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

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

                                   (Mark One)

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

                                       or

|_|   Transition Report Pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934 for the Transition Period from _________ to ________

Commission File Number 0-19278

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

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

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

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

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

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

                      Applicable Only to Corporate Issuers

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

The number of shares of the registrant's common stock, $.01 par value,
outstanding as of August 11, 2003 was 17,091,733.

<PAGE>

                                Explanatory Note

We are filing this amendment to our Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003, filed with the Securities and Exchange Commission
on August 14, 2003, to reflect restatement of our condensed consolidated balance
sheet as of June 30, 2003, our condensed consolidated statements of operations
for the three and six months ended June 30, 2003 and 2002, our condensed
consolidated statements of cash flows for the six months ended June 30, 2003 and
2002 and related footnotes. The restatement corrects errors related to over
accruals of certain expenses caused by a flaw in the Company's computer software
identified during our 2003 year-end closing procedures. The pretax impact on
results of operations of correcting the error related to the computer flaw for
the three months ended June 30, 2003 and 2002 was an increase of $52,000 and
$187,000, respectively. The pretax impact on results of operations of correcting
the error related to the computer flaw for the six months ended June 30, 2003
and 2002 was an increase of $73,000 and $258,000, respectively. See Note 1 of
"Notes to Condensed Consolidated Financial Statements" for a detailed disclosure
of the impacts of this restatement.

This amendment is limited in scope to the portions of our Quarterly Report on
Form 10-Q/A for the quarter ended June 30, 2003 impacted by this restatement and
does not amend, update or change any other items or disclosures contained in the
original Form 10-Q filed on August 14, 2003. Changes have also been made to the
following additional items in this Quarterly Report on Form 10-Q/A as a result
of the restatement:

      o     Part I, Item 1, "Financial Statements"

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

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

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


                                      -2-
<PAGE>

PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements

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

<TABLE>
<CAPTION>
                                                                     June 30, 2003   December 31, 2002
                                                                      (Restated)
------------------------------------------------------------------------------------------------------
ASSETS
------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                 <C>
Current assets:
     Cash and cash equivalents                                          $ 12,851            $ 10,040
     Short-term investments                                                1,966               3,948
     Accounts receivable, net of allowance of
          $1,695 in 2003 and $943 in 2002                                 16,988              11,545
     Deferred processing costs                                            22,936              15,433
     Inventories                                                           4,464               4,820
     Income tax receivable                                                 1,758               3,357
     Deferred tax assets                                                   5,400               5,431
     Prepaid expenses and other current assets                             1,223               1,023
                                                                        ------------------------------
               Total current assets                                       67,586              55,597

Property, plant and equipment, net                                        50,535              53,535
Goodwill, net of accumulated amortization of $404 in 2003 and 2002         1,669               1,669
Other assets                                                               4,051               3,931
------------------------------------------------------------------------------------------------------
               Total assets                                             $123,841            $114,732
======================================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------------------------------
Current liabilities:
     Accounts payable and accrued liabilities                           $ 16,548            $ 10,489
     Current maturities of long-term debt                                  2,661               2,661
                                                                        ------------------------------
               Total current liabilities                                  19,209              13,150

Long-term debt                                                            14,592              15,922
Other liabilities                                                          1,333               1,637
------------------------------------------------------------------------------------------------------
               Total liabilities                                          35,134              30,709
------------------------------------------------------------------------------------------------------

Commitments and contingencies

Stockholders' equity:
     Preferred stock, $.01 par value; 5,000,000 shares
         Authorized; no shares issued or outstanding
     Common stock, $.01 par value; 70,000,000 shares
         Authorized; issued and outstanding 17,070,358
         shares in 2003 and 17,001,372 shares in 2002                        171                 170
     Additional paid-in capital                                           63,771              63,368
     Accumulated other comprehensive income                                  435                  78
     Retained earnings                                                    24,330              20,407
------------------------------------------------------------------------------------------------------
               Total stockholders' equity                                 88,707              84,023
------------------------------------------------------------------------------------------------------
               Total liabilities and stockholders' equity               $123,841            $114,732
======================================================================================================
</TABLE>

See accompanying notes to condensed consolidated financial statements.


                                      -3-
<PAGE>

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

<TABLE>
<CAPTION>
                                                      Three Months Ended June 30,            Six Months Ended June 30,
                                                        2003               2002               2003                2002
                                                    -------------------------------       -------------------------------
                                                     (Restated)         (Restated)         (Restated)          (Restated)
----------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>                <C>                <C>                <C>
Net revenues:
  Service                                           $     23,222       $     21,102       $     44,544       $     41,688
  Product                                                  1,570              1,907              2,727              3,406
                                                    ------------       ------------       ------------       ------------
                                                          24,792             23,009             47,271             45,094

Cost of services                                           8,320              8,987             17,045             17,055
Cost of products                                           1,144              1,084              2,205              1,965
                                                    ------------       ------------       ------------       ------------
                                                           9,464             10,071             19,250             19,020
                                                    ------------       ------------       ------------       ------------

Gross profit                                              15,328             12,938             28,021             26,074

Marketing, selling, general and administrative             9,735             10,311             19,067             21,540
Research and development                                     935              1,085              1,925              1,988
                                                    ------------       ------------       ------------       ------------
                                                          10,670             11,396             20,992             23,528

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

Operating income (loss)                                    4,658               (243)             7,029                761
Interest expense and other, net                             (169)              (362)              (464)              (620)
Gain on sale of patents                                                         950                                   950
                                                    ------------       ------------       ------------       ------------

Income from continuing operations
   before income taxes                                     4,489                345              6,565              1,091
Income tax provision (benefit)                             1,747                 (1)             2,642                323
                                                    ------------       ------------       ------------       ------------

Income from continuing operations                          2,742                346              3,923                768
Income from discontinued operations,
   net of loss on disposal of $291 in 2002                                       86                                    93
----------------------------------------------------------------------------------------------------------------------------
Net income                                          $      2,742       $        432       $      3,923       $        861
============================================================================================================================
Earnings per share:
     Basic:
        Income from continuing operations           $        .16       $        .02       $        .23       $        .05
        Discontinued operations                                                 .01                                   .01
                                                    ------------       ------------       ------------       ------------
        Net income                                  $        .16       $        .03       $        .23       $        .06
                                                    ============       ============       ============       ============
     Diluted:
        Income from continuing operations           $        .15       $        .02       $        .22       $        .05
        Discontinued operations                                                 .01                                   .01
                                                    ------------       ------------       ------------       ------------
        Net income                                  $        .15       $        .03       $        .22       $        .06
                                                    ============       ============       ============       ============
Shares used in computing earnings per share:
     Basic                                            17,037,302         15,521,088         17,025,760         14,818,770
     Diluted                                          17,736,448         15,864,341         17,468,168         15,200,592
</TABLE>

See accompanying notes to condensed consolidated financial statements.


                                      -4-
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                   2003                2002
Six Months Ended June 30,                                                       (Restated)          (Restated)
----------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>                 <C>
Cash Flow From Operating Activities
    Net income                                                                   $  3,923            $    861
    Adjustments to reconcile income
           to net cash provided by (used in) operating activities:
                 Depreciation and amortization                                      4,272               3,544
                 Gain on sale of patents                                                                 (950)
                 Changes in current assets and liabilities:
                         Accounts receivable                                       (5,294)               (799)
                         Deferred processing costs                                 (7,436)             (2,082)
                         Inventories                                                  496                 (82)
                         Prepaid expenses and other current assets                  1,555                 201
                         Accounts payable and other liabilities                     5,569              (2,892)
----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities                                 3,085              (2,199)

Cash Flow From Investing Activities
    Capital expenditures                                                             (991)             (3,472)
    Proceeds from sale of investments                                               1,982
    Proceeds from sale of patents                                                                       1,000
    Other, net                                                                       (341)                160
----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities                                   650              (2,312)

Cash Flow From Financing Activities
    Proceeds from issuance of common stock                                            404              16,193
    Principal payments on long-term debt                                           (1,331)             (1,299)
----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities                                  (927)             14,894

Effect of exchange rate changes on cash                                                 3                 154
----------------------------------------------------------------------------------------------------------------

Net increase in cash and cash equivalents                                           2,811              10,537
Cash and cash equivalents at beginning of period                                   10,040               5,192
----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                                       $ 12,851            $ 15,729
================================================================================================================

Supplementary cash flow data:
    Cash paid during the period for interest, excluding amounts capitalized      $    506            $    623
    Cash paid (refunded) during the period for taxes                                 (758)                287
</TABLE>

See accompanying notes to condensed consolidated financial statements


                                      -5-
<PAGE>

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

1.    Restatement of Financial Statements

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

Changes to Consolidated Balance Sheet:

                                                        As of June 30, 2003
                                                     ---------------------------
                                                      Reported         Restated
                                                      --------         --------
Deferred tax assets                                  $   5,784         $   5,400
Total current assets                                    69,970            67,586
Total assets                                           124,225           123,841
Accounts payable and accrued liabilities                17,502            16,548
Total current liabilities                               20,163            19,209
Total liabilities                                       36,088            35,134
Retained earnings                                       23,760            24,330
Total stockholders' equity                              88,137            88,707
Total liabilities and stockholders' equity             124,225           123,841
================================================================================

Changes to Consolidated Statement of Operations:

<TABLE>
<CAPTION>
                                                          Three Months Ended                 Three Months Ended
                                                            June 30, 2003                       June 30, 2002
                                                      ----------------------------------------------------------------
                                                      (Reported)        (Restated)         (Reported)        (Restated)
-------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>               <C>                <C>               <C>
Cost of services                                      $   8,372         $   8,320          $   9,174         $   8,987
Gross profit                                             15,276            15,328             12,751            12,938
Operating income (loss)                                   4,606             4,658               (430)             (243)
Income from continuing
   operations before income taxes                         4,437             4,489                158               345
Income tax provision (benefit)                            1,725             1,747                (76)               (1)
Income from continuing operations                         2,712             2,742                234               346
Net income                                                2,712             2,742                320               432
Net income per share:
   Basic:
       Income from continuing operations                      *                *                 .01              .02
       Net income                                             *                *                 .02              .03
   Diluted:
       Income from continuing operations                      *                *                 .01              .02
       Net income                                             *                *                 .02              .03
=========================================================================================================================
</TABLE>


                                      -6-
<PAGE>

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

1.    Restatement of Financial Statements (continued)

      Changes to Consolidated Statement of Operations:

<TABLE>
<CAPTION>
                                                                 Six Months Ended                Six Months Ended
                                                                   June 30, 2003                   June 30, 2002
                                                           --------------------------------------------------------------
                                                           (Reported)         (Restated)    (Reported)         (Restated)
      -------------------------------------------------------------------------------------------------------------------
      <S>                                                   <C>               <C>            <C>               <C>
      Cost of services                                      $  17,118         $  17,045      $ 17,313          $ 17,055
      Gross profit                                             27,948            28,021        25,816            26,074
      Operating income                                          6,956             7,029           503               761
      Income from continuing
         operations before income taxes                         6,492             6,565           833             1,091
      Income tax provision (benefit)                            2,611             2,642           220               323
      Income from continuing operations                         3,881             3,923           613               768
      Net income                                                3,881             3,923           706               861
      Net income per share:
         Basic:
             Income from continuing operations                      *                *            .04              .05
             Net income                                             *                *            .05              .06
         Diluted:
             Income from continuing operations                      *                *            .04              .05
             Net income                                             *                *            .05              .06
      ===================================================================================================================
</TABLE>

1A.   Basis of Presentation

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

2.    Goodwill and Other Intangible Assets

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


                                      -7-
<PAGE>

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

2.    Goodwill and Other Intangible Assets (continued)

      The Company's other intangibles, which principally represents patents,
      patent applications and licenses, have carrying values of $2,344,000 and
      $2,105,000 as of June 30, 2003 and December 31, 2002, respectively, and
      are being amortized over their estimated useful lives ranging from five to
      ten years.

3.    Stock Options

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

      As required by SFAS No. 148, "Accounting for Stock-Based Compensation -
      Transition and Disclosure - an amendment of SFAS No. 123", the following
      table shows the estimated effect on earnings and per share data as if the
      Company had applied the fair value recognition provisions of SFAS No. 123
      to stock-based employee compensation.


                                      -8-
<PAGE>

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

3.    Stock Options (continued)

<TABLE>
<CAPTION>
                                                                     Three Months Ended                 Six Months Ended
                                                                          June 30,                           June 30,
                                                                 --------------------------------------------------------------
                                                                    2003             2002             2003              2002
      (in thousands, except per share data)                      (Restated)       (Restated)       (Restated)       (Restated)
      -------------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>              <C>              <C>              <C>
      Net income
          As reported:
                Income from continuing operations                $     2,742      $       346      $     3,923      $       768
                Discontinued operations                                                    86                                93
                                                                 --------------------------------------------------------------
                Net income                                       $     2,742      $       432      $     3,923      $       861
                                                                 ==============================================================
          Impact on income from continuing
              operations and net income related
              to stock-based employee compensation
              expense, net of tax                                $       207      $        64      $       405      $       172
                                                                 ==============================================================
          Pro forma:
                Income from continuing operations                $     2,535      $       282      $     3,518      $       596
                Discontinued operations                                                    86                                93
                                                                 --------------------------------------------------------------
                Net income                                       $     2,535      $       368      $     3,518      $       689
                                                                 ==============================================================

      Net income per share
          As reported
             Basic:
                Income from continuing operations                $       .16      $       .02      $       .23      $       .05
                Discontinued operations                                                    .01                              .01
                                                                 --------------------------------------------------------------
                Net income                                       $       .16      $       .03      $       .23      $       .06
                                                                 ==============================================================
             Diluted:
                Income from continuing operations                $       .15      $       .02      $       .22      $       .05
                Discontinued operations                                                   .01                               .01
                                                                 --------------------------------------------------------------
                Net income                                       $       .15      $       .03      $       .22      $       .06
                                                                 ==============================================================

          Pro forma
             Basic:
                Income from continuing operations                $       .15      $       .01      $       .21      $       .04
                Discontinued operations                                                   .01                               .01
                                                                 --------------------------------------------------------------
                Net income                                       $       .15      $       .02      $       .21      $       .05
                                                                 ==============================================================
             Diluted:
                Income from continuing operations                $       .14      $       .01      $       .20      $       .04
                Discontinued operations                                                   .01                               .01
                                                                 --------------------------------------------------------------
                Net income                                       $       .14      $       .02      $       .20      $       .05
      =========================================================================================================================
</TABLE>


                                      -9-
<PAGE>

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

3.    Stock Options (continued)

      The fair value for the option grants was estimated at the date of grant
      using the Black-Scholes Option-Pricing Model with the following
      weighted-average assumptions:

<TABLE>
<CAPTION>
                                                        Three Months Ended                Six Months Ended
                                                             June 30,                         June 30,
                                                    ------------------------------------------------------------
                                                      2003             2002             2003              2002
           -----------------------------------------------------------------------------------------------------
<S>                                                 <C>               <C>              <C>                <C>
           Expected life (years)                      5                 5                5                  5
           Risk free interest rate                   2.63%             3.33%            2.63%              3.33%
           Volatility factor                        87.00%            80.00%           87.00%             80.00%
           Dividend yield                            0.00%             0.00%            0.00%              0.00%
           -----------------------------------------------------------------------------------------------------
</TABLE>

4.    Continuing Operations - 2002 Gains/Charges

      Sale of Patents

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

      Medtronic Settlement

      In July, 1999, Medtronic Sofamor Danek, Inc., Sofamor Danek L.P. and
      Sofamor Danek Holdings, Inc. (collectively, "Medtronic") sued the Company
      in the United States District Court for the Western District of Tennessee
      alleging that certain instruments and instrument sets relating to cortical
      bone dowel products, including the bio-d(R)threaded cortical bone dowel
      and endodowel, manufactured, sold and/or otherwise distributed by the
      Company infringe on certain claims of patents owned by Medtronic.

      In April, 2002, Medtronic and the Company settled this lawsuit. The
      Company agreed to pay an aggregate of $1,900,000 to Medtronic in 24 equal
      monthly installments, without interest, and supported by an irrevocable
      standby letter of credit. In addition, the Company agreed to cease the
      processing, marketing, distributing, advertising and promoting of the
      bio-d(R) threaded cortical bone dowel by January 31, 2003, with which the
      Company complied. (See Note 8 - "Debt and Financing Arrangements").

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


                                      -10-
<PAGE>

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

5.    Discontinued Operations

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

      These operations represented the Company's ceramic and titanium plasma
      spray coating services and products, which were previously reflected in
      the Company's Other segment. The Company recorded a loss of $291,000 on
      the sale of this business in the second quarter of 2002 to reduce the
      carrying value of the assets and liabilities sold to fair value. Revenues
      and net income for these operations were $1,135,000 and $377,000,
      respectively, for the three months ended June 30, 2002 and $1,630,000 and
      $384,000, respectively, for the six months ended June 30, 2002. The
      financial results of these operations prior to the sale are reflected in
      the statements of operations as discontinued operations and all prior
      periods have been reclassified to conform to this presentation.

6.    Deferred Processing Costs

      Deferred processing costs consist of the following:

<TABLE>
<CAPTION>
                                                                                June 30,   December 31,
      (in thousands)                                                             2003          2002
      -------------------------------------------------------------------------------------------------
<S>                                                                             <C>          <C>

      Donor tissue to be processed and distributed
         by the Company                                                         $ 4,810      $ 2,411
      Tissue in process                                                           4,793        5,043
      Processed implantable donor tissue to be distributed
         by the Company                                                          11,510        6,234
      Processed implantable donor tissue held for clients                         1,823        1,745
      -------------------------------------------------------------------------------------------------
                                                                                $22,936      $15,433
      =================================================================================================

</TABLE>

7.    Inventories

      Inventories consist of the following:

<TABLE>
<CAPTION>
                                                                                June 30,  December 31,
      (in thousands)                                                             2003        2002
      -------------------------------------------------------------------------------------------------
<S>                                                                             <C>         <C>
      Supplies                                                                  $  241      $   223
      Raw materials                                                                800          678
      Finished goods                                                             3,423        3,919
      -------------------------------------------------------------------------------------------------
                                                                                $4,464      $ 4,820
      =================================================================================================
</TABLE>


                                      -11-
<PAGE>

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

8.    Debt and Financing Arrangements

      In June, 2002, the Company obtained an automatically declining irrevocable
      standby letter of credit to support the $1,900,000 ($792,000 as of June
      30, 2003) due to Medtronic Sofamor Danek, Inc. pursuant to the settlement
      agreement. The commitment under the standby letter of credit is
      $1,900,000, but such commitment decreases over time based on a
      predetermined schedule concurrent with the Company's monthly payments
      under the settlement. As of June 30, 2003, the standby letter of credit
      has been reduced to $919,000. The amount committed under the standby
      letter of credit reduces the Company's availability under its $5,000,000
      revolving line of credit. As of June 30, 2003, no amounts were outstanding
      under the revolving line of credit and $4,081,000 was available.

9.    Commitments and Contingencies

      Litigation

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

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

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

      On May 30, 2003, the Company entered into a definitive agreement to settle
      its claims with GenSci arising out of the patent lawsuit. The settlement
      is for an aggregate of $7.5 million, which among other items, requires
      GenSci to pay the Company $1.0 million upon the approval of the settlement
      by the bankruptcy court and to pay the balance of $6.5 million in 20 equal
      quarterly payments of $325,000 plus interest at the federal judgment rate
      as measured at the end of each quarter, to a maximum of 3% per annum. To
      secure the future amounts to be paid to the Company, GenSci will provide
      an irrevocable letter of credit in the amount of $5.0 million and a
      security interest in GenSci's assets to secure the remaining balance of
      $1.5 million. The security interest will be subordinated only to
      financing, if any, that GenSci may receive from a bank or other
      institutional lender.


                                      -12-
<PAGE>

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

9.    Commitments and Contingencies (continued)

      In August, 2003, the parties verbally agreed to amend the definitive
      settlement agreement to adjust the payment terms of the settlement if
      GenSci's proposed merger with IsoTis B.V. ("IsoTis") is consummated.
      Pursuant to this verbal agreement, the Company will receive $2.5 million
      from GenSci upon its exit from bankruptcy and GenSci's merger with IsoTis,
      which is expected to occur simultaneously, and the balance of $5.0 million
      in 20 equal payments of $250,000 plus interest at the federal judgment
      rate as measured at the end of each quarter to a maximum of 3% per annum.
      To secure the future amounts to be paid to the Company, GenSci will
      provide an irrevocable letter of credit in the amount of $5.0 million.
      Should GenSci's merger with IsoTis not be consummated, the settlement will
      automatically revert back to the original payment terms. An amendment to
      the definitive settlement is being prepared and is expected to be signed
      shortly.

      The Company has not recorded the effect of either of these settlement
      agreements in its financial statements and does not expect to record the
      settlement until the settlement agreement is approved by the bankruptcy
      court and GenSci emerges from bankruptcy.

      The settlement also provides that the Company covenants not to sue GenSci
      for infringing any of the Company's existing patents with respect to
      GenSci's new products, as long as GenSci does not change the formulation
      and composition of the new products. Additionally, the parties have agreed
      to dismiss all other litigation that is currently pending between them.

      GenSci Orthobiologics, Inc. v. Osteotech, Inc.

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

      Scroggins v. Zimmer Holdings, Inc.

      On or about June 24, 2002, the Company received a complaint filed in the
      United States District Court for the Eastern District of Louisiana against
      numerous defendants, including the Company. The complaint alleges that
      plaintiff received defective medical hardware in connection with a certain
      hip replacement procedure in May, 1992, and that such hardware was
      manufactured or distributed by certain of the defendants other than the
      Company. The procedure involved the use of allograft bone tissue processed
      by the Company and provided by one of our clients. Plaintiff alleged
      personal injuries and $1,000,000 in damages.


                                      -13-
<PAGE>

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

9.    Commitments and Contingencies (continued)

      On April 8, 2003, the Company filed a Motion for Summary Judgment seeking
      dismissal of plaintiff's claims with prejudice. On May 9, 2003, the Court
      granted the Company's Motion for Summary Judgment dismissing plaintiff's
      claims as to the Company with prejudice.

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

      The Company is a defendant with several other defendants in three actions
      pending in the Superior Court for the State of California, Los Angeles
      County. The Regner case sought class action status and initially alleged
      causes of action based on a violation of the California Business and
      Professional Code Section 17200, as well as a number of common law causes
      of action, including negligence, deceit, and intentional and negligent
      infliction of emotional distress. Through dismissals, either by the Court
      or voluntarily by plaintiffs, only the California Business and
      Professional Code claims, which are based on the allegation that
      defendants are engaging in the activity of buying or selling organs or
      tissue for valuable consideration or profit, and certain negligence claims
      remain with respect to the actions. In addition, the plaintiffs through
      the Regner case sought class action status and injunctive relief and
      "restitution" with respect to their California Business and Professional
      Code claims. To the extent any of the other causes of action lie against
      the Company, plaintiffs are seeking damages in an unspecified amount.
      Although this litigation has been pending for some time, significant
      discovery has only recently commenced. Plaintiffs filed a motion for leave
      to file a Fourth Amended Complaint to allow the adding of two additional
      class representatives and to make other changes to the complaint, which
      motion was denied without prejudice on February 3, 2003. Plaintiffs'
      counsel have recently indicated that, rather than seek to amend the Regner
      complaint, they plan to file a new action on behalf of three plaintiffs
      alleging claims similar to those asserted in the Regner case.

      That new action, Sorrels, Decker and Blake v. Inland Eye and Tissue Bank,
      et al, was served on the Company on March 24, 2003. It also purports to be
      a class action, and like the Regner case, it alleges violation of Section
      17200 and negligence against the Company. The Company denies the claims
      and recently filed an answer to this complaint. On July 3, 2003, the
      Company filed a motion for summary judgment in the Regner case. That
      motion is scheduled to be heard on December 8, 2003.

      On July 14, 2003, the Court denied the motion for class certification
      filed by the plaintiffs in the Regner case, and in a subsequent ruling, as
      a result of the Regner decision, the class certification request in the
      Sorrels case was stricken from the complaint.

      The Company believes that the claims made against it in these actions are
      without merit and will continue to vigorously defend against such claims.

      Alphatec Manufacturing v. Osteotech, Inc.

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


                                      -14-
<PAGE>

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

9.    Commitments and Contingencies (continued)

      On August 6, 2003, the Company answered the complaint and asserted
      counterclaims setting forth causes of action for breach of contract,
      breach of implied good faith and good dealing, fraudulent
      misrepresentation, fraudulent concealment, unjust enrichment, unfair
      competition cancellation or rescission of the contract and indemnification
      of the Company's costs and attorney's fees. The Company is seeking
      monetary damages in an amount to be determined at trial, rescission of the
      distribution agreement between the parties, and rescission of an October
      24, 2002 letter agreement between the parties, pursuant to which the
      Company made a payment in compromise of the first year minimum purchase
      requirements of the distribution agreement.

      The Company believes that the claims are without merit and intends to
      vigorously defend against such claims. In fourth quarter 2002, after
      assessing the Company's purchasing patterns under the distribution
      agreement as a result of the suspension of sale and distribution of the
      Affirm(TM) Anterior Cervical Plating System manufactured by Alphatec and
      distributed by the Company because of a higher than normal level of
      complaints, the Company recorded a provision of approximately $1.1 million
      for the penalty that would be due for the expected shortfall in the second
      year purchase commitment.

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

10.   Comprehensive Income

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

<TABLE>
<CAPTION>
                                                              Three Months Ended           Six Months Ended
                                                                    June 30,                    June 30,
                                                            ------------------------------------------------------
                                                               2003          2002          2003          2002
      (in thousands)                                        (Restated)    (Restated)    (Restated)    (Restated)
      ------------------------------------------------------------------------------------------------------------
<S>                                                            <C>           <C>           <C>           <C>
      Net income

      Currency translation adjustments                         $2,742        $  432        $3,923        $  861

                                                                  332           556           357           457
      ------------------------------------------------------------------------------------------------------------

      Comprehensive income                                     $3,074        $  988        $4,280        $1,318
      ============================================================================================================
</TABLE>


                                      -15-
<PAGE>

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

11.   Stockholders' Equity - Common Stock

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

12.   Foreign Net Operating Loss Carryforwards

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


                                      -16-
<PAGE>

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

13.   Earnings Per Share

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

<TABLE>
<CAPTION>
                                                                 Three Months Ended                  Six Months Ended
                                                                      June 30,                            June 30,
                                                            ----------------------------------------------------------------
                                                                2003              2002              2003             2002
      (dollars in thousands except per share data)           (Restated)        (Restated)        (Restated)       (Restated)
      ----------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>               <C>               <C>              <C>
      Income from continuing operations                     $      2,742      $        346      $     3,923      $       768
      Discontinued operations                                                           86                                93
                                                            ----------------------------------------------------------------
      Net income available to
        common shareholders                                 $      2,742      $        432      $     3,923      $       861
                                                            ================================================================

      ----------------------------------------------------------------------------------------------------------------------
      Denominator for basic earnings
        per share, weighted average common
        shares outstanding                                    17,037,302        15,521,088       17,025,760       14,818,770
      Effect of dilutive securities, stock options               699,146           343,253          442,408          381,822
                                                            ----------------------------------------------------------------
      Denominator for diluted earnings
        per share                                             17,736,448        15,864,341       17,468,168       15,200,592
                                                            ================================================================

      ----------------------------------------------------------------------------------------------------------------------
      Basic earnings per share:
        Income from continuing operations                   $        .16      $        .02      $       .23      $       .05
        Discontinued operations                                                        .01                               .01
                                                            ----------------------------------------------------------------
        Net income                                          $        .16      $        .03      $       .23      $       .06
                                                            ================================================================

      ----------------------------------------------------------------------------------------------------------------------
      Diluted earnings per share:
        Income from continuing operations                   $        .15      $        .02      $       .22      $       .05
        Discontinued operations                                                        .01                               .01
                                                            ----------------------------------------------------------------
        Net income                                          $        .15      $        .03      $       .22      $       .06
                                                            ================================================================

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

      Weighted average shares issuable upon the exercise of stock options which
      were not included in the calculation of diluted earnings per share were
      501,269 and 1,182,188, and 662,942 and 1,839,161 for the three and six
      months ended June 30, 2003 and 2002, respectively. Such shares were not
      included because they were antidilutive.


                                      -17-
<PAGE>

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

14.   Operating Segments

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

<TABLE>
<CAPTION>
                                                                 Three Months Ended             Six Months Ended
                                                                       June 30,                      June 30,
                                                               ------------------------------------------------------
                                                                  2003           2002           2003          2002
      (dollars in thousands)                                   (Restated)     (Restated)     (Restated)    (Restated)
      ---------------------------------------------------------------------------------------------------------------
<S>                                                             <C>            <C>            <C>            <C>
      Revenues:
        Demineralized Bone Matrix Segment                       $ 12,263       $ 11,490       $ 23,632       $ 23,641
        Base Tissue Segment                                       10,959          9,612         20,912         18,047
        Other, principally metal spinal
            implants                                               1,570          1,907          2,727          3,406
      ---------------------------------------------------------------------------------------------------------------
        Consolidated                                            $ 24,792       $ 23,009       $ 47,271       $ 45,094
      ===============================================================================================================
       Operating income (loss):
         Demineralized Bone Matrix Segment                      $  4,392       $  2,881       $  7,657       $  4,593
         Base Tissue Segment                                       1,703         (2,633)         1,882         (2,532)
        Other, principally metal spinal
            Implants                                              (1,437)          (491)        (2,510)        (1,300)
      ---------------------------------------------------------------------------------------------------------------
         Consolidated                                           $  4,658       $   (243)      $  7,029       $    761
      ===============================================================================================================
</TABLE>

      During the three months ended June 30, 2003, two of our clients,
      Musculoskeletal Transplant Foundation ("MTF") and the American Red Cross
      Tissue Services ("ARC"), in the Demineralized Bone Matrix Segment and Base
      Tissue Segments each accounted for 23% and 25%, respectively, of
      consolidated net revenues and accounted for 29% and 31%, respectively, of
      consolidated net revenues for the three months ended June 30, 2002. For
      the six months ended June 30, 2003, these same two clients accounted for
      25% and 26%, respectively, of consolidated net revenues, and 31% and 31%,
      respectively, of consolidated net revenues for the six months ended June
      30, 2002.

15.   Reclassifications

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


                                      -18-
<PAGE>

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

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

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002

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

Results of Operations

Critical Accounting Policies and Estimates

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

Income from Continuing Operations

Consolidated income from continuing operations was $2,742,000 or $.15 diluted
earnings per share and $3,923,000 or $.22 diluted earnings per share for the
three and six months ended June 30, 2003, respectively, compared to consolidated
income from continuing operations of $346,000 or $.02 diluted earnings per share
and $768,000 or $.05 diluted earning per share in the respective corresponding
periods in 2002. Both the three and six months ended June 30, 2002 included an
after tax charge of $1,071,000 or $.07 diluted loss per share associated with
the Medtronic litigation settlement and an after tax gain of $830,000 or $.05
diluted earnings per share related to the sale of the PolyActive(TM) polymer
biomaterial technology and patents to IsoTis BV. The improvement in income from
continuing operations in 2003 compared to 2002 is due to a combination of
increased revenues, improved gross margins, continued cost containment and the
impact in 2002 of the charges mentioned directly above.


                                      -19-
<PAGE>

Discontinued Operations

On July 10, 2002, we completed the sale of the business and substantially all of
the assets, including the assumption of certain liabilities, of our operations
in Leiden, The Netherlands for $1,000,000 in cash and a non-interest bearing
note with a face value of $1,500,000. These operations represented our ceramic
and titanium plasma spray coating services and products. We recognized a loss on
the sale of this business of $291,000 in the second quarter of 2002. Revenues
and net income from these operations were $1,135,000 and $377,000, respectively,
for the three months ended June 30, 2002, and $1,630,000 and $384,000,
respectively, in the six months ended June 30, 2002.

Net Income

Consolidated net income in the second quarter of 2003 was $2,742,000 or $.15
diluted net income per share compared to consolidated net income of $432,000 or
$.03 diluted net income per share in the second quarter of 2002. Consolidated
net income for the six months ended June 30, 2003 was $3,923,000 or $.22 diluted
net income per share compared to consolidated net income of $861,000 or $.06
diluted net income per share for the six months ended June 30, 2002.

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

Net Revenues

Consolidated net revenues increased 8% to $24,792,000 in the second quarter of
2003 compared to consolidated revenues of $23,009,000 in the corresponding
period in 2002. Domestic net revenues increased 3% to $22,492,000 in the second
quarter of 2003 from second quarter 2002 domestic net revenues of $21,836,000.
The increase in domestic revenues was due primarily to increased base tissue
processing fees as a result of a 9% increase in donors processed, including the
release of a portion of the donors that were subject to our 2002 tissue
quarantine, increased bio-implant units shipped, shipments of the Optium(TM) DBM
carrier product and the impact of our 2003 price increases; partially offset by
a decline in unit sales volume in Grafton(R) DBM and lower sales of metal spinal
implants. Foreign-based revenues increased 96% to $2,300,000 in the second
quarter of 2003 from $1,173,000 in the same period in 2002. The increase in
foreign-based revenues was primarily a result of increased unit sales volume in
Grafton(R) DBM and OsteoPure(TM)Allogeneic Cancellous Tissue, increased base
tissue processing fees and 2003 price increases; partially offset by a decline
in bovine tissue unit sales volume.

Consolidated net revenues increased 5% to $47,271,000 for the six months ended
June 30, 2003 compared to consolidated revenues of $45,094,000 in the
corresponding period in 2002. Domestic net revenues increased slightly in the
six months ended June 30, 2003 to $43,183,000 from $42,723,000 in the
corresponding period in 2002. The increase in domestic revenues was due
primarily to increased base tissue processing fees as a result of a 10% increase
in donors processed, including the release of a portion of the donors that were
subject to our 2002 tissue quarantine, increased bio-implant units shipped,
shipments of the Optium(TM) DBM carrier product and the impact of our 2003 price
increases; partially offset by a decline in unit sales volume in Grafton(R) DBM
and lower sales of metal spinal implants. Foreign-based revenues increased 72%
to $4,088,000 for the six months ended June 30, 2003 from $2,371,000 for the six
months ended June 30, 2002. The increase in foreign-based revenues was primarily
a result of increased unit sales volume in Grafton(R) DBM and OsteoPure(TM)
Allogeneic Cancellous Tissue, increased base tissue processing fees and 2003
price increases, partially offset by a decline in bovine tissue unit sales
volume.


                                      -20-
<PAGE>

The Demineralized Bone Matrix ("DBM") Segment (formerly the Grafton(R) DBM
Segment), or DBM Segment, revenues increased 7% to $12,263,000 in the second
quarter of 2003 from revenues of $11,490,000 in the corresponding period in
2002. DBM Segment revenues of $23,632,000 for the six months ended June 30, 2003
were relatively flat with DBM Segment revenues of $23,641,000 for the six months
ended June 30, 2002. Domestic DBM Segment revenues declined 2% to $10,911,000 in
second quarter 2003 from revenues of $11,133,000 in second quarter 2002 and
decreased 6% to $21,274,000 for the six months ended June 30, 2003 from
$22,660,000 for the corresponding period in the prior year. The decreases in
each period resulted primarily from a decline in Grafton(R) DBM unit sales
volume due to continuing strong competition, partially offset by shipments of
the Optium(TM) DBM carrier product and the effects of the 2003 price increase.
To address the continued decline in domestic Grafton(R) DBM unit volume and
revenues, we have provided additional commission incentives to our sales force
and have initiated sales and marketing programs, which include aggressively
priced contracts for fixed contractual periods, with Osteotech branded Grafton
Plus(TM) DBM Paste for competitive accounts. Foreign-based Grafton(R) DBM
revenues increased 279% to $1,352,000 in the second quarter of 2003 from
revenues of $357,000 in the corresponding period in the prior year and increased
140% to $2,358,000 for the six months ended June 30, 2003 from $981,000 for the
six months ended June 30, 2002. These increases were primarily the result of
increased unit sales volume and the effects of the 2003 price increases.

Base Allograft Tissue Segment, or Base Tissue Segment, revenues increased 14% to
$10,959,000 in the second quarter of 2003 from $9,612,000 in the corresponding
period in 2002. The increase is principally the result of a 12% increase in base
tissue processing fees as a result of a 9% increase in the number of donors
processed for our clients, including the release of a portion of the donors that
were subject to our 2002 tissue quarantine, the direct distribution of Osteotech
labeled base allograft tissue, a 13% increase in bio-implant revenues as a
result of increased unit sales volume, a 95% increase in OsteoPure(TM)
Allogeneic Cancellous Tissue revenues and the impact of our 2003 price
increases. Base Tissue Segment revenues increased 16% to $20,912,000 for the six
months ended June 30, 2003 from $18,047,000 in the corresponding period in 2002.
The increase is principally the result of a 19% increase in base tissue
processing fees as a result of a 10% increase in the number of donors processed
for our clients, including the release of a portion of the donors that were
subject to our 2002 tissue quarantine, the direct distribution of Osteotech
labeled base allograft tissue, an 11% increase in bio-implant revenues as a
result of increased unit sales volume, a 114% increase in OsteoPure(TM)
Allogeneic Cancellous Tissue revenues and the impact of our 2003 price
increases. As part of the settlement of a lawsuit in the second quarter of 2002,
we removed our bio-d(R) Threaded Cortical Bone Dowel, or bio-d(R), from the
market in January, 2003. Revenues for the bio-d(R) were $381,000 in the second
quarter of 2002, and $40,000 and $997,000 for the six months ended June 30, 2003
and 2002, respectively.

Revenue from other product lines declined 18% in the second quarter of 2003 to
$1,570,000 from $1,907,000 in the same period in 2002 and declined 20% for the
six months ended June 30, 2003 to $2,727,000 from $3,406,000 in the
corresponding period in 2002. Metal spinal implant system revenues declined 15%
in the second quarter of 2003 and 20% for the six months ended June 30, 2003
compared to the corresponding periods in 2002, principally as a result of our
suspension of the sale and distribution of the Affirm(TM) Anterior Cervical
Plating System in October, 2002 due to a higher than normal level of complaints.
Revenues from the Affirm(TM) Anterior Cervical Plating System were $421,000 and
$729,000 for the three and six months ended June 30, 2002, respectively. Bovine
tissue product revenues declined 27% in the three months ended June 30, 2003 and
23% for the six months ended June 30, 2003 compared to the corresponding periods
in 2002 primarily as a result of lower unit sales volume.

During the three months ended June 30, 2003, two of our clients in the
Grafton(R) DBM and Base Tissue Segments, the Musculoskeletal Transplant
Foundation, or MTF, and the American Red Cross, or ARC, each


                                      -21-
<PAGE>

accounted for 23% and 25%, respectively, of consolidated net revenues. In the
three months ended June 30, 2002, MTF and ARC accounted for 29% and 31%,
respectively, of consolidated net revenues. In the six months ended June 30,
2003, these same clients accounted for 25% and 26%, respectively, of
consolidated revenues, and accounted for 31% and 31%, respectively, of
consolidated revenues for the six months ended June 30, 2002. We have processing
agreements with each of these clients. The MTF agreement expires in December,
2008 and the ARC agreement expires in December, 2006.

Gross Profit

Consolidated gross profit as a percentage of consolidated net revenues was 62%
in the second quarter of 2003 compared to 56% in the second quarter of 2002.
Consolidated gross profit as a percentage of consolidated net revenues was 59%
for the six months ended June 30, 2003 compared to 58% for the six months ended
June 30, 2002. The improvement in gross profit margin in both periods of 2003
was primarily the result of increased revenues, which generated higher
production levels and greater absorption of the fixed costs associated with our
tissue processing facility opened in June, 2002.

Marketing, Selling, General and Administrative Expenses

Consolidated marketing, selling, general and administrative expenses declined 6%
in second quarter 2003 to $9,735,000 from $10,311,000 in the corresponding
period in 2002, and declined 11% for the six months ended June 30, 2003 to
$19,067,000 from $21,540,000 for the six months ended June 30, 2002. The
decreases in both periods in marketing, selling, general and administrative
expenses relates mainly to decreased legal fees as a result of the settlement of
a number of our lawsuits in 2002 and the cessation of our funding of the
American Tissue Services Foundation, partially offset by increased costs for
insurance coverage as a result of the tightening of the insurance markets.

Research and Development Expenses

Consolidated research and development expenses decreased 14% in the second
quarter of 2003 to $935,000 from $1,085,000 in the corresponding period in 2002,
and declined 3% in the six months ended June 30, 2003 to $1,925,000 from
$1,988,000 in the six months ended June 30, 2002. The decreases primarily
related to a concentration by our research and development organization on the
development and implementation of the technical and scientific requirements
necessary to rework the allograft tissue subject to our 2002 tissue quarantine,
which resulted from our temporary suspension of Base Tissue Segment processing
and, therefore, delays in spending on certain on-going research and development
projects. We expect our research and development efforts in the second half of
2003 to return to the continued development of new Grafton(R) DBM and
bio-implant tissue forms and the continued development of our Plexus(TM)
Technology.

Litigation Settlement Charge

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

Operating Income

Consolidated operating income increased $4,901,000 to $4,658,000 in the second
quarter of 2003 from an operating loss of $243,000 in the second quarter of
2002. Consolidated operating income increased $6,268,000 for the six months
ended June 30, 2003 to $7,029,000 from $761,000 for the six months ended


                                      -22-
<PAGE>

June 30, 2002. Included in both periods in 2002 is the aforementioned litigation
settlement charge of $1,785,000.

DBM Segment operating income increased 52% to $4,392,000 in the three months
ended June 30, 2003 from $2,881,000 in the same period in 2002. The increase
results principally from the growth in revenues and a decrease in operating
expenses, primarily related to a $1,068,000 reduction in legal fees. DBM Segment
operating income increased $3,064,000 for the six months ended June 30, 2003 to
$7,657,000 from $4,593,000 in the corresponding period in 2002. The improvement
in operating income in the six months ended June 30, 2003 compared to the same
period in 2002 is due primarily to lower operating expenses, principally from a
$1,902,000 reduction in legal fees, lower selling, marketing and promotional
spending, and slightly improved gross profit margins.

Base Tissue Segment operating income improved $4,336,000 in the second quarter
of 2003 to $1,703,000 from an operating loss of $2,633,000 in the corresponding
period in 2002, and improved $4,414,000 for the six months ended June 30, 2003
to $1,882,000 from an operating loss of $2,532,000 for the six months ended June
30, 2002. The improvements in both periods resulted primarily from the increase
in revenues and improved gross profit margins as a result of processing
efficiencies and higher unit production volumes. In addition, both periods in
2002 were negatively impacted by the litigation settlement charge of $1,785,000.

Operating losses associated with other revenues were $1,437,000 and $2,510,000
for the three months and six months ended June 30, 2003, respectively, and were
$491,000 and $1,300,000 for the same respective periods in 2002. The operating
loss, which is generated primarily from our metal spinal implant product line,
results primarily from the decline in revenues due to the suspension of
distribution activities for the Affirm(TM) Anterior Cervical Plating System,
costs associated with the infrastructure established to support our metal spinal
implant product lines which were not offset by sufficient unit volume, increased
costs associated with marketing, selling and promotional activities and
increased legal fees.

Other Income (Expense)

Other income (expense), which primarily represents interest expense, net of
interest income, was $169,000 and $464,000 for the three months and six months
ended June 30, 2003, respectively, compared to interest expense, net of interest
income, of $362,000 and $620,000 in the corresponding periods in 2002,
respectively. In 2003 and 2002, interest expense on long-term debt, is partially
offset by interest income.

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

Income Tax Provision

The effective income tax rate for the three months and six months ended June 30,
2003 was 39% and 40%, respectively, which exceeded the United States federal
statutory rate principally due to state income taxes.

For the three months ended June 30, 2002, we recognized an income tax benefit
from continuing operations primarily due to losses incurred in our domestic
operation and our ability to utilize previously unrecognized net operating loss
carryforwards, which carried a full valuation allowance, to offset foreign
income. In addition, we did not record an income tax provision for discontinued
operations due to our ability to utilize additional foreign net operating loss
carryforwards to offset taxable income.


                                      -23-
<PAGE>

For the six months ended June 30, 2002, our effective income tax rate from
continuing operations was 30%, as our tax provision on expected domestic income
was partially offset by the utilization of foreign net operating loss
carryforwards, which carried a full valuation allowance, to offset foreign
income. We did not recognize an income tax provision for discontinued operations
due to utilization of net operating loss carryforwards, which carried a full
valuation allowance, to offset income from operations and the tax gain on the
sale of our operations in The Netherlands.

In the three and six month periods ended June 30, 2002, we utilized
approximately $2,000,000 (tax effect of approximately $680,000) of our
historical net operating loss carryforwards relating to our subsidiary in The
Netherlands. (See Note 12 of "Notes to Condensed Consolidated Financial
Statements.")

Liquidity and Capital Resources

At June 30, 2003 we had cash, cash equivalents and short-term investments of
$14,817,000 compared to $13,988,000 at December 31, 2002. We invest excess cash
in U.S. Government-backed securities and investment grade commercial paper of
major U.S. corporations. The increase in cash, cash equivalents and short-term
investments was primarily due to the improvement in operating results and the
receipt of a Federal income tax refund, partially offset by continued
investments in our business. Working capital increased $5,930,000 to $48,377,000
at June 30, 2003 compared to $42,447,000 at December 31, 2002. The increase in
working capital resulted primarily from an increase in accounts receivables from
clients and customers as a result of the increase in first and second quarter
2003 revenues as compared to fourth quarter 2002 revenues and additional
investments in deferred processing costs as we rebuild and expend our allograft
tissue inventories, partially offset by an increase in accounts payable and
accrued expenses.

Net cash provided by operating activities was $3,085,000 in the six months ended
June 30, 2003 and net cash used in operating activities was $2,199,000 in the
six months ended June 30, 2002. The increase resulted primarily from improved
profitability compared to the prior year, increased non-cash charges,
principally depreciation and amortization, an increase in accounts payable and
accrued expenses and the receipt of a Federal income tax refund; partially
offset by an increase in accounts receivables from clients and customers as a
result of the increase in first and second quarter 2003 revenues as compared to
fourth quarter 2002 revenues and additional investments in deferred processing
costs resulting from our efforts to rebuild and expand our allograft tissue
inventories.

Cash provided by investing activities was $650,000 for the six months ended June
30, 2003 compared to cash used in investing activities of $2,312,000 for the six
months ended June 30, 2002. Cash provided by investing activities in 2003 was
primarily generated from the sale of short-term investments of $1,982,000,
partially offset by capital expenditures of $991,000. Cash used in investing
activities in 2002 was principally the result of capital expenditures of
$3,472,000.

Net cash used in financing activities was $927,000 for the six months ended June
30, 2003 and cash provided by financing activities was $14,894,000 for the six
months ended June 30, 2002. Net cash used in financing activities in 2003 was
principally the result of payments on long-term debt, partially offset by
proceeds from the sale of common stock associated with employee stock option
exercises and our employee stock purchase plan. Cash provided by financing
activities in 2002 primarily resulted from the sale of 2.8 million shares of
common stock in May, 2002 at a price of $6.25 generating net proceeds of
$15,756,000, sales of common stock associated with employee stock option
exercises and our employee stock purchase plan, partially offset by principal
payments on long-term debt.

We have a Credit Facility with a U.S. bank that includes: a $5,000,000 revolving
line of credit, a building mortgage loan, and an equipment term loan. At June
30, 2003, there were no borrowings under the


                                      -24-
<PAGE>

revolving line of credit, $4,098,000 was outstanding under the building mortgage
loan and $13,155,000 was outstanding under the equipment term loan. In support
of the amounts due under the settlement of certain patent litigation, we
provided an automatically declining irrevocable standby letter of credit in an
original amount of $1,900,000. As of June 30, 2003, the standby letter of credit
has been reduced to $919,000. Amounts committed under this standby letter of
credit decrease over time based on a predetermined schedule concurrent with our
monthly payments under the settlement and reduce the amounts available under the
revolving line of credit. As of June 30, 2003, no amounts were outstanding under
the revolving line of credit and $4,081,000 was available.

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

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

Impact of Inflation and Foreign Currency Exchange Fluctuations

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

Litigation

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

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


                                      -25-
<PAGE>

material information relating to us (or our consolidated subsidiaries) required
to be included in our periodic SEC filings.

Changes in Internal Controls

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

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

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

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

On May 30, 2003, we entered into a definitive agreement to settle our claims
with GenSci arising out of the patent lawsuit. The settlement is for an
aggregate of $7.5 million, which among other items, requires GenSci to pay us
$1.0 million upon the approval of the settlement by the bankruptcy court and to
pay the balance of $6.5 million in 20 equal quarterly payments of $325,000 plus
interest at the federal judgment rate as measured at the end of each quarter, to
a maximum of 3% per annum. To secure the future amounts to be paid to us, GenSci
will provide an irrevocable letter of credit in the amount of $5.0 million and a
security interest in GenSci's assets to secure the remaining balance of $1.5
million. The security interest will be subordinated only to financing, if any,
that GenSci may receive from a bank or other institutional lender.


                                      -26-
<PAGE>

In August, 2003, the parties verbally agreed to amend the definitive settlement
agreement to adjust the payment terms of the settlement if GenSci's proposed
merger with IsoTis B.V. ("IsoTis") is consummated. Pursuant to this verbal
agreement, we will receive $2.5 million from GenSci upon its exit from
bankruptcy and GenSci's merger with IsoTis, which is expected to occur
simultaneously, and the balance of $5.0 million in 20 equal payments of $250,000
plus interest at the federal judgment rate as measured at the end of each
quarter to a maximum of 3% per annum. To secure the future amounts to be paid to
us, GenSci will provide an irrevocable letter of credit in the amount of $5.0
million. Should GenSci's merger with IsoTis not be consummated, the settlement
will automatically revert back to the original payment terms. An amendment to
the definitive settlement agreement is prepared and is expected to be signed
shortly.

We have not recorded the effect of either of these settlement agreements in our
financial statements and do not expect to record the settlement until the
bankruptcy court approves the settlement agreement and GenSci emerges from
bankruptcy.

The settlement also provides that we covenant not to sue GenSci for infringing
any of our existing patents with respect to GenSci's new products, as long as
GenSci does not change the formulation and composition of the new products.
Additionally, the parties have agreed to dismiss all other litigation that is
currently pending between them.

GenSci Orthobiologics, Inc. v. Osteotech, Inc.

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

Scroggins v. Zimmer Holdings, Inc.

On or about June 24, 2002, we received a complaint filed in the United States
District Court for the Eastern District of Louisiana against numerous
defendants, including us. The complaint alleges that plaintiff received
defective medical hardware in connection with a certain hip replacement
procedure in May, 1992, and that such hardware was manufactured or distributed
by certain of the defendants other than us. The procedure involved the use of
allograft bone tissue processed by us and provided by one of our clients.
Plaintiff alleged personal injuries and $1,000,000 in damages.

On April 8, 2003, we filed a Motion for Summary Judgment seeking dismissal of
plaintiff's claims with prejudice. On May 9, 2003, the Court granted the
Company's Motion for Summary Judgment dismissing plaintiff's claims as to us
with prejudice.


                                      -27-
<PAGE>

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

We are a defendant with several other defendants in three actions pending in the
Superior Court for the State of California, Los Angeles County. The Regner case
sought class action status and initially alleged causes of action based on a
violation of the California Business and Professional Code Section 17200, as
well as a number of common law causes of action, including negligence, deceit,
and intentional and negligent infliction of emotional distress. Through
dismissals, either by the Court or voluntarily by plaintiffs, only the
California Business and Professional Code claims, which are based on the
allegation that defendants are engaging in the activity of buying or selling
organs or tissue for valuable consideration or profit, and certain negligence
claims remain with respect to the actions. In addition, the plaintiffs through
the Regner case sought class action status and injunctive relief and
"restitution" with respect to their California Business and Professional Code
claims. To the extent any of the other causes of action lie against us,
plaintiffs are seeking damages in an unspecified amount. Although this
litigation has been pending for some time, significant discovery has only
recently commenced. Plaintiffs filed a motion for leave to file a Fourth Amended
Complaint to allow the adding of two additional class representatives and to
make other changes to the complaint, which motion was denied without prejudice
on February 3, 2003. Plaintiffs' counsel have recently indicated that, rather
than seek to amend the Regner complaint, they plan to file a new action on
behalf of three plaintiffs alleging claims similar to those asserted in the
Regner case.

That new action, Sorrels, Decker and Blake v. Inland Eye and Tissue Bank, et al,
was served on March 24, 2003. It also purports to be a class action, and like
the Regner case, it alleges violation of Section 17200 and negligence against
us. We denied the claims and recently filed an answer to this complaint. On July
3, 2003, we filed a motion for summary judgment in the Regner case. That motion
is scheduled to be heard on December 8, 2003.

On July 14, 2003, the Court denied the motion for class certification filed by
the plaintiffs in the Regner case, and in a subsequent ruling, as a result of
the Regner decision, the class certification request in the Sorrels case was
stricken from the complaint.

We believe that the claims made against us in these actions are without merit
and will continue to vigorously defend against such claims.

Alphatec Manufacturing v. Osteotech, Inc.

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

On August 6, 2003, we answered the complaint and asserted counterclaims setting
forth causes of action for breach of contract, breach of implied good faith and
good dealing, fraudulent misrepresentation, fraudulent concealment, unjust
enrichment, unfair competition cancellation or rescission of the contract and
indemnification of our costs and attorney's fees. We are seeking monetary
damages in an amount to be determined at trial, rescission of the distribution
agreement between the parties, and rescission of an October 24, 2002 letter
agreement between the parties, pursuant to which we made a payment in compromise
of the first year minimum purchase requirements of the distribution agreement.


                                      -28-
<PAGE>

We believe that the claims are without merit and intends to vigorously defend
against such claims. In fourth quarter 2002, after assessing our purchasing
patterns under the distribution agreement as a result of the suspension of sale
and distribution of the Affirm(TM) Anterior Cervical Plating System manufactured
by Alphatec and distributed by us because of a higher than normal level of
complaints, we recorded a provision of approximately $1.1 million for the
penalty that would be due for the expected shortfall in the second year purchase
commitment.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a)   An annual meeting of stockholders of Osteotech, Inc. was held on June 12,
      2003.

(b)   The matters voted upon at the annual meeting and the results of the voting
      are set forth below:

      i)    With respect to the election of Directors of Osteotech, the persons
            named below were elected at the annual meeting to serve a term of
            one year or until the next annual meeting of stockholders. They
            constitute the entire board of directors of Osteotech. Each received
            the following number of votes:

                  Director                          For           Withheld
                  ----------------------------------------------------------
                  Richard W. Bauer               13,534,704        2,657,803
                  Kenneth P. Fallon, III         14,721,297        1,471,210
                  Michael J. Jeffries            13,534,801        2,657,706
                  Donald D. Johnston             14,706,267        1,486,240
                  John Phillip Kostuik, M.D.     14,833,414        1,359,093
                  Stephen J. Sogin, Ph.D.        14,710,684        1,481,823

      ii)   With respect to a proposal to increase the number of authorized
            shares of Common Stock which may be issued under Osteotech's 2000
            Stock Plan by 1,250,000 shares to 2,250,000 shares, the stockholders
            voted 7,277,707 shares in favor, 4,892,292 shares against and
            266,701 shares abstained. Broker non-votes were not applicable. This
            proposal received the vote required by Delaware General Corporation
            Law and Osteotech's by-laws for approval (i.e. the affirmative vote
            of a majority of the shares of common stock voted on the proposal).

      ii)   With respect to a proposal to ratify the appointment of
            PricewaterhouseCoopers LLP as Osteotech's independent auditors for
            the fiscal year ending December 31, 2003, the stockholders voted
            16,010,121 shares in favor, 123,885 shares against and 58,051 shares
            abstained. Broker non-votes were not applicable. This proposal
            received the vote required by Delaware General Corporation Law and
            Osteotech's by-laws for approval (i.e. the affirmative vote of a
            majority of the shares of common stock voted on the proposal).


                                      -29-
<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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

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

        3.1      Restated Certificate of Incorporation of
                 Osteotech, as amended                                     ^

        3.2      Third Amended and Restated Bylaws of Osteotech            ^

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

        4.1      Rights Agreement dated as of February 1, 1996             ^
                 between Osteotech, Inc. and Registrar and Transfer
                 Co., as amended
                                                                           ^^^
        10.41    Amended and Restated 2000 Stock Plan approved by
                 Osteotech, Inc.'s stockholders on June 12, 2003

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

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

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

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

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


*     Filed herewith.

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

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

^^^   Previously filed as an exhibit to the Company's Quarterly Report on Form
      10-Q for the quarter ended June 30, 2003 filed with the Securities and
      Exchange Commission on August 14, 2003 and incorporated herein by
      reference.

(b)   Reports on Form 8-K

      On June 18, 2003, we filed with the Commission a Current Report on Form
      8-K to announce the results of the matters voted on at our Annual Meeting
      on June 12, 2003.

      On June 2, 2003, we filed with the Commission a Current Report on Form 8-K
      to announce that we had signed a definitive agreement to settle the claims
      against GenSci arising out of a patent lawsuit in which GenSci was found
      to have infringed certain of our patents.

      On April 29, 2003, we filed with the Commission a Current Report on Form
      8-K to announce our financial results for the quarter ended March 31,
      2003.


                                      -30-
<PAGE>

      On April 21, 2003, we filed with the Commission a Current Report on Form
      8-K to announce that we had reached an agreement in principle to settle
      the claims against GenSci arising out of a patent lawsuit in which GenSci
      was found to have infringed certain of our patents.


                                      -31-
<PAGE>

                                   SIGNATURES

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

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


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


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


                                      -32-