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 March 31, 1999

                                       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
     incorporation or organization)                       Identification No.)

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.
Yes [X] No [_]

                      Applicable Only to Corporate Issuers

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practical date.

Common Stock, $.01 par value - 13,841,729 shares as of April 30, 1999.



<PAGE>

PART I.  FINANCIAL INFORMATION
ITEM 1.  Financial Statements

                        OSTEOTECH, INC. AND Subsidiaries
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (unaudited)
                             (dollars in thousands)

                                                         March 31,  December 31,
                                                           1999         1998
--------------------------------------------------------------------------------
ASSETS
--------------------------------------------------------------------------------
Current assets:
     Cash and cash equivalents                           $  8,676    $ 15,119
     Short-term investments                                 8,664       2,922
     Accounts receivable, net                              13,783      11,980
     Inventories                                            2,068       1,568
     Prepaid expenses and other current assets              6,459       5,533
                                                        ------------------------
        Total current assets                               39,650      37,122

Property, plant and equipment, net                         20,804      16,044
Excess of cost over net assets of business acquired,
     less accumulated amortization of $1,797 in 1999
     and $1,701 in 1998                                     3,918       1,997
Other assets                                                1,177       1,951
--------------------------------------------------------------------------------
Total assets                                             $ 65,549    $ 57,114
================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
Current liabilities:
     Accounts payable and accrued liabilities            $  9,692    $  9,935
     Notes payable                                            526         609
     Current maturities of long-term debt and
         obligations under capital leases                     102         205
                                                        ------------------------
        Total current liabilities                          10,320      10,749

Other liabilities                                           1,124         435
--------------------------------------------------------------------------------
Total liabilities                                          11,444      11,184
--------------------------------------------------------------------------------

Commitments and contingencies

Stockholders' equity:
     Preferred stock, $.01 par value; 5,676,595 shares
         authorized; no shares issued or outstanding
     Common stock, $.01 par value; 20,000,000 shares
         authorized; issued and outstanding 13,837,302
         shares in 1999 and 13,380,291 shares in 1998         137         133
     Additional paid-in capital                            42,496      37,332
     Accumulated other comprehensive income (loss)           (140)         11
     Retained earnings                                     11,612       8,454
--------------------------------------------------------------------------------
Total stockholders' equity                                 54,105      45,930
--------------------------------------------------------------------------------
Total liabilities and stockholders' equity               $ 65,549    $ 57,114
================================================================================

See accompanying notes to condensed consolidated financial statements.

                                       -2-

<PAGE>

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


Three Months Ended March 31,                               1999           1998
--------------------------------------------------------------------------------
Net revenues:
     Service                                        $    17,857    $    13,157
     Product                                                831            318
                                                  ------------------------------
                                                         18,688         13,475

Cost of services                                          5,454          4,053
Cost of products                                            403            174
                                                  ------------------------------
                                                          5,857          4,227
                                                  ------------------------------

Gross profit                                             12,831          9,248


Marketing, general and administrative expenses            6,374          4,819
Research and development expense                          1,452          1,129
                                                  ------------------------------
                                                          7,826          5,948
                                                  ------------------------------

Operating income                                          5,005          3,300

Interest and other income, net                              250            252
                                                  ------------------------------

Income before income taxes                                5,255          3,552

Income tax provision                                      2,097          1,446

--------------------------------------------------------------------------------
Net income                                          $     3,158    $     2,106
================================================================================
Net income per share:
      Basic                                         $       .23    $       .16
      Diluted                                       $       .22    $       .15
--------------------------------------------------------------------------------
Shares used in computing net income per share:
      Basic                                          13,721,763     13,218,824
      Diluted                                        14,548,709     14,158,892
================================================================================

See accompanying notes to condensed consolidated financial statements.

                                       -3-

<PAGE>

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


Three Months Ended March 31,                                 1999         1998
--------------------------------------------------------------------------------
Cash Flow From Operating Activities
   Net income                                              $  3,158    $  2,106
   Adjustments to reconcile net income to net cash
      provided by operating activities:
         Depreciation and amortization                          766         684
         Changes in assets and liabilities:
               Accounts receivable                           (1,285)        131
               Inventories                                      (34)       (317)
               Prepaid expenses and other current assets       (887)      1,128
               Accounts payable and other liabilities        (1,080)       (881)
--------------------------------------------------------------------------------
Net cash provided by operating activities                       638       2,851

Cash Flow From Investing Activities
   Capital expenditures                                      (4,261)     (1,846)
   Purchases of investments                                  (7,688)     (1,972)
   Proceeds from sale of investments                          1,946         500
   Acquisition of business                                   (1,467)
   Increase in other assets                                    (162)        (27)
--------------------------------------------------------------------------------
Net cash used in investing activities                       (11,632)     (3,345)

Cash Flow From Financing Activities
   Proceeds from issuance of common stock                     2,511       1,108
   Income tax benefit related to stock options                2,657       1,075
   Proceeds from issuance of notes payable                      116
   Principal payments on notes payable                         (268)       (181)
   Principal payments on long-term debt
      and obligations under capital leases                     (573)       (169)
   Increase in other liabilities                                171
--------------------------------------------------------------------------------
Net cash provided by financing activities                     4,614       1,833

Effect of exchange rate changes on cash                         (63)         (2)
--------------------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents         (6,443)      1,337
Cash and cash equivalents at beginning of period             15,119      13,884
--------------------------------------------------------------------------------
Cash and cash equivalents at end of period                 $  8,676    $ 15,221
================================================================================

Supplementary cash flow data:
   Cash paid during the period for interest                $     16    $     28
   Cash paid during the period for taxes                          5
   Acquisition of business:
      Fair value of assets acquired                           2,563
      Liabilities assumed                                     2,669

See accompanying notes to condensed consolidated financial statements.

                                       -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  to  present  fairly  the  Company's
     consolidated financial position as of March 31, 1999 and December 31, 1998,
     and the consolidated  results of operations and the consolidated cash flows
     for the  three-month  periods ended March 31, 1999 and 1998. The results of
     operations  for  the  respective   interim   periods  are  not  necessarily
     indicative  of the results to be expected for the full year.  The condensed
     consolidated  financial  statements  should be read in conjunction with the
     audited  financial  statements  for the year ended  December 31, 1998 which
     were included as part of the Company's Report on Form 10-K.

2.   Stock Split

     In February,  1999, the Board of Directors authorized a three-for-two stock
     split in the form of a 50% stock  dividend that was  distributed  in March,
     1999 to stockholders of record on March 5, 1999.  Stockholders'  equity has
     been restated to give  retroactive  recognition  to the stock split for all
     periods presented.  In addition, all references in the financial statements
     to shares, per share data, and stock option data have been restated.

3.   Acquisition

     Effective  January 1, 1999, the Company  completed the acquisition of a 90%
     interest in OST Developpement SA ("OST"), a processor of bovine bone grafts
     for orthopaedic and dental use. The aggregate purchase price paid consisted
     solely  of  cash  consideration  of  9,000,000  French  Francs  ("FRF")  or
     approximately  $1,594,700.  In addition, the Company incurred approximately
     $317,300 of  transaction  costs.  The  acquisition  was  accounted for as a
     purchase and the consolidated  financial statements include the accounts of
     OST from  January 1, 1999.  The  acquisition  resulted in an excess of cost
     over the fair value of net assets  acquired  of  $2,018,000  which is being
     amortized  over 15 years.  The Company  also has the option to purchase the
     remaining 10% of OST at a price to be determined at the time of purchase.


                                       -5-

<PAGE>

                        OSTEOTECH, INC. AND Subsidiaries

              Notes To Condensed Consolidated Financial Statements
                                   (unaudited)

4.   Comprehensive Income

     Comprehensive  income for the three-month  periods ended March 31, 1999 and
     1998 was:

     (dollars in thousands)                                1999            1998
     ---------------------------------------------------------------------------

     Net income                                       $ 3,158           $ 2,106

     Currency translation adjustments                    (151)              (10)
     ---------------------------------------------------------------------------

     Comprehensive Income                             $ 3,007           $ 2,096
     ===========================================================================

5.   Financing Arrangements

     The Company  has a Loan and  Security  agreement  with a U.S.  bank,  which
     provides  for  borrowings  of up to  $3,000,000  under a revolving  line of
     credit and $4,000,000 under an equipment line of credit.  In December 1998,
     the  Company  received  a  commitment  from the same bank for a new  credit
     facility,  which  will  replace  the  current  facilities.  The new  credit
     facility  will  include  a  $5,000,000  revolving  line  of  credit  and  a
     $21,500,000  building  mortgage loan and equipment line of credit which the
     Company will use to fund the  construction  of a new  processing  facility.
     Consummation  of the new  credit  facility  is subject  to  execution  of a
     definitive agreement.

6.   Commitments and Contingencies

     Product Liability Litigation

     The Company is a defendant in two state court product  liability actions in
     which patients claim that they have suffered  damages from the implantation
     of orthopaedic bone screws allegedly distributed by the Company. One of the
     actions  is  stayed.  Management  believes  that the suits and  claims  are
     without  merit and will continue to defend such actions  vigorously.  It is
     the Company's  position that either a device distributed by the Company was
     not implanted in the patient,  or that if the allegations in the complaints
     regarding the use of the device are assumed to be true, the device was used
     in a manner  which  was  contrary  to the use  approved  by the FDA and the
     Company's  written  warnings  concerning use.  Pursuant to its distribution
     agreement  with  the  Company,  the  manufacturer  of the  spinal  fixation
     devices,  Heinrich C. Ulrich,  KG  ("Ulrich")  has agreed to indemnify  the
     Company for all costs,  and damages  incurred by the Company in  connection
     with its distribution of products manufactured by Ulrich, except such costs
     and damages which are caused by the  Company's  gross  negligence,  willful
     misconduct  or  unauthorized  claim made by the  Company in  marketing  the
     products.

                                       -6-

<PAGE>

                        OSTEOTECH, INC. AND Subsidiaries

              Notes To Condensed Consolidated Financial Statements
                                   (unaudited)

6.   Commitments and Contingencies - continued

     In July,  1998,  a  complaint  was filed  against the Company in the Second
     Judicial  District  Court,  Bernallilo  County,  New Mexico,  which alleges
     negligence,    strict    liability,    breach   of   warranty,    negligent
     misrepresentation,  fraud,  and  violation  of the New Mexico  Unfair Trade
     Practices Act arising from allegedly  defective  dental implant coating and
     coating services provided to plaintiffs by a subsidiary of the Company, Cam
     Implants BV.  Plaintiffs have demanded  unspecified  monetary  damages.  In
     August, 1998, the Company removed this action to the United States District
     Court for the  District  of New Mexico  and filed and  served  its  answer,
     denying any and all liability in this action,  and moved to dismiss five of
     the seven claims alleged  against it. In November,  1998, the Company moved
     for  summary  judgment  in its favor on all of the  claims  alleged in this
     action,  on the ground that all of  plaintiffs'  claims are barred by their
     applicable  statutes of  limitations.  In March,  1999, the court dismissed
     with prejudice the plaintiff's  negligence and strict liability claims, and
     to date the Court has limited  discovery in this action to matters  related
     to the statue of limitations  issue.  The Company  believes that the claims
     against it are without merit and will continue to vigorously defend against
     such claims.

     Patent Litigation

     In January,  1998, the Company filed a patent  infringement  action against
     GenSci   Regeneration   Laboratories,   Inc.  ("GenSci  Labs")  and  GenSci
     Regeneration  Sciences,  Inc. ("GenSci  Sciences") alleging that the GenSci
     parties  violated  claims of one of the  patents  involving  the  Company's
     Grafton(R) Demineralized Bone Matrix (DBM) process. Approximately two weeks
     after  Osteotech's  filing,  GenSci  Labs filed a suit  against the Company
     alleging  patent  infringement  of two  patents  assigned to GenSci Labs in
     addition to tortious  interference  with a business  expectancy,  negligent
     interference with a prospective  economic  advantage and inducing breach of
     contract and seeking a declaratory judgment of the invalidity of two of the
     Company's patents covering  Grafton(R) DBM. In February,  1998, GenSci Labs
     amended its complaint  alleging  essentially  the same causes of action but
     adding a third patent to the allegation of patent infringement. The actions
     have been  consolidated into one lawsuit.  In September,  1998, GenSci Labs
     served an amended complaint,  which asserted, in addition to the previously
     asserted  claims,  claims  of  false  advertising  under  Federal  law.  In
     September,  1998, the Company served its answer to this amended  complaint,
     asserted  counterclaims  against  GenSci  Labs  and  served  a  third-party
     complaint  against GenSci  Sciences,  and DePuy Motech,  Inc. The Company's
     counterclaims  and third  party  complaint  accused  the GenSci  parties of
     infringing a second Company  patent,  in addition to the patent referred to
     above,  and accused the DePuy  Motech,  Inc.  and GenSci  parties of acting
     jointly  and  severally  in  infringing  on the  claims  of  both  patents.
     Discovery has commenced and is ongoing. In April, 1999, GenSci Regeneration
     Laboratories  Inc.  made a motion to amend its  complaint to allege that in
     addition to the Company's Grafton(R) DBM Flex product, the

                                       -7-

<PAGE>

                        OSTEOTECH, INC. AND Subsidiaries

              Notes To Condensed Consolidated Financial Statements
                                   (unaudited)

6.   Commitments and Contingencies - continued

     Company's  Grafton(R)  DBM Gel and  Putty  products  infringe  on  GenSci's
     patents  at issue.  GenSci  also  seeks an  amendment  to modify  its false
     advertising  claim,  alleging that in addition to the Company,  individuals
     acting on the Company's behalf engaged in false advertising.

     In April,  1999,  the Company  filed and served its  opposition to GenSci's
     motion and in May,  1999,  GenSci  filed and  served its reply.  The motion
     remains pending. The Company has and will continue to vigorously defend any
     claims  against it and  prosecute  the claims it has  asserted  against the
     GenSci and DePuy parties.

     In February,  1999, a complaint was filed against the Company in the United
     States  District Court for the Northern  District of Florida.  This action,
     which has been brought by  plaintiffs,  University of Florida  Tissue Bank,
     Inc.,  Regeneration  Technologies,  Inc.,  Sofamor Danek Group,  Inc.,  and
     Sofamor Danek L.P. alleges that  Osteotech's  bio-d(TM)  threaded  cortical
     bone  dowel  and  Endodowel  infringe  on the  claims  of U.S.  Patent  No.
     5,814,084,   entitled   "Diaphysical   Cortical  Dowel."  In  April,  1999,
     plaintiffs   filed  an  amended   complaint   adding  a  claim  for  patent
     infringement  against the Company with respect to US Patent No.  5,814,084,
     entitled "Bone Grafting Units",  which is owned by plaintiff  University of
     Florida  Tissue Bank,  Inc. In May,  1999, the Company filed its answer and
     counter claim seeking declaratory  judgment that the patents in question in
     this  action are  invalid  and  otherwise  not  infringed  by the  Company.
     Although  monetary  damages are sought,  an amount has not been  specified.
     Based upon  reviews  conducted  by its outside  patent  counsel,  Osteotech
     believes that its bio-d(TM)  threaded  cortical bone dowel and Endodowel do
     not  infringe  the patent  asserted  in the  action.  Osteotech  intends to
     vigorously defend the action.

     Litigation  is subject to many  uncertainties  and  management is unable to
     predict the outcome of the pending  suits and claims.  It is possible  that
     the results of operations or liquidity and capital resources of the Company
     could  be  adversely  affected  by the  ultimate  outcome  of  the  pending
     litigation or as a result of the costs of  contesting  such  lawsuits.  The
     Company is unable to estimate the  potential  liability,  if any,  that may
     result from the pending litigation and,  accordingly,  no provision for any
     liability   (except  for  accrued   legal  costs)  has  been  made  in  the
     consolidated financial statements.

                                       -8-

<PAGE>

                        OSTEOTECH, INC. AND Subsidiaries

              Notes To Condensed Consolidated Financial Statements
                                   (unaudited)

7.   Earnings Per Share

     The  following  table  sets  forth the  computation  of basic  and  diluted
     earnings  per share for the  three-month  periods  ended March 31, 1999 and
     1998:

     (dollars in thousands except per share data)         1999          1998
     ---------------------------------------------------------------------------

     Net income available to common
      Shareholders                                     $     3,158   $     2,106
     ---------------------------------------------------------------------------
     Denominator for basic earnings per share:
     Weighted average Common shares outstanding         13,721,763    13,218,824

     Effect of dilutive securities:
         Stock options                                     826,541       939,708
         Warrants                                              405           360

                                                       -------------------------
     Denominator for diluted earnings per share         14,548,709    14,158,892
     ---------------------------------------------------------------------------

         Basic earnings per share                      $       .23   $       .16
     ===========================================================================

         Diluted earnings per share                    $       .22   $       .15
     ===========================================================================

8.   Operating Segments

     Summarized  in the table below is financial  information  for the Company's
     reportable segments for the periods ending March 31,:

<TABLE>
<CAPTION>
                                     Grafton(R)          Base
                                        DBM             Tissue
     (in thousands)                   Segment           Segment           Other       Consolidated
     ------------------------------------------------------------------------------------------------
<S>                                    <C>              <C>            <C>              <C>
     Revenues:
         1999                          $11,575          $ 5,803        $ 1,310          $18,688
         1998                            8,403            4,272            800           13,475
     ------------------------------------------------------------------------------------------------
     Operating income (loss):
         1999                          $ 4,438          $ 1,434          $(867)         $ 5,005
         1998                            2,324            1,165           (189)           3,300
     ------------------------------------------------------------------------------------------------
</TABLE>

9.   Reclassifications

     Certain  prior year amounts have been  reclassified  to conform to the 1999
     presentation.

                                       -9-


<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 the Company's  Annual Report on Form 10-K for the year ended December
31, 1998, 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-MONTH PERIODS ENDED MARCH 31, 1999 AND 1998

Results of Operations

All per share data have been adjusted for the  three-for-two  stock split in the
form of a 50% stock dividend in March, 1999.

Net Income

Consolidated  net income in the first quarter of 1999 increased to $3,158,000 or
$.22  diluted net income per share as compared  to net income of  $2,106,000  or
$.15 diluted net income per share in the first quarter of 1998.

The following is a discussion of factors affecting results of operations for the
three-month periods ended March 31, 1999 and 1998.

Net Revenues

Consolidated  net  revenues in the first  quarter of 1999 were  $18,688,000,  an
increase of $5,213,000 or 39% from the $13,475,000  reported in first quarter of
1998. The increase was principally due to higher revenues in both the Grafton(R)
Demineralized  Bone Matrix (DBM) segment ("the  Grafton(R) DBM segment") and the
Base  Allograft  Bone  Tissue  segment  (the "Base  Tissue  segment").  Domestic
revenues, which consist principally of revenues from the Grafton(R) DBM and Base
Tissue segments,  increased 37% and foreign  revenues  increased 73% compared to
the first quarter of 1998. The increase in foreign revenues  resulted  primarily
from the  contribution  to revenues  made by OST  Developpement  SA ("OST").  In
January,  1999,  the  Company  completed  the  acquisition  of 90% of OST  which
principally  processes  bovine bone tissue  products for  orthopaedic and dental
use.

                                      -10-


<PAGE>

Grafton(R) DBM segment  revenues in the first quarter of 1999 were  $11,575,000,
an increase of  $3,172,000  or 38%  compared to the first  quarter of 1998.  The
increase  resulted from increased demand for Grafton(R) DBM and a price increase
effective January 1, 1999. By contrast, Grafton(R) DBM sales from our clients to
hospitals grew 25% in the quarter ended March 31, 1999. The lower growth rate in
end-user  sales in the first  quarter as compared  with the growth in Grafton(R)
DBM sales,  reflects  the  traditional  hospital  buy-in prior to the January 1,
price increase and the year-end  selling  efforts by our direct and agency sales
network.  As a result,  client  inventories were depleted at the end of 1998 and
were  replenished  by our clients in the first  quarter of 1999.  We expect that
during the balance of 1999, the growth in Grafton(R)  DBM segment  revenues will
be more in line with the growth rate in  end-user  sales.  Base  Tissue  segment
revenues were $5,803,000 or 36% higher in the first quarter 1999 compared to the
prior year  principally  as a result of a 29%  increase  in the number of donors
processed for our clients.

During the first three months of 1999 and 1998,  two of our  Grafton(R)  DBM and
Base  Tissue  segment  clients  accounted  for 56% and  37%,  and 54% and 40% of
revenues, respectively.

Gross Profit

Gross  profit as a percentage  of revenues was 69% in the first  quarter of 1999
and 1998. We expect that during the balance of the year, on a comparative basis,
consolidated gross profit as a percentage of consolidated revenues will decrease
by  approximately  two  percentage  points as a result of  increased  processing
expenses associated with the implementation of viral inactivation  technology in
the Base Tissue segment and increases in capacity.

Marketing, General and Administrative

Marketing,  general and administrative  expenses increased  $1,555,000 or 32% in
the first  quarter of 1999  compared to the same period last year.  The increase
was primarily  attributable to: (i) incremental agent commissions resulting from
increased  volume in the Grafton(R) DBM segment and (ii) expanded  marketing and
promotional  activities  associated with the roll out of the bio-d(TM)  threaded
cortical  bone dowel,  which is included  in the Base  Tissue  segment,  and the
Ulrich SSCS(TM) spinal fixation system.  Additionally,  corporate administrative
costs  increased  compared  to 1998  principally  as a result of higher  outside
professional costs.

Research and Development

Research and development  expenses  increased $323,000 or 29% as compared to the
same period in 1998.  The  increase  was  primarily  attributable  to  increased
spending in the Base Tissue segment associated with the continued development of
a viral  inactivation  process and ongoing  development of new allograft  tissue
products.

Operating Income

Operating  income  increased  $1,705,000  or 52% in the  first  quarter  of 1999
compared  to the same  period  in 1998.  The  increase  results  primarily  from
improved  operating  income  in the  Grafton(R)  DBM and  Base  Tissue  segments
resulting from the increases in revenue discussed above.

                                      -11-

<PAGE>

Income Tax Provision

The effective  income tax rate declined to 40% in the first quarter of 1999 from
41% in the first quarter of 1998.

Liquidity and Capital Resources

At March  31,  1999,  we had  cash and  short-term  investments  of  $17,340,000
compared to  $18,041,000  at December  31, 1998.  We invest  excess cash in U.S.
Government-backed securities and investment grade commercial paper of major U.S.
corporations.  Working capital increased  $2,957,000 to $29,330,000 at March 31,
1999 compared to $26,373,000 at December 31, 1998.  Accounts receivable at March
31, 1999 increased $1,803,000 due to revenue increases.

Net cash provided by operating  activities  was $638,000 in the first quarter of
1999, compared to $2,851,000 in the first quarter of 1998. The decrease resulted
primarily from an increase in accounts  receivable and deferred processing costs
and a  decrease  in  accounts  payable  and  accrued  liabilities.  Cash used in
investing  activities increased to $11,632,000 in the first quarter of 1999 from
$3,345,000 in the first quarter of 1998. The increase results  principally from;
(i) capital  expenditures that increased to $4,261,000 from $1,846,000 resulting
from our continued investment in facilities and equipment needed for current and
future business  requirements,  (ii) a net increase in short-term investments of
$5,742,000,  and (iii) cash used to purchase an additional  85% interest in OST.
During the fourth quarter of 1998, we commenced construction of a new processing
facility  in  Eatontown,  New  Jersey.  The  estimated  aggregate  cost  for the
construction  of the building,  including  furniture,  fixtures and equipment is
approximately $25,000,000;  $21,500,000 of which we expect will be funded by our
current bank through a building mortgage loan and equipment line of credit.  The
remaining  balance of $3,500,000 will be funded through  available cash reserves
or  anticipated  cash flow  from  operations.  Net cash  provided  by  financing
activities increased to $4,614,000 from $1,833,000 in the first quarter of 1998,
principally  from cash  proceeds  received  from stock option  exercises and tax
benefits resulting from the stock option exercises.

We have a loan and  security  agreement  with a U.S.  bank,  which  provides for
borrowings of up to $3,000,000  under a revolving  line of credit and $4,000,000
under an equipment line of credit.  At March 31, 1999,  $89,000 was  outstanding
under the  equipment  line of credit  and there were no  borrowings  outstanding
under the  revolving  line of  credit.  The  existing  credit  facility  will be
replaced  with a new credit  facility  that will include a $5,000,000  revolving
line of  credit  in  addition  to the  $21,500,000  building  mortgage  loan and
equipment  line of  credit  discussed  above.  Consummation  of the  new  credit
facility is subject to execution of a definitive agreement.  We also have a line
of credit with a Dutch bank,  which  provides for  borrowings of up to 5,000,000
Dutch  Guilders  ("dfl"),  or  approximately  $2,440,000  at the March 31,  1999
exchange rate. Analysis of our cash position and anticipated cash flow indicated
that it most likely would not be necessary to utilize a  significant  portion of
this line of credit and, therefore, we agreed with the bank to limit borrowings,
if any, to no more than dfl 3,000,000 or  approximately  $1,466,000 at the March
31, 1999 exchange rate. There were no borrowings  outstanding  under this credit
line as of March 31, 1999. Additionally,  we have a line of credit with a French
bank,  which  provides for borrowing of up to FRF  2,750,000,  or  approximately
$452,000  at the  March  31,  1999  exchange  rate.  There  were  no  borrowings
outstanding under this credit line as of March 31, 1999.

                                      -12-

<PAGE>

We  believe  that  our cash and cash  equivalents,  short-term  investments  and
available  lines of credit,  together  with  anticipated  future  cash flow from
operations, will be sufficient to meet our near-term requirements.  From time to
time we may seek  additional  funds through equity or debt  financing.  However,
there can be no assurances that such additional  funds will be available,  or if
available, that such funds will be available on favorable terms.

Impact of Inflation and Foreign Currency Exchange Fluctuations

The results of the Company's operations for the periods discussed above have not
been significantly affected by inflation or foreign currency fluctuations.

Litigation

Osteotech,  Inc. is  involved in various  legal  proceedings  involving  product
liability and patent infringement  claims. For a discussion of these matters see
PART II., ITEM 1. LEGAL PROCEEDINGS,  Note 6 of "Notes to Consolidated Financial
Statements"  and the  Company's  Annual  Report on Form 10-K for the year  ended
December 31, 1998.  It is possible  that our results of  operations or liquidity
and capital resources could be adversely affected by the ultimate outcome of the
pending litigation or as a result of the costs of contesting such lawsuits.

Year 2000

We recognize the need to ensure that Year 2000 issues will not adversely  impact
our  operations  and have  identified  our  potential  Year  2000  risk in three
categories:  internal  business  software and hardware;  internal  non-financial
systems; and noncompliance by suppliers and customers.

     Internal Business Software and Hardware

     Several  years ago we  determined  that our existing  business  information
     systems were not adequate to support the anticipated growth in our business
     operations and purchased a fully integrated management  information system,
     which is Year 2000 compliant. Most of the new system is operational at this
     time and the remainder of the system is scheduled to be operational in June
     1999. The completion cost for  implementation of the remaining  software is
     not expected to be material.  All related hardware used to support internal
     business software is currently Year 2000 compliant.  As a result, we do not
     believe  that we require a  contingency  plan with  respect to our internal
     business  systems,  and therefore  have not developed one.  However,  if we
     subsequently  identify  significant risks we will develop contingency plans
     as deemed necessary at that time.

     Internal Non-financial Systems

     We have completed our assessment of our internal non-financial systems such
     as office  equipment,  security  systems and other  business  equipment and
     determined that minimal changes are required for Year 2000  compliance.  We
     expect to be in full  compliance  with our internal  non-financial  systems
     before  the year  2000  and the  cost to  achieve  such  compliance  is not
     expected to be material.

                                      -13-

<PAGE>

     Noncompliance by Suppliers and Customers

     We  have  initiated  written  communications  with  all of our  significant
     suppliers and customers to determine the extent to which we are  vulnerable
     to those third  parties'  failure to achieve Year 2000  compliance.  We are
     currently evaluating the responses and, if there are any affected suppliers
     and/or  customers,  will  develop  contingency  plans in order to  minimize
     disruption to our business operations.  At this time we cannot estimate the
     additional cost, if any, that may result from such contingency plans.

     Risk of Non-Compliance

     Based on the progress we have made in  addressing  Year 2000 issues,  we do
     not foresee  significant  risks  associated  with our year 2000  compliance
     program at this time.  Although we expect to be  compliant  before the year
     2000, there is no guarantee that these results will be achieved. Partial or
     total  business  systems  interruption  or the  inability of a  significant
     supplier or customer to achieve Year 2000 compliance  could have a material
     adverse effect on our business operations,  financial condition, results of
     operations and business prospects.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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

In April, 1999, GenSci Regeneration Laboratories Inc. made a motion to amend its
complaint  to allege  that in  addition  to the  Company's  Grafton(R)  DBM Flex
product,  the  Company's  Grafton(R)  DBM Gel and  Putty  products  infringe  on
GenSci's  patents at issue.  GenSci also seeks an  amendment to modify its false
advertising claim, alleging that in addition to the Company,  individuals acting
on the  Company's  behalf  engaged in false  advertising.  In April,  1999,  the
Company filed and served its opposition to GenSci's motion. In May, 1999, GenSci
filed and served its reply. The motion remains pending.

University of Florida Tissue Bank, Inc. v. Osteotech, Inc

In April, 1999,  plaintiffs filed an amended complaint adding a claim for patent
infringement  against  the  Company  with  respect to US Patent  No.  5,814,084,
entitled  "Bone  Grafting  Units",  which is owned by  plaintiff  University  of
Florida Tissue Bank, Inc. In May, 1999, the Company filed its answer and counter
claim seeking  declaratory  judgment that the patents in question in this action
are invalid and otherwise not infringed by the Company.

                                      -14-

<PAGE>

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

On February 18, 1999,  Osteotech  filed with the  Commission a Current Report on
Form 8-K to announce  that its Board of Directors  had approved a  three-for-two
split of its common stock in the form of a 50% stock dividend.  The dividend was
distributed  on or about  March 19, 1999 to  shareholders  of record on March 5,
1999.  Upon completion of the  distribution,  Osteotech had  approximately  13.5
million shares of common stock  outstanding.  Fractional  shares were not issued
pursuant to the split, but in lieu of a fractional share, cash was paid based on
the  closing  price of  Osteotech  stock as of the close of  trading on March 5,
1999, as adjusted for the stock split.  The Board of Directors  authorized  this
distribution  of common stock with the intention of benefiting  shareholders  by
increasing  the amount of shares  available  for  investment by a wider range of
shareholders.

On March 25, 1999,  Osteotech's  Board of Directors  approved  amendments to the
Rights  Agreement  dated as of February 1, 1996 which  provides for  Osteotech's
shareholders'  right plan to (i) extend  the  expiration  date of the plan until
March 25, 2009 and (ii) increase the purchase price for the rights to $170.00.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

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

Exhibit                                                                   Page
Number          Description                                              Number
------          -----------                                              ------

27.0            Financial Data Schedule                                    E-1

(b)  Reports on Form 8-K

On February 2, 1999, we filed with the  Commission a Current  Report on Form 8-K
to announce that we had completed its previously announced  acquisition of a 90%
interest in OST Developpement SA of Clermont-Ferrand,  France. On June 25, 1998,
Osteotech  acquired a 5% interest in OST. On January 25, 1999, the remaining 85%
interest in OST was  acquired  with an  effective  date of January 1, 1999.  The
aggregate cost of the transaction is FRF 9,000,000 (about 1.5 million at current
exchange  rates).  The  acquisition is expected to contribute  approximately  $4
million in revenues and be accretive to net income in 1999.  The agreement  also
provides for the future  purchase by Osteotech of the  remaining 10% of OST at a
price to be determined at the time of the acquisition of the remaining shares.




                                      -15-

<PAGE>

On February 18, 1999,  Osteotech  filed with the  Commission a Current Report on
Form 8-K to announce  that its Board of Directors  has approved a  three-for-two
split of its common stock in the form of a 50% stock dividend.  The dividend was
distributed  on or about  March 19, 1999 to  shareholders  of record on March 5,
1999.  Upon completion of the  distribution,  Osteotech had  approximately  13.5
million shares of common stock  outstanding.  Fractional  shares were not issued
pursuant to the split, but in lieu of a fractional share, cash was paid based on
the  closing  price of  Osteotech  stock as of the close of  trading on March 5,
1999, as adjusted for the stock split.  The Board of Directors  authorized  this
distribution  of common stock with the intention of benefiting  shareholders  by
increasing  the amount of shares  available  for  investment by a wider range of
shareholders.

As a result of the split,  the number of shares of Common  Stock  covered by the
following registration statements were proportionately increased as follows:

Registration                 Registered Shares           Shares Covered
Statement                        Pre-Split                 Post-Split
----------------------    ----------------------       ------------------

Form S-8                           818,624                  1,227,936
(File No. 33-64019)

Form S-8                           181,376                    272,064
(File No. 33-42383)

Form S-8                         1,593,885                  2,390,828
(File No. 33-44547)

Form S-8                         1,250,000                  1,875,000
(File No. 33-82782)

On March 3, 1999,  Osteotech  filed with the Commission a Current Report on Form
8-K to  confirm  that it has been  named as a  defendant  in a lawsuit  filed in
United States District  Court,  Northern  District of Florida,  by University of
Florida  Tissue Bank,  Inc.,  Regeneration  Technologies  Inc. and Sofamor Danek
Group Inc. The lawsuit alleges that Osteotech's bone dowel infringes U.S. Patent
No.  5814084.  Based upon  reviews  that had been  previously  conducted  by its
outside patent counsel, Osteotech believes that its bone dowel does not infringe
any claim of this patent. Osteotech intends to vigorously defend this lawsuit.

                                      -16-

<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.


                                                          Osteotech, Inc.
                                                     ---------------------------
                                                            (Registrant)



Date: May 14, 1999                               By: /s/ Richard W. Bauer
                                                     ---------------------------
                                                     Richard W. Bauer
                                                     President, Chief
                                                     Executive Officer

Date: May 14, 1999                               By: /s/ Michael J. Jeffries
                                                     ---------------------------
                                                     Michael J. Jeffries
                                                     Executive Vice President
                                                     Chief Operating Officer
                                                     Chief Financial Officer


                                      -17-