts payable and accrued expenses and the receipt of a Federal
income tax refund; partially offset by an increase in accounts receivables from
clients and customers as a result of the increase in revenues in 2003 as
compared to fourth quarter 2002 and additional investments in deferred
processing costs.


                                      -25-
<PAGE>

Cash provided by investing activities was $2,115,000 for the nine months ended
September 30, 2003 compared to cash used in investing activities of $6,120,000
for the nine months ended September 30, 2002. Cash provided by investing
activities in 2003 was primarily generated from the sale of short-term
investments of $3,948,000, partially offset by capital expenditures of
$1,326,000. Cash used in investing activities in 2002 was principally the result
of capital expenditures of $4,253,000, the purchase of short-term investments of
$3,948,000, partially offset by the proceeds received from the sale of our
subsidiary in The Netherlands and the sale of the PolyActive(TM) polymer
biomaterial technology and patents to IsoTis BV.

Net cash used in financing activities was $1,406,000 for the nine months ended
September 30, 2003 and cash provided by financing activities was $14,239,000 for
the nine months ended September 30, 2002. Net cash used in financing activities
in 2003 was principally the result of payments on long-term debt, partially
offset by proceeds from the sale of common stock associated with employee stock
option exercises and our employee stock purchase plan. Cash provided by
financing activities in 2002 primarily resulted from the sale of 2.8 million
shares of common stock in May, 2002 at a price of $6.25 generating net proceeds
of $15,756,000, sales of common stock associated with employee stock option
exercises and our employee stock purchase plan, partially offset by principal
payments on long-term debt.

We have a Credit Facility with a U.S. bank that includes: a $5,000,000 revolving
line of credit, a building mortgage loan, and an equipment term loan. At
September 30, 2003, there were no borrowings under the revolving line of credit,
$4,040,000 was outstanding under the building mortgage loan and $12,548,000 was
outstanding under the equipment term loan. In support of the amounts due under
the settlement of certain patent litigation, we provided an automatically
declining irrevocable standby letter of credit in an original amount of
$1,900,000. As of September 30, 2003, the standby letter of credit has been
reduced to $676,000. Amounts committed under this standby letter of credit
decrease over time based on a predetermined schedule concurrent with our monthly
payments under the settlement and reduce the amounts available under the
revolving line of credit. As of September 30, 2003, no amounts were outstanding
under the revolving line of credit and $4,324,000 was available.

As of September 30, 2003, there were no material changes in our contractual
obligations or long-term debt from that disclosed in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations,
Liquidity and Capital Resources" in our Annual Report on Form 10-K for the year
ended December 31, 2002.

We believe that our cash and cash equivalents and available lines of credit,
together with anticipated future cash flows from operations, will be sufficient
to meet our forecasted cash needs for the next twelve months. From time to time
we may seek additional funds through equity or debt financing. However, there
can be no assurance that such additional funds will be available, or if
available, that such funds will be available on favorable terms.

Impact of Inflation and Foreign Currency Exchange Fluctuations

Results of operations for the periods discussed above have not been materially
affected by inflation or foreign currency fluctuations.


                                      -26-
<PAGE>

Litigation

Osteotech, Inc. is involved in various legal proceedings. For a discussion of
these matters see, Note 9 of "Notes to Condensed Consolidated Financial
Statements" included elsewhere herein and PART II. ITEM 1. LEGAL PROCEEDINGS,
and our Annual Report on Form 10-K for the year ended December 31, 2002. It is
possible that our results of operations or liquidity and capital resources could
be adversely affected by the ultimate outcome of pending litigation or as a
result of the costs of contesting such lawsuits.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For information regarding our exposure to certain market risks, see Item 7A,
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, in our Annual Report
on Form 10-K for the year ended December 31, 2002. There have been no
significant changes in our market risk exposures from the fiscal 2002 year-end.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a - 15(e) under the Exchange Act) as of
September 30, 2003 (the "Evaluation Date"). Based upon that evaluation, and
taking into consideration of the additional procedures discussed below, the
Chief Executive Officer and Chief Financial Officer concluded that as of the
Evaluation Date our disclosure controls and procedures were effective in timely
alerting them to the material information relating to us (or our consolidated
subsidiaries) required to be included in our periodic SEC filings.

Changes in Internal Controls

There were no significant changes made in our internal controls over financial
reporting during the period covered by this report, however, in March, 2004, as
described below, we made changes in our internal controls over financial
reporting.

On March 2, 2004, we announced that we would restate our consolidated financial
statements as a result of over accruals of certain expenses caused by a
previously undetected flaw in our computer software that is used to maintain
certain accounting records. Executive management and the Audit Committee were
informed by our independent auditors that they considered that there was a
"material weakness" (as defined under standards established by the American
Institute of Certified Public Accountants) relating to the timely review and
monitoring of certain account analyses, including the account related to this
portion of our computer software. Other than the matters discussed above related
to the previously undetected flaw in our computer system, no other matters were
identified that required adjustment to or disclosure in our consolidated
financial statements. We have corrected the flaw in our computer software and
have instituted more comprehensive review and monitoring procedures to mitigate
the risk of errors occurring in the future.


                                      -27-
<PAGE>

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The following is a description of material developments that occurred in
lawsuits reported in our Annual Report on Form 10-K for the year ended December
31, 2002 and our Quarterly Reports on Form 10-Q for the quarters ended March 31,
2003 and June 30, 2003. Additionally, we are a party to other litigation
incidental to our business, none of which, individually or in the aggregate, are
expected to have a material adverse effect.

GenSci Regeneration Laboratories, Inc. v. Osteotech, Inc.; Osteotech, Inc. v.
GenSci Regeneration Sciences, Inc.

In January, 1998, we filed a patent infringement action against GenSci
Regeneration Laboratories, Inc. ("GenSci Labs") and GenSci Regeneration
Sciences, Inc. ("GenSci Sciences", collectively, "GenSci") alleging that GenSci
violated claims of one of the patents involving our Grafton(R) Demineralized
Bone Matrix (DBM) process. In December 2001, as a result of a trial commenced in
the United States District Court for the Central District of California, we were
awarded damages in the amount of $17,533,634 for GenSci's infringement of our
patents. This damage award will be reduced by the $3.0 million previously paid
by DePuy in 1999 and 2000 in settlement of our claims against DePuy in this
lawsuit. We have not recognized any portion of the net award of $14,533,634 in
our financial statements. On December 21, 2001, GenSci filed for bankruptcy
protection under Chapter 11 of the U.S. Bankruptcy Code.

On May 30, 2003, we entered into a definitive agreement to settle our claims
with GenSci arising out of the patent lawsuit. The settlement is for an
aggregate of $7.5 million. In August, 2003, the parties amended the definitive
settlement agreement to adjust the payment terms of the settlement. Pursuant to
the amended agreement, we will receive $2.5 million from GenSci upon its exit
from bankruptcy and GenSci's merger with IsoTis B.V. ("IsoTis") and the balance
of $5.0 million in 20 equal payments of $250,000 plus interest at the federal
judgment rate as measured at the end of each quarter to a maximum of 3% per
annum. To secure the future amounts to be paid to us, GenSci will provide an
irrevocable letter of credit in the amount of $5.0 million. On October 14, 2003,
the Bankruptcy Court signed an Order confirming GenSci's Plan of Reorganization
at which time GenSci emerged from bankruptcy. GenSci's merger with IsoTis was
consummated on October 27, 2003. On October 29, 2003 we received the initial
payment of $2.5 million, a Promissory Note in the amount of $5.0 million and the
$5.0 million letter of credit collateralizing the Promissory Note. As a result,
we will recognize pre-tax income of $7.5 million in the fourth quarter of 2003.

The settlement also provides that we covenant not to sue GenSci for infringing
any of our existing patents with respect to GenSci's products currently marketed
under the names Accell(TM), DynaGraft(R) II and OrthoBlast(TM) II, as long as
GenSci does not change the formulation and composition of such products.
Additionally, the parties have agreed to dismiss all other litigation that is
currently pending between them.

GenSci Orthobiologics, Inc. v. Osteotech, Inc.

On March 6, 2000, GenSci Orthobiologics, Inc. ("GenSci") filed a complaint in
the United States District Court for the Central District of California against
us, alleging unlawful monopolization and an attempt to monopolize the market for
demineralized bone matrix ("DBM") and for entering into agreements in restraint
of trade in violation of Sections 1 and 2 of the Sherman Antitrust Act and
Section 3 of the Clayton Act; and for unlawful and unfair business practices in
violation of Section 17200 of the California Unfair


                                      -28-
<PAGE>

Competition Law. On December 20, 2001, GenSci filed a bankruptcy petition with
the United States Bankruptcy Court for the Central District of California.
GenSci did not seek relief from the automatic stay to pursue this action. On May
30, 2003, the parties executed a Joint Settlement Agreement that, inter alia,
requires the dismissal of this action with prejudice within ten days after the
Bankruptcy Court's approval of GenSci's Plan of Reorganization. The Bankruptcy
Court signed an Order on October 14, 2003 confirming GenSci's Plan of
Reorganization. The Consent Judgment and Stipulation of Dismissal were filed
with the Court on November 5, 2003, but have not yet been signed by the Court.

"O" Company, Inc. v. Osteotech, Inc.,

In July, 1998, a complaint was filed against us in the Second Judicial District
Court, Bernallilo County, New Mexico, which alleges negligence, strict
liability, breach of warranties, negligent, misrepresentation, fraud, and
violation of the New Mexico Unfair Trade Practices Act arising from allegedly
defective dental implant coating and coating services provided to plaintiffs by
our subsidiary, Osteotech Implants BV, formerly known as CAM Implants BV. In
August, 1998, we removed this action to the United States District Court for the
District of New Mexico and filed and served our answer, denying any and all
liability in this action and moved to dismiss five of the seven claims alleged
against us. We successfully moved to dismiss plaintiffs' claims for negligence
and strict liability. Remaining are claims for breach of warranties, negligent
misrepresentation, fraud, and violation of the New Mexico Unfair Trade Practices
Act. Plaintiffs are seeking monetary damages in an amount to be determined at
trial. On February 13, 2003, we filed a motion for summary judgment on the basis
that plaintiffs sued the wrong party. On September 17, 2003, the court issued a
memorandum opinion and order denying our motion for summary judgment. On October
8, 2003, a Rule 16 Settlement Conference was conducted and the parties reached a
tentative settlement agreement, which does not obligate us to pay monetary
damages to the plaintiffs, but assigns certain of our rights under our insurance
policies to the plaintiffs. The parties are now in the process of negotiating
and preparing mutually acceptable definitive agreements. On October 10, 2003,
the Court issued an order staying all proceedings in the action and vacating
case management deadlines. In the event the parties are unable to consummate a
settlement within thirty days from October 8, 2003, and no further extension is
granted, the Court will lift the stay of proceedings and the parties will return
to active litigation. On November 10, 2003, the parties filed a motion for an
extension to continue negotiations on the settlement documents. If the stay is
lifted, further discovery on matters relating to the merits of plaintiffs'
claims and the scope of plaintiffs' alleged damages would continue.

Regner v. Inland Eye & Tissue Bank of Redlands; Thacker v. Inland Eye & Tissue
Bank of Redlands; Savitt v. Doheny Eye and Tissue Bank; Sorrels, Decker and
Blake v. Inland Eye & Tissue Bank, et al.

We are a defendant with other defendants in several actions pending in the
Superior Court for the State of California, Los Angeles County. The Regner case
sought class action status and initially alleged causes of action based on a
violation of the California Business and Professional Code Section 17200, as
well as a number of common law causes of action, including negligence, deceit,
and intentional and negligent infliction of emotional distress. Through
dismissals, either by the Court or voluntarily by plaintiffs, only the
California Business and Professional Code claims, which are based on the
allegation that defendants are engaging in the activity of buying or selling
organs or tissue for valuable consideration or profit, and certain negligence
claims remain with respect to the actions. In addition, the plaintiffs through
the Regner case sought class action status and injunctive relief and
"restitution" with respect to their California Business and Professional Code
claims. To the extent any of the other causes of action lie against us,
plaintiffs are seeking damages in an unspecified amount.

In September, 2003, a settlement was entered into by the parties in the Savitt
case, and plaintiffs subsequently dismissed this lawsuit with prejudice. Also in
September, 2003, a global settlement was


                                      -29-
<PAGE>

negotiated in the Regner, Thacker and Sorrels cases. The settlements in the
Savitt, Regner, Thacker and Sorrels cases had no impact on our financial
position or results of operations. Settlement documents have been finalized, and
on November 6, 2003 the Court issued an order dismissing the cases, with
prejudice.

Alphatec Manufacturing v. Osteotech, Inc.

Alphatec Manufacturing, Inc., the manufacturer of the Affirm(TM) Anterior
Cervical Plate System ("Affirm(TM)"), filed an action on July 3, 2002 against us
in the United States District Court for the Southern District of California. The
complaint sets forth causes of action for recovery of contractual penalty,
breach of contract, fraud and trade libel arising out of a distribution
agreement between the parties. Alphatec is seeking $1.4 million plus interest on
the contractual penalty claim, $600,000 on the fraud claim and additional
unspecified compensatory damages.

On August 3, 2003, we answered the complaint and asserted counterclaims setting
forth causes of action for breach of contract, breach of implied covenant of
good faith and fair dealing, fraudulent misrepresentation, fraudulent
concealment, unjust enrichment, unfair competition, cancellation or rescission
of the contract and indemnification. We are seeking compensatory and punitive
damages in an amount to be determined at trial as well as reasonable attorney's
fees. Discovery has not yet commenced.

We believe that Alphatec's claims are without merit and intend to vigorously
defend against such claims. In the fourth quarter of 2002, we recorded a
provision of approximately $2.5 million, which includes an estimate of the
penalty that would be due for the expected shortfall in the second year purchase
commitment and an amount to fully reserve all implant inventory and
instrumentation associated with Affirm(TM).


                                      -30-
<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits (numbered in accordance with Item 601 of Regulation S-K)

          Exhibit                                                         Page
          Number    Description                                          Number
          ------    -----------                                          ------
            3.1     Restated Certificate of Incorporation of                ^
                    Osteotech, as amended

            3.2     Third Amended and Restated Bylaws of                    ^
                    Osteotech

            3.4     Certificate of Retirement and Prohibition of            ^^
                    Reissuance of Shares of Osteotech, Inc.,
                    dated April 4, 2002

            4.1     Rights Agreement dated as of February 1, 1996           ^
                    between Osteotech, Inc. and Registrar and
                    Transfer Co., as amended

          10.41     Amended and Restated 2000 Stock Plan approved           ^^^
                    by Osteotech, Inc.'s stockholders on June 12,
                    2003

          10.42     Joint Settlement Agreement and Agreements for           ^^^
                    Release of Claims and Amendment of Plan of
                    Reorganization dated May 30, 2003, by and
                    among Osteotech, Inc., GenSci Orthobiologics,
                    Inc. and GenSci Regeneration Sciences, Inc.

            31.1    Certification of Chief Executive Officer                *
                    pursuant to Section 302 of the Sarbanes-Oxley
                    Act of 2002

            31.2    Certification of Chief Financial Officer                *
                    pursuant to Section 302 of the Sarbanes-Oxley
                    Act of 2002

            32.1    Certification of Chief Executive Officer                *
                    pursuant to Section 906 of the Sarbanes-Oxley
                    Act of 2002

            32.2    Certification of Chief Financial Officer                *
                    pursuant to Section 906 of the Sarbanes-Oxley
                    Act of 2002

      *     Filed herewith.

      ^     Previously filed as an exhibit to the Company's Annual Report on
            Form 10-K for the fiscal year ended December 31, 2001 and
            incorporated herein by reference thereto.

      ^^    Previously filed as an exhibit to the Company's Quarterly Report on
            Form 10-Q for the quarter ended September 30, 2002 and incorporated
            herein by reference thereto.

      ^^^   Previously filed as an exhibit to the Company's Quarterly Report on
            Form 10-Q for the quarter ended September 30, 2003 filed with the
            Securities and Exchange Commission on November 13, 2003 and
            incorporated herein by reference.

(b)   Reports on Form 8-K

      On September 26, 2003, we filed with the Commission a Current Report on
      Form 8-K to announce a reduction in our workforce effective September 24,
      2003.

      On July 25, 2003, we filed with the Commission a Current Report on Form
      8-K to announce our financial results for the quarter ended June 30, 2003.


                                      -31-
<PAGE>

                                   SIGNATURES

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

Date: April 23, 2004                        Osteotech, Inc.
                                            -----------------------------------
                                            (Registrant)

Date: April 23, 2004                   By:  /S/ Richard W. Bauer
                                            -----------------------------------
                                            Richard W. Bauer
                                            President, Chief Executive Officer
                                            (Principal Executive Officer)

Date: April 23, 2004                   By:  /S/ Michael J. Jeffries
                                            -----------------------------------
                                            Michael J. Jeffries
                                            Executive Vice President,
                                            Chief Financial Officer
                                            (Principal Financial Officer and
                                            Chief Accounting Officer)


                                      -32-