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


                                    FORM 10-Q


                                   (Mark One)

[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities  Exchange
Act of 1934 For the Period Ended March 31, 1998

                                       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 - 8,859,553 shares as of April 30, 1998


<PAGE>



PART I.  FINANCIAL INFORMATION
ITEM 1.  Financial Statements


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

                                                         March 31,  December 31,
                                                           1998        1997
--------------------------------------------------------------------------------
ASSETS
--------------------------------------------------------------------------------
Current assets:
     Cash and cash equivalents                           $ 15,221      $ 13,884 
     Short-term investments                                 2,945         1,473
     Accounts receivable, net                               7,402         7,547
     Inventories                                            1,101           792
     Deferred income taxes                                  1,532           457
     Prepaid expenses and other current assets              2,784         3,930
                                                         ----------------------
        Total current assets                               30,985        28,083
                                                                       
Property, plant and equipment, net                         12,881        11,650
Excess of cost over net assets of business acquired,                   
     Less accumulated amortization of $1,512 in 1998 and               
     $1,449 in 1997                                         2,186         2,249
Other assets                                                1,075         1,070
--------------------------------------------------------------------------------
Total assets                                             $ 47,127      $ 43,052
================================================================================
                                                                       
LIABILITIES AND STOCKHOLDERS' EQUITY                                   
--------------------------------------------------------------------------------
Current liabilities:                                                   
     Accounts payable and accrued liabilities            $  7,068      $  6,919
     Notes payable                                            427           608
     Current maturities of long-term debt and                          
         obligations under capital leases                     566           634
                                                         ----------------------
        Total current liabilities                           8,061         8,161
                                                                       
Long-term debt and obligations under capital leases           100           203
Other liabilities                                             395           396
--------------------------------------------------------------------------------
Total liabilities                                           8,556         8,760
================================================================================
                                                                       
Commitments and contingencies                                          
                                                                       
Stockholders' equity:                                                  
     Preferred stock, $.01 par value; 5,676,595 shares                 
         authorized; no shares issued or outstanding                   
     Common stock, $.01 par value; 20,000,000 shares                   
         authorized; issued and outstanding 8,857,053                  
         Shares in 1998 and 8,686,346 shares in 1997           89            87
     Additional paid-in capital                            38,311        36,130
     Accumulated other comprehensive loss                     (85)          (75)
     Retained earnings(deficit)                               256        (1,850)
--------------------------------------------------------------------------------
Total stockholders' equity                                 38,571        34,292
--------------------------------------------------------------------------------
Total liabilities and stockholders' equity               $ 47,127      $ 43,052
================================================================================

     See accompanying notes to condensed consolidated financial statements.

                                       -2-

<PAGE>


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


Three Months Ended March 31,                               1998          1997
--------------------------------------------------------------------------------
Net revenues:
     Service                                         $    13,157    $     9,478
     Product                                                 318            606
                                                     ---------------------------
                                                          13,475         10,084

Costs and expenses:
     Cost of services                                      4,053          3,420
     Cost of products                                        174            452
     Marketing, general and administrative                 4,819          3,798
     Research and development                              1,129            936
                                                     ---------------------------
                                                          10,175          8,606

Operating income                                           3,300          1,478

Other income (expense):
     Interest income                                         240            131
     Interest expense                                        (28)           (48)
     Other                                                    40              9
                                                     ---------------------------
                                                             252             92
                                                     ---------------------------

Income before income taxes                                 3,552          1,570

Income tax provision                                       1,446            738

--------------------------------------------------------------------------------
Net income                                           $     2,106    $       832
================================================================================
Net income per share:
      Basic                                          $       .24    $       .10
      Diluted                                        $       .22    $       .10
--------------------------------------------------------------------------------
Shares used in computing net income per share:
      Basic                                            8,812,549      8,043,553
      Diluted                                          9,439,261      8,374,262
================================================================================


     See accompanying notes to condensed consolidated financial statements.


                                       -3-

<PAGE>



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


Three Months Ended March 31,                                    1998       1997
--------------------------------------------------------------------------------
Cash Flow From Operating Activities
   Net income                                                 $ 2,106    $  832
   Adjustments to reconcile net income to net cash
      provided by (used in) operating activities:
         Depreciation and amortization                            684       587
         Deferred income taxes                                 (1,075)      (50)
         Income tax benefit related to stock options            1,075
         Other items, net 
         Changes in assets and liabilities:
            Accounts receivable                                   131      (362)
            Inventories                                          (317)      (90)
            Prepaid expenses and other current assets           1,128        34
            Accounts payable and other liabilities                194       361
--------------------------------------------------------------------------------
Net cash provided by operating activities                       3,926     1,312

Cash Flow From Investing Activities
   Capital expenditures                                        (1,846)     (572)
   Purchases of investments                                    (1,972)     (986)
   Proceeds from sale of investments                              500     1,986
   Increase in other assets                                       (27)      (29)
--------------------------------------------------------------------------------
Net cash provided by (used in) investing activities            (3,345)      399

Cash Flow From Financing Activities
   Proceeds from issuance of common stock                       1,108       418
   Proceeds from issuance of notes payable                                   93
   Principal payments on notes payable                           (181)     (259)
   Principal payments on long-term debt
      and obligations under capital leases                       (169)     (196)
--------------------------------------------------------------------------------
Net cash provided by financing activities                         758        56

Effect of exchange rate changes on cash                            (2)       27
--------------------------------------------------------------------------------

Net increase in cash and cash equivalents                       1,337     1,794
Cash and cash equivalents at beginning of period               13,884     7,290
--------------------------------------------------------------------------------
Cash and cash equivalents at end of period                    $15,221    $9,084
================================================================================

Supplementary cash flow data:
   Cash paid during the period for interest                   $    28    $   47
   Cash paid during the period for taxes                                    231


     See accompanying notes to condensed consolidated financial statements.


                                       -4-

<PAGE>


                        OSTEOTECH, INC. AND SUBSIDIARIES

              Notes To Condensed Consolidated Financial Statements
                                   (unaudited)

1.   Basis of Presentation

     The accompanying  unaudited  condensed  consolidated  financial  statements
     reflect all  adjustments  (consisting  only of normal  recurring  accruals)
     considered   necessary  by  management  to  present  fairly  the  Company's
     consolidated financial position as of March 31, 1998 and December 31, 1997,
     and the consolidated  results of operations and the consolidated cash flows
     for the  three-month  periods ended March 31, 1998 and 1997. 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, 1997 which
     were included as part of the Company's Report on Form 10-K.


2.   Changes in Accounting Policies

     Effective  January 1, 1998,  the Company  adopted  Statement  of  Financial
     Accounting Standard No. 130, "Reporting Comprehensive Income" ("SFAS 130").
     SFAS 130 established  standards for reporting and display of  comprehensive
     income and its components in financial statements.

     Comprehensive  income for the three-month  periods ended March 31, 1998 and
     1997 was $2,096,000 and $875,000,  respectively. Other comprehensive income
     consists solely of foreign currency translation adjustments.

3.   Commitments and Contingencies

     Litigation

     The Company  remains a defendant  in two lawsuits in which  patients  claim
     that  they  have  suffered  damages  from  the  implantation  of  allegedly
     defective  spinal fixation  devices  allegedly  distributed by the Company.
     Management believes that the suits and claims are without merit and intends
     to  defend  such  actions   vigorously.   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 suits.  The  Company is unable to  estimate  the
     potential  liability,  if any, that may result from the pending  litigation
     and, accordingly,  no provision for any liability (except for accrued legal
     costs) has been made in the consolidated financial statements.

     The Company is  involved in a patent  infringement  action  against  GenSci
     Laboratories,  Inc. and GenSci Regeneration  Sciences,  Inc.  (collectively
     "GenSci")  alleging  that GenSci has violated  claims of one of the patents
     involving the Company's Grafton(R) Demineralized Bone Matrix (DBM) process.


                                       -5-

<PAGE>


3.   Commitments and Contingencies (continued)

     GenSci has filed a suit against the Company alleging patent infringement of
     three patents assigned to GenSci in addition to tortious  interference with
     a business expectancy,  negligent  interference with a prospective economic
     advantage  and  inducing  breach of  contract  and  seeking  a  declaratory
     judgment  of  the  invalidity  of two of  the  Company's  patents  covering
     Grafton(R) DBM.

     The Company intends to vigorously pursue its claims against GenSci and also
     believes that GenSci's claims against the Company are without merit.


4.   Earnings Per Share

     The  following  table  sets  forth the  computation  of basic  and  diluted
     earnings per share:

                                                            Three Months Ended
                                                         -----------------------
     (dollars in thousands except per share data)             1998         1997
     ---------------------------------------------------------------------------

     Net income available to common
         Shareholders                                    $    2,106   $      832
     ===========================================================================
     Denominator for basic earnings per share:         
     Weighted average Common shares and                
           nominal warrants outstanding *                 8,812,549    8,043,553
                                                       
     Effect of dilutive securities:                    
         Stock options                                      626,472      272,287
         Warrants                                               240       58,422
                                                       
                                                         -----------------------
     Denominator for diluted earnings per share           9,439,261    8,374,262
     ===========================================================================
                                                       
         Basic earnings per share                        $      .24   $      .10
     ===========================================================================
                                                       
         Diluted earnings per share                      $      .22   $      .10
     ===========================================================================
                                                     
     *    Nominal warrants are warrants with an exercise price of $.03.


5.   Reclassifications

     Certain prior year amounts have been  reclassified to conform with the 1998
     presentation.


                                       -6-

<PAGE>


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

Information contained herein contains "forward-looking statements" (as such term
is defined in the Private Securities Litigation Reform Act of 1995) 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
other variations thereon or comparable terminology. Certain statements contained
in "Management's  Discussion and Analysis of Financial  Condition and Results of
Operations" and other sections herein, including without limitation,  statements
regarding the Company's  liquidity  and capital  resources and other  statements
contained  herein  regarding   matters  that  are  not  historical   facts,  are
forward-looking  statements.  No assurance can be given that the future  results
covered by the  forward-looking  statements  will be  achieved.  The matters set
forth in Exhibit 99.0 to the Company's Form 10-K for the year ended December 31,
1997,  constitute  cautionary  statements  identifying  important  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.


FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1998 AND 1997

Results of Operations

Net Income

Net income in the first  quarter of 1998  increased to  $2,106,000 or $.24 basic
earnings per share and $.22 diluted earnings per share as compared to net income
of $832,000 or $.10 basic and diluted earnings per share in the first quarter of
1997.

Following is a discussion of factors which  affected  results of operations  for
the three-month periods ended March 31, 1998 and 1997.

Revenues

Consolidated  net  revenues  in the  first  quarter  of  1998  increased  34% to
$13,475,000  from  $10,084,000  in the first  quarter of 1997.  During the first
three months of 1998 and 1997, two of the Company's  major  customers  accounted
for 54% and 40%, and 63% and 29% of revenues, respectively.

Domestic  revenues  increased  36% to  $12,773,000  in the first quarter of 1998
compared to $9,404,000  in the first  quarter of 1997.  The increase in domestic
revenues   resulted   principally   from  increased  demand  for  the  Company's
proprietary Grafton(R) DBM allograft-processing services, which increased 57% in
1998 compared to the prior year.

Foreign non-allograft bone tissue revenues increased 3% to $702,000 in the first
quarter of 1998 compared to $680,000 in the first quarter of 1997.  The increase
resulted  principally  from an increase in orthopaedic  coating  service revenue
partially offset by a decrease in ceramic product revenues.


                                       -7-

<PAGE>


Cost of Services and Products

Cost of  services  as a  percentage  of  service  revenues  was 31% in the first
quarter of 1998  compared  to 36% in the first  quarter of 1997.  The decline in
costs as a  percentage  of revenues  results  from an  increased  percentage  of
revenues coming from services with higher gross margins,  operating efficiencies
resulting from increased volume and an increase in fees charged to the Company's
customers for certain allograft processing services.

Cost of  products  as a  percentage  of  product  revenues  was 55% in the first
quarter of 1998,  compared to 75% in 1997.  The decline in costs as a percentage
of revenue in 1998 results primarily from a shift in product mix toward products
with higher gross margins.

Marketing, General and Administrative

Marketing,  general and administrative  expenses increased  $1,021,000 or 27% in
the first  quarter of 1998  compared to the same period last year.  The increase
was primarily  attributable to expanded  marketing and  promotional  activities,
increased agent  commissions  directly related to the increase in Grafton(R) DBM
revenues and increased  administrative  costs,  principally outside professional
services.

Research and Development

Research and development  expenses  increased $193,000 or 21% as compared to the
same period in 1997,  principally as a result of increased  spending  associated
with the  expansion of the  Company's  viral  inactivation  process to a broader
range of allograft bone tissue and the  development of new allograft bone tissue
products,  certain of which are expected to be introduced into the market before
the end of 1998.

Other Income (expense)

In the first quarter of 1998, other income increased by $160,000 compared to the
first  quarter of 1997 due to higher  invested cash and lower  outstanding  debt
balances.

Income Tax Provision

The Company's  effective income tax rate declined to 41% in the first quarter of
1998 from 47% in the first quarter of 1997. The high  effective  income tax rate
in 1997  resulted  from foreign  losses for which no current tax  benefits  were
available.


                                       -8-

<PAGE>


Liquidity and Capital Resources

At  March  31,  1998,  the  Company  had  cash  and  short-term  investments  of
$18,166,000  compared to  $15,357,000  at December 31, 1997 and working  capital
increased $3,002,000 to $22,924,000 from $19,922,000.

Net cash  provided by  operations  was  $3,926,000 in the first quarter of 1998,
compared to  $1,312,000  in the first  quarter of 1997.  The  increase  resulted
primarily  from the  Company's  improved  earnings  in 1998 and a  reduction  in
prepaid income taxes. Capital expenditures increased to $1,846,000 from $572,000
in the first  quarter of 1997 as the Company  continues to invest in  facilities
and  equipment  needed for current and future  business  requirements.  Net cash
provided by financing activities increased to $758,000 from $56,000 in the first
quarter of 1997,  principally  from cash  proceeds  received  from stock  option
exercises.

The Company has a loan and security  agreement with a US bank which provides for
borrowings of up to $3,000,000  under a revolving  line of credit and $4,000,000
under an equipment line of credit.  At March 31, 1998,  $560,000 was outstanding
under the  equipment  line of credit  and there were no  borrowings  outstanding
under the revolving line of credit. The Company also has a line of credit with a
Dutch bank which  provides  for  borrowings  of up to 5,000,000  Dutch  Guilders
("dfl"),  or  approximately  $2,400,000  at the March 31,  1998  exchange  rate.
Analysis of the Company's 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,  the  Company  agreed with the bank to limit its
borrowings, if any, to no more than dfl 3,000,000 or approximately $1,440,000 at
the March 31, 1998 exchange rate.  Additionally,  in connection  with the Leiden
facility  lease,  the Company is required to maintain a declining bank guarantee
which reduced the current amount  available for borrowings to dfl 2,922,000,  or
approximately  $1,402,000  at the March 31, 1998  exchange  rate.  There were no
borrowings outstanding under this credit line as of March 31, 1998.

The Company believes that its 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 its near-term requirements.  From time to
time the Company may seek  additional  funds through  equity or debt  financing.
However, there can be no assurances that such additional funds will be available
to the  Company,  or if  available,  that such funds will be  available on terms
favorable to the Company.

Impact of Inflation and Foreign Currency Exchange Fluctuations

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


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Not Applicable


                                       -9-

<PAGE>


PART II. OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

Patent Litigation

The following developments have occurred in the lawsuits between the Company and
GenSci  reported in Item 3 in the  Company's  Annual Report on Form 10-K for the
fiscal  year  ended  December  31,  1997.  On April 8,  1998,  the  court in the
California  action  issued an order  staying  the  California  action  pending a
determination  by the court in the New Jersey  action as to  whether  GenSci was
subject to the  jurisdiction  of the court in New  Jersey.  On May 4, 1998,  the
court in the New  Jersey  action  issued an order  transferring  the New  Jersey
action  to the  United  States  District  Court  for  the  Central  District  of
California.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

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

          Exhibit                                                  Page
          Number      Description                                 Number


          27.0        Financial Data Schedule                       E-1


     (b)  Reports on Form 8-K

          On January 12, 1998,  the Company filed with the  Commission a Current
          Report on Form 8-K to  announce  that the U.S.  Patent  and  Trademark
          office has issued the Company U.S. Patent #5702677 entitled "Spherical
          Hydroxyapatite Particles and Process for the Production Thereof" ("the
          Patent").

          On February 2, 1998,  the Company filed with the  Commission a Current
          Report on Form 8-K to announce that the Company had filed a lawsuit on
          January 16, 1998,  in the U.S.  District  Court in Newark,  New Jersey
          against GenSci  Laboratories,  Inc. and GenSci Regeneration  Sciences,
          Inc.  for patent  infringement  and that  approximately  two (2) weeks
          after Osteotech's filing, GenSci had filed a suit in the U.S. District
          Court for the Central  District of  California  accusing  Osteotech of
          violating  certain  claims of two patents  assigned to GenSci,  by the
          processing of Grafton(R) DBM Flex.




                                      -10-

<PAGE>


                                   SIGNATURES



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


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



Date: May 11, 1998                      By:    /s/ Richard W. Bauer
                                               -----------------------
                                               Richard W. Bauer
                                               President, Chief
                                               Executive Officer



Date: May 11, 1998                      By:    /s/ Michael J. Jeffries
                                               -----------------------
                                               Michael J. Jeffries
                                               Executive Vice President
                                               Chief Operating Officer
                                               Chief Financial Officer




                                      -11-