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


                                    FORM 10-Q


                                   (Mark One)

[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities  Exchange
Act of 1934 For the Period Ended June 30, 1999

                                       or

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Transition Period from ___________ to __________


                         Commission File Number 0-19278


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

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

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

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

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

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


                      Applicable Only to Corporate Issuers

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

Common Stock, $.01 par value - 14,169,261 shares as of July 31, 1999.


<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,          December 31,
                                                                 1999                1998
                                                               --------          ------------
<S>                                                            <C>                <C>
ASSETS
Current assets:
     Cash and cash equivalents                                 $ 12,009           $ 15,119
     Short-term investments                                       3,760              2,922
     Accounts receivable, net                                    14,752             11,980
     Inventories                                                  3,415              1,568
     Deferred processing cost                                     3,766              2,620
     Prepaid expenses and other current assets                    3,295              2,913
                                                               --------           --------
        Total current assets                                     40,997             37,122

Property, plant and equipment, net                               25,064             16,044
Excess of cost over net assets of business acquired,
     less accumulated amortization of $1,893 in 1999 and
     $1,701 in 1998                                               3,822              1,997
Other assets                                                      1,816              1,951
                                                               --------           --------
Total assets                                                   $ 71,699           $ 57,114
                                                               ========           ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable and accrued liabilities                  $  7,273           $  9,935
     Notes payable                                                  222                609
     Current maturities of long-term debt and
         obligations under capital leases                             2                205
                                                               --------           --------
        Total current liabilities                                 7,497             10,749

Other liabilities                                                   953                435
                                                               --------           --------
Total liabilities                                                 8,450             11,184
                                                               --------           --------

Commitments and contingencies

Stockholders' equity:
     Preferred stock, $.01 par value; 5,676,595 shares
         authorized; no shares issued or outstanding
     Common stock, $.01 par value; 70,000,000 shares
         authorized; issued and outstanding 14,169,150
         shares in 1999 and 13,380,291 shares in 1998               140                133
     Additional paid-in capital                                  48,424             37,332
     Accumulated other comprehensive income (loss)                 (271)                11
     Retained earnings                                           14,956              8,454
                                                               --------           --------
Total stockholders' equity                                       63,249             45,930
                                                               --------           --------
Total liabilities and stockholders' equity                     $ 71,699           $ 57,114
                                                               ========           ========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                      -2-

<PAGE>


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

<TABLE>
<CAPTION>

                                                           Three Months                     Six Months
                                                          Ended June 30,                  Ended June 30,
                                                   ---------------------------     ---------------------------
                                                       1999            1998            1999             1998
--------------------------------------------------------------------------------------------------------------
<S>                                                <C>             <C>             <C>             <C>
Net revenues:
   Service                                         $    18,969     $    14,927     $    36,826     $    28,084
   Product                                                 633             203           1,464             521
   License fee                                             118             124             118             124
                                                   -----------     -----------     -----------     -----------
                                                        19,720          15,254          38,408          28,729

Cost of services                                         5,672           4,461          11,126           8,514
Cost of products                                           443             178             846             352
                                                   -----------     -----------     -----------     -----------
                                                         6,115           4,639          11,972           8,866
                                                   -----------     -----------     -----------     -----------

Gross Profit                                            13,605          10,615          26,436          19,863

Marketing, general and administrative                    6,689           5,762          13,063          10,581
Research and development                                 1,486           1,077           2,938           2,206
                                                   -----------     -----------     -----------     -----------
                                                         8,175           6,839          16,001          12,787
                                                   -----------     -----------     -----------     -----------

Operating income                                         5,430           3,776          10,435           7,076

Interest and other income, net                             178             349             428             601
                                                   -----------     -----------     -----------     -----------

Income before income taxes                               5,608           4,125          10,863           7,677

Income tax provision                                     2,264           1,696           4,361           3,142

--------------------------------------------------------------------------------------------------------------
Net income                                         $     3,344     $     2,429     $     6,502     $     4,535
==============================================================================================================
Net income per share:
     Basic                                         $       .24     $       .18     $       .47     $       .34
     Diluted                                       $       .23     $       .17     $       .44     $       .32
--------------------------------------------------------------------------------------------------------------
Shares used in computing net income per share:
     Basic                                          14,013,539      13,289,739      13,867,413      13,254,280
     Diluted                                        14,727,581      14,086,282      14,637,907      14,122,587
</TABLE>




See accompanying notes to condensed consolidated financial statements.

                                      -3-

<PAGE>


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

<TABLE>
<CAPTION>

Six Months Ended June 30,                                      1999           1998
-----------------------------------------------------------------------------------
<S>                                                          <C>           <C>
Cash Flow From Operating Activities
   Net income                                                $  6,502      $  4,535
   Adjustments to reconcile net income to net cash
      provided by (used in) operating activities:
         Depreciation and amortization                          1,473         1,371
         Changes in assets and liabilities:
               Accounts receivable                             (2,295)       (1,130)
               Inventories                                     (1,389)         (451)
               Prepaid expenses and other current assets       (1,522)        1,882
               Accounts payable and other liabilities          (3,522)          786
-----------------------------------------------------------------------------------
Net cash (used in) provided by operating activities              (753)        6,993

Cash Flow From Investing Activities
   Capital expenditures                                        (9,208)       (2,941)
   Purchases of investments                                    (7,688)       (5,441)
   Proceeds from sale of investments                            6,850         3,445
   Acquisition of business                                     (1,467)
   Increase in other assets                                      (824)         (230)
-----------------------------------------------------------------------------------
Net cash used in investing activities                         (12,337)       (5,167)

Cash Flow From Financing Activities
   Proceeds from issuance of common stock                       4,710         1,386
   Income tax benefit related to stock options                  6,389         1,099
   Repurchase of common stock                                                  (532)
   Proceeds from issuance of notes payable                        116
   Principal payments on notes payable                           (572)         (468)
   Principal payments on long-term debt
      and obligations under capital leases                       (758)         (325)
   Increase in other liabilities                                  171
-----------------------------------------------------------------------------------
Net cash provided by financing activities                      10,056         1,160

Effect of exchange rate changes on cash                           (76)            2
-----------------------------------------------------------------------------------

Net (decrease) increase in cash and cash equivalents           (3,110)        2,988
Cash and cash equivalents at beginning of period               15,119        13,884
-----------------------------------------------------------------------------------
Cash and cash equivalents at end of period                   $ 12,009      $ 16,872
===================================================================================

Supplementary cash flow data:
   Cash paid during the period for interest                  $     27      $     49
   Cash paid during the period for taxes                        2,061           988
   Acquisition of business:
      Fair value of assets acquired                             2,563
      Liabilities assumed                                       2,669
</TABLE>


See accompanying notes to condensed consolidated financial statements.

                                      -4-

<PAGE>


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

1.   Basis of Presentation

     The accompanying  unaudited  condensed  consolidated  financial  statements
     reflect all  adjustments  (consisting  only of normal  recurring  accruals)
     considered   necessary  by  management  to  present  fairly  the  Company's
     consolidated  financial position as of June 30, 1999 and December 31, 1998,
     and  the  consolidated  results  of  operations  for  the  three-month  and
     six-month  periods ended June 30, 1999 and 1998, and the consolidated  cash
     flows for the six-month  periods then ended.  The results of operations for
     the  respective  interim  periods  are not  necessarily  indicative  of the
     results  to be  expected  for the full  year.  The  condensed  consolidated
     financial  statements  should  be  read in  conjunction  with  the  audited
     financial  statements  for the year  ended  December  31,  1998  which were
     included as part of the Company's Report on Form 10-K.


2.   Stockholders' Equity

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

     In June, 1999, the Stockholders of the Company approved an amendment to the
     Company's certificate of incorporation to increase the number of authorized
     shares of common stock to 70,000,000 shares.


3.   Acquisition of OST Developpement SA

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


4.   Acquisition of Spinal Fixation System

     In June,  1999,  the Company  acquired the  Versalok(R)  Low Back  Fixation
     System (the  "Versalok(R)  System"),  including  all  patents,  from Wright
     Medical  Technology,  Inc.  for  $600,000.  Pursuant  to the  terms  of the
     purchase  agreement,  the Company  also  agreed to  purchase  approximately
     $1,120,000  of  inventory,  consisting  primarily  of finished  goods.  The
     $600,000 payment to acquire the

                                      -5-

<PAGE>

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


4.   Acquisition of Spinal Fixation System - continued

     product rights and patents will be amortized using the straight-line  basis
     over five years.


5.   Comprehensive Income

     Comprehensive  income for the the three-month  and six-month  periods ended
     June 30, 1999 and 1998:

<TABLE>
<CAPTION>
                                                       Three months ended         Six months ended
                                                            June 30,                  June 30,
                                                      --------------------      --------------------

(dollars in thousands)                                 1999         1998         1999         1998
-------------------------------------------------     -------      -------      -------      -------
<S>                                                   <C>          <C>          <C>          <C>
Net income                                            $ 3,344      $ 2,429      $ 6,502      $ 4,535

Currency translation adjustments                         (131)          11         (282)           1
-------------------------------------------------     -------      -------      -------      -------

Comprehensive Income                                  $ 3,213      $ 2,440      $ 6,220      $ 4,536
=================================================     =======      =======      =======      =======
</TABLE>


6.   Financing Arrangements

     In June, 1999, the Company replaced its domestic lines of credit with a new
     credit  facility  which includes a $5,000,000  unsecured  revolving line of
     credit,  a $4,500,000  building  mortgage loan and a $17,000,000  equipment
     line of credit.  The revolving line of credit is committed  through May 31,
     2001. In the absence of default,  the Company has the option to convert the
     revolving line of credit to a term-loan and the outstanding  unpaid balance
     as of  May  31,  2001  will  be  repayable  in  forty-eight  equal  monthly
     installments  of  principal  together  with  accrued  interest.  An  unused
     facility  fee of .25% is  payable on the  unused  portion of the  revolving
     loan. The mortgage loan will be drawn down upon completion of the Company's
     new allograft tissue processing  facility  currently under construction and
     will be  secured  by the  building  which  will  house  the new  processing
     facility and the land on which the building is located.  The mortgage  loan
     will be  repayable  in 120 equal  monthly  installments  of  principal  and
     interest based on a twenty-year mortgage  amortization  schedule.  Upon the
     120th  payment,  the full  amount of the unpaid  principal  will be due and
     payable.  The  equipment  line of credit is secured by equipment  and other
     capital  expenditures  purchased  using the  proceeds  of such  line,  with
     advances of up to 80% of the cost  thereof.  Upon  expiration of an initial
     drawdown period, which expires December, 2001, the equipment line of credit
     will be repayable in equal monthly  installments  of principal and interest
     based on a seven-year  amortization  schedule.  During the drawdown  period
     interest only will be


<PAGE>


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


6.   Financing Arrangements - continued

     payable  under the equipment  line of credit.  Pursuant to the terms of the
     loan and security agreement (the  "Agreement"),  the Company is required to
     meet  certain  financial   covenants  regarding  minimum  working  capital,
     tangible  net worth and  interest  coverage.  In  addition,  the  Agreement
     contains  limitations on sales of assets other than in the ordinary  course
     of business and additional  indebtedness.  At June 30, 1999,  there were no
     borrowings outstanding under this credit facility.


7.   Commitments and Contingencies

     Product Liability Litigation

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

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

                                      -7-

<PAGE>


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


7.   Commitments and Contingencies - continued

     Patent Litigation

     In January,  1998, the Company filed a patent  infringement  action against
     GenSci   Regeneration   Laboratories,   Inc.  ("GenSci  Labs")  and  GenSci
     Regeneration  Sciences,  Inc. ("GenSci  Sciences") alleging that the GenSci
     parties  violated  claims of one of the  patents  involving  the  Company's
     Grafton(R) Demineralized Bone Matrix (DBM) process. Approximately two weeks
     after  Osteotech's  filing,  GenSci  Labs filed a suit  against the Company
     alleging infringement of two patents assigned to GenSci Labs in addition to
     tortious  interference with a business expectancy,  negligent  interference
     with a prospective  economic  advantage and inducing breach of contract and
     seeking a  declaratory  judgment of the  invalidity of two of the Company's
     patents covering Grafton(R) DBM. In February, 1998, GenSci Labs amended its
     complaint alleging essentially the same causes of action but adding a third
     patent to the  allegation  of patent  infringement.  The actions  have been
     consolidated  into one lawsuit.  In September,  1998, GenSci Labs served an
     amended complaint,  which asserted,  in addition to the previously asserted
     claims, claims of false advertising under Federal law. In September,  1998,
     the  Company  served  its  answer  to  this  amended  complaint,   asserted
     counterclaims  against  GenSci  Labs  and  served a  third-party  complaint
     against GenSci Sciences, and DePuy Motech, Inc. The Company's counterclaims
     and third party complaint accused the GenSci parties of infringing a second
     Company patent,  in addition to the patent  referred to above,  and accused
     the DePuy Motech,  Inc. and GenSci  parties of acting jointly and severally
     in infringing on the claims of both patents. Discovery has commenced and is
     ongoing.  In May, 1999, GenSci Labs amended its complaint to allege that in
     addition  to the  Company's  Grafton(R)  DBM Flex  product,  the  Company's
     Grafton(R) DBM Gel and Putty  products  infringe on GenSci Lab's patents at
     issue.  GenSci  Labs  also  amended  its  complaint  to  modify  its  false
     advertising  claim,  alleging that in addition to the Company,  individuals
     acting on the Company's  behalf engaged in false  advertising.  The Company
     filed and served its answer and  counterclaims to the amended  complaint in
     May,  1999.  The Company  believes  that the claims  against it are without
     merit and will  continue  to  vigorously  defend  against  such  claims and
     prosecute the claims it has asserted against the GenSci and DePuy parties.

     In February,  1999, a complaint was filed against the Company in the United
     States  District Court for the Northern  District of Florida.  This action,
     which has been brought by  plaintiffs,  University of Florida  Tissue Bank,
     Inc.,  Regeneration  Technologies,  Inc.,  Sofamor Danek Group,  Inc.,  and
     Sofamor Danek L.P. alleges that Company's  bio-d(TM) threaded cortical bone
     dowel and Endodowel  infringe on the claims of U.S.  Patent No.  5,814,084,
     entitled  "Diaphysical Cortical Dowel." In April, 1999, plaintiffs filed an
     amended  complaint  adding a claim  for  patent  infringement  against  the
     Company with respect to US Patent No.  5,814,084,  entitled  "Bone Grafting
     Units", which is owned by plaintiff University of Florida Tissue Bank, Inc.
     In May,  1999,  the  Company  filed its  answer  and  counterclaim  seeking
     declaratory  judgment  that the  patents  in  question  in this  action are
     invalid and otherwise not infringed by the Company. Although the plaintiffs
     seek  monetary  damages,  an amount  has not been  specified.  The  Company
     believes the claims asserted in this action to be without merit and intends
     to vigorously defend against such claims.


<PAGE>


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

7.   Commitments and Contingencies - continued

     In July, 1999, Medtronic Sofamor Danek Inc., Sofamor Danek L.P. and Sofamor
     Danek Holdings, Inc. ("Danek") sued Osteotech in the United States District
     Court for the Western  District of  Tennessee  alleging  that  instruments,
     instrument sets and cortical bone dowel products, including but not limited
     to the bio-d(TM) threaded cortical bone dowel and Endodowel,  manufactured,
     sold and/or otherwise distributed by the Company infringe on certain claims
     of U.S.  Patent  Nos.  5,741,253,  entitled  "Method for  Inserting  Spinal
     Implants",  and  5,484,437,  entitled  "Apparatus  and Method of  Inserting
     Spinal  Implants",  which are owned by Danek. The Company has not yet filed
     its answer in this case.

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


8.   Earnings Per Share

     The  following  table  sets  forth the  computation  of basic  and  diluted
     earnings per share for the three-month and six-month periods ended June 30,
     1999 and 1998:

<TABLE>
<CAPTION>

                                                          Three Months Ended               Six Months Ended
                                                               June 30,                        June 30,
                                                     ---------------------------     ---------------------------
(dollars in thousands
 except per share data)                                 1999             1998           1999             1998
------------------------------------------------     -----------     -----------     -----------     -----------
<S>                                                  <C>             <C>             <C>             <C>
Net income available to Common                       $     3,344     $     2,429     $     6,502     $     4,535
    Shareholders
------------------------------------------------     -----------     -----------     -----------     -----------

Weighted average common shares                        14,013,539      13,289,739      13,867,413      13,254,280
                                                     -----------     -----------     -----------     -----------
Denominator for basic earnings per share              14,013,539      13,289,739      13,867,413      13,254,280

Effect of dilutive securities:
    Stock options                                        713,631         796,208         770,086         868,139
    Warrants                                                 411             335             408             168
                                                     -----------     -----------     -----------     -----------
Denominator for diluted earnings per
share                                                 14,727,581      14,086,282      14,637,907      14,122,587
------------------------------------------------     -----------     -----------     -----------     -----------

    Basic earnings per share                         $       .24     $       .18     $       .47     $       .34
------------------------------------------------     -----------     -----------     -----------     -----------

    Diluted earnings per share                       $       .23     $       .17     $       .44     $       .32
------------------------------------------------     -----------     -----------     -----------     -----------
</TABLE>

                                      -9-

<PAGE>


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


9.   Operating Segments

     Summarized  in the table below is financial  information  for the Company's
     reportable  segments for the three-month  and six-month  periods ended June
     30, 1999 and 1998:

<TABLE>
<CAPTION>

                                                   Three Months Ended            Six Months Ended
                                                         June 30,                    June 30,
                                                 ----------------------      ----------------------
     (dollars in thousands)                        1999          1998          1999          1998
     ---------------------------------------     --------      --------      --------      --------
<S>                                              <C>           <C>           <C>           <C>
     Revenues:
       Grafton(R)DBM Segment                     $ 10,866      $ 10,144      $ 22,441      $ 18,547
       Base Tissue Segment                          7,715         4,435        13,518         8,707
       Other                                        1,139           675         2,449         1,475
       Consolidated                                19,720        15,254        38,408        28,729
     ---------------------------------------     --------      --------      --------      --------
     Operating income (loss):
       Grafton(R)DBM Segment                     $  3,642      $  3,170      $  8,080      $  5,494
       Base Tissue Segment                          2,651           907         4,085         2,072
       Other                                         (863)         (301)       (1,730)         (490)
       Consolidated                                 5,430         3,776        10,435         7,076
     ---------------------------------------     --------      --------      --------      --------
</TABLE>


10.  Inventories

     Inventories consist of the following:

<TABLE>
<CAPTION>

     (dollars in thousands)                            June 30, 1999    December 31, 1998
     ---------------------------------------------     -------------    -----------------
<S>                                                       <C>                 <C>
     Raw Materials                                        $  807              $  646
     Finished Goods                                        2,608                 922
     ---------------------------------------------        ------              ------

                                                          $3,415              $1,568
                                                          ------              ------
</TABLE>


11.  Reclassifications

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

                                      -10-

<PAGE>


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

Information contained herein contains "forward-looking  statements" which can be
identified  by the  use  of  forward-looking  terminology  such  as  "believes",
"expects",  "may", "will", "should", or "anticipates" or the negative thereof or
variations thereon or comparable terminology,  or by discussions of strategy. No
assurance can be given that the future  results  covered by the  forward-looking
statements will be achieved. Some of the matters set forth in the "Risk Factors"
section of the Company's  Annual Report on Form 10-K for the year ended December
31, 1998, constitute  cautionary statements  identifying factors with respect to
such forward-looking statements, including certain risks and uncertainties, that
could cause actual results to vary materially from the future results  indicated
in such  forward-looking  statements.  Other  factors  could also  cause  actual
results  to  vary  materially   from  the  future  results   indicated  in  such
forward-looking statements.

FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998

Results of Operations

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

Net Income

Consolidated net income in the second quarter of 1999 increased to $3,344,000 or
$.23  diluted net income per share as compared  to net income of  $2,429,000  or
$.17  diluted net income per share in the second  quarter of 1998.  Consolidated
net  income in the first six  months of 1999  increased  to  $6,502,000  or $.44
diluted  net income per share as compared  to net income of  $4,535,000  or $.32
diluted net income per share in the first six months of 1998.


The following is a discussion of factors affecting results of operations for the
three-month and six-month periods ended June 30, 1999 and 1998.


Net Revenues

Consolidated  net revenues  increased 29% to  $19,720,000  from  $15,254,000  in
second quarter of 1998 and increased 34% to $38,408,000  from $28,729,000 in the
first six months of 1998. The increase was principally due to higher revenues in
both the Grafton(R) Demineralized Bone Matrix (DBM) segment ("the Grafton(R) DBM
segment")  and  the  Base  Allograft  Bone  Tissue  segment  (the  "Base  Tissue
segment").  Domestic  revenues,  which consist  principally of revenues from the
Grafton(R)  DBM and Base Tissue  segments,  increased  27% to  $18,667,000  from
$14,666,000  in second  quarter of 1998 and  increased 32% to  $36,138,000  from
$27,439,000 in the first six months of 1998. Foreign revenues,  which consist of
non-allograft  tissue  revenues,  increased 79% to  $1,053,000  from $588,000 in
second  quarter of 1998 and increased 76% to $2,270,000  from  $1,290,000 in the
first six months of 1998. The increase in foreign  revenues  resulted  primarily
from the  contribution  to revenues  made by OST  Developpement  SA ("OST").  In
January,  1999,  the  Company  completed  the  acquisition  of 90% of OST  which
principally  processes  bovine bone tissue  products for  orthopaedic and dental
use.

                                      -11-

<PAGE>


Grafton(R) DBM segment revenues  increased 7% to $10,866,000 from $10,144,000 in
second quarter of 1998 and increased 21% to $22,441,000  from $18,547,000 in the
first six  months of 1998.  The  increase  resulted  from  increased  demand for
Grafton(R) DBM and a price increase  effective  January 1, 1999.  Grafton(R) DBM
segment  revenues  growth slowed in the second  quarter of 1999 as compared with
the prior year same quarter  primarily due to a new competitive  tissue product.
We  believe  this slow  down  will be a  short-term  issue as  surgeons  try the
competitive  product and determine for themselves the  superiority of Grafton(R)
DBM.

Base Tissue  segment  revenues  increased 74% to $7,715,000  from  $4,435,000 in
second quarter of 1998 and increased 55% to $13,518,000  from  $8,707,000 in the
first six months of 1998.  The  increase in the  quarter and six months  results
principally  from an increase in the number of donors processed for our clients,
46% and 38%,  respectively,  and revenues from the bio-d(TM)  threaded  cortical
bone dowel launched at the end of 1998.

In the second quarter and first six months of 1999, two of our Grafton(R)DBM and
Base Tissue segment clients accounted for 57% and 36% of consolidated  revenues,
respectively.

Gross Profit

Gross profit as a percentage of revenues was 69% in the second quarter and first
six months of 1999.  Gross profit as a percentage  of revenues in the prior year
was 70% in the second  quarter and 69% in the first six months.  The decrease in
the second  quarter  results from costs  associated  with  additional  allograft
tissue processing  capacity which was added to meet the continuing growth in our
allograft tissue business.

Marketing, General and Administrative

Marketing,  general and administrative expenses increased $927,000 or 16% in the
second quarter and $2,482,000 or 23% in the first six months of 1999 compared to
the same  periods in 1998.  The  increase  was  primarily  attributable  to: (i)
incremental agent commissions  resulting from increased volume in the Grafton(R)
DBM segment and (ii) expanded  marketing and promotional  activities  associated
with the roll out of two new products, the bio-d(TM) system which is included in
the Base Tissue segment and the Segmental Spinal Correction System(TM) ("SSCS").
Additionally,   corporate   administrative  costs  increased  compared  to  1998
principally  as a result of higher  outside  professional  service costs and the
inclusion of OST's operating expenses.

Research and Development

Research  and  development  expenses  increased  $409,000  or 38% in the  second
quarter and $732,000 or 33% in the first six months of 1999 compared to the same
periods in 1998. The increase was primarily  attributable to increased  spending
in the Base Tissue segment associated with the continued  development of a viral
inactivation process and ongoing development of new allograft tissue products.

                                      -12-

<PAGE>

Operating Income

Operating  income  increased  $1,654,000  or  44%  in  the  second  quarter  and
$3,359,000  or 47% in the first six months of 1999  compared to the same periods
in 1998.  Grafton(R) DBM segment  operating income increased  $472,000 or 15% in
the  second  quarter  and  $2,586,000  or 47% in the  first  six  months of 1999
compared to the same  periods in 1998.  Base  Tissue  segment  operating  income
increased  $1,744,000 or 192% in the second quarter and $2,013,000 or 97% in the
first six months of 1999  compared to the same  periods in 1998.  The  increases
result  principally from the increases in revenue discussed above. Other segment
operating income decreased $562,000 or 187% in the second quarter and $1,240,000
or 253% in the first six months of 1999  compared  to the same  periods in 1998.
The decreases result principally from increased  marketing  expenses  associated
with the SSCS(TM) system.

Income Tax Provision

The  effective  income  tax rate  declined  to  approximately  40% in the second
quarter and first six months of 1999 from 41% in the same periods last year.

Liquidity and Capital Resources

At June 30, 1999, we had cash and short-term investments of $15,769,000 compared
to   $18,041,000   at  December  31,  1998.   We  invest  excess  cash  in  U.S.
Government-backed securities and investment grade commercial paper of major U.S.
corporations.  Working capital  increased  $7,127,000 to $33,500,000 at June 30,
1999  compared to  $26,373,000  at December  31,  1998.  The increase in working
capital results principally from an increase in accounts receivable, inventories
and  deferred  processing  costs and a decrease in accounts  payable and accrued
liabilities.  Accounts receivable increased $2,772,000 due to revenue increases.
The increase in inventories of $1,847,000 is associated  with the acquisition of
the Versalok(R)  System and the launch of the SSCS(TM)  system.  The increase in
deferred  processing  costs is associated  with the growth in our Grafton(R) DBM
and Base Tissue segments.

Net cash used in  operating  activities  was $753,000 in the first six months of
1999,  compared to cash  provided by operating  activities  of $6,993,000 in the
first six months of 1998.  The decrease  resulted  primarily  from  increases in
accounts  receivable  and deferred  processing  costs and a decrease in accounts
payable and accrued liabilities.  Cash used in investing activities increased to
$12,337,000  in the first six  months of 1999 from  $5,167,000  in the first six
months of 1998.  The  increase  results  principally  from;  (i) an  increase in
capital  expenditures to $9,208,000 from $2,941,000 resulting from our continued
investment in facilities  and equipment  needed for current and future  business
requirements,  (ii) cash used to purchase an additional 85% interest in OST, and
(iii) the acquisition of the Versalok(R)  System. In the fourth quarter of 1998,
we commenced  construction  of a new  allograft  tissue  processing  facility in
Eatontown,  New Jersey. The estimated aggregate cost for the construction of the
building,   including   furniture,   fixtures  and  equipment  is  approximately
$32,000,000;  $21,500,000 of which will be funded through the building  mortgage
loan and equipment line of credit included in the credit facility concluded with
our bank in June,  1999.  The remaining  balance of  $10,500,000  will be funded
through  available cash reserves or anticipated cash flow from  operations.  Net
cash provided by financing  activities  increased to $10,056,000 from $1,160,000
in the first six months of 1998,  principally  from cash proceeds  received from
stock option  exercises and the related income tax benefits  resulting from such
stock option exercises.

                                      -13-

<PAGE>

In June,  1999, we replaced our domestic lines of credit with a credit  facility
that includes a $5,000,000  revolving line of credit, a $4,500,000 mortgage loan
and $17,000,000  equipment line of credit.  We also have a line of credit with a
Dutch bank,  which  provides for  borrowings of up to 5,000,000  Dutch  Guilders
("dfl"),  or  approximately  $2,347,000  at the June  30,  1999  exchange  rate.
Analysis of our cash position and  anticipated  cash flow indicated that it most
likely would not be necessary to utilize a  significant  portion of this line of
credit and, therefore,  we agreed with the bank to limit borrowings,  if any, to
no more than dfl  3,000,000  or  approximately  $1,408,000  at the June 30, 1999
exchange rate. Additionally,  we have a line of credit with a French bank, which
provides for borrowing of up to FRF 2,250,000,  or approximately $355,000 at the
June 30, 1999 exchange rate. There were no borrowings  outstanding  under any of
the Company's credit facilities as of June 30, 1999.

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

Impact of Inflation and Foreign Currency Exchange Fluctuations

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

Litigation

Osteotech,  Inc. is  involved in various  legal  proceedings  involving  product
liability and patent infringement  claims. For a discussion of these matters see
Note 7 of "Notes to Condensed Consolidated Financial Statements", PART II., ITEM
1. LEGAL  PROCEEDINGS and the Company's  Annual Report on Form 10-K for the year
ended  December  31,  1998.  It is possible  that our results of  operations  or
liquidity  and capital  resources  could be  adversely  affected by the ultimate
outcome of the pending litigation or as a result of the costs of contesting such
lawsuits.

Year 2000

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

     Internal Business Software and Hardware

     Several  years ago we  determined  that our existing  business  information
     systems were not adequate to support the anticipated growth in our business
     operations and purchased a fully integrated management  information system,
     which is Year 2000 compliant. Most of the new system is operational at this
     time and the remainder of the system is scheduled to be  operational in the
     fourth  quarter 1999. We have a contingency  plan to prevent  disruption to
     our internal  business  systems if the remaining  part of the system is not
     fully  operational  prior to  January  1,  2000.  The  completion  cost for
     implementation  of the  remaining  software is not expected to be material.
     All related hardware supporting our internal business software is currently
     Year 2000 compliant.

                                      -14-

<PAGE>

     Internal Non-financial Systems

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

     Noncompliance by Suppliers and Customers

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


     Risk of Non-Compliance

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


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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

In May, 1999,  GenSci  Regeneration  Laboratories  Inc. amended its complaint to
allege  that  in  addition  to  the  Company's   Grafton(R)  DBM  Flex  product,
Osteotech's  Grafton(R) DBM Gel and Putty products  infringe on GenSci's patents
at issue.  GenSci also  amended its  complaint  to modify its false  advertising
claim, alleging that in addition to Osteotech, individuals acting on Osteotech's
behalf engaged in false  advertising.  Osteotech filed and served its answer and
counterclaims to the amended complaint in May, 1999.

                                      -15-

<PAGE>


Medtronic Sofamor Danek Inc., Sofamor Danek L.P. and Sofamor
Danek Holdings, Inc. v. Osteotech

In July,  1999,  Medtronic  Sofamor  Danek Inc.,  Sofamor Danek L.P. and Sofamor
Danek  Holdings,  Inc.  ("Danek") sued  Osteotech in the United States  District
Court  for  the  Western  District  of  Tennessee   alleging  that  instruments,
instrument sets and cortical bone dowel  products,  including but not limited to
the bio-d(TM)  threaded  cortical bone dowel and Endodowel,  manufactured,  sold
and/or  otherwise  distributed by the Company infringe on certain claims of U.S.
Patent Nos.  5,741,253,  entitled  "Method for Inserting Spinal  Implants",  and
5,484,437,  entitled "Apparatus and Method of Inserting Spinal Implants",  which
are owned by Danek. Osteotech has not yet filed its answer in this case.


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

     (a)  An annual meeting of stockholders was held on June 3, 1999.

     (b)  The  directors  elected at the  annual  meeting to serve a term of one
          year or until the next annual meeting of stockholders were: Richard W.
          Bauer,  Kenneth  P.  Fallon,  III,  Michael  J.  Jeffries,  Donald  D.
          Johnston,  John Phillip Kostuik,  M.D., FRCS(C), and Stephen J. Sogin,
          Ph.D. They constitute the entire board of directors of the Company.

     (c)  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 received the following number of votes:


                        Director                     For             Withheld
               ----------------------------    ----------------   --------------
               Richard W. Bauer                   11,861,698         429,738
               Kenneth P. Fallon, III             11,868,748         422,688
               Michael J. Jeffries                11,861,698         429,738
               Donald D. Johnston                 11,861,248         430,188
               John Phillip Kostuik, M.D.         11,864,975         426,461
               Stephen J. Sogin, Ph.D.            11,864,075         427,361


         ii)   With respect to a proposal to approve an amendment to Osteotech's
               Certificate of Incorporation to increase the number of authorized
               shares of common stock to  70,000,000  shares,  the  stockholders
               voted 11,069,751  shares in favor,  1,211,373  against and 10,312
               abstained.  Broker  non-votes were not applicable.  This proposal
               received the vote  required by the Delaware  General  Corporation
               Law ("DGCL") for approval (i.e. affirmative vote of a majority of
               the outstanding shares of common stock).

                                      -16-

<PAGE>


        iii)   With respect to a proposal to approve an amendment to Osteotech's
               1991 Stock Option Plan,  as amended  (the  "Plan"),  to limit the
               number of shares  issuable  under options which may be granted to
               eligible  persons,  the stockholders  voted 11,756,782  shares in
               favor,  521,859 against and 12,795  abstained.  Broker  non-votes
               were not applicable.  This proposal received the vote required by
               the DGCL and Osteotech's  by-laws for approval (i.e.  affirmative
               vote of a  majority  of the  outstanding  shares of common  stock
               present at the meeting and entitled to vote).

         iv)   With  respect  to  a  proposal  to  ratify  the   appointment  of
               PricewaterhouseCoopers  LLP as Osteotech's  independent  auditors
               for the fiscal year ending  December 31, 1999;  the  stockholders
               voted  12,281,724  shares  in  favor,  3,722  against  and  5,990
               abstained.  Broker  non-votes were not applicable.  This proposal
               received the vote required by DGCL and the Company's  by-laws for
               approval (i.e.  affirmative vote of a majority of the outstanding
               shares of common  stock  present at the meeting  and  entitled to
               vote).



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


           3.4      Certificate of Amendment of Restated                 E-1
                    Certificate of Incorporation of
                    Osteotech, Inc.

          10.33     Loan and  Security  Agreement  among Summit          E-3
                    Bank,   Osteotech  Inc.,  Osteotech  Investment
                    Corp., CAM Implants, Inc., Osteotech,  B.V., HC
                    Implants    B.V.,    CAM    Implants,     B.V.,
                    Osteotech/CAM    Services,    B.V.,   and   OST
                    Developpement dated June 10, 1999.

          27.0      Financial Data Schedule                              E-87



     (b)  Reports on Form 8-K

     On April 15, 1999,  we filed with the  Commission a current  report on Form
     8-K to announce that GenSci Regeneration  Laboratories Inc. ("GenSci") made
     a motion in the United States  District  Court for the Central  District of
     California to amend its patent  infringement  claims  against  Osteotech to
     include Grafton(R) DBM Gel and Grafton(R) DBM Putty.

     On June 1, 1999, we filed with the  Commission a current report on Form 8-K
     to announce that GenSci's  motion for leave to amend its complaint had been
     granted.

                                      -17-

<PAGE>

                                   SIGNATURES


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



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




Date:    August 12, 1999                     By: /s/Richard W. Bauer
                                                 -------------------------------
                                                 Richard W. Bauer
                                                 President, Chief
                                                 Executive Officer



Date:    August 12, 1999                     By: /s/Michael J. Jeffries
                                                 -------------------------------
                                                 Michael J. Jeffries
                                                 Executive Vice President
                                                 Chief Operating Officer
                                                 Chief Financial Officer

                                      -18-