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


                                    FORM 10-Q



                                   (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, 2005

                                                         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 ___

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 ___

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

The  number  of  shares  of the  registrant's  common  stock,  $.01  par  value,
outstanding as of November 7, 2005 was 17,207,315.

<PAGE>



PART I.  FINANCIAL INFORMATION
ITEM 1.  Financial Statements

                        OSTEOTECH, INC. and SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (unaudited)
                             (dollars in thousands)
<TABLE>
<S>                                                                                               <C>                   <C>
                                                                                        September 30,          December 31,

                                                                                              2005                 2004
-------------------------------------------------------------------------------------------------------------------------------
ASSETS
-------------------------------------------------------------------------------------------------------------------------------
Current assets:
     Cash and cash equivalents                                                      $  18,345             $  13,391
     Accounts receivable, net of allowance of
          $1,849 in 2005 and $1,468 in 2004                                            16,668                14,795
     Deferred processing costs                                                         34,589                36,049
     Inventories                                                                       1,356                 1,202
     Prepaid expenses and other current assets                                         3,012                 5,595
                                                                                      -----------------------------------------
               Total current assets                                                    73,970                71,032

Property, plant and equipment, net                                                     39,585                37,447
Goodwill                                                                                1,669                 1,669
Other assets                                                                            5,528                 6,256
-------------------------------------------------------------------------------------------------------------------------------
               Total assets                                                          $120,752              $116,404
===============================================================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------------------------------------------------------------------------------------------------
Current liabilities:
     Accounts payable and accrued liabilities                                        $  17,185            $  11,532
     Current maturities of capital lease obligation/long-term debt                         638                2,661
                                                                                      -----------------------------------------
               Total current liabilities                                                17,823               14,193

Capital lease obligation                                                                15,773                    -
Long-term debt                                                                            -                  10,076
Other liabilities                                                                       5,106                   740
-------------------------------------------------------------------------------------------------------------------------------
               Total liabilities                                                        38,702               25,009
-------------------------------------------------------------------------------------------------------------------------------

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 17,200,401
         shares in 2005 and 17,175,474 shares in 2004                                     172                   172
     Additional paid-in capital                                                        64,615                64,482
     Accumulated other comprehensive income                                               779                   750
     Retained earnings                                                                 16,484                25,991
-------------------------------------------------------------------------------------------------------------------------------
               Total stockholders' equity                                              82,050                91,395
                                                                                      -----------------------------------------
               Total liabilities and stockholders' equity                            $120,752              $116,404
===============================================================================================================================

See accompanying notes to condensed consolidated financial statements.
</TABLE>


                                       2
<PAGE>




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




<TABLE>
<S>                                                                                                                          <C>
                                                                  Three Months Ended             Nine Months Ended September 30,
                                                                     September 30,
                                                                 2005                2004       2005                     2004
                                                        ---------------------------------------------------------------------------
Net revenues:
  Service                                                  $   21,898          $   21,694         $  70,333        $  65,040
  Product                                                         347                 438             1,050            3,094
                                                        ------------------   ----------------  -----------------  ------------------
                                                               22,245              22,132            71,383           68,134

Cost of services                                               15,107              12,129            43,280           34,826
Cost of products                                                  132                (295)              397            3,415
                                                        ------------------  ------------------  ---------------  ------------------
                                                               15,239              11,834            43,677           38,241
                                                        ------------------  ------------------  ---------------  ------------------

Gross profit                                                    7,006              10,298            27,706           29,893

Marketing, selling, general and administrative                 11,607               7,684            33,180           27,868
Research and development                                        1,101               1,145             3,287            3,188
                                                        ------------------  ------------------  ---------------  ------------------
                                                               12,708               8,829            36,467           31,056
                                                        ------------------  ------------------  ---------------  ------------------

Operating income (loss)                                        (5,702)              1,469            (8,761)          (1,163)

Other, net:
  Interest expense, net                                          (394)               (137)             (546)            (359)
  Foreign currency losses                                         (25)                133              (847)              10
                                                        ------------------  ------------------  ---------------  ------------------
                                                                 (419)                 (4)           (1,393)            (349)

Income (loss) before income provision (benefit)                (6,121)              1,465           (10,154)          (1,512)

Income tax provision (benefit)                                    676                 443              (647)            (852)
                                                        ------------------  ------------------  ---------------  ------------------

Net income (loss)                                         $    (6,797)        $     1,022       $    (9,507)      $     (660)
                                                        =================       =============     ==============        ===========

Earnings (loss) per share:
     Basic                                                $       (.40)       $         .06     $        (.55)        $  (.04)
     Diluted                                              $       (.40)       $         .06     $        (.55)        $  (.04)

Shares used in computing earnings (loss) per share:
     Basic                                                   17,199,004          17,154,119       17,187,865        17,139,620
     Diluted                                                 17,199,004          17,208,069       17,187,865        17,139,620

See accompanying notes to condensed consolidated financial statements.
</TABLE>


                                       3
<PAGE>




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




<TABLE>
<S>                         <C>                                                                     <C>                 <C>
Nine Months Ended September 30,                                                                     2005                2004
                                                                                        -------------------- --------------------
Cash Flow From Operating Activities
    Net loss                                                                         $    (9,507)          $     (660)
    Adjustments to reconcile net loss
           to net cash provided by operating activities:
                 Depreciation and amortization                                             4,285                5,840
                 Provision for metal spinal implant systems                                  -                  1,998
                 Changes in  assets and liabilities:
                         Accounts receivable                                              (2,563)               (3,534)
                         Deferred processing costs                                         1,051                (3,776)
                         Inventories                                                        (194)                  373
                         Prepaid expenses and other  assets                                3,453                  (237)
                         Accounts payable and other liabilities                            6,335                   144
                                                                                        -------------------- --------------------
Net cash provided by operating activities                                                  2,860                   148

Cash Flow From Investing Activities
    Capital expenditures                                                                   (1,261)              (1,333)
    Proceeds from sale of land and building                                                16,500                   -
    Other, net                                                                               (340)                 (91)
                                                                                        -------------------- --------------------
Net cash provided by (used in) investing activities                                         14,899               (1,424)

Cash Flow From Financing Activities
    Proceeds from issuance of common stock                                                     133                  244
    Principal payments on long-term debt                                                   (12,826)             (1,996)
                                                                                        -------------------- --------------------
Net cash used in financing activities                                                      (12,693)             (1,752)

Effect of exchange rate changes on cash                                                       (112)                178
                                                                                          ------------------ --------------------
Net increase (decrease) in cash and cash equivalents                                          4,954               (2,850)
Cash and cash equivalents at beginning of period                                             13,391               15,326
                                                                                        -------------------- --------------------
Cash and cash equivalents at end of period                                                $  18,345            $  12,476
                                                                                        ==================== ====================

Supplementary cash flow data:
    Cash paid during the period for interest                                          $       427          $       410
    Cash paid (refunded) during the period for taxes                                       (2,844)               1,434
Noncash financing and investing activities:
    Capital lease obligation                                                               16,500                  -
    Asset retirement obligation                                                             1,339                  -


See accompanying notes to condensed consolidated financial statements
</TABLE>


                                       4
<PAGE>



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



1.     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  statement of the  consolidated  financial
position as of September 30, 2005,  the  consolidated  results of operations for
the three  months and nine months  ended  September  30, 2005 and 2004,  and the
consolidated  cash flows for the nine months ended  September 30, 2005 and 2004.
The results of operations and cash flows for the respective  interim periods are
not necessarily  indicative of the results to be expected for the full year. The
December  31,  2004  financial  information  has been  derived  from the audited
financial  statements  for the year  ended  December  31,  2004.  The  condensed
consolidated  financial statement should be read in conjunction with the audited
consolidated  financial  statements,  which were  included as part of Osteotech,
Inc.'s (the  "Company")  Annual Report on Form 10-K for the year ended  December
31, 2004.

2.     Other Intangible Assets

The Company's intangibles, other than goodwill, are recorded at an original cost
of  $3,080,000  and  $2,846,000  as of September 30, 2005 and December 31, 2004,
respectively,   and  are   principally   represented   by  patents   and  patent
applications.  The  carrying  values  of such  intangibles  are  $1,838,000  and
$1,710,000 as of the same  respective  dates.  Patents are amortized  over their
estimated useful lives ranging from five to ten years.  Patent application costs
are  amortized  upon  grant of the  patent or  expensed  if the  application  is
rejected or withdrawn.

3.       Stock Options

The Company  accounts  for stock option  awards in  accordance  with  Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and
related interpretations ("APB No. 25"). Accordingly, no compensation expense has
been  recognized  for stock option  grants,  since all options have been granted
with an  exercise  price  equal  to or  greater  than  the  market  price of the
underlying  common  stock on the date of grant.  The  Company  has  adopted  the
"disclosure  only"  provisions  of Statement of  Financial  Accounting  Standard
("SFAS") No. 123,  "Accounting for Stock Based  Compensation"  ("SFAS No. 123").
Pro forma information regarding net income/loss and net income/loss per share is
required by SFAS No. 123, and has been  determined  as if the Company  accounted
for its stock  options  on a fair value  basis.  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,  or such other
period to match the vesting period or adjusted vesting period  determined by the
Company's Board of Directors.

In December, 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 (Revised 2004),  "Share-Based  Payment" ("SFAS No. 123R"). SFAS No. 123R
addresses all forms of share-based  payment  ("SBP")  awards,  including  shares
issued under employee stock purchase plans, stock options,  restricted stock and
stock  appreciations  rights.  SFAS No. 123R will require the Company to expense
SBP awards as compensation  costs for SBP  transactions  measured at fair value.
SFAS No. 123R would have been effective beginning in the Company's third quarter
of 2005,  however,  in April,  2005,  the  Securities  and  Exchange  Commission
extended  the  effective  date of SFAS No. 123R to January 1, 2006.  The Company
intends  to adopt SFAS No.  123R  using the  modified  prospective  method.  The
Company is currently  evaluating  its  long-term  incentive  plan related to the
issuance of stock options, but no decisions have yet been made.

                                       5
<PAGE>

In anticipation of the effective date of SFAS No. 123 and to provide  additional
incentive to the Company's  employees,  in June,  2005,  the Company's  Board of
Directors approved the accelerated vesting of all unvested stock options with an
exercise  price greater than $3.33,  the closing  price of the Company's  common
stock  on June  9,  2005.  Stock  options  representing  435,850  shares  of the
Company's common stock were vested immediately as a result of this Board action.
In accordance  with the provisions of APB No. 25, the Company will not recognize
any  compensation  cost in its consolidated  statement of operations  related to
this  Board  action,  since  the  exercise  price  of  the  options  which  were
accelerated was greater than the market price. However,  compensation costs, net
of tax,  associated with the  acceleration of these stock options and determined
in accordance  with SFAS No. 123 of  approximately  $748,000 are included in the
following  table in addition to the amounts that would have been  reflected  had
this  Board  action  not  occurred  in  compliance  with the  "disclosure  only"
provisions of SFAS No. 123.

Effective August 3, 2005, the Company's Board of Directors approved amending all
of the  option  agreements  issued to the  Company's  Chief  Financial  Officer,
Michael J. Jeffries, to provide that all of his options shall remain exercisable
through the original expiration date of such option agreements,  notwithstanding
any provisions in such option  agreements  which would have limited the exercise
period of such options  following the  termination of Mr.  Jeffries'  employment
with the  Company.  Originally,  the option  agreements  provided  that upon the
termination of Mr. Jeffries'  employment with the Company, the option granted to
Mr.  Jeffries' had to be exercised no later than the earlier of (i) the original
expiration  date or  (ii)(a)  the  90th day  following  the  termination  of Mr.
Jeffries'  employment with the Company or (b) the first  anniversary of the date
Mr.  Jeffries'  employment  with the Company is terminated if his  employment is
terminated  due to his death or  disability.  As a result of this  change in Mr.
Jeffries stock options and in accordance  with the provisions of APB No. 25, the
Company recognized compensation cost of $42,500 in its consolidated statement of
operations for all stock options that had an exercise price less than $4.69, the
closing price on August 3, 2005, and will not recognize any  compensation  costs
for Mr.  Jeffries other stock options  because the exercise prices of such other
stock options were greater than the market price of the  Company's  common stock
on August 3, 2005.  In  accordance  with the  provisions  of SFAS No. 123,  this
change to Mr.  Jeffries' stock options  resulted in a compensation  cost, net of
tax, of $291,000  which will be included in the  following  table in  accordance
with the "disclosure only" provisions of SFAS No. 123.

On June 9, 2005, the Company's Board of Directors  approved  amending all of the
option  agreements issued to the Company's Chief Executive  Officer,  Richard W.
Bauer, to provide that all of his options shall remain  exercisable  through the
original  expiration  date  of  such  option  agreements,   notwithstanding  any
provisions  in such  option  agreements  which would have  limited the  exercise
period of such options following the termination of Mr. Bauer's  employment with
the  Company.   Originally,   the  option  agreements  provided  that  upon  the
termination of Mr. Bauer's  employment  with the Company,  the option granted to
Mr.  Bauer had to be  exercised  no later than the  earlier of (i) the  original
expiration date or (ii)(a) the 90th day following the termination of Mr. Bauer's
employment with the Company or (b) the first anniversary of the date Mr. Bauer's
employment with the Company is terminated if his employment is terminated due to
his death or  disability.  In accordance  with the provisions of APB No. 25, the
Company will not recognize any compensation  cost in its consolidated  statement
of operations  related to this change to Mr.  Bauer's stock  options,  since the
exercise  price of Mr.  Bauer's  stock  options were all greater than the market
price of the  Company's  common stock on June 9, 2005.  In  accordance  with the
provisions of SFAS No. 123, this change to Mr. Bauer's stock options resulted in
a  compensation  cost,  net of tax,  of  $288,000  which will be included in the
following table in accordance with the "disclosure  only" provisions of SFAS No.
123.

                                       6
<PAGE>

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.


<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
                                                         Three Months Ended                Nine Months Ended
                                                            September 30,                    September 30,
                                                  -------------------------------- ---------------------------------
(in thousands, except per share data)                     2005           2004               2005            2004
------------------------------------------------- ---------------- --------------- ---------------- ----------------

Net income (loss) - reported                           $(6,797)        $  1,022       $ (9,507)        $    (660)
Impact on net income (loss) related to
  stock-based employee compensation
  expense, net of tax                                 $    372        $     190      $    1,892        $      644
Net income (loss) - pro forma                          $(7,169)       $     832        $(11,399)        $  (1,304)
                                                   ================ =============== ================ ================

Earnings (loss) per share
    As reported:
       Basic                                             $(.40)         $  .06        $     (.55)      $      (.04)

       Diluted                                          $ (.40)        $  .06         $     (.55)      $      (.04)

    Pro forma:
       Basic                                            $ (.42)         $  .05        $     (.66)      $      (.08)
       Diluted                                          $ (.42)         $  .05        $     (.66)      $      (.08)
                                                  ================ =============== ================ ================
</TABLE>

4.       Recent Accounting Pronouncements

In March,  2005, the FASB issued FASB  Interpretation  No. 47,  "Accounting  for
Conditional  Asset  Retirement   Obligation"  ("FIN  47").  The   interpretation
addresses  diverse   practices,   which  have  developed  with  respect  to  the
recognition  of asset  retirement  obligations  when the timing and/or method of
settlement  of  an  obligation   are   conditional   on  a  future  event.   The
interpretation  requires  recognition  of a  liability  for the fair  value of a
conditional  asset  retirement  obligation  if the  liability  can be reasonably
estimated.  The fair value of a liability for the conditional  asset  retirement
obligation  should be recognized  when  incurred  (generally  upon  acquisition,
construction or development)  and/or through the normal  operation of the asset.
This  guidance is  effective  no later than the end of fiscal years ending after
December 15, 2005.  Retrospective  application for interim financial information
is permitted  but is not  required.  The Company is in the process of evaluating
the impact, if any, of implementing FIN 47.

In May,  2005,  the FASB  issued  SFAS No.  154,  "Accounting  Changes and Error
Corrections". SFAS No. 154 addresses the requirements for the accounting for and
reporting  of a  change  in  accounting  principle.  It  requires  retrospective
application  to prior  periods  financial  statements  of changes in  accounting
principles  unless  a  pronouncement  giving  rise  to a  change  in  accounting
principle  includes  specific  transition   provisions,   in  which  case  those
provisions should be followed.  This guidance must be implemented for accounting
changes and  corrections of errors made in fiscal years beginning after December
15, 2005.

                                       7
<PAGE>

5.       2005 and 2004 Charges

2005 Charges

Reserves for Obsolescence and Expiration

During the second quarter of 2005, the Company increased its reserves for tissue
inventories  obsolescence  and  expiration  by  $790,000,   mostly  due  to  the
previously announced dispute with Bone Bank Allograft ("BBA"), which prevents us
from utilizing BBA labeled tissue.

2004 Charges

Provision for Metal Spinal Implant Systems

As a result of an assessment of its metal spinal  implant  business in the first
quarter of 2004, the Company ceased  marketing and distributing all metal spinal
implant product lines on June 30, 2004. The Company recorded a charge to cost of
sales in the first quarter of 2004 of $1,998,000 to reduce metal spinal  implant
inventory and instrumentation to estimated net realizable value.

In February,  2001, the Company entered into an exclusive distribution agreement
with Alphatec  Manufacturing,  Inc.  ("Alphatec")  to market and  distribute two
metal spinal  implant  products in the United  States and Canada.  In September,
2003,  the Company  terminated  this  agreement  effective  March 31, 2004.  The
agreement included provisions for minimum purchases over the contractual period,
subject to penalty  payments if the minimum  purchases  were not  achieved.  The
Company settled the provisions of the first year purchase commitment in 2002 and
recorded all appropriate charges at that time. In addition, the Company recorded
an estimated  reserve in 2002 of $1,079,000  for the penalty that may be due for
the  minimum  purchase  commitment  penalty  for year two of the  agreement.  In
September,  2004, the Company  settled,  among other items, the minimum purchase
commitment  penalty for year two of the  agreement for $600,000 and reversed the
remaining portion of the reserve of $479,000.

Severance - Sales and Marketing Reorganization

In  first  quarter  2004,  the  Company  reorganized  its  sales  and  marketing
departments.  As a result, the Company recorded a charge in marketing,  selling,
general and administrative  expenses of $650,000,  principally for the severance
costs  associated  with the departure of the executive  officer  responsible for
these areas and two other employees.


                                       8
<PAGE>



6      Deferred Processing Costs

Deferred processing costs consist of the following:
<TABLE>
<S>                                                                                      <C>                      <C> <C>
                                                                               September 30,             December 31, 2004
(in thousands)                                                                     2005
                                                                     -------------------------------- -----------------------

Donor tissue to be processed                                                     $12,764                       $  9,259
Tissue in process                                                                  6,056                         11,740
Processed implantable donor tissue to be distributed
   by the Company                                                                 15,340                         12,841
Processed implantable donor tissue held for clients                                  429                          2,209
                                                                     ------------------------------ -------------------------
                                                                                 $34,589                        $36,049
                                                                     ============================== =========================

7.       Inventories

Inventories consist of the following:
                                                                               September 30,             December 31, 2004
(in thousands)                                                                     2005
                                                                     -------------------------------- -----------------------

Supplies                                                                          $  252                     $     237
Raw materials                                                                        908                           718
Finished goods                                                                       196                           247
                                                                        ---------------------------- -------------------------
                                                                                 $ 1,356                       $  1,202
                                                                        ============================ =========================
</TABLE>

8.     Sale and Leaseback of Processing Facility

On August 8, 2005,  the Company  completed the sale of its principal  processing
facility located in Eatontown,  New Jersey to an unrelated third party for $16.5
million in cash.  The Company  also  entered into an agreement to lease back the
processing facility. The lease agreement is for an initial term of 20 years with
two five-year renewal options at the Company's election.  Lease payments will be
$2,326,000  annually for the first seven years of the agreement,  $1,460,000 for
years eight  through  twelve,  a rental rate to be determined at the time with a
minimum rate of $1,460,000  and a maximum rate of $1,533,000  for years thirteen
through seventeen, and a rental rate to be determined at the time with a minimum
rate equal to the actual  rental rate in year  seventeen  and a maximum  rate of
$1,609,650 for years eighteen through twenty.  The Company retained ownership of
all property and equipment,  including leasehold improvements,  directly related
to the operation of the Company's business. The transaction has been recorded as
a capital lease,  with the resulting gain of  approximately  $3,630,000 from the
sale of the facility deferred and amortized in proportion to the amortization of
the leased  assets.  The deferred  gain is reflected as a component of long-term
liabilities in the accompanying balance sheet.

The Company  utilized a portion of the proceeds from the sale of our  processing
facility  to  repay  all  outstanding  bank  debt  as  of  August  8,  2005,  of
$10,963,000.   All  remaining  proceeds  of  approximately  $5,323,000,  net  of
transaction costs of approximately $214,000,  arising from this transaction will
be utilized for general corporate purposes.

                                       9
<PAGE>


The following is a schedule of the future  minimum lease  payments  arising from
the capital lease as of September 30, 2005:

                                                                   Amount
                                                                 (in thousands)

           Remainder of 2005                                    $       582
           2006                                                       2,326
           2007                                                       2,326
           2008                                                       2,326
           2009                                                       2,326
           2010                                                       2,326
           Thereafter                                                22,785
           Total minimum lease payments                              34,997
           Less interest portion of payments                         18,586
                                                                     _________
           Present value of future minimum
                   lease payments                                    16,411
           Current maturities of capital lease obligation               638
                                                                     ________
           Capital lease obligation                             $     15,773
                                                                     ========

9.       Debt and Financing Arrangements

The Company had a Credit Facility, as amended,  which included a $5,000,000 line
of credit,  a mortgage loan and an equipment  term loan. On August 8, 2005,  the
Company  entered  into the  sale and  leaseback  transaction  for the  Company's
principal  processing  facility,  which  is more  fully  discussed  in Note 7. A
portion of the proceeds  from this  transaction  were utilized to repay the then
outstanding  balance of the mortgage and  equipment  term loan,  and the line of
credit,  which had no  amounts  outstanding  on August 8,  2005,  was  cancelled
resulting in the termination of the Credit Facility.

10.  Asset Retirement Obligations

SFAS No.  143,  "Accounting  for Asset  Retirement  Obligations",  requires  the
Company to record a liability  equal to the fair value of the estimated  cost to
retire an asset.  The asset  retirement  obligation  ("ARO")  is  recorded  as a
liability  in the  period  in  which  the  obligation  is  incurred  or  becomes
determinable  (as defined in the standard) with a corresponding  increase in the
carrying amount of the related  long-lived  asset.  The ARO is accreted from its
current  discounted  value to its  expected  future  settlement  value,  and the
related  capitalized  cost is  depreciated  over the useful  life of the related
long-lived  asset.  The ARO is based  upon a  number  of  assumptions  requiring
professional  judgment,  including  expected  future  settlement  values and the
credit-adjusted  risk  free  interest  rate,  and  future  adjustments  of these
assumptions may have a material impact on the Company's results of operations.

The  Company  has two ARO's  related  to the  estimated  costs  associated  with
deconstructing   the  Company's   processing   environments   housed  in  leased
facilities.  The first ARO,  in the amount of  $1,500,000,  was  established  in
December, 2004 concurrent with the impairment of the Company's former processing
environment.  This ARO is included in accounts  payable and accrued  liabilities
because  the  process of  deconstructing  and  refurbishment  of the  processing
facility is expected to commence  within the next year. No changes have occurred
to this ARO in 2005. The second ARO was  established in August,  2005 concurrent
with the sale and leaseback of the Company's current  processing  facility.  The
initial  value of the ARO,  which was  recorded  as a long-term  liability,  was
approximately  $1,339,000 and will be accreted to its estimated settlement value
of approximately  $5,700,000 over the initial twenty-year term of the lease. The
related capitalized cost has been included in property,  plant and equipment and
will be amortized over the initial term of the lease.

                                       10
<PAGE>

11.  Commitments and Contingencies

Litigation

The following is a description of material developments that occurred during the
three  months ended  September  30, 2005 in lawsuits  reported in the  Company's
Annual  Report  on Form  10-K  for the  year  ended  December  31,  2004 and the
Company's  Quarterly  Reports on Form 10-Q for the quarters ended March 31, 2005
and June 30, 2005. Additionally, from time to time 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 our results of
operations or financial condition.

Tissue Transplant Technology, Ltd. d/b/a Bone Bank Allografts v. Osteotech, Inc.

In December, 2004, the Company was served with a suit filed by Tissue Transplant
Technology,  Ltd.  d/b/a Bone Bank  Allografts  ("BBA")  alleging,  among  other
things, breach of contract in connection with a processing agreement between the
two parties entered into on June 1, 2000. BBA's complaint, as amended,  contains
claims for breach of contract,  tortious  interference  with existing  contract,
tortious  interference  with  prospective  business  relationships,  negligence,
breach  of  fiduciary  duty,  unfair  competition,  fraud,  and  federal  unfair
competition.  BBA does not allege a specified amount of damages.  On January 31,
2005, the Company filed a motion to transfer venue to the District of New Jersey
and a motion  to  dismiss  some of BBA's  claims.  On April 26,  2005,  the U.S.
District Court for the Western  District of Texas denied the Company's motion to
transfer venue and granted the Company's  motion to dismiss only with respect to
the breach of  fiduciary  duty claim.  As a result,  litigation  with respect to
BBA's remaining  claims will go forward in the Western District of Texas. On May
10,  2005,  the  Company  filed  its  answer,   affirmative   defenses  and  two
counterclaims  for  breach of  contract.  The  Company  and BBA have  previously
participated  in  three  mediation   sessions,   but  were  unable  to  reach  a
non-litigation  resolution  to the  dispute.  On September  14, 2005,  the Court
granted  BBA's  motion to file its second  amended  complaint,  which tracks the
allegations of the amended  complaint and adds further  allegations on the fraud
and unfair competition claims.

The Company  believes that the claims made against it in this action are without
merit and will vigorously defend against such claims.


                                       11
<PAGE>


12.      Comprehensive Income

Comprehensive income (loss) for the three months and nine months ended September
30, 2005 and 2004 were as follows:

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
                                                           Three Months Ended                  Nine Months Ended
                                                              September 30,                      September 30,
                                                    ---------------------------------- -----------------------------------

(in thousands)                                             2005             2004              2005             2004
                                                     ----------------- ---------------- ----------------- -----------------

Net income (loss)                                     $  (6,797)         $  1,022        $  (9,507)        $    (660)

Currency translation adjustments                           (897)             (333)              29              (421)
                                                    ----------------- ---------------- ----------------- -----------------

Comprehensive income (loss)                            $ (7,694)        $     689         $ (9,478)         $ (1,081)
                                                    ================= ================ ================= =================
</TABLE>


13.      Earnings (loss) 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, 2005 and 2004:

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
                                                                  Three Months Ended                  Nine Months Ended
                                                                     September 30,                      September 30,
                                                           ---------------------------------- ----------------------------------
(dollars in thousands except per share data)                         2005              2004             2005              2004
                                                           ---------------- ----------------- ---------------- -----------------

Net income (loss) available to
    common shareholders                                        $    (6,797)       $   1,022        $   (9,507)      $     (660)
                                                           ================ ================= ================ =================

Denominator for basic earnings
    per share, weighted average common
    shares outstanding                                         17,199,004        17,154,119       17,187,865        17,139,620
Effect of dilutive securities, stock options                     -                   53,950         -                 -
                                                           ---------------- ----------------- ---------------- -----------------
Denominator for diluted earnings
    per share                                                  17,199,004        17,208,069       17,187,865        17,139,620
                                                           ================ ================= ================ =================

Earnings (loss) per share:
    Basic                                                       $     (.40)      $       .06       $    (.55)       $      (.04)
    Diluted                                                     $     (.40)      $       .06       $    (.55)       $      (.04)

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

As of  September  30,  2005 and 2004,  the Company  had  outstanding  options to
purchase  2,925,162 and 2,638,887  shares of common stock,  respectively,  which
were excluded from the  calculation of diluted net loss per share as the effects
are antidilutive.

                                       12
<PAGE>




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, 2005 and 2004:

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
                                                               Three Months Ended                   Nine Months Ended
                                                                 September 30,                        September 30,
                                                      ------------------------------------- ----------------------------------
(dollars in thousands)                                       2005               2004               2005          2004
----------------------------------------------------- ------------------ ------------------ ---------------- -----------------
Revenues:
  Demineralized Bone Matrix Segment                      $  12,507          $  12,021          $  39,414        $  34,316
  Base Tissue Segment                                        9,391              9,673             30,919           30,724
  Other                                                        347                438              1,050            3,094
                                                         --------------- ------------------ ---------------- -----------------
  Consolidated                                           $  22,245          $  22,132          $  71,383        $  68,134
                                                        ================ ================== ================ =================
 Operating income (loss):
   Demineralized Bone Matrix Segment                    $      (586)        $    2,008        $    1,297        $    3,249
   Base Tissue Segment                                       (5,352)              (929)          (10,263)           (1,993)
   Other                                                        236                390               205            (2,419)
                                                       ------------------ ----------------- ----------------- -----------------
   Consolidated                                          $   (5,702)        $    1,469        $   (8,761)       $   (1,163)
                                                       ================== ================= ================= =================
</TABLE>

One of our  clients in the  Demineralized  Bone  Matrix  ("DBM") and Base Tissue
Segments, the Musculoskeletal  Transplant Foundation ("MTF"),  accounted for 24%
and 28% of  consolidated  net  revenues  during the three months and nine months
ended  September  30, 2005,  respectively.  In January,  2005,  MTF acquired the
allograft  tissue banking  operations of the American Red Cross  ("ARC"),  which
previously had been a major customer of the Company.  For the three months ended
September 30, 2005, the Company did not recognize any revenues from ARC. For the
nine months ended September 30, 2005, ARC accounted for 1% of  consolidated  net
revenues.  For the three and nine months ended  September 30, 2004,  MTF and ARC
accounted for 21% and 20% and 22% and 21%,  respectively,  of  consolidated  net
revenues.  As of September  30, 2005 and  December  31, 2004,  these two clients
together accounted for 29% and 32%,  respectively,  of consolidated  outstanding
accounts receivables.

15.      Reclassifications

Certain  prior  year  amounts  have been  reclassified  to  conform  to the 2005
presentation.

16.      Unsolicited Takeover Attempt by MTF

On June 30, 2005, MTF made an unsolicited offer to acquire the Company for $6.25
per common share. In response to the unsolicited  offer,  the Company's Board of
Directors considered the proposed offer and informed MTF on August 30, 2005 that
the  proposal  was  inadequate  and not in the best  interest  of the  Company's
shareholders'.  MTF, in a letter to the Company dated October 17, 2005, withdrew
its offer. As a result of the unsolicited  takeover  attempt by MTF, the Company
incurred  professional fees for financial,  legal and other advisory services of
approximately  $662,000  during the three months ended  September 30, 2005.  The
Company's arrangement with its investment banker provides for a monthly retainer
of $100,000  for  additional  advisory  services.  Such  advisory  services  are
provided  for the  life of the  arrangement,  but no less  than  twelve  monthly
periods, beginning in September, 2005.

                                       13
<PAGE>

17.      Government Regulations

The Company markets Grafton(R) DBM as a human  tissue-based  product pursuant to
an August,  1995 designation from the Food and Drug  Administration  ("FDA"). In
March,  2002,  the FDA  informed  the Company  that the agency was  changing the
regulatory status of Grafton(R) DBM and will henceforth regulate it as a medical
device. In an October 30, 2003 letter,  the FDA indicated that its determination
regarding  Grafton(R)  DBM is also to be applied to Grafton  Plus(TM)  DBM.  The
Company  believes  the FDA's  change in its position  regarding  Grafton(R)  DBM
resulted  from its decision to regulate all  demineralized  bone with a carrier,
including those processed and marketed by certain of our competitors, as medical
devices.  In 2004,  after two years of dialog  with the FDA  explaining  why the
Company believed  Grafton(R) DBM did not qualify as a medical device and because
of the  definition  of  "tissue"  as  contained  in the  Good  Tissue  Practices
regulations,  the  Company  communicated  to the FDA that it would file a 510(k)
submission for its Grafton(R) DBM line of tissue forms and, as appropriate,  for
certain of the private  label DBMs it  processes.  The Company filed five 510(k)
submissions  beginning in late 2004 for its Grafton(R) DBM tissues forms and for
certain of the private label DBM tissue forms it processes.  The Company has and
is in the process of responding to the FDA's questions on its 510(k) submissions
and the Company will continue to respond to any questions that the FDA may have.

The  Company  believes  that our DBM tissue  forms will be  eligible  for 510(k)
clearance,  but the FDA may require it to obtain premarket approval,  or the FDA
may not issue any  clearance  or approval in a timely  fashion,  or at all.  The
Company  cannot be sure that the FDA will clear or approve  its  submissions  or
will clear or approve any or all claims that it currently  makes for  Grafton(R)
DBM.  Additionally,  failure to obtain FDA clearance or approval for  Grafton(R)
DBM timely, or any limitation on Grafton(R) DBM, or any limitation on Grafton(R)
DBM  claims,   could  materially  adversely  affect  the  Company's  results  of
operations and financial position.

On  September  19,  2005,  the  Company  received  a letter  from the FDA  dated
September  16,  2005,   which  was  addressed  to  the  Company  and  all  other
manufacturers of DBM products in which the FDA confirmed its prior determination
to classify DBM products as devices and further stated that the manufacturers of
such  products  now must  file  510(k)  applications  with  the FDA and  receive
clearance  from the FDA by  November  15,  2005 in order to  continue to legally
distribute these products.  On October 28, 2005, the Company formally  requested
an extension  from the November 15, 2005 deadline set by the FDA in its letter
of September 16th.


                                       14
<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, 2004
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 MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

Government Regulation

We market Grafton(R)  Demineralized  Bone Matrix ("DBM") as a human tissue-based
product  pursuant  to an  August,  1995  designation  from  the  Food  and  Drug
Administration  ("FDA"). In March, 2002, the FDA informed us that the agency was
changing the regulatory status of Grafton(R) DBM and will henceforth regulate it
as a medical device.  In an October 30, 2003 letter,  the FDA indicated that its
determination regarding Grafton(R) DBM is also to be applied to Grafton Plus(TM)
DBM.  We believe  the FDA's  change in its  position  regarding  Grafton(R)  DBM
resulted  from its decision to regulate all  demineralized  bone with a carrier,
including those processed and marketed by certain of our competitors, as medical
devices.  In 2004,  after  two years of dialog  with the FDA  explaining  why we
believed  Grafton(R)  DBM did not qualify as a medical device and because of the
definition of "tissue" as contained in the Good Tissue Practices regulations, we
communicated  to the  FDA  that  we  would  file a  510(k)  submission  for  our
Grafton(R)  DBM line of tissue  forms and,  as  appropriate,  for certain of the
private  label DBMs we process.  We filed five 510(k)  submissions  beginning in
late 2004 for our  Grafton(R)  DBM tissues  forms and for certain of the private
label DBM tissue forms we process.  We have and are in the process of responding
to the FDA's questions on our 510(k) submissions and we will continue to respond
to any questions that the FDA may have.

We believe that our DBM tissue forms will be eligible for 510(k) clearance,  but
the FDA may require us to obtain  premarket  approval,  or the FDA may not issue
any clearance or approval in a timely fashion, or at all. We cannot be sure that
the FDA will clear or approve  our  submissions  or will clear or approve any or
all claims that we currently make for Grafton(R) DBM.  Additionally,  failure to
obtain FDA clearance or approval for Grafton(R) DBM timely, or any limitation on
Grafton(R)  DBM, or any  limitation on Grafton(R) DBM claims,  could  materially
adversely affect our results of operations and financial position.

On September  19, 2005,  we received a letter from the FDA dated  September  16,
2005,  which was  addressed  to the Company and all other  manufacturers  of DBM
products in which the FDA  confirmed  its prior  determination  to classify  DBM
products as devices and further stated that the  manufacturers  of such products
now must file 510(k)  applications  with the FDA and receive  clearance from the
FDA by  November  15,  2005 in order to  continue  to legally  distribute  these
products.  On October 28, 2005,  we formally  requested  an  extension  from the
November 15, 2005 deadline set by the FDA in their letter of September 16th.



                                       15
<PAGE>

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
reserves for rework,  excess and  obsolesence,  property,  plant and  equipment,
intangible   assets,   current  and  deferred  income  taxes,  asset  retirement
obligations,  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, 2004.

Net Income (Loss)

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
                           Three Months Ended September          Nine Months Ended September
                                        30,                                  30,
                           ------------------------------       -------------------------------
                                     2005           2004                   2005           2004
                           ------------------------------       -------------------------------
                                    (dollars in thousands, except per share amounts)

Net income (loss)                $(6,797)         $1,022              $ (9,507)        $ (660)
Earnings (loss) per share         $(0.40)         $ 0.06               $ (0.55)        $(0.04)

</TABLE>

The net losses for the three months and nine months ended September 30, 2005 are
primarily  attributable  to lower  gross  profit  margins,  increased  operating
expenses  and  foreign  currency  transaction  losses,  as well as the  negative
impacts of our inability to recognize  the full tax benefits  arising from these
operating losses.  Gross profit margins were negatively  impacted,  primarily by
the  underabsorption of processing costs,  increased reserves and write-offs for
excess, obsolete and expiring tissue inventories, the continued shift in revenue
mix  and  more  aggressive  sales  discounting.   Operating  expenses  increased
primarily due to costs associated with implementation of programs to turn around
the  domestic  business,  costs  arising  from the  unsolicited  proposal by the
Musculoskeletal   Transplant   Foundation   ("MTF")  to  acquire   Osteotech  of
approximately  $662,000,  expenses associated with our continuing  investment in
strengthening  and  diversifying  our  domestic  tissue  sources  and  increased
professional fees. We incurred  transaction losses on the outstanding balance of
intercompany debt due to the strengthening of the U.S. dollar against the Euro.

Net income for the three months ended September 30, 2004 included the impacts of
the  reversal  of  estimated  purchase  commitment   penalties  related  to  the
settlement  of  a  lawsuit,  the  reduction  in  provisions  for  the  Company's
Management  Performance  Bonus Plan,  favorable  currency exchange rates for the
period and the  favorable  impact from a lower  effective  tax rate.  Net income
(loss)  for the three  months  and nine  months  ended  September  30,  2004 was
impacted  by a  decline  in gross  profit  margins  primarily  due to lower  net
revenues,  the continued change in revenue mix and increased per unit processing
costs as a result of declining unit  production  volumes,  which has resulted in
the  underabsorption  of  fixed  costs,  partially  offset  by  lower  operating
expenses.  Additionally,  the net loss for the nine months ended  September  30,
2004 was  impacted by the  reserves  recorded  in the first  quarter of 2004 for
costs  associated  with our exit from the spinal metal implant  business and the
reorganization  of our sales and marketing  functions,  and from the reversal of
estimated purchase  commitment  penalties related to the settlement of a lawsuit
in the third quarter of 2004.


                                       16
<PAGE>

Consolidated Net Revenues

<TABLE>
<S>                                                                    <C>                                           <C>
                                          Three Months Ended September 30,               Nine Months Ended September 30,
                                    ---------------------------------------------   -------------------------------------------
                                                                         Percent                                       Percent
                                             2005            2004         Change             2005            2004       Change
                                    --------------  -------------- --------------   -------------- --------------- ------------
                                                                      (dollars in thousands)
DBM Segment
Domestic:
  Grafton(R) DBM                            $ 9,380         $ 8,708           8%          $30,198         $26,445          14%
  Private Label                               1,019           1,866         -45%            2,959           3,012          -2%
                                    ---------------------------------------------   -------------------------------------------
                                             10,399          10,574          -2%           33,157          29,457          13%
International:
  Grafton(R) DBM                              2,108           1,447          46%            6,257           4,859          29%
                                    ---------------------------------------------   -------------------------------------------
    Total DBM Segment                        12,507          12,021           4%           39,414          34,316          15%
                                    ---------------------------------------------   -------------------------------------------

Base Tissue Segment
Domestic:
  Traditional Tissue:
    Processing                              2,409           3,614           -33%            9,193          11,379         -19%
    Direct Distribution                     1,929             441           337%            4,795           1,333         260%
  Graftech(R) Bio-implants                  3,893           4,474           -13%           13,164          15,289         -14%
                                    ---------------------------------------------   -------------------------------------------
                                            8,231           8,529            -3%           27,152          28,001          -3%
International:
Traditional Tissue Processing &
Direct Distribution                        1,160           1,144             1%            3,767           2,723          38%
                                    ---------------------------------------------   -------------------------------------------
    Total Base Tissue Segment              9,391           9,673            -3%           30,919          30,724           1%
                                    ---------------------------------------------   -------------------------------------------

Other product lines                           347             438           -21%            1,050           3,094         -66%
                                    ---------------------------------------------   -------------------------------------------

Consolidated Revenues                     $22,245         $22,132             1%          $71,383         $68,134           5%
                                    =============================================   ===========================================
</TABLE>


Consolidated  revenues  for  the  three  months  ended  September  30,  2005  of
$22,245,000 increased slightly over revenues of $22,132,000 for the three months
ended September 30, 2004.  Consolidated revenues increased 5% to $71,383,000 for
the nine months ended September 30, 2005 from  $68,134,000 in the  corresponding
period in 2004. We believe that third quarter revenues were negatively  impacted
by a decline in domestic customer ordering  patterns,  which is believed to have
resulted,  in part, from the uncertainty  created in our domestic  customer base
and sales force by MTF's unsolicited  proposal to acquire Osteotech.  Since this
situation  continued  into October until MTF withdrew its  proposal,  revenue in
October was weaker than expected as well.

                                       17
<PAGE>

Segment Net Revenues

Revenues in the DBM Segment  increased  4% and 15% for the three months and nine
months ended September 30, 2005,  respectively,  as compared to the same periods
in the prior year. Domestic Grafton(R) DBM revenues increased in both periods in
2005 as compared to the comparable  periods in 2004 substantially as a result of
recognition  of higher per unit  selling  prices  resulting  from the  continued
implementation  of  the  strategic  initiative  to  distribute  our  proprietary
products  directly to end users, for which we recognize a greater portion of the
end user selling  price.  Revenues for the shipment of private  label DBM tissue
forms  declined in both periods in 2005,  primarily due to a reduction in orders
from one of our  partners in the third  quarter of 2005 as they  adjusted  their
inventory  levels.  Our initial  shipments to this partner occurred in the third
quarter  of  2004,  reflecting  their  initial  inventory  build.  International
Grafton(R) DBM revenues increased in both the three months and nine months ended
September 30, 2005 due to increased unit sales volume over the  comparable  2004
periods  resulting  from  increased  penetration  in  existing  markets  and the
continued expansion into additional markets.

Base Allograft Tissue Segment, or Base Tissue Segment,  revenues declined 3% for
the three months ended  September 30, 2005 compared to the prior year period and
were basically flat for the nine months ended  September 30, 2005 as compared to
the same period in 2004. Revenues generated from the distribution of Graftech(R)
Bio-implants  declined  13% and 14% in the third  quarter and nine months  ended
September 30, 2005, respectively,  as compared to the same respective periods in
2004,  primarily  due to continued  lower  demand.  Domestic  client  processing
revenues  declined in both  periods in 2005 as  compared to the same  periods in
2004 because we processed  50% and 31% fewer donors for our clients in the three
months and nine months ended  September 30, 2005,  respectively,  as compared to
the same prior year periods.  The domestic  distribution  of traditional  tissue
increased 337% and 260% for the three months and nine months ended September 30,
2005, respectively,  as compared to the same periods in 2004, mainly as a result
of increased unit sales volume.

One of our clients in the DBM and Base Tissue Segments,  MTF,  accounted for 24%
and 28% of  consolidated  net  revenues  during the three months and nine months
ended  September  30, 2005,  respectively.  In January,  2005,  MTF acquired the
allograft  tissue banking  operations of the American Red Cross  ("ARC"),  which
previously had been a major customer of the Company.  For the three months ended
September  30, 2005,  we did not  recognize  any revenues from ARC. For the nine
months ended  September  30, 2005,  ARC  accounted  for 1% of  consolidated  net
revenues. For the three months and nine months ended September 30, 2004, MTF and
ARC accounted for 21% and 20% and 22% and 21%, respectively, of consolidated net
revenues.


                                       18
<PAGE>



Gross Profit Margin

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
                                           Three Months Ended September          Nine Months Ended September
                                                        30,                                  30,
                                          --------------------------------      -------------------------------
                                                      2005           2004                  2005           2004
                                          --------------------------------      -------------------------------
                                                                 (dollars in thousands)

     Gross Profit                                  $ 7,006       $ 10,298              $ 27,706       $ 29,893
     Gross Profit Margin                               32%            47%                   39%            44%
</TABLE>


Consolidated  gross profit margins  declined in the three months and nine months
ended September 30, 2005 as compared to the same periods in 2004,  primarily due
to the  underabsorption  of  processing  costs,  primarily  due to the continued
planned reduction in unit production output as a result of strategic initiatives
to reduce inventories in the Graftech(R)  Bio-implant product line and a decline
in the number of donors processed;  reserves and write-offs for excess, obsolete
and  expiring  tissue  inventories,  primarily  in the  Graftech(R)  Bio-implant
product line, of approximately $1,800,000 and $4,142,000 in the three months and
nine months ended September 30, 2005, respectively.  In addition, the decline in
gross profit margin results from the continued  shift in revenue mix,  including
the  growth of  international  revenues,  which  represent  15% of  consolidated
revenues in both periods of 2005 as compared to 13% in the third quarter of 2004
and 12% for the nine months ended  September  30, 2004.  International  revenues
have a lower gross profit margin than domestic  revenues due to utilization of a
stocking distributor business model. Also, gross profit margins were impacted by
more aggressive sales discounting to offset domestic competitive  pressures.  We
expect that we will continue to experience  underabsorption  of processing costs
through the remainder of 2005,  and we may provide  additional  reserves for, or
write-offs  of,  portions  of our  tissue  inventories,  especially  related  to
Graftech(R) Bio-implants,  as a result of our strategic initiatives. As such, we
expect that gross profit margins will continue to be negatively  impacted by our
strategic initiatives in the fourth quarter of 2005.

Operating Expenses

<TABLE>
<S>                                                              <C>                                          <C>
                                    Three Months Ended September 30,              Nine Months Ended September 30,
                           -------------------------------------------   -------------------------------------------
                                                              Percent                                       Percent
                                  2005           2004         Change         2005           2004            Change
                           ------------   ------------    ------------   ------------   ------------   -------------
                                                            (dollars in thousands)
   Marketing, Selling & G&A   $ 11,607        $ 7,684            +51%       $ 33,180       $ 27,868            +19%
   Research & Development        1,101          1,145             -4%          3,287          3,188             +3%
                           -------------------------------------------   -------------------------------------------
                           -------------------------------------------   -------------------------------------------
     Total                    $ 12,708        $ 8,829            +44%       $ 36,467       $ 31,056            +17%
                           ===========================================   ===========================================
</TABLE>

Marketing,  selling,  general and administrative expenses increased in the three
months and nine  months  ended  September  30,  2005,  principally  due to costs
associated with implementation of programs to turn around the domestic business,
costs  associated with the expansion of our  international  operations and donor
recovery  activities,  expenses  associated  with our  continuing  investment in
strengthening  and  diversifying  our  domestic  tissue  sources  and  increased
professional  fees,  including  the  costs  associated  with  MTF's  unsolicited
proposal to acquire Osteotech of $662,000.

                                       19
<PAGE>


Research  and  development  expenses  decreased  4% for the three  months  ended
September  30, 2005 and  increased  3% for the nine months ended  September  30,
2005, as compared to the same  respective  period in 2004,  primarily due to the
timing of our  efforts  related to the  development  new  product  lines or line
extension for existing product lines, including Grafton(R) DBM Orthoblend, which
was  launched  in  April,  2005,  and the  Xpanse(TM)  Bone  Insert,  which  was
introduced  in  September,   2005.  We  expect  that  research  and  development
expenditures  will  continue to increase in future  quarters due to new projects
and programs and increased activity on existing projects and programs, including
the continued development of our Plexus(TM) Technology.

Operating Income (Loss)


<TABLE>
<S>                                                             <C>                                      <C>
                                Three Months Ended September 30,          Nine Months Ended September 30,

                           ----------------------------------------- -----------------------------------------
                           -------------------------  -------------- -------------------------  --------------
                                                          Percent                                    Percent
                              2005           2004         Change         2005           2004         Change
                           --------   ------------    ------------   ------------   ------------   -----------
                                                        (dollars in thousands)

     DBM Segment:              $   (586)    $ 2,008           -129%   $    1,297     $  3,249          -60%
     Base Tissue Segment         (5,352)       (929)           476%      (10,263)      (1,993)         415%
     Other product lines            236         390            -39%          205       (2,419)        -108%
                           ----------------------------------------- ---------------------------------------
                           ----------------------------------------- ---------------------------------------
       Total                    $(5,702)    $ 1,469            488%    $  (8,761)     $(1,163)         653%
                           ========================================= =======================================
</TABLE>


We  incurred a  consolidated  operating  loss in both the three  months and nine
months ended  September  30, 2005  resulting  primarily  from lower gross profit
margins and  increased  operating  expenses as  previously  discussed  elsewhere
herein.  The operating  loss in both the DBM Segment and the Base Tissue Segment
is directly  related to the impact of lower gross profit  margins and  increased
operating costs, although the Base Tissue Segment bears a significant portion of
the negative impacts from  underabsorption  of processing costs and the reserves
and write-offs for excess, obsolete and expiring tissue inventories.

Other, Net

Other, net, which primarily represents interest expense, net of interest income,
and foreign currency  translation and transaction  gains and losses was $419,000
and  $1,393,000  for the three months and nine months ended  September 30, 2005,
respectively,  compared to $4,000 and $349,000 for the corresponding  periods in
2004. Interest expense, net of interest income, was $394,000 and $546,000 in the
three months and nine months ended September 30, 2005, respectively, compared to
$137,000 and $359,000 in the three  months and nine months ended  September  30,
2004,  respectively.  Interest expense, net of interest income, has increased in
both  periods  in  2005 as  compared  to the  same  respective  periods  in 2004
primarily  as a  result  of  increased  interest  costs  on  the  capital  lease
obligation  established as a result of the sale and leaseback transaction of our
processing facility, which occurred on August 8, 2005. Losses related to changes
in exchange rates on foreign transactions  denominated in US dollars,  primarily
related to intercompany  debt, were $25,000 and $847,000 in the three months and
nine  months  ended  September  30,  2005,  respectively,  compared to income of
$133,000  and $10,000 in the three months and nine months  ended  September  30,
2004, respectively.

                                       20
<PAGE>

On July 7, 2005,  the Board of Directors  declared $5.5 million of  intercompany
loans  between the  domestic  company  and OST  Developpement  S.A.,  our French
subsidiary,  to be  permanent  debt  requiring  no  principal  payments  on such
intercompany  loans for the  foreseeable  future.  As a result,  and pursuant to
Statement of Financial  Accounting  Standard  ("SFAS") No. 52, "Foreign Currency
Translation",  from July 7, 2005 forward that portion of the  intercompany  debt
will no longer be subject to the  effects of  variations  in  currency  exchange
rates between the U.S.  dollar and the Euro. The remaining  outstanding  balance
under  intercompany  loans between the domestic company and OST Developpement of
$3,817,000 as of September 30, 2005 will continue to be subject to variations in
currency exchange rates between the U.S. dollar and the Euro.

Income Tax Provision (Benefit)

We had an income tax expense for the three months ended September 30, 2005 and a
benefit for the nine months ended  September 30, 2005 primarily due to losses in
our  domestic  and  foreign   operations   and  our  assessment  of  the  future
recoverability  of these tax benefits.  In assessing our actual  results for the
nine months ended September 30, 2005 and our  expectations  for the remainder of
2005, we determined  that we had  recognized  more tax benefits in the first two
quarters of 2005 than we currently  expect to be able to recognize  for the full
year. By the end of 2005, our income tax benefit will be principally  equivalent
to amounts we expect to be able to currently  realize in cash.  As such, we have
not provided any benefit for a substantial  portion of domestic  federal  income
tax benefits and all domestic state income tax benefits as we have established a
valuation  allowance  for such income tax benefits in  accordance  with SFAS No.
109, "Accounting for Income Taxes", because our current assessment is that it is
more likely than not that such  benefits will not be  recoverable.  We intend to
maintain a valuation allowance related to domestic income taxes until sufficient
positive  evidence  exists to support the reversal of any  valuation  allowances
which we have established.

The effective  income tax rate for the three months ended September 30, 2004 was
30%. We  recognized  income tax  benefits  for the three  months and nine months
ended  September  30, 2004  primarily  due to losses  incurred  in our  domestic
operation and our  assessment of the  recoverability  of these  benefits and our
ability  to  utilize   previously   unrecognized   foreign  net  operating  loss
carryforwards,  which  carried a full  valuation  allowance,  to offset  foreign
income.


Liquidity and Capital Resources

At September 30, 2005, we had cash and cash equivalents of $18,345,000  compared
to   $13,391,000   at   December 31,   2004.  We  invest  excess  cash  in  U.S.
Government-backed securities and investment grade commercial paper of major U.S.
corporations. Working capital decreased $692,000 to $56,147,000 at September 30,
2005 compared to $56,839,000 at December 31, 2004,  principally due to a decline
in  tissue   inventories  and  an  increase  in  accounts  payable  and  accrued
liabilities,  partially  offset by  increased  accounts  receivable  and the net
proceeds generated from the sale of land and building of $5,323,000.

Net cash provided by operating  activities  was  $2,860,000 and $148,000 for the
nine months ended September 30, 2005 and 2004, respectively. The increase in net
cash  provided by operating  activities  is primarily due to a refund of federal
income taxes and increased accounts payable.

                                       21
<PAGE>

Cash provided by investing  activities was $14,899,000 for the nine months ended
September 30, 2005  compared to cash used in investing  activities of $1,424,000
for the nine months  ended  September  30,  2004.  Cash  provided  by  investing
activities in 2005 primarily  results from the sale of the processing  facility.
Cash  used in  investing  activities  in 2004  primarily  results  from  capital
expenditures of $1,333,000.

Net cash used in financing  activities  was  $12,693,000  and $1,752,000 for the
nine months ended  September 30, 2005 and 2004,  respectively.  Net cash used in
financing   activities  in  2005  primarily  represents  the  repayment  of  all
outstanding  bank debt  during  the  third  quarter  2005,  and in 2005 and 2004
scheduled  principal  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.

On August 8, 2005, we completed the sale of our  principal  processing  facility
located in Eatontown,  New Jersey to an unrelated  third party for $16.5 million
in cash. We also entered into an agreement to leaseback the processing facility.
The  lease  agreement  is for an  initial  term of 20 years  with two  five-year
renewal options at our election.  Lease payments will be $2,326,000 annually for
the first  seven years of the  agreement,  $1,460,000  for years  eight  through
twelve,  a rental  rate to be  determined  at the time  with a  minimum  rate of
$1,460,000  and  a  maximum  rate  of  $1,533,000  for  years  thirteen  through
seventeen,  and a rental rate to be  determined  at the time with a minimum rate
equal  to the  actual  rental  rate  in year  seventeen  and a  maximum  rate of
$1,609,650  for years  eighteen  through  twenty.  We retained  ownership of all
property and equipment,  including leasehold  improvements,  directly related to
the operation of our business.  The transaction was recorded as a capital lease,
with  the  resulting  gain of  approximately  $3,630,000  from  the  sale of the
facility  deferred and amortized in proportion to the amortization of the leased
assets.

We utilized a portion of the proceeds from the sale of our  processing  facility
to repay all outstanding  indebtedness under the Credit Facility as of August 8,
2005 of $10,963,000 and the line of credit was cancelled. All remaining proceeds
of approximately $5,323,000, net of transaction costs of approximately $214,000,
arising from this transaction will be utilized for general corporate purposes.

Subject to the  uncertainty  surrounding  our domestic DBM product lines as more
fully discussed in Note 17 in the condensed  consolidated  financial  statements
and "Government Regulation" included elsewhere in this "Management's  Discussion
and Analysis of Financial Condition and Results of Operations",  we believe that
our cash and cash equivalents and anticipated future cash flows from operations,
will be sufficient to meet our forecasted cash needs for the next twelve months.
If we are  unsuccessful  in our efforts to either  obtain  clearance for our DBM
products  by the FDA  imposed  deadline  of  November  15,  2005,  or  obtain an
extension of this deadline,  we may be required to cease future  distribution of
some or all of our DBM tissue forms from the domestic  market until such time as
we receive  clearance.  If this action  were to happen,  it will have a material
adverse  effect on our financial  position,  including our available  cash,  and
results of operations.  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.

Recent Accounting Pronouncement

In December, 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 (Revised 2004),  "Share-Based  Payment" ("SFAS No. 123R"). SFAS No. 123R
addresses all forms of share-based  payment  ("SBP")  awards,  including  shares
issued under employee stock purchase plans, stock options,  restricted stock and
stock appreciations  rights. SFAS No. 123R will require us to expense SBP awards
as compensation costs for SBP transactions measured at fair value. SFAS No. 123R
would have been effective  beginning in our third quarter of 2005,  however,  in
April, 2005, the Securities and Exchange  Commission extended the effective date
of SFAS No. 123R to January 1, 2006.  We intend to adopt SFAS No. 123R using the
modified prospective method. We are currently evaluating our long-term incentive
plans related to the issuance of stock  options,  but no decisions have yet been
made.

                                       22
<PAGE>

In March,  2005, the FASB issued FASB  Interpretation  No. 47,  "Accounting  for
Conditional  Asset  Retirement   Obligation"  ("FIN  47").  The   interpretation
addresses  diverse   practices,   which  have  developed  with  respect  to  the
recognition  of asset  retirement  obligations  when the timing and/or method of
settlement  of  an  obligation   are   conditional   on  a  future  event.   The
interpretation  requires  recognition  of a  liability  for the fair  value of a
conditional  asset  retirement  obligation  if the  liability  can be reasonably
estimated.  The fair value of a liability for the conditional  asset  retirement
obligation  should be recognized  when  incurred  (generally  upon  acquisition,
construction or development)  and/or through the normal  operation of the asset.
This  guidance is  effective  no later than the end of fiscal years ending after
December 15, 2005.  Retrospective  application for interim financial information
is  permitted  but is not  required.  We are in the  process of  evaluating  the
impact, if any, of implementing FIN 47.

In May,  2005,  the FASB  issued  SFAS No.  154,  "Accounting  Changes and Error
Corrections"  ("SFAS No. 154").  SFAS No. 154 addresses the requirements for the
accounting  for and reporting of a change in accounting  principle.  It requires
retrospective  application to prior periods  financial  statements of changes in
accounting  principles  unless  a  pronouncement  giving  rise  to a  change  in
accounting  principle  includes specific  transition  provisions,  in which case
those  provisions  should be followed.  This  guidance must be  implemented  for
accounting  changes and  corrections  of errors made in fiscal  years  beginning
after December 15, 2005.

Contractual Obligations

As of September  30,  2005,  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" in our
Annual Report on Form 10-K for the year ended December 31, 2004,  except for the
minimum lease  commitments  under the capital lease  obligation  entered into on
August  8,  2005  and the  repayment  of the  then  outstanding  balance  of our
long-term  debt. As of September 30, 2005,  future  minimum lease payments under
the capital lease obligation entered into on August 8, 2005 are as follows:

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
                                                                       Less Than                        After
(In thousands)                                              Total       One Year        Years 2-3        3 Years

Capital lease obligation                                  $34,997         $2,326         $4,652         $28,019
</TABLE>

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   related  to  the
translation  of  financial  statements  denominated  in foreign  currency  to US
dollars.  Losses  related to changes in exchange  rates on foreign  transactions
denominated  in US  dollars,  including  intercompany  debt,  were  $25,000  and
$847,000  in the  three  months  and  nine  months  ended  September  30,  2005,
respectively,  compared to gains of $133,000 and $10,000 in the three months and
nine months ended September 30, 2004, respectively.

Litigation

Osteotech,  Inc. is involved in various legal  proceedings.  For a discussion of
these  matters  see,  Note 11 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, 2004 and our
Quarterly  Reports on Form 10-Q for the  quarters  ended March 31, 2005 and June
30,  2005,  respectively.  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.

                                       23
<PAGE>

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,  2004.  There  have  been no
significant changes in our market risk exposures from the fiscal 2004 year-end.

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

During the first nine months of 2005,  our  management,  including the principal
executive  officer and principal  financial  officer,  evaluated our  disclosure
controls and procedures (as defined in Rules  13a-15(e) and 15d-15(e)  under the
Securities  Exchange  Act  of  1934)  related  to  the  recording,   processing,
summarization  and reporting of information in our reports that we file with the
SEC. These disclosure  controls and procedures have been designed to ensure that
material information  relating to us, including our subsidiaries,  is made known
to our management, including these officers, by other of our employees, and that
this information is recorded, processed,  summarized, evaluated and reported, as
applicable,  within the time periods specified in the SEC's rules and forms. Due
to the inherent  limitations of control systems,  not all  misstatements  may be
detected.  These  inherent  limitations  include the realities that judgments in
decision-making  can be faulty and that  breakdowns  can occur because of simple
error or mistake.  Additionally,  controls can be circumvented by the individual
acts of some  persons,  by  collusion of two or more  people,  or by  management
override  of  the  control.   Our  controls  and  procedures  can  only  provide
reasonable, not absolute, assurance that the above objectives have been met.

A  material  weakness  is a control  deficiency,  or a  combination  of  control
deficiencies,  that  results  in more than a remote  likelihood  that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.

During  the  course  of  the  quarter  ended  September  30,  2005,   management
identified,  and remediated, a material weakness with respect to the preparation
and review of certain domestic financial information,  which was included in our
internal  financial  results for the month ended August 31, 2005.  Specifically,
sufficient  review,  investigation and follow-up on underlying  account analyses
were not performed pursuant to established procedures. The matter was identified
by the domestic  financial  group and corrected  prior to the  completion of the
consolidated  financial  statements  for the quarter  ended  September 30, 2005.
Management  believes that no other monthly periods were effected.  To reduce the
risk of a  recurrence  of this  matter or similar  matters,  certain  additional
review  procedures  have been  instituted  effective with the preparation of the
financial statements for the quarter ended September 30, 2005.

Based on their  evaluation,  and the  remediation of the  deficiency  identified
above, as of September 30, 2005, our principal  executive  officer and principal
financial officer have concluded that our disclosure controls and procedures (as
defined in Rules  13a-15(e) and 15d-15(e)  under the Securities  Exchange Act of
1934, as amended (the "Exchange  Act")) are effective to reasonably  ensure that
the  information  required to be  disclosed by us in the reports that we file or
submit  under  the  Securities  Exchange  Act of  1934 is  recorded,  processed,
summarized  and  reported  within the time  periods  specified  in SEC rules and
forms.

                                       24
<PAGE>

Changes in internal controls

Except as discussed  above,  there were no changes made in our internal  control
over  financial  reporting,  as such  term is  defined  in Rules  13a-15(f)  and
15(d)-15(f)  under the Exchange  Act,  during the period  covered by this report
that have materially  affected,  or are reasonably likely to materially  affect,
these controls subsequent to the date of their last evaluation.

PART II.      OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

The following is a description of material developments that occurred during the
three months ended September 30, 2005 in lawsuits  reported in our Annual Report
on Form 10-K for the year ended  December 31, 2004 and our Quarterly  Reports on
Form 10-Q for the quarters ended March 31, 2005 and June 30, 2005. Additionally,
from time to time 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 on our results of operations or financial condition.

Tissue Transplant Technology, Ltd. d/b/a Bone Bank Allografts v. Osteotech, Inc.

In  December,  2004,  we were  served  with a suit  filed by  Tissue  Transplant
Technology,  Ltd.  d/b/a Bone Bank  Allografts  ("BBA")  alleging,  among  other
things, breach of contract in connection with a processing agreement between the
two parties  entered  into on September 1, 2000.  BBA's  complaint,  as amended,
contains  claims for breach of contract,  tortious  interference  with  existing
contract,   tortious  interference  with  prospective  business   relationships,
negligence,  breach of fiduciary duty,  unfair  competition,  fraud, and federal
unfair  competition.  BBA does not  allege a  specified  amount of  damages.  On
January 31,  2005,  we filed a motion to transfer  venue to the  District of New
Jersey and a motion to dismiss some of BBA's claims. On April 26, 2005, the U.S.
District  Court for the Western  District of Texas denied our motion to transfer
venue and  granted  our  motion to  dismiss  only with  respect to the breach of
fiduciary duty claim.  As a result,  litigation  with respect to BBA's remaining
claims will go forward in the Western  District of Texas.  On May 10,  2005,  we
filed our  answer,  affirmative  defenses  and two  counterclaims  for breach of
contract. The parties have previously  participated in three mediation sessions,
but  were  unable  to  reach a  non-litigation  resolution  to the  dispute.  On
September 14, 2005,  the Court  granted BBA's motion to file its second  amended
complaint,  which  tracks the  allegations  of the  amended  complaint  and adds
further allegations on the fraud and unfair competition claims.

We believe that the claims made against us in this action are without  merit and
will vigorously defend against such claims.

ITEM 5.  OTHER MATTERS

As a result of the advance notice provision for stockholder  proposals  included
in Osteotech's  Fourth Amended and Restated  Bylaws,  previously filed on a Form
8-K filed with the SEC on August 31, 2005, the required notice date for non-Rule
14a-8 stockholder    proposals    that   was   previously    published    in the
Company's Revised Definitive Proxy Statement on Schedule 14A, filed with the SEC
on May  5,  2005  has  changed.

As previously published,  in order for a stockholder to have a proposal included
in the proxy statement for the 2006 annual  stockholders'  meeting, the proposal
must comply with both the procedures identified by Rule 14a-8 under the Exchange
Act and be received in writing by  Osteotech's  Secretary on or before 5:00 p.m.
Eastern  Standard Time on January 9, 2006. Such a proposal will be considered at
the 2006 annual stockholders' meeting.

                                       25
<PAGE>



In the event a  stockholder  does not meet the  January  9, 2006  deadline,  the
stockholder  can still give  notice of a proposal  to be  presented  at the 2006
annual stockholders'  meeting between 5:00 p.m. Eastern Standard Time ("EST") on
February 9, 2006 and 5:00 p.m. EST on March 11,  2006;  however,  such  proposal
will not be included in the proxy  materials  relating to such  meeting.  Such a
proposal will be considered timely within Rule 14a-4(c) and may be considered at
the 2006  annual  stockholders'  meeting if it  complies  with Rule  14a-8.  The
previously  published deadline for such proposals was 5:00 p.m. EST on March 25,
2006.

Any proposal  received after March 11, 2006 will be considered  untimely  within
Rule  14a-4(c) of the Exchange  Act and the persons  named in the proxy for such
meeting may  exercise  their  discretionary  voting  power with  respect to such
proposal.

                                       26
<PAGE>


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits (numbered in accordance with Item 601 of Regulation S-K)
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

 Exhibit                                                                                                             Page
 Number          Description                                                                                        Number

    10.56       Form of  Nontransferable  Non-Incentive  Stock Option  Agreement  pursuant to the 1991 Stock Option      *
                Plan and Form of Amendment thereto
    10.57       Form of  Nontransferable  Incentive Stock Option  Agreement  pursuant to the 1991 Stock Option Plan      *
                and Form of Amendment thereto
    10.58       Form of Nontransferable  Non-Incentive  Stock Option Agreement Cliff Vesting Option pursuant to the      *
                2000 Stock Plan and Form of Amendment thereto
    10.59       Form of  Nontransferable  Non-Incentive  Stock Option Agreement pursuant to the 2000 Stock Plan and      *
                Form of Amendment thereto
    10.60       Form of Nontransferable Incentive Stock Option Agreement Cliff Vesting Option pursuant to the 2000       *
                Stock Plan and Form of Amendment thereto
    10.61       Form of  Non-Qualified  Stock Option  Agreement  pursuant to the 1991 Stock Option Plan and Form of      *
                Amendment thereto
    10.62       Purchase and Sale Agreement between  Osteotech,  Inc. and 201 Industrial Way, Inc., dated August 5,      *
                2005
    10.63       Agreement of Lease between 201 Industrial Way, Inc. and Osteotech, Inc., dated August 5, 2005            *
    10.64       Employment  Agreement,  effective  as of  November 1, 2000,  between  Osteotech,  Inc.  and Mark H.      *
                Burroughs
    10.65       Indemnity  Agreement,  dated as of November 1, 2000,  by and between  Osteotech,  Inc.  and Mark H.      *
                Burroughs
    10.66       Employee Confidential Information,  and Invention and Non-Competition  Agreement, dated November 1,      *
                2000, by and between Osteotech, Inc. and Mark H. Burroughs
    10.67       Change in Control Agreement,  dated as of November 1, 2000, by and between Osteotech, Inc. and Mark      *
                H. Burroughs
    10.68       Retirement  Agreement,  dated as of July 26, 2005,  by and between  Osteotech,  Inc. and Michael J.      *
                Jefferies
    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

</TABLE>


                                       27
<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:  November 9, 2005                    OSTEOTECH, INC.
(Registrant)

Date:  November 9, 2005               By:  /s/RICHARD W. BAUER

                                           Richard W. Bauer
                                           Chief Executive Officer
                                           (Principal Executive Officer)



Date:  November 9, 2005               By:  /s/MICHAEL J. JEFFRIES
                                           Michael J. Jeffries
                                           Executive Vice President,
                                           Chief Financial Officer
                                           (Principal Financial Officer and
                                           Chief Accounting Officer)