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, 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 - 8,776,224 shares as of July 31, 1998.

                                       1

<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,
                                                                                                   1998                 1997
---------------------------------------------------------------------------------------------------------------------------------
ASSETS
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                              <C>                   <C>    
Current assets:
     Cash and cash equivalents                                                                   $16,872               $13,884
     Short-term investments                                                                        3,469                 1,473
     Accounts receivable, net                                                                      8,676                 7,547
     Inventories                                                                                   1,209                   792
     Deferred income taxes                                                                         1,556                   457
     Prepaid expenses and other current assets                                                     2,045                 3,930
                                                                                            -------------------------------------
        Total current assets                                                                      33,827                28,083

Property, plant and equipment, net                                                                13,419                11,650
Excess of cost over net assets of business acquired,
     less accumulated amortization of $1,575 in 1998 and
     $1,449 in 1997                                                                                2,123                 2,249
Other assets                                                                                       1,256                 1,070
---------------------------------------------------------------------------------------------------------------------------------
Total assets                                                                                     $50,625              $43,052
=================================================================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------------------------------------------------------------
Current liabilities:
     Accounts payable and accrued liabilities                                                     $8,796               $ 6,919
     Notes payable                                                                                   140                   608
     Current maturities of long-term debt and
         obligations under capital leases                                                            488                   634
                                                                                            -------------------------------------
        Total current liabilities                                                                  9,424                 8,161

Long-term debt and obligations under capital leases                                                   21                   203
Other liabilities                                                                                    399                   396
---------------------------------------------------------------------------------------------------------------------------------
Total liabilities                                                                                  9,844                 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 8,859,092
         shares in 1998 and 8,686,346 shares in 1997                                                  89                    87
     Additional paid-in capital                                                                   38,081                36,130
     Accumulated other comprehensive loss                                                            (74)                  (75)
     Retained earnings(deficit)                                                                    2,685                (1,850)
---------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity                                                                        40,781                34,292
---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity                                                       $50,625               $43,052
=================================================================================================================================
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                       2

<PAGE>




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


<TABLE>
<CAPTION>
                                                                    Three Months                          Six Months
                                                                    Ended June 30,                       Ended June 30,
                                                         -----------------------------------  -----------------------------------
                                                                  1998             1997               1998              1997
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>              <C>                <C>              <C>    
Net revenues:
     Service                                                    $14,927          $ 9,887            $28,084          $19,365
     Product                                                        203              559                521            1,165
     Licensing fee                                                  124              257                124              257
                                                         ------------------ ----------------  -----------------  ----------------
                                                                 15,254           10,703             28,729           20,787

Costs and expenses:
     Cost of services                                             4,461            3,526              8,514            6,946
     Cost of products                                               178              410                352              862
     Marketing, general and administrative                        5,762            3,831             10,581            7,629
     Research and development                                     1,077              890              2,206            1,826
                                                         ------------------ ----------------  -----------------  ----------------
                                                                 11,478            8,657             21,653           17,263

Operating income                                                  3,776            2,046              7,076            3,524

Other income (expense):
     Interest income                                                271              138                511              269
     Interest expense                                               (22)             (31)               (50)             (79)
     Other                                                          100               35                140               44
                                                         ------------------ ----------------  -----------------  ----------------
                                                                    349              142                601              234
                                                         ------------------ ----------------  -----------------  ----------------

Income before income taxes                                        4,125            2,188              7,677            3,758

Income tax provision                                              1,696              785              3,142            1,523

---------------------------------------------------------------------------------------------------------------------------------
Net income                                                      $ 2,429          $ 1,403            $ 4,535          $ 2,235
=================================================================================================================================
Net income per share:
     Basic                                                      $   .27          $   .17            $   .51          $   .28
     Diluted                                                    $   .26          $   .17            $   .48          $   .27
---------------------------------------------------------------------------------------------------------------------------------
Shares used in computing net income per share:
     Basic                                                    8,859,826        8,080,874          8,836,187        8,062,214
     Diluted                                                  9,390,855        8,479,063          9,415,058        8,426,663
=================================================================================================================================
</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>
<S>                                                             <C>            <C>     
Six Months Ended June 30,                                           1998           1997
----------------------------------------------------------------------------------------
Cash Flow From Operating Activities
   Net income                                                   $  4,535       $  2,235
   Adjustments to reconcile net income to net cash
      provided by operating activities:
         Depreciation and amortization                             1,371          1,218
         Deferred income taxes                                    (1,099)           (50)
         Income tax benefit related to stock options               1,099
         Changes in assets and liabilities:
               Accounts receivable                                (1,130)           161
               Inventories                                          (451)           (49)
               Prepaid expenses and other current assets           1,882            321
               Accounts payable and other liabilities              1,885             55
----------------------------------------------------------------------------------------
Net cash provided by operating activities                          8,092          3,891

Cash Flow From Investing Activities
   Capital expenditures                                           (2,941)        (1,585)
   Purchases of investments                                       (5,441)        (4,431)
   Proceeds from sale of investments                               3,445          2,973
   Increase in other assets                                         (230)           (50)
----------------------------------------------------------------------------------------
Net cash used in investing activities                             (5,167)        (3,093)

Cash Flow From Financing Activities
   Proceeds from issuance of common stock                          1,386            670
   Repurchase of common stock                                       (532)
   Proceeds from issuance of notes payable                                           93
   Principal payments on notes payable                              (468)          (530)
   Principal payments on long-term debt
     and obligations under capital leases                           (325)          (397)
----------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities                   61           (164)

Effect of exchange rate changes on cash                                2             29
----------------------------------------------------------------------------------------

Net increase in cash and cash equivalents                          2,988            663
Cash and cash equivalents at beginning of period                  13,884          7,290
----------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                      $ 16,872       $  7,953
========================================================================================

Supplementary cash flow data:
   Cash paid during the period for taxes                        $    988       $  1,071
   Cash paid during the period for interest                           49             87
</TABLE>


     See accompanying notes to condensed consolidated financial statements.

                                       4


<PAGE>




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

1.   Basis of Presentation

     The accompanying  unaudited  condensed  consolidated  financial  statements
     reflect all  adjustments  (consisting  only of normal  recurring  accruals)
     considered   necessary  by  management  to  present  fairly  the  Company's
     consolidated  financial position as of June 30, 1998 and December 31, 1997,
     and  the  consolidated  results  of  operations  for  the  three-month  and
     six-month  periods ended June 30, 1998 and 1997, and the consolidated  cash
     flows for the six-month  periods then ended.  The results of operations for
     the  respective  interim  periods  are not  necessarily  indicative  of the
     results  to be  expected  for the full  year.  The  condensed  consolidated
     financial  statements  should  be  read in  conjunction  with  the  audited
     financial  statements  for the year  ended  December  31,  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 was $2,440,000 and $4,536,000 in the three months and
     six months ended June 30, 1998,  respectively,  compared to $1,408,000  and
     $2,283,000  in the same  periods  last  year.  Other  comprehensive  income
     consists solely of foreign currency translation adjustments.

3.   Financing Arrangements

     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.  In July 1998,  the Company
     received a commitment  from the same bank for a new credit  facility  which
     will replace the current  facilities  which expire in August 1998.  The new
     credit  facility will include a $5,000,000  revolving  line of credit and a
     $21,500,000  building  mortgage loan and equipment line of credit which the
     Company  will  use to fund the  planned  construction  of a new  processing
     facility. Consummation of the new credit facility is subject to negotiation
     and execution of a definitive agreement.


                                       5
<PAGE>


4.   Commitments and Contingencies

     Acquisition

     In June 1998, the Company acquired a 5% interest in OST Developpement  S.A.
     ("OST"), a subsidiary of Transphyto S.A. of Clermont-Ferrand, France for an
     aggregate purchase price of 496,662 French Francs ("FRF"), or approximately
     $84,400.  OST is a  processor  of bovine bone  grafts for  orthopaedic  and
     dental use. The Company will  acquire an  additional  85% interest no later
     than March 1999,  provided that certain milestones are achieved by OST. The
     purchase  price  for the  additional  interest  will be FRF  8,503,338,  or
     approximately  $1,402,000 at the June 30, 1998 exchange  rate.  The Company
     also has the option to purchase the  remaining  10% of OST at a price to be
     determined at the time of purchase.

     In addition,  the Company has agreed to provide  interest  bearing loans to
     OST of up to FRF 10,000,000,  or  approximately  $1,649,000 at the June 30,
     1998 exchange rate, to support its capital  expenditure and working capital
     requirements.  In July and August 1998,  the Company  made  advances to OST
     aggregating FRF 1,600,000 or $269,000.

     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
     continues to defend against such actions vigorously.

     The Company is  involved in a patent  infringement  action  against  GenSci
     Regeneration  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.  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.


                                       6
<PAGE>


4.   Commitments and Contingencies (Continued)

     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. Although  plaintiffs have demanded monetary damages, an amount
     has not yet been specified.  As this case is in its preliminary stages, the
     Company  has not yet filed an answer to or  otherwise  moved to dismiss the
     complaint.  The Company,  however,  believes that the claims against it are
     without merit and will vigorously  defend against such claims.  The Company
     maintains a general  liability  insurance  policy with Lexington  Insurance
     Company ("Lexington"), and Lexington has been notified of this action.

     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 any of the pending  litigation and,  accordingly,  no provision
     for any liability has been made in the consolidated financial statements.

5.   Stock Repurchase Program

     In June  1998,  the  Board  of  Directors  of the  Company  authorized  the
     repurchase and retirement of up to $5,000,000 of the Company's common stock
     through  open  market  purchases.  As of June 30,  1998,  the  Company  had
     repurchased  and  retired  30,000  shares  of  common  stock  at a cost  of
     $532,000.  During July and August 1998, the Company repurchased and retired
     an additional 215,000 shares of common stock at a cost of $4,426,000.


                                       7
<PAGE>


6.   Earnings Per Share

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


<TABLE>
<CAPTION>
                                                               Three Months Ended                   Six Months Ended
                                                                     June 30,                           June 30,
                                                        ----------------------------------------------------------------------
        (dollars in thousands
         except per share data)                               1998             1997              1998              1997
        ----------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>              <C>               <C>               <C>      
        Net income available to Common
            Shareholders                                        $ 2,429          $ 1,403           $ 4,535           $ 2,235
        ----------------------------------------------------------------------------------------------------------------------
        Weighted average common shares                        8,859,826        7,950,510         8,836,187         7,926,274
        Nominal warrants outstanding (a)                                         130,364                             135,940
                                                        ----------------------------------------------------------------------
        Denominator for basic earnings per share              8,859,826        8,080,874         8,836,187         8,062,214
        Effect of dilutive securities:
            Stock options                                       530,806          325,213           578,759           327,961
            Warrants                                                223           72,976               112            36,488
                                                        ----------------------------------------------------------------------
        Denominator for diluted earnings per
        share                                                 9,390,855        8,479,063         9,415,058         8,426,663
        ----------------------------------------------------------------------------------------------------------------------
            Basic earnings per share                            $   .27          $   .17           $   .51           $   .28
        ----------------------------------------------------------------------------------------------------------------------
            Diluted earnings per share                          $   .26          $   .17           $   .48           $   .27
        ----------------------------------------------------------------------------------------------------------------------
</TABLE>


        (a)  Nominal warrants are warrants with an exercise price of $.03.


7.   Reclassifications

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


                                       8
<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 AND SIX-MONTH PERIODS ENDED JUNE 30, 1998 AND 1997

Results of Operations

Net Income

Net income in the second  quarter of 1998  increased to $2,429,000 or $.27 basic
earnings per share and $.26 diluted earnings per share compared to net income of
$1,403,000 or $.17 basic and diluted earnings per share in the second quarter of
1997.  Net income in the first six months of 1998 was  $4,535,000  or $.51 basic
earnings per share and $.48 diluted earnings per share compared to net income of
$2,235,000 or $.28 basic earnings per share and $.27 diluted  earnings per share
in the first six months of 1997.

Following is a discussion of factors which  affected  results of operations  for
the three-month and six-month periods ended June 30, 1998 and 1997.

Revenues

Consolidated revenues in the second quarter of 1998 increased 43% to $15,254,000
from $10,703,000 in the second quarter of 1997. Revenues in the first six months
of 1998 increased 38% to $28,729,000 from $20,787,000 in the first six months of
1997.  During  the  second  quarter  and  first six  months of 1998,  two of the
Company's  major  customers   accounted  for  56%  and  39%  and  55%  and  39%,
respectively, of revenues.


                                       9
<PAGE>


Results of Operations (continued)

Domestic  revenues  increased 51% to  $14,666,000  in the second quarter of 1998
from  $9,725,000 in the second  quarter of 1997 and increased 43% to $27,439,000
in the first six  months of 1998  from  $19,129,000  in the first six  months 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 65% in the second quarter of 1998 and 61% in the first
six months of 1998 as compared  to the same  periods in 1997.  Allograft  tissue
processing services other than Grafton increased 35% and 25%,  respectively,  in
the second quarter and first six months of 1998.

Foreign  non-allograft  revenues  decreased 40% in the second quarter of 1998 to
$588,000  from  $978,000 in the second  quarter of 1997 and decreased 22% in the
six months ended June 30, 1998 to $1,290,000  from  $1,658,000 in the six months
ended June 30, 1997. The decrease in foreign revenues resulted  principally from
lower ceramic  product  revenues and, in accordance  with the license  agreement
entered into in 1997,  lower licensing fee revenues.  Additionally,  orthopaedic
coating  revenues  decreased due to a temporary  closing of one of the Company's
major coating  customer's  facility in  conjunction  with the relocation of such
facility.

Cost of Services and Products

Cost of  services  as a  percentage  of service  revenues  was 30% in the second
quarter and first six months of 1998  compared to 36% in both periods last year.
The decline in costs as a  percentage  of  revenues  results  from an  increased
percentage of revenue 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 88% and 68% in the
second quarter and first six months of 1998,  respectively,  compared to 73% and
74% in the same  periods  last year.  The  changes in costs as a  percentage  of
product  revenues during the second quarter and first six months of 1998 results
primarily from a shift in product mix.

Marketing, General and Administrative

Marketing,  general and administrative  expenses increased  $1,931,000 or 50% in
the  second  quarter  and  $2,952,000  or 39% in the first  six  months of 1998,
compared  to  the  same  periods  last  year.   The  increases   were  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.


                                       10
<PAGE>


Research and Development

Research and development  expenses increased $187,000 or 21% and $380,000 or 21%
in the second  quarter and first six months of 1998,  respectively,  compared to
the same periods last year.  The increases  result  principally  from  increased
spending   associated   with  the  future   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 second  quarter and first six months of 1998,  other income  increased by
$207,000 and $367,000, respectively,  compared to the same periods last year due
to higher invested cash and lower outstanding debt balances.

Income Tax Provision

The Company's  effective income tax rate was 41% in the second quarter and first
six months of 1998  compared to 36% and 41%,  respectively,  in the same periods
last year. In the second  quarter of 1997,  higher  foreign  income  reduced the
overall effective tax rate since  corresponding taxes were offset by utilization
of net operating loss carryforwards.

Liquidity and Capital Resources

At June 30, 1998, the Company had cash and short-term investments of $20,341,000
compared  to  $15,357,000  at  December  31,  1997.  Working  capital  increased
$4,481,000  to  $24,403,000  at June 30, 1998 from  $19,922,000  at December 31,
1997.

Net cash provided by operations  was $8,092,000 in the first six months of 1998,
compared to  $3,891,000 in the first six months of 1997.  The increase  resulted
primarily  from  improved  earnings  in 1998 and a reduction  in prepaid  income
taxes.

Cash used in  investing  activities  increased  to  $5,167,000  in the first six
months of 1998 from  $3,093,000  in the first six months of 1997.  The  increase
results principally from capital expenditures which increased to $2,941,000 from
$1,585,000 as the Company continues to invest in facilities and equipment needed
for  current and future  business  requirements.  The Company  plans to commence
construction of a new processing  facility which it expects to occupy by the end
of 1999 at an aggregate  anticipated  cost of  approximately  $25  million.  The
Company plans to fund the  construction of this facility  primarily from the new
credit facility described below.

Net cash provided by financing activities increased by $225,000 in the first six
months of 1998,  principally  from an increase in cash  proceeds  received  from
stock  option  exercises  net of cash used to  repurchase  30,000  shares of the
Company's  common  stock.  In June 1998,  the Board of  Directors of the Company
authorized  the  repurchase  and retirement of up to $5,000,000 of the Company's
common stock through open market purchases. As of June 30, 1998, the Company had
repurchased  and retired  30,000  shares of common  stock at a cost of $532,000.
During July and August 1998, the Company  repurchased  and retired an additional
215,000 shares of common stock at a aggregate cost of $4,426,000.



                                       11
<PAGE>


Liquidity and Capital Resources (continued)

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 June 30, 1998,  $427,000 was  outstanding
under the  equipment  line of credit  and there were no  borrowings  outstanding
under the  revolving  line of  credit.  In July  1998,  the  Company  received a
commitment  from the same bank for a new credit  facility which will replace the
current  facilities  which expire in August 1998.  The new credit  facility will
include  a  $5,000,000  revolving  line of  credit  and a  $21,500,000  building
mortgage  loan and  equipment  line of credit which the Company will use to fund
the planned construction of a new processing  facility.  Consummation of the new
credit  facility  is  subject  to  negotiation  and  execution  of a  definitive
agreement.  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  $2,452,000  at the June 30, 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 the 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  $1,471,000 at the June 30,
1998 exchange rate.  There were no borrowings  under this credit line as of June
30, 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.


                                       12
<PAGE>


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Not Applicable

PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

     "O" Company, Inc. v. Osteotech,  Inc.,  Civ-98-06655 (Second Judicial Dist.
     Ct., Bernallilo County, N.M.)

     On July 16, 1998,  the Company  received a complaint that was filed against
     it in the Second Judicial District Court,  Bernallilo  County,  New Mexico.
     The complaint 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. Although  plaintiffs have demanded  monetary  damages,  an
     amount  has not yet  been  specified.  As this  case is in its  preliminary
     stages,  the Company has not yet filed an answer to or  otherwise  moved to
     dismiss the  complaint.  The  Company,  however,  believes  that the claims
     against it are  without  merit and will  vigorously  defend  against  those
     claims.  The Company  maintains a general  liability  insurance policy with
     Lexington Insurance Company ("Lexington"),  and Lexington has been notified
     of this action.

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

          (a)  An annual meeting of stockholders was held on June 4, 1998.

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

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

               i)   With  respect to the  election of  Directors of the Company,
                    the persons  named below  received the  following  number of
                    votes:

                    Director                          For             Withheld
                    ------------------------------------------------------------
                    Richard W. Bauer                  7,465,308       413,940
                    Kenneth P. Fallon, III            7,468,773       410,475
                    Michael J. Jeffries               7,465,005       414,243
                    Donald D. Johnston                7,464,213       415,035
                    John Phillip Kostuik, M.D.        7,461,498       417,560
                    Stephen J. Sogin, Ph.D.           7,461,688       417,560



                                       13
<PAGE>


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (Continued)

          ii)  With respect to a proposal to ratify  amendments to the Company's
               1991 Stock Option Plan, as amended (the "Plan"),  to increase the
               number of shares of common stock  reserved for issuance under the
               Plan by 818,624  shares to  2,813,765  shares,  the  stockholders
               voted  2,939,328  shares in favor,  2,494,623  against and 19,465
               abstained.  Broker  non-votes were not applicable.  This proposal
               received the vote required by Delaware  General  Corporation  Law
               ("DGCL") and the Company's by-laws for approval (i.e. affirmative
               vote of a  majority  of the  outstanding  shares  present  at the
               meeting,  by  proxy or in  person,  and  entitled  to vote at the
               annual meeting).

          iii) With  respect to a proposal to ratify  amendments  to the Plan to
               conform the Plan with the current  provisions of Rule 16b-3 under
               the  Securities  Exchange  Act of 1934,  the  stockholders  voted
               7,611,923 shares in favor,  172,267 against and 16,336 abstained.
               Broker non-votes were not applicable.  This proposal received the
               vote required by DGCL and the Company's by-laws for approval.

          iv)  With  respect to a proposal to ratify the  selection of Coopers &
               Lybrand LLP as the Company's  independent auditors for the fiscal
               year ending December 31, 1998; the  stockholders  voted 7,862,518
               shares in  favor,  9,734  against  and  6,996  abstained.  Broker
               non-votes were not  applicable.  This proposal  received the vote
               required  by  DGCL  and  the  Company's   by-laws  for  approval.
               Effective  July 1, 1998,  Coopers & Lybrand LLP merged with Price
               Waterhouse.    The    newly    formed    firm   is    known    as
               PricewaterhouseCoopers LLP.


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

          None.



                                       14


<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 13, 1998            By:              /s/RICHARD W. BAUER
                                                    --------------------------
                                                     Richard W. Bauer
                                                     President, Chief
                                                     Executive Officer



Date:    August 13, 1998            By:              /s/MICHAEL J. JEFFRIES
                                                    --------------------------
                                                     Michael J. Jeffries
                                                     Executive Vice President
                                                     Chief Operating Officer
                                                     Chief Financial Officer



                                       15