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, 2001

                                       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 are a 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 - 14,045,427 shares as of July 31, 2001.
<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,
                                                                  2001           2000
-----------------------------------------------------------------------------------------
ASSETS
-----------------------------------------------------------------------------------------
<S>                                                             <C>            <C>
Current assets:
  Cash and cash equivalents                                     $  7,433       $ 10,923
  Short-term investments                                           1,951          1,935
  Accounts receivable, net                                        19,138         13,503
  Inventories                                                      5,206          3,584
  Deferred processing costs                                        7,804          5,914
  Prepaid expenses and other current assets                        3,773          4,710
                                                             ----------------------------
        Total current assets                                      45,305         40,569

Property, plant and equipment, net                                60,213         58,290
Excess of cost over net assets of business acquired, net
  of accumulated amortization of $2,669 in 2001 and
  $2,477 in 2000                                                   3,102          3,294
Other assets                                                       2,349          2,285
-----------------------------------------------------------------------------------------
        Total assets                                            $110,969       $104,438
=========================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------------------------------------------------------------
Current liabilities:
  Accounts payable and accrued liabilities                      $ 19,143       $ 11,345
  Current maturities of long-term debt                             1,923            101
                                                             ----------------------------
        Total current liabilities                                 21,066         11,446

Long-term debt                                                    19,543         19,930
Other liabilities                                                  1,131          1,211
-----------------------------------------------------------------------------------------
        Total liabilities                                         41,740         32,587
-----------------------------------------------------------------------------------------

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 14,038,477
         shares in 2001 and 13,989,307 shares in 2000                139            138
     Additional paid-in capital                                   46,825         46,577
     Accumulated other comprehensive loss                           (931)          (497)
     Retained earnings                                            23,196         25,633
-----------------------------------------------------------------------------------------
        Total stockholders' equity                                69,229         71,851
-----------------------------------------------------------------------------------------
        Total liabilities and stockholders' equity              $110,969       $104,438
=========================================================================================
</TABLE>

The accompanying notes are an integral part of these 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,
                                    ----------------------------   ----------------------------
                                            2001            2000           2001            2000
-----------------------------------------------------------------------------------------------
<S>                                 <C>             <C>            <C>             <C>
Net revenues:
  Service                           $     18,308    $     19,788   $     35,220    $     37,531
  Product                                  1,273             831          2,314           1,734
                                    ------------    ------------   ------------    ------------
                                          19,581          20,619         37,534          39,265

Cost of services                           7,317           6,173         13,948          11,802
Cost of products                           1,488             569          2,221           1,151
                                    ------------    ------------   ------------    ------------
                                           8,805           6,742         16,169          12,953
                                    ------------    ------------   ------------    ------------

Gross profit                              10,776          13,877         21,365          26,312

Marketing, selling, general and
  administrative                          13,006           8,600         22,919          16,732
Research and development                   1,180           1,687          2,288           3,047
                                    ------------    ------------   ------------    ------------
                                          14,186          10,287         25,207          19,779
                                    ------------    ------------   ------------    ------------

Income from litigation settlement                            250                            500
                                    ------------    ------------   ------------    ------------

Operating income (loss)                   (3,410)          3,840         (3,842)          7,033

Interest and other income, net                98             279            265             585
                                    ------------    ------------   ------------    ------------

Income (loss) before income taxes         (3,312)          4,119         (3,577)          7,618

Income tax provision (benefit)            (1,182)          1,595         (1,140)          3,125

-----------------------------------------------------------------------------------------------
Net income (loss)                   $     (2,130)   $      2,524   $     (2,437)   $      4,493
===============================================================================================
Net income (loss) per share:
     Basic                          $       (.15)   $        .18   $       (.17)   $        .32
     Diluted                        $       (.15)   $        .18   $       (.17)   $        .31
-----------------------------------------------------------------------------------------------
Shares used in computing net
  income (loss) per share:
     Basic                            14,011,866      14,089,366     14,006,241      14,148,189
     Diluted                          14,011,866      14,327,732     14,006,241      14,477,928
</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)

Six Months Ended June 30,                                      2001        2000
-------------------------------------------------------------------------------
Cash Flow From Operating Activities
   Net income (loss)                                       $ (2,437)   $  4,493
   Adjustments to reconcile net income (loss) to
      Net cash provided by operating activities:
         Depreciation and amortization                        2,716       1,902
         Other non-cash charges                               1,861          44
         Changes in current assets and liabilities:
               Accounts receivable                           (5,924)      2,482
               Deferred processing costs                     (2,029)       (352)
               Inventories                                   (2,178)       (926)
               Prepaid expenses and other current assets        930       2,591
               Accounts payable and other liabilities         7,929      (1,895)
-------------------------------------------------------------------------------
Net cash provided by operating activities                       868       8,339

Cash Flow From Investing Activities
   Capital expenditures                                      (5,766)    (14,790)
   Purchases of investments                                  (1,951)     (1,942)
   Proceeds from sale of investments                          1,935       3,946
   Decrease in other assets                                    (170)       (182)
-------------------------------------------------------------------------------
Net cash used in investing activities                        (5,952)    (12,968)

Cash Flow From Financing Activities
   Proceeds from issuance of common stock                       248         460
   Repurchase of common stock                                            (3,121)
   Proceeds from issuance of long-term debt                   1,468       2,382
   Principal payments on long-term debt                         (88)
   Decrease in other liabilities                                (77)       (100)
-------------------------------------------------------------------------------
Net cash provided by (used in) financing activities           1,551        (379)

Effect of exchange rate changes on cash                          43          44
-------------------------------------------------------------------------------

Net decrease in cash and cash equivalents                    (3,490)     (4,964)
Cash and cash equivalents at beginning of period             10,923      16,770
-------------------------------------------------------------------------------
Cash and cash equivalents at end of period                 $  7,433    $ 11,806
===============================================================================

Supplementary cash flow data:
   Cash paid during the period for interest, excluding
      amounts capitalized                                  $     57    $    305
   Cash paid during the period for taxes                        945         678

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 and
     certain  non-cash  charges in the three month  period  ended June 30, 2001)
     considered  necessary  by  management  to present  fairly the  consolidated
     financial  position  as of June  30,  2001,  the  consolidated  results  of
     operations for the  three-month  and six-month  periods ended June 30, 2001
     and 2000 and the consolidated  cash flows for the six months ended June 30,
     2001 and 2000. The results of operations for the respective interim periods
     are not  necessarily  indicative of the results to be expected for the full
     year. The December 31, 2000 financial information has been derived from the
     audited  financial  statements  for the year ended  December 31, 2000.  The
     condensed  consolidated  financial statements should be read in conjunction
     with the audited financial  statements for the year ended December 31, 2000
     which were included as part of Osteotech Inc.'s (the Company) Annual Report
     on Form 10-K.

2.   Inventories

     Inventories, net of reserves, consist of the following:

                                                     June 30,       December 31,
     (dollars in thousands)                            2001             2000
     ---------------------------------------------------------------------------
     Supplies                                         $  308           $  202
     Raw materials                                       701              891
     Finished goods                                    4,197            2,491
     ---------------------------------------------------------------------------
                                                      $5,206           $3,584
     ===========================================================================

     As of June 30, 2001 and  December  31,  2000,  the Company had reserves for
     excess and obsolete finished goods inventories of $1,766,000 and $1,021,000
     respectively.

3.   Comprehensive Income

     Comprehensive  income for the three-month and six-month  periods ended June
     30, 2001 and 2000:

                                        Three months ended     Six months ended
                                              June 30,             June 30,
                                       ----------------------------------------

     (dollars in thousands)                  2001      2000      2001      2000
     --------------------------------------------------------------------------

     Net income (loss)                    $(2,130)  $ 2,524   $(2,437)  $ 4,493

     Currency translation adjustments         (26)      (75)     (434)     (126)
     --------------------------------------------------------------------------

     Comprehensive income (loss)          $(2,156)  $ 2,449   $(2,871)  $ 4,367
     ==========================================================================


                                       -5-
<PAGE>

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

4.   Commitments and Contingencies

     In December, 2000, the Company entered into an exclusive 15-year processing
     and  distribution  agreement with the American Tissue  Services  Foundation
     ("ATSF"),  a  not-for-profit  corporation  organized  under the laws of the
     State of  Delaware.  Michael J.  Jeffries,  the  Company's  Executive  Vice
     President,  Chief  Financial  Officer  and  Secretary  and a member  of the
     Company's  board of  directors,  is a member of the board of  directors  of
     ATSF.  Additionally,  in February,  2001,  the Company  entered into a Loan
     Agreement  with ATSF which  expires on December 31,  2010.  Pursuant to the
     Loan  Agreement,  ATSF may borrow up to $1,500,000  from the Company.  Each
     loan matures five (5) years from the date it is made and bears  interest at
     a rate per annum equal to the five year Treasury Bill rate plus one percent
     (1%).  Interest is payable on a quarterly  basis.  As of June 30, 2001, the
     Company had loaned ATSF an aggregate of $1,070,000  at an average  interest
     rate of 4.43%.

     The funds loaned to ATSF are being utilized by ATSF to fund its operations.
     In accordance with Generally Accepted Accounting Principles, the Company is
     providing a reserve  against  these loans until such time that ATSF is able
     to generate  positive cash flow from  operations.  For the six months ended
     June  30,  2001,  the  Company  has  provided  reserves  totaling  $862,000
     ($564,000  for the three months ended June 30, 2001)  against  these loans,
     which charge is included in marketing,  selling, general and administrative
     expenses.  The Company expects that it will loan  additional  funds to ATSF
     throughout  the  remainder  of  the  fiscal  year  and  expects  to  record
     additional reserves against these loans.

     Litigation

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

     In May,  2001,  the United States Court of Appeals for the Federal  Circuit
     denied  GenSci's  petition for writ of mandamus.  In its  petition,  GenSci
     sought to have the Federal  Circuit direct the United States District Court
     for the Central  District of  California to vacate its March 22, 2001 order
     denying  GenSci's  motion to withdraw  its  admissions  that  DynaGraft  is
     osteogenic   (osteoinductive),   and  that  DynaGraft   contains  new  bone
     growth-inducing amounts of demineralized osteogenic bone powder. In denying
     GenSci's  petition,  the Court of Appeals held that the District  Court did
     not abuse its  discretion  in  refusing  to allow  GenSci to  withdraw  its
     admissions  because GenSci continued to represent to both the Court and the
     public  that  it   believes   the   DynaGraft   products   are   osteogenic
     (osteoinductive).

     Musculoskeletal Transplant Foundation v. Osteotech, Inc.

     In October 2000, plaintiffs  Musculoskeletal  Transplant Foundation ("MTF")
     and Synthes Spine Company, L.P. ("Synthes") commenced an action against the
     Company and Osteotech Investment Corporation (collectively,  the "Company")
     in the  United  States  District  Court  for the  District  of New  Jersey.
     Plaintiffs seek a declaratory  judgment that their  manufacture,  use, sale
     and/or offer for sale of their demineralized bone matrix products, known as
     DBX(R),  does not  infringe  on the  claims of United  States  Patent  Nos.
     5,290,558  (the "'558  Patent") and  5,284,655  (the "'655  Patent") of the
     Company,  and that the `558 and `655 Patents are invalid and unenforceable.
     In addition to declaratory relief, plaintiffs seek injunctive relief.


                                       -6-
<PAGE>

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

4.   Commitments and Contingencies (continued)

     In  June,  2001,  the  Company  made a motion  for an  order  preliminarily
     enjoining  MTF and Synthes  from  selling or offering to sell their  DBX(R)
     products. A hearing was held on that motion on July 23, 2001 and a decision
     is pending. Discovery is otherwise continuing.

     Regner v.  Inland Eye & Tissue  Bank of  Redlands;  Thacker v. Inland Eye &
     Tissue Banks

     Plaintiffs  brought  suits  against  the  Company and fifteen or more other
     defendants  in the  Superior  Courts  for  the  State  of  California,  San
     Bernardino  County and Los  Angeles  County.  The suits  seek class  action
     status and allege  causes 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.

     In June, 2001, the Court sustained the Company's demurrer seeking dismissal
     of the  complaints,  but granted  plaintiffs  leave to amend. To the extent
     amended  complaints  are filed,  defendants,  including  the  Company  have
     notified  the Court and the  parties  that they will again  file  demurrers
     seeking dismissal of the complaints.

     Wright Medical Technology, Inc. v. Osteotech, Inc.

     In June,  2001, the Company  received a complaint filed in an action in the
     United States  District  Court for New Jersey,  which  alleges  against the
     Company  claims  for false  advertising,  and  tortious  interference  with
     business  relations and prospective  business advantage relating to certain
     statements  allegedly  made by the Company  regarding a FDA Warning  Letter
     received by the plaintiff with respect to a tissue product  marketed by the
     plaintiff.  In addition to  injunctive  relief,  plaintiff  seeks  monetary
     damages in an  unspecified  amount.  On June 15,  2001,  the court  granted
     plaintiffs a temporary  restraining order against the Company.  On June 20,
     2001,  the  Company  obtained a stay of that  order from the United  States
     Court of Appeals for the Third Circuit, pending an appeal of that order. On
     June 29, 2001,  the District  Court  issued an order  granting  plaintiffs'
     motion for a preliminary injunction, and amended the order on July 2, 2001,
     enjoining the Company from making the accused  statements and requiring the
     Company to issue a clarification of such statements. This order is also the
     subject of an appeal in the Third  Circuit  Court of  Appeals.  The Company
     denies any and all liability.

     Younger v. Hayes Medical Center, Inc.

     In  April,  2001,  the  Company  was  served in an  action  brought  in the
     Twentieth  Judicial  District  Court in Ellis County,  Kansas  against Hays
     Medical Center, Inc., the Musculoskeletal Transplant Foundation, Metropath,
     Inc. and the Company. With respect to the Company, the suit alleges a cause
     of action for negligence in connection with allegedly  defective  allograft
     bone tissue  provided by defendants  and  allegedly  implanted in plaintiff
     during a surgical procedure.  Plaintiff seeks monetary damages in excess of
     $75,000.  In May, 2001, the Company answered the complaint  denying any and
     all liability. Discovery in this action has commenced.


                                       -7-
<PAGE>

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

4.   Commitments and Contingencies (continued)

     The  foregoing is a  description  of material  developments  that  occurred
     during  the  quarter  ended  June  30,  2001 in  lawsuits  reported  in the
     Company's  Annual Report on Form 10-K for the year ended  December 31, 2000
     and the Company's Quarterly Report on Form 10-Q for the quarter ended March
     31, 2001 and the filing of a new lawsuit  involving  the Company  which was
     not  previously  reported.  Additionally,  the  Company  is  party to other
     litigation  incidental to its business,  none of which,  individually or in
     the  aggregate,  are  expected  to have a  material  adverse  effect on the
     Company.

     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 for services previously rendered)
     has been made in the consolidated financial statements.

5.   Net Income (Loss) Per Share

     The  following  table  sets  forth the  computation  of basic  and  diluted
     earnings (loss) per share for the  three-month and six-month  periods ended
     June 30, 2001 and 2000:

<TABLE>
<CAPTION>
                                                     Three Months Ended         Six Months Ended
                                                           June 30,                 June 30,
                                                ------------------------------------------------------
(dollars in thousands
 except per share data)                                 2001          2000         2001          2000
------------------------------------------------------------------------------------------------------
<S>                                              <C>           <C>          <C>           <C>
Net income (loss) available to
 common Shareholders                             $    (2,130)  $     2,524  $    (2,437)  $     4,493
======================================================================================================

Denominator for basic net
 income (loss) per share:
    Weighted average common
    shares outstanding                            14,011,886    14,089,366   14,006,241    14,148,189

Effect of dilutive securities:
    Stock options                                                  238,272                    329,521
    Warrants                                                            94                        218
                                                 ----------------------------------------------------
Denominator for diluted net
 income (loss) per share                          14,011,886    14,327,732   14,006,241    14,477,928
======================================================================================================

    Basic earnings (loss)
    per share                                    $      (.15)  $       .18  $      (.17)  $       .32
======================================================================================================

    Diluted earnings (loss)
    per share                                    $      (.15)  $       .18  $      (.17)  $       .31
======================================================================================================
</TABLE>

     In 2001, common equivalent shares,  consisting solely of stock options, are
     excluded  from the  calculation  of  diluted  net  loss per  share as their
     effects are antidilutive.


                                       -8-
<PAGE>

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

6.   Operating Segments

     Summarized in the table below is financial  information  for our reportable
     segments for the three-month and six-month periods ending June 30, 2001 and
     2000:

                                    Three Months Ended       Six Months Ended
                                         June 30,                June 20,
                                ------------------------------------------------
(dollars in thousands)                 2001        2000        2001        2000
--------------------------------------------------------------------------------
Revenues:
  Grafton(R)DBM Segment            $  9,926    $ 12,190    $ 20,946    $ 22,294
  Base Tissue Segment                 7,998       7,288      13,584      14,599
  Other                               1,657       1,141       3,004       2,372
--------------------------------------------------------------------------------
  Consolidated                     $ 19,581    $ 20,619    $ 37,534    $ 39,265
================================================================================
Operating income (loss):
  Grafton(R)DBM Segment            $    450    $  3,324    $  2,638    $  5,952
  Base Tissue Segment                (1,586)      1,563      (3,042)      2,962
  Other                              (2,274)     (1,047)     (3,438)     (1,881)
--------------------------------------------------------------------------------
  Consolidated                     $ (3,410)   $  3,840    $ (3,842)   $  7,033
================================================================================

7.   Second Quarter Charges

     In June 2001, the Company recorded charges of $1,845,000  ($1,107,000,  net
     of tax,  or $.08  diluted  net loss per share) of which  $655,000  has been
     recorded as cost of product and  $1,190,000 has been recorded as marketing,
     selling, general and administrative expense. Such charges were primarily to
     establish  reserves  associated with excess  inventory and  instrumentation
     associated with spinal implant systems.

8.   Reclassifications

     Certain  prior year amounts have been  reclassified  to conform to the 2001
     presentation.


                                       -9-
<PAGE>

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

Information contained herein contains "forward-looking  statements" which can be
identified  by the  use  of  forward-looking  terminology  such  as  "believes",
"expects",  "may", "will", "should", or "anticipates" or the negative thereof or
variations thereon or comparable terminology,  or by discussions of strategy. No
assurance can be given that the future  results  covered by the  forward-looking
statements will be achieved. Some of the matters set forth in the "Risk Factors"
section of our Annual Report on Form 10-K for the year ended  December 31, 2000,
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, 2001 AND 2000

Results of Operations

Net Income (Loss)

We incurred a consolidated  net loss in the second quarter 2001 of $2,130,000 or
$.15  diluted  net loss per share as  compared  to  consolidated  net  income of
$2,524,000 or $.18 diluted net income per share in the second  quarter 2000. The
second quarter 2001 included charges of $1,107,000,  net of tax, or $.08 diluted
loss per  share,  primarily  to  establish  reserves  for excess  inventory  and
instrumentation associated with spinal implant systems. Consolidated net loss in
the six months ended June 30, 2001 was  $2,437,000  or $.17 diluted net loss per
share as compared to  consolidated  net income of $4,493,000 or $.31 diluted net
income per share in the six months ended June 30, 2000. The three and six months
ended June 30, 2000 included  $150,000 and $300,000 or $.01 and $.02 diluted net
income per share,  respectively,  or $250,000 and $500,000 before  provision for
taxes, respectively,  related to the settlement with DePuy Acromed, Inc. (DePuy)
in connection with the GenSci patent litigation,  however, 2001 does not include
any income  from the patent  litigation  settlement  because  the last  required
payment was made by DePuy in December, 2000.

The following is a discussion of factors affecting results of operations for the
three-month and six-month periods ended June 30, 2001 and 2000.

Net Revenues

Consolidated   net  revenues  in  the  second   quarter  2001  decreased  5%  to
$19,581,000,  from  $20,619,000  in the second  quarter 2000 and decreased 4% to
$37,534,000  in the six months ended June 30, 2001 from  $39,265,000  in the six
months ended June 30, 2000. Domestic revenues decreased 5% in the second quarter
2001 to $18,185,000 from $19,187,000 in the second quarter 2000 and decreased 6%
to $34,527,000 in the six months ended June 30, 2001 from $36,718,000 in the six
months ended June 30, 2000.  Foreign-based  revenues  decreased 3% in the second
quarter to  $1,396,000  compared to  $1,432,000  in the second  quarter 2000 and
increased  18% to  $3,007,000  in the six months ended June 30, 2001 compared to
$2,547,000 in the six months ended June 30, 2000. The decrease in  foreign-based
revenues in the quarter resulted primarily from a decline in Grafton(R) DBM unit
sales in the quarter  compared to the prior year. The increase in  foreign-based
revenues in the six months ended June 30, 2001  resulted  primarily  from a full
six months of Grafton(R) DBM unit volume which was not launched in Europe until


                                      -10-
<PAGE>

March, 2000 and increased sales of ceramic products. Additionally, foreign-based
revenues were adversely  affected by the strength of the U.S. dollar compared to
the Dutch Guilder and French Franc resulting in a 6% reduction of  foreign-based
revenues  in the second  quarter  and six months  ended June 30, 2001 versus the
corresponding period in the prior year.

Grafton(R)  Demineralized Bone Matrix (DBM) Segment,  or Grafton(R) DBM Segment,
revenues decreased 19% to $9,926,000 in the second quarter 2001 from $12,190,000
in the second  quarter 2000 and  decreased  6% to  $20,946,000,  which  includes
$1,000,000  of revenue  which was  recognized  in the first  quarter of 2001 and
deferred from the fourth quarter of 2000 in accordance  with Generally  Accepted
Accounting  Principles,  or GAAP, and SEC Staff Accounting  Bulletin 101, in the
six months ended June 30, 2001 from $22,294,000 in the six months ended June 30,
2000. The revenue  decrease in the second quarter was primarily  impacted by one
of our clients  liquidating a portion of its on-hand inventory and not replacing
that  inventory  in  the  quarter.   Domestically,  our  clients'  shipments  of
Grafton(R)  DBM to  hospital/end  users in the three months and six months ended
June 30, 2001 were  $14,348,000 and  $28,975,000,  a decline of about 5% and 3%,
respectively,  versus the prior year.  Growth of our Grafton(R) DBM tissue forms
has been  negatively  affected by increasing  competition as more companies have
developed tissue forms 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 tissue forms to grow as we continue to expand into Europe
and  as  we  sell  such  tissue  forms  domestically  in  conjunction  with  our
bio-implant tissue forms and metal implants.

Base Allograft Tissue Segment, or Base Tissue Segment, revenues increased 10% in
the second quarter 2001 to $7,998,000 from $7,288,000 in the second quarter 2000
and  decreased  7% to  $13,584,000  in the six months  ended June 30,  2001 from
$14,599,000 in the six months ended June 30, 2000. The increased revenues in the
second  quarter is  primarily  associated  with a 316%  increase in  bio-implant
revenues and a 72% increase in  OsteoPure(TM)  Femoral head processing  revenue,
which were partially offset by a 32% decrease in base tissue processing revenues
resulting from a 34% decline in the number of donors  processed for our clients.
In the six months ended June 30, 2001, base tissue  processing  revenue declined
39% due to a 43%  decrease in the number of donors  processed  for our  clients,
partially  offset by a 334% increase in bio-implant  revenues and a 44% increase
in OsteoPure(TM) Femoral head processing revenue.

Other  revenues  increased  $516,000  and  $632,000 in the three  months and six
months  ended June 30,  2001,  respectively,  as compared  to the  corresponding
periods in the prior year. The increases relate primarily to increased volume in
spinal metal implant systems and ceramic products.

During the second quarter and six months ended June 30, 2001, two of our clients
in the  Grafton(R) DBM and Base Tissue  Segments  accounted for 35% and 39%, and
39% and 42% of revenues, respectively.

Gross Profit

Gross  profit as a  percentage  of net  revenues  was 55% and 57% in the  second
quarter and six months ended June 30, 2001, respectively,  as compared to 67% in
both periods of 2000.  The decrease  results from the  underabsorption  of costs
related to increased capacity, costs related to new processing  technologies,  a
decline in the number of donors processed and released to clients, and allograft
bone tissue forms that have not yet achieved revenue levels  sufficient to fully
absorb processing costs. In addition,  in June 2001, we established  reserves of
$655,000 for excess implant inventories.


                                      -11-
<PAGE>

Marketing, Selling, General and Administrative

Marketing,  selling,  general  and  administrative  expenses  increased  51%  to
$13,006,000 in the second quarter 2001 compared to $8,600,000 in the same period
last year and increased 37% to $22,919,000 in the six months ended June 30, 2001
compared to $16,732,000 in the six months ended June 30, 2000.  These  increases
were primarily attributable to a second quarter reserve of $1,190,000 for excess
instrument sets associated with spinal implant systems,  $779,000 and $1,243,000
expended  on  activities  related  to  securing  additional  sources  of donated
allograft tissue in the three and six months ended June 30, 2001,  respectively,
increased legal fees in connection with various lawsuits to which we are a party
and  increased  costs   associated  with  marketing,   selling  and  promotional
activities  associated  with  Grafton(R)  DBM and the  continuing  launch of new
bio-implant tissue forms.

Research and Development

Research and  development  expenses  decreased  30% to  $1,180,000 in the second
quarter 2001 compared to $1,687,000 in the second quarter 2000 and decreased 25%
to  $2,288,000  in the six months ended June 30, 2001  compared to $3,047,000 in
the same period last year due to  decreased  spending  related  primarily to the
completion of development of new bio-implant tissue forms which are currently in
launch mode and on new processing technology and packaging.

Operating Income (Loss)

We incurred  consolidated  operating  losses of $3,410,000 and $3,842,000 in the
second  quarter and six months  ended June 30, 2001,  respectively,  compared to
consolidated  operating  income of $3,840,000 and $7,033,000 in the same periods
in 2000  primarily as a result of decreased  operating  income in the Grafton(R)
DBM Segment and an operating loss in the Base Tissue Segment as well as reserves
for excess inventory and instrumentation  associated with spinal implant systems
and reserves for loans to the American Tissue Services  Foundation,  or ATSF, of
$564,000 and $862,000 in the second  quarter and six months ended June 30, 2001,
respectively.  In  addition,  2001 does not  include  any income from the patent
litigation  settlement because DePuy made the last required payment in December,
2000,  while the three and six months ended June 30, 2000 included  $250,000 and
$500,000 of payments respectively.

Grafton(R) DBM Segment operating income, decreased 86% to $450,000 in the second
quarter 2001 compared to $3,324,000 in the same period in 2000 and decreased 56%
to  $2,638,000  in the six months ended June 30, 2001  compared to $5,952,000 in
the same period in 2000. The decrease results primarily from lower gross margins
due to underabsorption of cost, increased legal fees, increased costs associated
with  marketing,  selling and promotional  activities,  and a decrease in patent
litigation settlement payments mentioned above.

The Base Tissue Segment  incurred an operating loss of $1,586,000 and $3,042,000
in the second quarter and six months ended June 30, 2001, respectively, compared
to operating  income of $1,563,000  and  $2,962,000 in the same periods in 2000.
The  operating  losses  resulted  from lower gross margins due to the decline in
donor processing revenue and the underabsorption of processing costs,  increased
legal  fees,  reserves  for  excess  instrument  sets and  increased  costs  for
marketing,  selling and promotional  activities,  primarily  associated with the
launch of new bio-implant tissue forms.

Operating  losses  associated  with  other  revenues  increased   $1,227,000  to
$2,274,000 in the second quarter 2001 and increased $1,557,000 to $3,438,000 for
the six months ended June 30, 2001. The increases are primarily  attributable to
second quarter reserves for excess inventory and instrumentation associated with
metal spinal implant systems and reserves for our funding of ATSF.


                                      -12-
<PAGE>

Income Tax Provision (Benefit)

We provided a benefit for income taxes in the second  quarter and the six months
ended June 30, 2001 on our domestic losses due to our ability to carryback these
losses and recover taxes paid in previous  years. No income tax benefit has been
recorded for foreign losses during either period, principally as a result of the
uncertainty of realization of such future tax benefits.

Liquidity and Capital Resources

At June 30, 2001, we had cash and short-term  investments of $9,384,000 compared
to   $12,858,000   at  December  31,  2000.   We  invest  excess  cash  in  U.S.
Government-backed securities and investment grade commercial paper of major U.S.
corporations.  Working capital  decreased  $4,884,000 to $24,239,000 at June 30,
2001  compared to  $29,123,000  at December  31,  2000.  The decrease in working
capital  results  principally  from  the  utilization  of  cash  and  short-term
investments to partially fund capital  expenditures  and increased  requirements
for principal payments under our credit facility.

Net cash  provided  by  operating  activities  decreased  to $868,000 in the six
months ended June 30, 2001  compared to  $8,339,000  in the same period of 2000.
The decrease resulted primarily from decreases in net income.

Cash used in  investing  activities  decreased to  $5,952,000  in the six months
ended June 30, 2001 from  $12,968,000  in the same period of 2000.  The decrease
results  principally  from a decline in capital  expenditure of $9,024,000 and a
decline  in net  proceeds  from  the  sale of  investments  of  $2,020,000.  The
reduction in capital  expenditures  is primarily due to reduced  spending on the
construction of our new processing facility which is nearing completion.  In the
fourth quarter of 1998, we commenced  construction of a new processing  facility
in Eatontown,  New Jersey. The estimated  aggregate cost for the construction of
the  building,  including  furniture,  fixtures and  equipment is  approximately
$37,000,000.  A portion of the  aggregate  construction  costs have been  funded
through a $4,500,000 building mortgage loan and a $17,000,000  equipment line of
credit. The remaining balance has been and will be funded through available cash
reserves or  anticipated  cash flow from  operations.  Through June 30, 2001, we
have  incurred  $35,996,000  of  capital  expenditures,   including  capitalized
interest of $1,489,000, related to the new processing facility.

Net cash  provided by financing  activities  increased to  $1,551,000 in the six
months  ended June 30, 2001 from net cash used of $379,000 in the  corresponding
period in the prior  year.  In the prior  year,  we used  $3,121,000  of cash to
repurchase common stock.

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 June 30, 2001,  there were no borrowings under the revolving
line of credit,  $4,466,000 was outstanding under the building mortgage loan and
$17,000,000 was outstanding  under the equipment line of credit.  We have a line
of credit with a Dutch bank,  which  provides for  borrowings of up to 3,000,000
Dutch  Guilders  ("dfl"),  or  approximately  $1,158,000  at the June  30,  2001
exchange  rate. At June 30, 2001,  there were no  borrowings  under this line of
credit.

We are currently a party to two distribution  agreements that require us to make
minimum  purchases over the next two years in an aggregate amount of $9,000,000.
Through June 30, 2001, we had purchased $4,035,000 pursuant to these agreements.
In  addition,  we have agreed to loan ATSF up to  $1,500,000.  Through  June 30,
2001, we have loaned ATSF $1,070,000.


                                      -13-
<PAGE>

In the six months ended June 30, 2001,  we  experienced  a decrease in available
cash and cash  equivalents due to our continued  investment in our business.  We
expect  to  continue  to make  investments  in our  business  over  the next two
quarters which will further deplete our available cash balances. We believe that
our available 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 cash  needs for the  remainder  of the  current
fiscal year. We anticipate we may need to seek  additional  funds through equity
or debt financing to fund the future growth and operations of the Company beyond
the current fiscal year.  Towards this end, we are currently  exploring possible
financing  options.  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

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

Litigation

Osteotech,  Inc. is  involved in various  legal  proceedings  involving  product
liability,  patent  infringement  and other  claims.  For a discussion  of these
matters see, Note 4 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, 2000.  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

The following is a description of material developments that occurred during the
quarter  ended June 30, 2001 in lawsuits  reported in our Annual  Report on Form
10-K for the year ended December 31, 2000 and our Quarterly  Report on Form 10-Q
for the quarter  ended March 31, 2001 and the filing of a new lawsuit  involving
us which  was not  previously  reported.  Additionally,  we are a party to other
litigation  incidental to our business,  none of which,  individually  or in the
aggregate, are expected to have a material adverse effect.

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

In May, 2001, the United States Court of Appeals for the Federal  Circuit denied
GenSci's petition for writ of mandamus.  In its petition,  GenSci sought to have
the Federal  Circuit  direct the United  States  District  Court for the Central
District  of  California  to vacate its March 22,  2001 order  denying  GenSci's
motion to withdraw its admissions that DynaGraft is osteogenic (osteoinductive),
and that DynaGraft  contains new bone  growth-inducing  amounts of demineralized
osteogenic bone powder. In denying GenSci's petition,  the Court of Appeals held
that the District Court did not abuse its discretion in refusing to allow GenSci
to withdraw its  admissions  because  GenSci  continued to represent to both the
Court and the public that it believes  the  DynaGraft  products  are  osteogenic
(osteoinductive).


                                      -14-
<PAGE>

Musculoskeletal Transplant Foundation v. Osteotech, Inc.

In October 2000,  plaintiffs  Musculoskeletal  Transplant Foundation ("MTF") and
Synthes Spine Company,  L.P.  ("Synthes")  commenced an action against us in the
United States  District Court for the District of New Jersey.  Plaintiffs seek a
declaratory judgment that their manufacture,  use, sale and/or offer for sale of
their demineralized bone matrix products,  known as DBX(R), does not infringe on
the claims of our United States Patent Nos.  5,290,558  (the "'558  Patent") and
5,284,655  (the "'655  Patent"),  and that the `558 and `655 Patents are invalid
and unenforceable. In addition to declaratory relief, plaintiffs seek injunctive
relief.

In June,  2001,  we made a motion for an order  preliminarily  enjoining MTF and
Synthes from selling or offering to sell their  DBX(R)  products.  A hearing was
held on that motion on July 23, 2001 and a decision  is  pending.  Discovery  is
otherwise continuing.

Regner v. Inland Eye & Tissue Bank of  Redlands;  Thacker v. Inland Eye & Tissue
Banks

Plaintiffs  brought suits against us and fifteen or more other defendants in the
Superior  Courts  for the State of  California,  San  Bernardino  County and Los
Angeles  County.  The suits seek class action status and allege causes 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.

In June,  2001,  the Court  sustained  our  demurrer  seeking  dismissal  of the
complaints,  but  granted  plaintiffs  leave to  amend.  To the  extent  amended
complaints are filed, defendants,  including us, have notified the Court and the
parties that they will again file demurrers seeking dismissal of the complaints.

Wright Medical Technology, Inc. v. Osteotech, Inc.

In June,  2001, we received a complaint  filed in an action in the United States
District Court for New Jersey,  which alleges claims for false advertising,  and
tortious interference with business relations and prospective business advantage
relating to certain  statements  allegedly  made by us  regarding an FDA Warning
Letter  received by the plaintiff with respect to a tissue  product  marketed by
the  plaintiff.  In addition to  injunctive  relief,  plaintiff  seeks  monetary
damages in an unspecified amount. On June 15, 2001, the court granted plaintiffs
a temporary  restraining  order against us. On June 20, 2001, we obtained a stay
of that order from the United  States  Court of Appeals  for the Third  Circuit,
pending an appeal of that order.  On June 29, 2001, the District Court issued an
order granting plaintiffs' motion for a preliminary injunction,  and amended the
order on July 2, 2001,  enjoining  us from  making the  accused  statements  and
requiring us to issue a clarification of such statements. This order is also the
subject of an appeal in the Third Circuit Court of Appeals.  We deny any and all
liability.

Younger v. Hayes Medical Center, Inc.

In April,  2001, we were served in an action  brought in the Twentieth  Judicial
District Court in Ellis County,  Kansas against Hays Medical  Center,  Inc., the
Musculoskeletal  Transplant Foundation,  Metropath, Inc. and us. With respect to
us,  the suit  alleges a cause of  action  for  negligence  in  connection  with
allegedly  defective  allograft bone tissue provided by defendants and allegedly
implanted in plaintiff  during a surgical  procedure.  Plaintiff  seeks monetary
damages in excess of $75,000. In May 2001, we answered the complaint denying any
and all liability. Discovery in this action has commenced.


                                      -15-
<PAGE>

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

(a)  An annual meeting of stockholders was held on June 14, 2001.

(b)  The directors  elected at the annual meeting to serve a term of one year or
     until the next  annual  meeting of  stockholders  were:  Arthur A.  Alfaro,
     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
               ----------------------------------------------------------------
               Arthur A. Alfaro                     11,872,734       1,476,709
               Richard W. Bauer                     11,871,250       1,478,193
               Kenneth P. Fallon, III               13,153,143         196,300
               Michael J. Jeffries                  11,887,883       1,461,560
               Donald D. Johnston                   13,136,793         212,650
               John Phillip Kostuik, M.D.           13,151,343         198,100
               Stephen J. Sogin, Ph.D.              13,134,358         215,085

          ii)  With  respect  to  a  proposal  to  ratify  the   appointment  of
               PricewaterhouseCoopers  LLP as Osteotech's  independent  auditors
               for the fiscal year ending  December 31, 2001,  the  stockholders
               voted  13,315,836  shares in favor,  19,447  against  and  13,210
               abstained.  Broker  non-votes were not applicable.  This proposal
               received the vote required by Delaware  General  Corporation  Law
               and the Company's by-laws for approval (i.e.  affirmative vote of
               a majority of the shares of common  stock  present at the meeting
               and entitled to vote on the proposal).

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
------            -----------                              ------
                     None

(b)  Reports on Form 8-K

On May 22, 2001,  we filed with the  Commission a Current  Report on Form 8-K to
announce  that the United  States  Court of Appeals for the Federal  Circuit has
denied GenSci's petition for writ of mandamus.


                                      -16-
<PAGE>

                                   SIGNATURES

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

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

Date: August 10, 2001             By:      /S/ Richard W. Bauer
                                           ------------------------------
                                           Richard W. Bauer
                                           Chief Executive Officer

Date: August 10, 2001             By:      /S/ Michael J. Jeffries
                                           ------------------------------
                                           Michael J. Jeffries
                                           Executive Vice President
                                           Chief Financial Officer


                                      -17-