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


                                    FORM 10-Q


                                   (Mark One)

[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities  Exchange
Act of 1934 For the Period Ended September 30, 2000

                                       or

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


Commission File Number 0-19278


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

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

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

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

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

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

                      Applicable Only to Corporate Issuers

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

Common Stock, $.01 par value - 13,963,480 shares as of October 31, 2000.

<PAGE>

PART I.    FINANCIAL INFORMATION
ITEM 1.    Financial Statements

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

<TABLE>
<CAPTION>
                                                                     September 30,           December 31,
                                                                          2000                   1999
                                                                   --------------------------------------
ASSETS
---------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                     <C>
Current assets:
     Cash and cash equivalents                                         $ 12,857                $ 16,770
     Short-term investments                                               1,935                   3,946
     Accounts receivable, net                                            12,575                  15,095
     Inventories                                                          2,801                   3,405
     Deferred processing costs                                            5,725                   5,310
     Prepaid expenses and other current assets                            3,060                   5,787
                                                                   --------------------------------------
        Total current assets                                             38,953                  50,313

Property, plant and equipment, net                                       51,623                  33,995
Excess of cost over net assets of business
     acquired, less accumulated amortization
     of $2,379 in 2000 and $2,089 in 1999                                 3,392                   3,682
Other assets                                                              2,172                   1,740
---------------------------------------------------------------------------------------------------------
Total assets                                                           $ 96,140                $ 89,730
=========================================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------------------------------------
Current liabilities:
     Accounts payable and accrued liabilities                          $  8,933                $ 13,231
                                                                   --------------------------------------
        Total current liabilities                                         8,933                  13,231

Long-term debt                                                           15,019                   6,359
Other liabilities                                                           742                     734
---------------------------------------------------------------------------------------------------------
Total liabilities                                                        24,694                  20,324
---------------------------------------------------------------------------------------------------------

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 13,963,480
         shares in 2000 and 14,194,126 shares in 1999                       138                     140
     Additional paid-in capital                                          46,358                  48,837
     Accumulated other comprehensive loss                                  (579)                   (376)
     Retained earnings                                                   25,529                  20,805
---------------------------------------------------------------------------------------------------------
Total stockholders' equity                                               71,446                  69,406
---------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity                             $ 96,140                $ 89,730
=========================================================================================================
</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                          Nine Months
                                                                      Ended September 30,                   Ended September 30,
                                                                ------------------------------        ------------------------------
                                                                     2000              1999               2000               1999
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                <C>                <C>                <C>
Net revenues:
   Service                                                      $    17,268        $    16,770        $    54,799        $    53,596
   Product                                                              648                699              2,382              2,163
   License fee                                                                                                                   118
                                                                -----------        -----------        -----------        -----------
                                                                     17,916             17,469             57,181             55,877

Cost of services                                                      6,132              5,204             17,934             16,330
Cost of products                                                        864                439              2,015              1,285
                                                                -----------        -----------        -----------        -----------
                                                                      6,996              5,643             19,949             17,615
                                                                -----------        -----------        -----------        -----------

Gross Profit                                                         10,920             11,826             37,232             38,262

Marketing, general and administrative                                 9,228              6,956             25,960             20,019
Research and development                                              1,427              1,310              4,474              4,248
                                                                -----------        -----------        -----------        -----------
                                                                     10,655              8,266             30,434             24,267

Income from litigation settlement                                       250              1,750                750              1,750
                                                                -----------        -----------        -----------        -----------

Operating income                                                        515              5,310              7,548             15,745

Interest and other income, net                                          290                208                875                636
                                                                -----------        -----------        -----------        -----------

Income before income taxes                                              805              5,518              8,423             16,381

Income tax provision                                                    574              2,270              3,699              6,631

------------------------------------------------------------------------------------------------------------------------------------
Net income                                                      $       231        $     3,248        $     4,724        $     9,750
====================================================================================================================================
Net income per share:
     Basic                                                      $       .02        $       .23        $       .34        $       .70
     Diluted                                                    $       .02        $       .22        $       .33        $       .67
------------------------------------------------------------------------------------------------------------------------------------
Shares used in computing net income per share:
     Basic                                                       13,960,228         14,174,402         14,085,310         13,969,901
     Diluted                                                     14,249,133         14,641,259         14,403,949         14,639,183
</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>

Nine Months Ended September 30,                                                 2000            1999
------------------------------------------------------------------------------------------------------
<S>                                                                         <C>              <C>
Cash Flow From Operating Activities
   Net income                                                               $  4,724         $  9,750
   Adjustments to reconcile net income to net cash
      Provided by operating activities:
         Depreciation and amortization                                         3,137            2,201
         Loss on disposal of fixed assets                                         11
         Provision for doubtful accounts                                           3
         Income tax benefit related to stock options                              32            3,365
         Changes in current assets and liabilities:
               Accounts receivable                                             2,388            1,403
               Inventories                                                       528           (1,451)
               Deferred processing costs                                        (415)          (2,104)
               Prepaid expenses and other current assets                       2,650              396
               Litigation settlement receivable                                                (2,000)
               Accounts payable and other liabilities                         (3,981)             913
------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                      9,077           12,473

Cash Flow From Investing Activities
   Capital expenditures                                                      (20,509)         (13,537)
   Purchases of investments                                                   (3,877)         (11,634)
   Proceeds from sale of investments                                           5,888           10,610
   Acquisition of business                                                                     (1,526)
   Increase in other assets                                                     (540)            (859)
------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                        (19,038)         (16,946)

Cash Flow From Financing Activities
   Proceeds from issuance of common stock                                        608            4,854
   Repurchase of common stock                                                 (3,121)
   Proceeds from issuance of notes payable                                                        116
   Principal payments on notes payable                                                           (693)
   Proceeds from long-term debt                                                8,660            3,000
   Principal payments on long-term debt                                                          (758)
   (Decrease)increase in other liabilities                                      (100)             171
------------------------------------------------------------------------------------------------------
Net cash provided by financing activities                                      6,047            6,690

Effect of exchange rate changes on cash                                            1              (78)
------------------------------------------------------------------------------------------------------

Net (decrease) increase in cash and cash equivalents                          (3,913)           2,139
Cash and cash equivalents at beginning of period                              16,770           15,119
------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                                  $ 12,857         $ 17,258
======================================================================================================

Supplementary cash flow data:
   Cash paid during the period for interest                                 $    494         $     29
   Cash paid during the period for taxes                                       1,882            2,114
   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 September 30, 2000 and December 31,
     1999,  the  consolidated  results of  operations  for the  three-month  and
     nine-month  periods ended September 30, 2000 and 1999, and the consolidated
     cash flows for the nine-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,  1999  which were
     included as part of the Company's Annual Report on Form 10-K.


2.   Inventories

     Inventories consist of the following:

                                                 September 30,      December 31,
     (dollars in thousands)                          2000              1999
     --------------------------------------------------------------------------

     Raw Materials and Supplies                    $ 1,184             $ 912
     Finished Goods                                  1,617             2,493
     --------------------------------------------------------------------------

                                                   $ 2,801           $ 3,405
     --------------------------------------------------------------------------


3.   Comprehensive Income

     Comprehensive  income for the  three-month  and  nine-month  periods  ended
     September 30, 2000 and 1999:

<TABLE>
<CAPTION>
                                              Three months ended            Nine months ended
                                                 September 30,                September 30,
                                              --------------------------------------------------

     (dollars in thousands)                    2000         1999            2000         1999
     -------------------------------------------------------------------------------------------
<S>                                            <C>        <C>              <C>          <C>
     Net income                                $231       $3,248           $4,724       $9,750

     Currency translation adjustments           (77)         189             (203)         (93)
     -------------------------------------------------------------------------------------------

     Comprehensive Income                      $154       $3,437           $4,521       $9,657
     ============================================================================================
</TABLE>

4.   Stock Repurchase Program

     In May  2000,  the  Board  of  Directors  of  the  Company  authorized  the
     repurchase and retirement of up to 1,000,000 shares of the Company's common
     stock through open market  purchases,  or block purchases.  As of September
     30, 2000, the Company had  repurchased and retired 330,500 shares of common
     stock at a cost of approximately $3,121,000.


                                       5
<PAGE>

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


5.   Commitments and Contingencies

     Service Contracts

     In September 2000, the Company entered into a new five-year  agreement with
     the  Musculoskeletal  Transplant  Foundation  ("MTF").  This new  agreement
     replaces the current  agreement  which would have  expired  March 31, 2002.
     Under  the new  agreement  MTF will no longer be  required  to  exclusively
     provide all donor tissue it recovers to Osteotech for  processing.  The new
     agreement  expires on August 31, 2005,  and provides  that either party has
     the right to terminate  the  agreement  commencing  March 31, 2002 upon six
     months prior written  notice.  Also,  under the terms of the new agreement,
     Osteotech will have the ability to directly  contract with tissue  recovery
     organizations   for  the   processing   of   tissue   recovered   by  those
     organizations.

     In June 2000, the Company  entered into an exclusive  five-year  processing
     agreement with Bone Bank  Allografts  ("BBA") of San Antonio,  Texas.  BBA,
     which is a tissue bank  accredited  by the American  Association  of Tissue
     Banks,  coordinates  the  procurement  and  distribution  of allograft bone
     tissue  nationally,  with a focus  in the  Southern  region  of the  United
     States.


     Purchase Commitments

     In  September  2000,  the  Company  entered  into a  non-cancelable  2-year
     agreement  with  Heinrich C. Ulrich,  K.G.  ("Ulrich")  for the purchase of
     $3,000,000 of inventory of a spinal vertebral body replacement system ("VBR
     System"), which the Company expects to begin marketing in the United States
     in the first  quarter of 2001.  An initial order of $875,300 is expected to
     be delivered by the end of December 2000.


     Litigation

     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") 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 the  Company'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 the Company's  patents
     U.S.  Patent Nos.  5,284,655  and  5,290,558  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. In August 1998, the actions were consolidated into one
     case before the United States  District  Court for the Central  District of
     California.


                                       6
<PAGE>

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


5.   Commitments and Contingencies (continued)

     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  AcroMed,
     Inc.("DePuy").  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 GenSci  parties
     and DePuy of acting  jointly and  severally in  infringing on the claims of
     both patents.

     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.

     In November 1999, the Company settled all claims which it had filed against
     DePuy.  As part of the  settlement,  DePuy has agreed to stop  selling  the
     GenSci products accused of infringing the Company's patents,  no later than
     February 4, 2001 and to pay the Company $3,000,000.  Payments of $2,000,000
     were  received  in the fourth  quarter  of 1999,  of which  $1,750,000  and
     $250,000 was recognized in income in the third and fourth quarters of 1999,
     respectively.  Further,  the Company has received and  recognized in income
     payments  of  $250,000  in each of the first  three  quarters  of 2000.  In
     accordance  with the  settlement  agreement  with DePuy, a final payment of
     $250,000 is expected to be made in the fourth quarter of 2000.

     In April 2000,  the Company,  GenSci Labs, and GenSci  Sciences  reached an
     agreement to dismiss with  prejudice  all of GenSci's  patent  infringement
     claims  against the Company's  proprietary  Grafton(R)  DBM products and to
     stay any action in GenSci's anti-trust suit, which it had filed against the
     Company  on  March  6,  2000,  until  the  completion  of the  trial of the
     Company's patent infringement claims against GenSci.  GenSci also agreed to
     dismiss all of the tort  claims that it had brought  against the Company in
     its patent  lawsuit  without  prejudice  and to transfer  the claims to the
     anti-trust  action. As a result of these dismissals,  GenSci will no longer
     have  any  claims  against  the  Company  in the  patent  action.  The only
     remaining  claims in the patent action  involve the  Company's  allegations
     that GenSci has infringed certain of the Company's patents through the sale
     of the Dynagraft(TM) Gel and Dynagraft(TM)  Putty products.  This agreement
     was subject to court approval, which approval has been received.

     In July 2000,  the Company filed a motion seeking  summary  judgment in its
     favor on GenSci Labs' and GenSci Sciences'  reverse doctrine of equivalents
     defense on the bases that the GenSci  parties failed to assert that defense
     in a timely manner and that the defense is otherwise meritless. The Company
     also  filed a motion  seeking  judgment  that the  portion of the case that
     GenSci  dismissed with  prejudice be ruled as  exceptional  based on GenSci
     Labs having  asserted and maintained  baseless  allegations  that Osteotech
     infringed GenSci Labs' patents, thus warranting an award of attorneys' fees
     and costs to Osteotech.


                                       7
<PAGE>

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


5.   Commitments and Contingencies (continued)

     Also,  in July 2000,  GenSci  filed  various  motions for summary  judgment
     seeking orders that GenSci does not infringe on Osteotech's  patents and/or
     that such patents are invalid.

     The  Company  will  continue  to  vigorously  prosecute  the  claims it has
     asserted in this action to protect its products and  intellectual  property
     to the fullest extent possible under the law.

     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  that  the  Company  engaged  in  unlawful
     monopolization,  attempted to monopolize the market for demineralized  bone
     matrix and entered 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 that the Company engaged in unlawful and unfair business practices
     in violation of section 17200 of the  California  Unfair  Competition  Law.
     GenSci has alleged  that the Company has  monopoly  power in the market for
     demineralized bone matrix products in the United States, and has engaged in
     anticompetitive  conduct by improperly asserting its patents through patent
     infringement  actions,  seeking  to have the  Food and Drug  Administration
     remove   certain  of  GenSci's   products  from  the  market,   restricting
     competitors'   access  to  raw   materials,   interfering   with   GenSci's
     arrangements to manufacture demineralized bone matrix implants, interfering
     with GenSci's  marketing and  distribution  arrangements,  and  disparaging
     GenSci's products.  GenSci seeks compensatory,  incidental,  consequential,
     and punitive  damages in an unspecified  amount,  and injunctive  relief to
     stop the Company from  restricting  the tissue banks for which it processes
     tissue  from  (a)  supplying   processed   demineralized   bone  matrix  to
     Osteotech's  competitors and (b) distributing the demineralized bone matrix
     implant products of Osteotech's  competitors.  Certain of these allegations
     had  previously  been  asserted  by GenSci in its  patent  litigation  with
     Osteotech in the Central District of California federal court.

     In April 2000,  the Company  reached an agreement  with GenSci whereby tort
     claims that were dismissed from the patent  litigation would be transferred
     to this action and this action was stayed until the completion of the trial
     of the Company's patent infringement claims against GenSci.

     The Company  believes the claims made in this lawsuit are without merit and
     intends to vigorously defend against these claims.

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

     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 the 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


                                       8
<PAGE>

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


5.   Commitments and Contingencies (continued)

     respect to U.S. 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. In May 1999, plaintiffs filed their reply to
     the Company's counterclaims.

     In October  2000,  the Court granted  plaintiffs  permission to amend their
     complaint  to allege that the  Company,  in addition to  infringing  on the
     claims of the U.S. Patent Nos. 5,814,084 and 4,950,296,  infringed upon the
     claims of a related patent owned by plaintiffs,  U.S. Patent No. 6,096,081.
     As with their infringement  claims regarding the other patents,  plaintiffs
     seek injunctive relief and unspecified damages.

     Discovery on all of the claims asserted in this litigation is ongoing.  The
     Company believes that the claims made against it in this action are without
     merit and will continue to vigorously defend against such claims.

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

     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, 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.  In September  1999, the Company filed its answer
     and  counterclaims  seeking a  declaratory  judgment  that the  patents  in
     question  in this action are invalid and  otherwise  not  infringed  by the
     Company. Plaintiffs filed their reply to the counterclaims in October 1999.

     In October  2000,  the Court granted  plaintiffs  permission to amend their
     complaint  to allege that the  Company,  in addition to  infringing  on the
     claims of the U.S. Patent Nos.  5,741,253 and 5,484,437  infringed upon the
     claims of a related patent owned by plaintiffs,  U.S. Patent No. 6,096,038.
     As with their infringement  claims regarding the other patents,  plaintiffs
     seek injunctive relief and unspecified damages.

     Discovery on all of the claims asserted in this litigation is ongoing.  The
     Company believes that the claims made against it in this action are without
     merit and will continue to vigorously defend against such claims.


                                       9
<PAGE>

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


5.   Commitments and Contingencies (continued)

     Condos v. Musculoskeletal Transplant Foundation

     In June 2000,  the Company was served with an action  brought in the United
     States  District  Court for the  District  of Utah  against the Company and
     Musculoskeletal  Transplant  Foundation ("MTF"). The suit alleges causes of
     action for strict  liability,  breach of implied  warranty  and  negligence
     arising from allegedly  defective  allograft bone tissue  processed  and/or
     provided  by the  Company and MTF which was  allegedly  implanted  into the
     plaintiff,  Chris Condos,  during two spinal surgeries.  Plaintiffs,  which
     include  Mr.  Condos's  family  members,  demand  monetary  damages  in  an
     unspecified  amount.  On July 25, 2000, the Company answered the complaint,
     denying any and all liability.

     The Company maintains a general liability insurance policy and has notified
     the insurance  company of this action and the insurance  company has agreed
     to defend the action.

     Regner v. Inland Eye & Tissue Bank of Redlands

     In May 2000,  Regner  brought  suit against the Company and fifteen or more
     other  defendants in the Superior  Court for the State of  California,  San
     Bernardino  County.  The suit seeks class action status and alleges a cause
     of action based on a violation of the California  Business and Professional
     Code,  as well as a number  of  common  law  causes  of  action,  including
     negligence,  deceit, and intentional and negligent  infliction of emotional
     distress. With respect to the Company, plaintiff claims that the Company is
     violating  California  law by engaging in the activity of buying or selling
     organs or tissue for valuable  consideration or profit. It appears that the
     plaintiff is seeking only injunctive  relief with respect to its California
     Business and Professional Code claim. To the extent any of the other causes
     of action exist against Osteotech, the plaintiffs are seeking damages in an
     unspecified amount in addition to class certification.

     In June 2000,  Regner  filed a motion for a  preliminary  injunction  and a
     hearing was held on June 28, 2000. The Court denied the motion. The Company
     also filed a demurrer to the  complaint  requesting  that the  complaint be
     dismissed.

     In September 2000, plaintiffs voluntarily dismissed without prejudice their
     claims  filed  in the  Superior  Court  for the  State of  California,  San
     Bernardino  County.  At or about the time of the dismissal,  the plaintiffs
     "refiled"  the action in the  Superior  Court for Los Angeles  County.  The
     Company,  however,  has not been served with that action.  In October 2000,
     the  defendants,   including  the  Company,  moved  to  vacate  plaintiffs'
     dismissal  of  the  San  Bernardino  County  action  and  have  the  action
     reinstated.  The Court  granted that motion and has scheduled a hearing for
     December 4, 2000,  on  defendants'  demurrers,  filed in June 2000,  to the
     plaintiffs'   complaint  requesting  that  the  action  be  dismissed  with
     prejudice.

     The Company  denies that it is engaged in the  activity  complained  of and
     asserts that it is licensed by the State of California to do precisely what
     it is doing, and that its activities are fully in accord with all state and
     federal laws. Therefore, the Company believes this suit to be without merit
     and will vigorously defend against the claims.


                                       10
<PAGE>

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


5.   Commitments and Contingencies (continued)

     Musculoskeletal Transplant Foundation v. Osteotech, Inc.

     In October 2000, the Musculoskeletal  Transplant Foundation ("MTF") filed a
     complaint  in the United  States  District  Court for the  District  of New
     Jersey  against the Company  seeking a  declaratory  judgment (1) that MTF,
     through  its  manufacture  and use of  certain  demineralized  bone  tissue
     products,  does not infringe any claim of U.S.  Patent Nos.  5,284,655  and
     5,290,558, which are owned by the Company; (2) that claims of those patents
     are invalid;  and (3) that the claims of those  patents are  unenforceable.
     The  complaint  was then amended to add Synthes  Spine  Company,  L.P. as a
     plaintiff.  Although  plaintiffs seek no specific  monetary award they have
     requested that the Court award the  plaintiff's  their  attorneys' fees and
     costs in this action.  The Company is assessing the claims asserted against
     it and has not yet responded to them.

     Steele v. Inland Eye and Tissue Bank

     In October 2000,  the Company was served with a summons and second  amended
     complaint  naming the Company as a "Doe"  defendant in an action pending in
     the Superior  Court for the State of  California,  San  Bernardino  County.
     Plaintiff  has  asserted   claims  against   defendants   for   intentional
     misrepresentation, negligent misrepresentation and tortious interference in
     connection with certain tissue procurement  activities allegedly engaged in
     by  defendants.  Plaintiff  seeks  damages in an  unspecified  amount.  The
     Company is currently  assessing the claims asserted  against it and has not
     yet responded to them.

     Orthopaedic Bone Screw Products Liability Litigation

     The Company  remained a defendant in one  previously  reported  state court
     products  liability  action involving  orthopaedic  bone screws:  Ponder v.
     Synthes. This action has been dismissed.

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

     In July 1998,  a  complaint  was filed  against  the  Company in the Second
     Judicial  District  Court,  Bernallilo  County,  New Mexico,  which alleges
     negligence,    strict    liability,    breach   of   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 March 1999,  the court  dismissed
     with  prejudice the  plaintiff's  negligence and strict  liability  claims.
     Remaining are claims for breach of warranty,  negligent  misrepresentation,
     fraud,  and violation of the New Mexico Unfair Trade  Practices  Act. As to
     those claims,  the Company has moved for summary judgment on the basis that
     all of the  remaining  claims are barred by their  applicable  statutes  of
     limitations.  At plaintiff's request, the court permitted limited discovery
     on the  matters  related to the  statute  of  limitations  issue,  which is
     ongoing.


                                       11
<PAGE>

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


5.   Commitments and Contingencies (continued)

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

     Litigation  is subject to many  uncertainties  and  management is unable to
     predict the outcome of the pending  suits and claims.  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.  We are  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.


6.   Earnings Per Share

     The  following  table  sets  forth the  computation  of basic  and  diluted
     earnings  per  share  for the  three-month  and  nine-month  periods  ended
     September 30, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                           Three Months Ended            Nine Months Ended
                                                                              September 30,                 September 30,
                                                                        -------------------------------------------------------
     (dollars in thousands
     except per share data)                                                2000           1999           2000           1999
     --------------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>            <C>            <C>            <C>
         Net income                                                    $       231    $     3,248    $     4,724    $     9,750
     --------------------------------------------------------------------------------------------------------------------------

     Weighted average common shares                                     13,960,228     14,174,402     14,085,310     13,969,901

                                                                        -------------------------------------------------------
     Denominator for basic earnings per share                           13,960,228     14,174,402     14,085,310     13,969,901

     Effect of dilutive securities:
        Stock options                                                      288,905        466,479        318,494        669,156
        Warrants                                                                              378            145            126
                                                                        -------------------------------------------------------
     Denominator for diluted earnings per share                         14,249,133     14,641,259     14,403,949     14,639,183
     --------------------------------------------------------------------------------------------------------------------------

        Basic net income per share                                     $       .02    $       .23    $       .34    $       .70
     --------------------------------------------------------------------------------------------------------------------------

        Diluted net income per share                                   $       .02    $       .22    $       .33    $       .67
     --------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       12
<PAGE>

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


7.   Operating Segments

     Summarized  in the table below is financial  information  for the Company's
     reportable  segments  for the  three-month  and  nine-month  periods  ended
     September 30, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                      Three Months Ended                Nine Months Ended
                                                                         September 30,                     September 30,
                                                                   -----------------------------------------------------------
     (dollars in thousands)                                           2000             1999             2000            1999
     -------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>              <C>              <C>              <C>
     Revenues:
       Grafton(R)DBM Segment                                       $ 11,139         $  9,905         $ 33,433         $ 32,346
       Base Tissue Segment                                            5,872            6,525           20,471           20,043
       Other                                                            905            1,039            3,277            3,488
     -------------------------------------------------------------------------------------------------------------------------
       Consolidated                                                $ 17,916         $ 17,469         $ 57,181         $ 55,877
     -------------------------------------------------------------------------------------------------------------------------
     Operating income (loss):
       Grafton(R)DBM Segment                                       $  2,158         $  4,429         $  8,110         $ 12,509
       Base Tissue Segment                                             (415)           1,884            2,547            5,969
       Other                                                         (1,228)          (1,003)          (3,109)          (2,733)
     -------------------------------------------------------------------------------------------------------------------------
       Consolidated                                                $    515         $  5,310         $  7,548         $ 15,745
     -------------------------------------------------------------------------------------------------------------------------
</TABLE>

8.   Reclassifications

     In 2000,  the  Emerging  Issues  Task Force  ("EITF")  issued  EITF  00-15,
     "Classification  in the  Statement  of Cash Flows of the Income Tax Benefit
     Received  by a Company  upon  Exercise  of a  Nonqualified  Employee  Stock
     Option." In  accordance  with the EITF,  in the statement of cash flows for
     the  nine  months  ended  September  30,  1999,  the  Company  reclassified
     $3,365,000  in income  tax  benefits  from the cash  flows  from  financing
     activities section to the cash flows from operating activities section.

     In  addition,  certain  other  prior  year  amounts  within  the  financial
     statements have been reclassified to conform to the 2000 presentation.


                                       13
<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 NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999

Results of Operations

Net Income

Consolidated net income in the third quarter of 2000, which includes $150,000 or
$.01 diluted net income per share related to the settlement  with DePuy Acromed,
Inc.  ("DePuy")  in  connection  with the  on-going  GenSci  patent  litigation,
decreased  to $231,000  or $.02  diluted net income per share as compared to net
income of  $3,248,000  or $.22 diluted net income per share in the third quarter
of 1999, which includes $1,050,000 or $.07 diluted net income per share from the
DePuy settlement. Consolidated net income in the nine months ended September 30,
2000,  which  includes  $450,000  or $.03  diluted net income per share from the
DePuy  settlement,  decreased to $4,724,000 or $.33 diluted net income per share
as compared to net income of  $9,750,000 or $.67 diluted net income per share in
the nine months ended  September  30, 1999,  which  includes  $1,050,000 or $.07
diluted net income per share from the DePuy settlement.

The following is a discussion of factors affecting results of operations for the
three-month and nine-month periods ended September 30, 2000 and 1999.

Net Revenues

Consolidated  net revenues  increased 3% to $17,916,000  from $17,469,000 in the
third quarter of 1999 and increased 2% to  $57,181,000  from  $55,877,000 in the
nine  months  ended  September  30,  1999.  Domestic  revenues,   which  consist
principally  of  revenues  from the  Grafton(R)  DBM and Base  Tissue  Segments,
increased  4% to  $17,375,000  from  $16,672,000  in third  quarter  of 1999 and
increased 2% to $54,093,000  from $52,810,000 in the nine months ended September
30, 1999.  Foreign  based  revenues  decreased  32% to $541,000 from $797,000 in
third quarter of 1999 and increased 1% to $3,088,000 from $3,067,000 in the nine
months ended  September 30, 1999.  The decrease in foreign based revenues in the
quarter resulted primarily from a decrease in unit volume for ceramic and bovine
products.  The increase in the nine months  resulted  primarily from the initial
distribution  of Grafton(R)  DBM in Europe offset by decreases in unit volume in
ceramic and bovine  products.  Both periods were also adversely  affected by the
strength of the U.S. dollar compared to the Dutch Guilder and French Franc.  The
impact of the exchange  rates reduced  foreign based  revenues by 14% and 13% in
the third quarter and nine months, respectively.

Grafton(R) DBM Segment revenues  increased 12% to $11,139,000 from $9,905,000 in
the third quarter of 1999 and increased 3% to  $33,433,000  from  $32,346,000 in
the nine months ended  September  30, 1999.  The increases in both periods are a
result of an increase in unit volume and the  distribution  of Grafton(R) DBM in
Europe. Grafton(R) DBM


                                       14
<PAGE>

was not  distributed in Europe during the nine months ended  September 30, 1999.
Despite a 7% growth at the  hospital/end-user  level,  our  revenues  during the
first nine months  grew at a slower  rate as a result of our clients  purchasing
less  Grafton(R)  DBM products in the first  quarter of 2000 than they needed to
meet hospital/end-user  demand. This is a result of our clients using $1,500,000
of excess  inventory  purchased  in December  1999 ahead of a 4% price  increase
which became effective  January 1, 2000.  Grafton(R) DBM Segment revenues growth
slowed in the third quarter of 2000 as compared with the prior year same quarter
primarily due to the  increasing  competition  as more  companies have developed
products with characteristics similar to Grafton(R) DBM. Although we expect that
this  competition  will  continue  in the  future,  we  expect  demand  for  our
Grafton(R) DBM products to grow as we take steps to compete more effectively and
introduce the product line into additional markets in both the United States and
Europe. Additionally, foreign based revenues were negatively impacted by 14% and
13% in the third quarter and nine months ended September 30, 2000, respectively,
due to a decline in the Dutch Guilder and French Franc against the U.S. dollar.

Base Tissue Segment revenues  decreased 10% to $5,872,000 from $6,525,000 in the
third quarter of 1999 and increased 2% to  $20,471,000  from  $20,043,000 in the
nine months  ended  September  30,  1999.  The  decrease in the quarter  results
principally from a 31% decline in the number of donors processed for our clients
as market demand  shifts  towards more  technically  advanced  tissue  products,
partially offset by a 112% increase in bio-implant revenues. The increase in the
nine months resulted  primarily from increases in bio-implant and  OsteoPure(TM)
Femoral Head processing  revenues and price increases  effective January 1, 2000
offset by a decrease in base tissue allograft  processing revenue as a result of
a decline in the number of donors processed.

In  September  2000,  we  entered  into  a  new  five-year  agreement  with  the
Musculoskeletal  Transplant  Foundation ("MTF"). This new agreement replaces the
current  agreement  which  would  have  expired  March 31,  2002.  Under the new
agreement MTF will no longer be required to exclusively provide all donor tissue
it recovers to us for processing.  The new agreement expires on August 31, 2005,
and  provides  that  either  party  has the  right to  terminate  the  agreement
commencing March 31, 2002 upon six months prior written notice.  Also, under the
terms of the new agreement,  we will have the ability to directly  contract with
tissue recovery  organizations  for the processing of tissue  recovered by those
organizations.

During the third quarter and nine months ended  September  30, 2000,  two of our
clients in the Grafton(R) DBM and Base Tissue Segment accounted for 51% and 41%,
and 50% and 40% of consolidated revenues.

Gross Profit

Gross profit as a percentage of revenues was 61% in the third quarter and 65% in
the nine months ended September 30, 2000,  respectively,  as compared to 68% and
69% in the same periods last year.  The  decreases in both periods  results from
the underabsorption of fixed costs in the Base Tissue Segment as a result of the
decline in donors  processed  for our  clients.  The decrease in the nine months
results  from costs  associated  with  additional  allograft  tissue  processing
capacity which was added in the second half of 1999 to meet the expected  growth
of our allograft tissue business.

Marketing, General and Administrative

Marketing,  general and administrative  expenses increased  $2,272,000 or 33% in
the third quarter and  $5,941,000 or 30% in the nine months ended  September 30,
2000  compared  to the same  periods  last  year.  The  increase  was  primarily
attributable  to: (i) increased legal fees  associated with patent  infringement
lawsuits  in both the  Grafton(R)  DBM and the Base  Tissue  Segments,  and (ii)
expanded marketing and promotional activities associated with the launch of four
new bio-implant products.


                                       15
<PAGE>

Research and Development

Research and development  expenses increased $117,000 or 9% in the third quarter
and $226,000 or 5% in the nine months ended  September  30, 2000 compared to the
same periods last year.  The increase was  primarily  attributable  to increased
spending in the  Grafton(R)  DBM and Base  Tissue  Segment  associated  with the
continued  development  of  several  new  processing  technologies  and  ongoing
development of new products.

Operating Income

Consolidated operating income decreased 90% to $515,000 in the third quarter and
52% to  $7,548,000  in the nine months  ended  September  30,  2000  compared to
$5,310,000  and  $15,745,000 in the same periods last year primarily as a result
of  decreased  operating  income  in both the  Grafton(R)  DBM and  Base  Tissue
Segments and reduced income from the DePuy patent litigation settlement.

Grafton(R)  DBM Segment  operating  income,  decreased  51% to $2,158,000 in the
third quarter and 35% to $8,110,000 in the nine months ended  September 30, 2000
compared  to  $4,429,000  and  $12,509,000  in the same  periods in 1999.  Third
quarter and nine month  operating  income of 2000 includes income from the DePuy
patent litigation settlement of $250,000 and $750,000,  respectively compared to
$1,750,000 in each period in 1999.  The decrease  results  primarily  from lower
gross profit  margin  resulting  from  increased  capacity and  increased  costs
associated with a patent lawsuit. Base Tissue Segment operating income decreased
122% to a loss of $415,000 in the third  quarter  and 57% to  $2,547,000  in the
nine months ended  September 30, 2000 compared to $1,884,000  and  $5,969,000 in
the same periods last year.  The decrease  results  primarily from a decrease in
gross profit  margin  resulting  from a decline in donors  processed,  increased
legal expenses  associated with two patent lawsuits and increased  marketing and
promotional spending associated with the launch of four new bio-implants.

Income Tax Provision

The  effective  income  tax rate  increased  to  approximately  71% in the third
quarter and to 44% in the nine months ended  September 30, 2000 from 41% and 40%
in the same periods last year.  The net change in the effective  income tax rate
in 2000 is caused by non-deductible  foreign losses partly offset by recognition
of tax benefits.

Liquidity and Capital Resources

At September 30, 2000, we had cash and  short-term  investments  of  $14,792,000
compared to  $20,716,000  at December  31, 1999.  We invest  excess cash in U.S.
Government-backed securities and investment grade commercial paper of major U.S.
corporations.  Working capital decreased  $7,062,000 to $30,020,000 at September
30, 2000 compared to  $37,082,000  at December 31, 1999. The decrease in working
capital  results  principally  from a  decrease  in cash,  accounts  receivable,
prepaid expenses, accounts payable and accrued liabilities.

Net cash  provided by operating  activities  decreased to $9,077,000 in the nine
months ended  September 30, 2000,  compared to $12,473,000 in the same period of
1999. The decrease  resulted  primarily from a decrease in net income and income
tax benefits related to stock options.

Cash used in investing  activities  increased to  $19,038,000 in the nine months
ended  September  30,  2000 from  $16,946,000  in the same  period of 1999.  The
increase  results  principally  from an  increase  in  capital  expenditures  to
$20,509,000  from  $13,537,000   resulting  from  our  continued  investment  in
facilities and equipment needed for current and future business requirements. In
the fourth  quarter  of 1998,  we  commenced  construction  of a new  processing
facility in Eatontown, New Jersey.


                                       16
<PAGE>

The estimated  aggregate cost for the  construction  of the building,  including
furniture,  fixtures and equipment is approximately $34,000,000;  $21,500,000 of
which we expect will be funded  through a building  mortgage  loan and equipment
line of credit.  The remaining  balance will be funded  through  available  cash
reserves or anticipated cash flow from operations.  Through  September 30, 2000,
we  have  incurred  $25,500,000  in  building  and  equipment  costs,  including
capitalized  interest of $487,000,  of which $15,019,000 has been funded through
bank financing.

Net cash  provided by financing  activities  decreased to $6,047,000 in the nine
months ended  September  30, 2000,  from  $6,690,000 in the same period of 1999,
principally  as a result of cash used to repurchase and retire 330,500 shares of
common stock at a cost of $3,121,000  and a decrease in cash  proceeds  received
from stock option exercises.

In September 2000, we entered into a non-cancelable 2-year agreement with Ulrich
for the purchase of $3,000,000  of inventory for the VBR System.  As a result of
previously outstanding credits with Ulrich in the amount of $1,400,000,  the net
cash flow effect of this commitment will be $1,600,000.

We have a credit facility with a U.S. bank, that includes a $5,000,000 revolving
line of credit, a $4,500,000 building mortgage loan, and a $17,000,000 equipment
line of credit.  At September 30, 2000,  $4,500,000  was  outstanding  under the
revolving line of credit and  $10,519,000  was  outstanding  under the equipment
line of credit.  The  revolving  line of credit  expires May 31, 2000,  at which
time,  upon written notice to the lender,  we have the option to extend the term
for an  additional  four  years.  The  equipment  line of  credit  automatically
converts to a seven-year  term loan on December 10, 2000. 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 $2,000,000 at the September 30, 2000 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  $1,200,000 at the September 30,
2000 exchange rate. There were no borrowings  outstanding under this credit line
as of September 30, 2000.  Additionally,  we have a line of credit with a French
bank,  which  provides for borrowing of up to FRF  1,000,000,  or  approximately
$134,000 at the  September  30, 2000  exchange  rate.  There were no  borrowings
outstanding under this credit line as of September 30, 2000.

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 our  operations  for the periods  discussed  above have not been
significantly affected by inflation or foreign currency fluctuations.


                                       17
<PAGE>

Litigation

We are involved in various legal proceedings.  For a discussion of these matters
see Note 5 of "Notes to Condensed Consolidated Financial Statements",  PART II.,
ITEM 1. LEGAL  PROCEEDINGS and our Annual Report on Form 10-K for the year ended
December 31, 1999.  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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     Update of Previously Reported Legal Proceedings

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

     In October  2000,  the Court granted  plaintiffs  permission to amend their
     complaint to allege that we, in addition to infringing on the claims of the
     U.S.  Patent Nos.  5,814,084 and 4,950,296,  infringed upon the claims of a
     related  patent owned by plaintiffs,  U.S.  Patent No.  6,096,081.  As with
     their  infringement  claims  regarding the other patents,  plaintiffs  seek
     injunctive relief and unspecified damages.

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

     In October  2000,  the Court granted  plaintiffs  permission to amend their
     complaint to allege that we, in addition to infringing on the claims of the
     U.S.  Patent Nos.  5,741,253 and 5,484,437  infringed  upon the claims of a
     related  patent owned by plaintiffs,  U.S.  Patent No.  6,096,038.  As with
     their  infringement  claims  regarding the other patents,  plaintiffs  seek
     injunctive relief and unspecified damages.

     Regner v. Inland Eye & Tissue Bank of Redlands

     In September 2000, plaintiffs voluntarily dismissed without prejudice their
     claims  filed  in the  Superior  Court  for the  State of  California,  San
     Bernardino  County.  At or about the time of the dismissal,  the plaintiffs
     "refiled"  the action in the  Superior  Court for Los Angeles  County.  We,
     however,  have not been  served  with that  action.  In October  2000,  the
     defendants,  including us, moved to vacate plaintiffs' dismissal of the San
     Bernardino County action and have the action reinstated.  The Court granted
     that  motion  and  has  scheduled  a  hearing  for  December  4,  2000,  on
     defendants'  demurrers to the  plaintiffs'  complaint  requesting  that the
     action be dismissed with prejudice.

     New Legal Proceedings

     Musculoskeletal Transplant Foundation v. Osteotech, Inc.

     In October 2000, the Musculoskeletal  Transplant Foundation ("MTF") filed a
     complaint  in the United  States  District  Court for the  District  of New
     Jersey against us seeking a declaratory  judgment (1) that MTF, through its
     manufacture and use of certain demineralized bone tissue products, does not
     infringe any claim of U.S. Patent Nos.  5,284,655 and 5,290,558,  which are
     owned by us; (2) that claims of those patents are invalid; and (3) that the
     claims of those patents are  unenforceable.  The complaint was then amended
     to add Synthes Spine Company, L.P. as a plaintiff. Although plaintiffs seek
     no specific monetary award they have requested that the Court award the


                                       18
<PAGE>

     plaintiff's  their  attorneys'  fees  and  costs  in  this  action.  We are
     assessing  the claims  asserted  against us and have not yet  responded  to
     them.

     Steele v. Inland Eye and Tissue Bank

     In October 2000, we were served with a summons and second amended complaint
     naming us as a "Doe"  defendant in an action  pending in the Superior Court
     for the State of California,  San Bernardino County. Plaintiff has asserted
     claims against  defendants  for  intentional  misrepresentation,  negligent
     misrepresentation  and tortious  interference  in  connection  with certain
     tissue procurement activities allegedly engaged in by defendants. Plaintiff
     seeks damages in an  unspecified  amount.  We are  currently  assessing the
     claims asserted against us and have not yet responded to them.


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
          ------     -----------                                        ------

          10.36      Amended and Restated Processing Agreement           E-1
                     Entered into September 11, 2000 with
                     Musculoskeletal Transplant Foundation and
                     Biocon, Inc. for which the Registrant is
                     requesting confidential treatment pursuant
                     to Rule 24b-2.

          27.0       Financial Data Schedule                             E-38

(b)  Reports on Form 8-K

          On October 18, 2000, we filed with the  Commission a Current Report on
          Form 8-K to  announce  that in  response  to earlier  letters  from us
          informing Musculoskeletal  Transplant Foundation ("MTF") that products
          made by MTF pursuant to the patent issued to MTF in February, 2000 may
          infringe on the claims of two Osteotech Grafton(R)  Demineralized Bone
          Matrix (DBM) patents;  U.S.  Patent No.  5,284,665 and U.S. Patent No.
          5,290,558,  issued in February and March 1994,  respectively,  MTF had
          filed a lawsuit in the United States  District  Court for the District
          of New Jersey  asking the court to rule that MTF does not infringe the
          claims of our patents. The suit also requests the court to declare our
          patents invalid and unenforceable.

          On September 11, 2000, we filed with the  Commission a Current  Report
          on Form 8-K to announce that we had entered a new five-year  agreement
          with MTF which replaces the current  five-year  agreement  which would
          have expired April 1, 2002.


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<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: November 10, 2000                      By: /s/ Richard W. Bauer
                                                 -------------------------------
                                                 Richard W. Bauer
                                                 Chief Executive Officer


Date: November 10, 2000                      By: /s/ Michael J. Jeffries
                                                 -------------------------------
                                                 Michael J. Jeffries
                                                 Executive Vice President
                                                 Chief Financial Officer


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