<PAGE>

                                  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 quarterly period ended March 31, 2006

                                       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)

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

<TABLE>
<S>                                                            <C>
  51 James Way, Eatontown, New Jersey                             07724
(Address of principal executive offices)                       (Zip Code)
</TABLE>

                                 (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
                                       ---    ---

Indicate by check mark whether the registrant is a large accelerated filer, or a
non-accelerated filer. See definition of "accelerated filer and large
accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer       Accelerated filer  X    Non-accelerated filer
                        ---                     ---                         ---
Indicated by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes     No  X
                                     ---    ---

                      APPLICABLE ONLY TO CORPORATE ISSUERS

The number of shares of the registrant's common stock, $.01 par value,
outstanding as of May 5, 2006 was 17,297,075.

<PAGE>

                                 OSTEOTECH, INC.

                                    FORM 10-Q

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                        PAGE NO.
                                                                        --------
<S>                                                                     <C>
PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
         Condensed Consolidated Balance Sheets as March 31, 2006 and
            December 31, 2005                                               3
         Condensed Consolidated Statements of Operations for the
            Three Months Ended March 31, 2006 and 2005                      4
         Condensed Consolidated Statements of Cash Flows for the
            Three Months Ended March 31, 2006 and 2005                      5
         Notes to Condensed Consolidated Financial Statements               6
Item 2.  Management's Discussion and Analysis of Financial Condition
            and Results of Operations                                      13
Item 3.  Quantitative and Qualitative Disclosures About Market Risks       19
Item 4.  Controls and Procedures                                           19

PART II. OTHER INFORMATION
Item 1.  Legal Proceedings                                                 21
Item 6.  Exhibits                                                          21
</TABLE>


                                      -2-

<PAGE>

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                             March 31,    December 31,
                                                                                2006          2005
                                                                            -----------   ------------
                                                                            (Unaudited)
<S>                                                                         <C>           <C>
ASSETS
Current assets:
   Cash and cash equivalents                                                  $ 12,790      $ 13,484
   Accounts receivable, net of allowance of $1,046 in 2006 and $1,131 in
      2005                                                                      18,021        14,879
   Deferred processing costs                                                    28,571        28,805
   Inventories                                                                   1,392         1,278
   Prepaid expenses and other current assets                                     3,679         3,438
                                                                              --------      --------
      Total current assets                                                      64,453        61,884
Property, plant and equipment, net                                              39,430        39,962
Other assets                                                                     8,925         9,176
                                                                              --------      --------
      Total assets                                                            $112,808      $111,022
                                                                              ========      ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable and accrued liabilities                                   $ 18,155      $ 16,320
   Current maturities of capital lease obligation                                  672           655
                                                                              --------      --------
      Total current liabilities                                                 18,827        16,975
Capital lease obligation                                                        15,428        15,603
Other liabilities                                                                7,499         7,689
                                                                              --------      --------
      Total liabilities                                                         41,754        40,267
                                                                              --------      --------
Commitments and contingencies
Stockholders' equity:
   Preferred stock, $.01 par value; 5,000,000 shares authorized; no
      shares issued or outstanding
   Common stock, $.01 par value; 70,000,000 shares authorized; issued and
      outstanding 17,277,075 shares in 2006 and 17,259,964 shares in 2005          173           173
   Additional paid-in capital                                                   65,049        64,915
   Accumulated other comprehensive income                                          716           793
   Retained earnings                                                             5,116         4,874
                                                                              --------      --------
      Total stockholders' equity                                                71,054        70,755
                                                                              --------      --------
      Total liabilities and stockholders' equity                              $112,808      $111,022
                                                                              ========      ========
</TABLE>

See accompanying notes to condensed consolidated financial statements.


                                      -3-

<PAGE>

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

<TABLE>
<CAPTION>
                                                          Three Months Ended
                                                              March 31,
                                                      -------------------------
                                                          2006          2005
                                                      -----------   -----------
<S>                                                   <C>           <C>
Net revenues:
   Service                                            $    24,506   $    23,438
   Product                                                    574           410
                                                      -----------   -----------
                                                           25,080        23,848
Cost of services                                           13,165        13,063
Cost of products                                              336           158
                                                      -----------   -----------
                                                           13,501        13,221
                                                      -----------   -----------
Gross profit                                               11,579        10,627
Marketing, selling, general and administrative             10,096        10,606
Research and development                                    1,172           962
                                                      -----------   -----------
                                                           11,268        11,568
                                                      -----------   -----------
Operating income (loss)                                       311          (941)
Other income (expense):
   Interest expense, net                                     (270)         (111)
   Other                                                      244          (185)
                                                      -----------   -----------
                                                              (26)         (296)
                                                      -----------   -----------
Income (loss) before income taxes                             285        (1,237)
Income tax provision (benefit)                                 43          (406)
                                                      -----------   -----------
Net income (loss)                                     $       242   $      (831)
                                                      ===========   ===========
Earnings (loss) per share:
   Basic                                              $       .01   $      (.05)
   Diluted                                            $       .01   $      (.05)
Shares used in computing earnings (loss) per share:
   Basic                                               17,265,853    17,176,696
   Diluted                                             17,363,156    17,176,696
</TABLE>

See accompanying notes to condensed consolidated financial statements.


                                      -4-

<PAGE>

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

<TABLE>
<CAPTION>
                                                                 Three Months Ended
                                                                      March 31,
                                                                 ------------------
                                                                   2006      2005
                                                                 -------   -------
<S>                                                              <C>       <C>
CASH FLOW FROM OPERATING ACTIVITIES
   Net income (loss)                                             $   242   $  (831)
   Adjustments to reconcile net income (loss)
      to net cash provided by (used in) operating activities:
      Depreciation and amortization                                1,380     1,405
      Stock-based compensation expense                                61
      Changes in current assets and liabilities:
         Accounts receivable                                      (3,142)   (4,094)
         Deferred processing costs                                   234    (1,179)
         Inventories                                                (114)     (231)
         Prepaid expenses and other current assets                  (241)     (513)
         Note receivables from patent litigation settlement          250       250
         Accounts payable and other liabilities                    1,638     4,419
                                                                 -------   -------
Net cash provided by (used in) operating activities                  308      (774)
CASH FLOW FROM INVESTING ACTIVITIES
   Capital expenditures                                             (786)     (142)
   Other, net                                                       (164)      (24)
                                                                 -------   -------
Net cash used in investing activities                               (950)     (166)
CASH FLOW FROM FINANCING ACTIVITIES
   Proceeds from issuance of common stock                             73        46
   Principal payments on capital lease obligation                   (158)
   Principal payments on long-term debt                                       (665)
                                                                 -------   -------
Net cash used in financing activities                                (85)     (619)
Effect of exchange rate changes on cash                               33       (72)
                                                                 -------   -------
Net decrease in cash and cash equivalents                           (694)   (1,631)
Cash and cash equivalents at beginning of period                  13,484    13,391
                                                                 -------   -------
Cash and cash equivalents at end of period                       $12,790   $11,760
                                                                 =======   =======
Supplementary cash flow data:
   Cash paid during the period for interest                      $   424   $   181
   Cash paid during the period for taxes                             191        18
                                                                 =======   =======
</TABLE>

See accompanying notes to condensed consolidated financial statements.


                                      -5-
<PAGE>

                        OSTEOTECH, INC. AND SUBSIDIARIES
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                  (dollars in thousands, except per share data)

1.   BASIS OF PRESENTATION

     The accompanying condensed consolidated financial statements, other than
     the condensed consolidated balance sheet at December 31, 2005, included
     herein are unaudited and reflect all adjustments (consisting only of normal
     recurring accruals) considered necessary by management for a fair statement
     of the consolidated financial position as of March 31, 2006 and the
     consolidated results of operations and consolidated cash flows for the
     three months ended March 31, 2006 and 2005. The results of operations and
     cash flows for the respective interim periods are not necessarily
     indicative of the results to be expected for the full year. Certain prior
     year amounts within the consolidated financial statements have been
     reclassified to conform to the 2006 presentation. The condensed
     consolidated financial statement should be read in conjunction with the
     audited consolidated financial statements, which were included as part of
     Osteotech, Inc.'s (the "Company") Annual Report on Form 10-K for the year
     ended December 31, 2005.

2.   RECENT ACCOUNTING PRONOUNCEMENTS

     As of January 1, 2006, we adopted the Statement of Financial Accounting
     Standards Board ("SFAS") No. 123(R), "Share Based Payment". Prior to the
     adoption of SFAS No. 123(R) we recognized and measured our share-based
     compensation in accordance with Accounting Principles Board ("APB") Opinion
     No. 25, "Accounting for Stock Issued to Employees," and related
     interpretations. The adoption of SFAS No. 123(R) did not have a material
     impact on our results of operations for the three months ended March 31,
     2006. See Note 5, "Stock Compensation Plan", for more information regarding
     the Company's adoption of SFAS No. 123(R).

     As of January 1, 2006, we adopted SFAS No. 154, "Accounting Changes and
     Error Corrections". SFAS No. 154 addresses the requirements for the
     accounting for and reporting of a change in accounting principle. It
     requires retrospective application to prior periods financial statements of
     changes in accounting principles unless a pronouncement giving rise to a
     change in accounting principle includes specific transition provisions, in
     which case those provisions should be followed. There was no impact on the
     Company's financial position, results of operations or cash flows from the
     adoption of this pronouncement.

3.   DEFERRED PROCESSING COSTS

     Deferred processing costs consist of the following:

<TABLE>
<CAPTION>
                                                    March 31,   December 31,
                                                      2006         2005
                                                    ---------   ------------
<S>                                                 <C>         <C>
Unprocessed donor tissue to be distributed by
   the Company                                       $ 9,118       $ 8,896
Tissue in process                                      6,223         4,621
Implantable donor tissue to be distributed by the
   Company                                            11,998        14,492
Implantable donor tissue held for clients              1,232           796
                                                     -------       -------
                                                     $28,571       $28,805
                                                     =======       =======
</TABLE>

     Unprocessed donor tissue to be distributed by the Company represents the
     value of such allograft bone tissue expected to be processed within the
     next year. Unprocessed donor tissue to be distributed by the Company
     expected to be processed in periods subsequent to one year of $3,378 at
     both March 31, 2006 and December 31, 2005 was reflected in other assets.


                                      -6-

<PAGE>

                        OSTEOTECH, INC. AND SUBSIDIARIES
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                  (dollars in thousands, except per share data)

4.   INVENTORIES

     Inventories consist of the following:

<TABLE>
<CAPTION>
                 March 31,   December 31,
                   2006         2005
                 ---------   ------------
<S>              <C>         <C>
Supplies           $  238       $  194
Raw materials         740          813
Finished goods        414          271
                   ------       ------
                   $1,392       $1,278
                   ======       ======
</TABLE>

5.   STOCK COMPENSATION PLANS

     The Company's stock compensation plan (the "2000 Stock Plan"), authorizes
     the grant of up to 2,250,000 shares of the Company's unissued common stock
     in the form of incentive stock options, non-qualified stock options or
     other stock-based awards to eligible employees, directors and consultants.
     Incentive stock options may be granted at prices not less than 100% of the
     fair market value on the date of grant. Non-qualified stock options and
     other stock-based awards may be granted at the discretion of the
     Compensation Committee of the Board of Directors under terms and conditions
     as determined by the Compensation Committee. Options issued pursuant to the
     2000 Stock Plan typically have terms requiring vesting ratable over four
     years, except for options issued to non-employee directors for which the
     vesting period is one year, or such period to match the vesting period or
     adjusted vesting period determined by the Company's Compensation Committee
     or Board of Directors. The vesting term of options issued in the three
     months ended March 31, 2006 had ratable vesting over four years. All
     options and stock based awards have a maximum contractual term of 10 years.
     The 2000 Stock Plan replaced prior plans, except to the extent that options
     issued under the prior plans continue to remain outstanding.

     The Company also has an employee stock purchase plan under which eligible
     employees have the ability to purchase shares of the Company's common
     stock. The purchase price of the stock is 85% of the fair value of the
     stock on the last day of each quarter.

     Stock Options

     The adoption of SFAS No. 123(R) requires companies to recognize in the
     statement of operations the grant-date fair value of stock options and
     other equity-based compensation issued to employees and directors,
     including employee stock options and employee stock purchases related to
     employee stock purchase plans. SFAS No. 123(R) supersedes APB No. 25, which
     we previously applied for all periods prior to 2006.

     The Company adopted SFAS No. 123(R) using the modified prospective
     transition method, which requires application of the accounting standard as
     of January 1, 2006 and the condensed consolidated financial statements as
     of and for the three months ended March 31, 2006 reflect such impact. In
     2005 and 2004, the Company's Board of Directors initiated several actions
     to accelerate the vesting of certain outstanding stock options. As a
     result, options representing 1,271,102 shares of common stock were vested
     and the non-cash compensation expense related to these stock options was
     reflected in our proforma disclosures required under SFAS No. 123. There
     was no non-cash compensation expense related to these stock options which
     will impact 2006 or any other future period. In accordance with the
     modified prospective transition method, the consolidated financial
     statements for prior periods have not been restated to reflect the impact
     of SFAS No. 123(R). For the three months ended March 31, 2006, we
     recognized a non-cash


                                      -7-

<PAGE>

                        OSTEOTECH, INC. AND SUBSIDIARIES
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                  (dollars in thousands, except per share data)

     compensation expense in the consolidated statement of operations of $61
     pursuant to the adoption of SFAS No. 123(R). Non-cash stock-based
     compensation for the three months ended March 31, 2006 resulted in no tax
     benefit to the Company as a result of the Company's providing a full
     valuation reserve on deferred tax assets. At March 31, 2006 and December
     31, 2005, the unrecorded fair value based compensation with respect to
     options issued prior to that date but not vested was $250 and $244,
     respectively, and the weighted average period over which that compensation
     will be charged to operations is 3.2 and 2.9 years, respectively.

     SFAS No. 123(R) requires companies to estimate the fair value of
     share-based payment awards on the date of grant using an option-pricing
     model. The value of the portion of the award that is ultimately expected to
     vest is recognized as expense over the requisite service period. The
     Company is also required to establish the value of an additional paid-in
     capital pool related to the tax impacts related to employee share-based
     compensation awards for which compensation costs were reflected in our pro
     forma disclosures required under SFAS No. 123. The Company has not yet
     completed the calculation of this pool, which is not required to be
     determined until the fourth quarter of 2006, but the Company believes there
     will be no impact on our financial position or results of operations from
     this calculation.

     Share-based compensation expense recognized in our condensed consolidated
     statements of operations for the three months ended March 31, 2006 included
     compensation expense for share-based payment awards granted prior to, but
     not yet vested as of January 1, 2006, as well as compensation expense for
     the share-based payment awards granted subsequent to January 1, 2006. Such
     share-based compensation expense was based on the grant date fair value
     estimated in accordance with the provisions of SFAS No. 123(R). Share-based
     compensation expense recognized in the condensed consolidated statements of
     operations for the three months ended March 31, 2006 is based on awards
     ultimately expected to vest, and therefore has been reduced for estimated
     forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the
     time of grant and revised, if necessary, in subsequent periods if actual
     forfeitures differ materially from those estimates.

     Prior to the adoption of SFAS No. 123(R), we accounted for share-based
     awards using the intrinsic value method in accordance with APB No. 25 as
     allowed under SFAS No. 123, "Accounting for Stock-Based Compensation."
     Under the intrinsic value method, no share-based compensation expense had
     been recognized in our condensed consolidated statements of operations for
     periods prior to 2006 because the exercise price of our stock options
     granted equaled the fair market value of the underlying stock at the date
     of grant. In our pro forma disclosures required under SFAS No. 123 for the
     periods prior to 2006, we estimated forfeitures and in subsequent periods
     adjusted forfeitures for actual amounts.

     For purposes of determining the estimated fair value of share-based payment
     awards on the date of grant under SFAS No. 123(R), the Company utilizes the
     Black-Scholes option-pricing model ("Black-Scholes Model"). The
     Black-Scholes Model requires the input of certain assumptions that involve
     judgment. Because stock options have characteristics significantly
     different from those of traded options, and because changes in the input
     assumptions can materially affect the fair value estimate, the existing
     models may not provide a reliable single measure of the fair value of the
     Company's stock options. Management will continue to assess the assumptions
     and methodologies used to calculate estimated fair value of share-based
     compensation. Circumstances may change and additional data may become
     available over time, which could result in changes to these assumptions and
     methodologies, and thereby materially impact our fair value determination.


                                      -8-

<PAGE>

                        OSTEOTECH, INC. AND SUBSIDIARIES
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                  (dollars in thousands, except per share data)

     The fair value of each option granted during the three months ended March
     31, 2006 and 2005 was estimated on the grant-date using the Black-Scholes
     Model with the following weighted average assumptions:

<TABLE>
<CAPTION>
                                        Three Months Ended March 31,
                                        ----------------------------
     Weighted Average Assumptions               2006    2005
     ----------------------------               ----   -----
<S>                                     <C>            <C>
Expected holding period (years)                    5       5
Risk-free interest rate                         4.32%   4.30%
Volatility factor                                 76%     79%
Dividend yield                                     0       0
Annual forfeiture rate                             3%      3%
Fair value per share at date of grant          $3.79   $2.54
</TABLE>

     The expected holding period was determined based on management's assessment
     considering expected experience and the Company's historical data.
     Volatility is estimated considering the historical volatility of the
     Company's daily common stock price over a period similar to the expected
     holding period of the option. The risk-free interest rate is based on U.S.
     Treasury rates appropriate for the expected holding period of the option.

     The following table summarizes information concerning option transactions
     for the periods presented:

<TABLE>
<CAPTION>
                                               Weighted Average
                                              Exercise Price per
            Options                Shares           Share
            -------              ----------   ------------------
<S>                              <C>          <C>
Outstanding at January 1, 2006    2,937,062          $8.03
   Granted                           20,000           5.87
   Exercised                        (10,000)          4.09
   Forfeited                        (15,000)          4.46
   Expired                          (58,875)          5.86
                                  ---------          -----
Outstanding at March 31, 2006     2,873,187          $8.09
                                  =========          =====
Exercisable at March 31, 2006     2,683,187          $8.39
                                  =========          =====
</TABLE>

     At March 31, 2006, the aggregate intrinsic value and the weighted average
     remaining contractual term of options outstanding and options exercisable
     was $246 and $122 and 5.4 years and 5.1 years, respectively. The aggregate
     intrinsic value represents the total pre-tax value, based on the Company's
     average stock price as of March 31, 2006, which would have been received by
     the option holders had they exercised their in-the-money options as of that
     date. During the three months ended March 31, 2006, no outstanding options
     vested and the intrinsic value of options exercised was $7.

     At March 31, 2006, the Company had 317,500 shares of common stock reserved
     for future stock option grants.


                                      -9-
<PAGE>

                        OSTEOTECH, INC. AND SUBSIDIARIES
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                  (dollars in thousands, except per share data)

     The following table sets forth pro forma net loss and net loss per share
     data for both basic and diluted net loss per share assuming the adoption of
     SFAS No. 123(R) for the periods presented:

<TABLE>
<CAPTION>
                                                     Three Months Ended
                                                       March 31, 2005
                                                     ------------------
<S>                                                  <C>
Net loss - as reported                                     $(831)
Impact on net loss related to stock-based
   employee compensation expense, net of tax                  54
                                                           -----
Net loss - pro forma                                       $(885)
                                                           =====
Basic and diluted net loss per share - as reported         $(.05)
Basic and diluted net loss per share - pro forma           $(.05)
                                                           =====
</TABLE>

     Stock Purchase Plan

     The Company's stock purchase plan provides for the issuance of up to
     575,000 shares of Common Stock. Eligible employees may purchase shares of
     the Company's Common Stock through payroll deductions of 1% to 7 1/2% of
     annual compensation. The purchase price for the stock is 85% of the fair
     market value of the stock on the last day of each calendar quarter. The
     1994 Purchase Plan expires on July 1, 2009. At March 31, 2006, 123,897
     shares were available for future offerings under this plan. Non-cash
     compensation expense related to the issuance of shares under this plan was
     not material to the consolidated statements of operations.

6.   COMMITMENTS AND CONTINGENCIES

     LITIGATION

     There were no material developments that occurred during the three months
     ended March 31, 2006 in the lawsuits reported in the Company's Annual
     Report on Form 10-K for the year ended December 31, 2005, except for the
     settlement of the Tissue Transplant Technology, Ltd. d/b/a Bone Bank
     Allograft action in February 2006, which was disclosed in the Company's
     2005 Annual Report on From 10-K and for which there was no impact on the
     Company's financial condition or results of operations from this
     settlement. In addition, the Company is not aware of any other matters or
     legal proceedings initiated against the Company during the first quarter of
     2006.

     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 currently unable to estimate the ultimate liability, if any,
     that may result from the pending litigation and, accordingly, no material
     provision for any liability (except for accrued legal costs for services
     previously rendered) has been made for such pending litigation in the
     consolidated financial statements.


                                      -10-

<PAGE>

                        OSTEOTECH, INC. AND SUBSIDIARIES
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                  (dollars in thousands, except per share data)

7.   COMPREHENSIVE INCOME (LOSS)

     Comprehensive income (loss) for the periods indicated is as follows:

<TABLE>
<CAPTION>
                                     Three Months
                                   Ended March 31,
                                   ---------------
                                    2006    2005
                                    ----   -----
<S>                                <C>     <C>
Net income (loss)                   $242   $(831)
Currency translation adjustments     (77)    457
                                    ----   -----
Comprehensive income (loss)         $165   $(374)
                                    ====   =====
</TABLE>

8.   EARNINGS (LOSS) PER SHARE

     The following table sets forth the computation of basic and diluted
     earnings (loss) per share for the periods indicated:

<TABLE>
<CAPTION>
                                                                Three Months Ended
                                                                    March 31,
                                                            -------------------------
                                                                2006          2005
                                                            -----------   -----------
<S>                                                         <C>           <C>
Net Income (loss) available to common stockholders          $       242   $      (831)
                                                            -----------   -----------
Denominator for basic earnings (loss) per share,
   weighted average common shares outstanding                17,265,853    17,176,696
Dilutive effect of stock options after application of the
   treasury stock method                                         97,303            --
                                                            -----------   -----------
Denominator for diluted income (loss) per share              17,363,156    17,176,696
                                                            ===========   ===========
Basic earnings (loss) per share                             $       .01   $      (.05)
                                                            ===========   ===========
Diluted earnings (loss) per share                           $       .01   $      (.05)
                                                            ===========   ===========
</TABLE>

     For the three months ended March 31 2006 and 2005, common equivalent
     shares, consisting solely of stock options of 2,235,850 and 2,848,362,
     respectively, are excluded from the calculation of diluted earnings (loss)
     per share as their effects are antidilutive.

9.   OPERATING SEGMENTS

     Summarized in the table below is financial information for the Company's
     reportable segments for the periods indicated:

<TABLE>
<CAPTION>
                              Three Months
                            Ended March 31,
                           -----------------
                             2006      2005
                           -------   -------
<S>                        <C>       <C>
Revenues:
   DBM Segment             $14,489   $12,895
   Base Tissue Segment      10,017    10,543
   Other                       574       410
                           -------   -------
   Consolidated            $25,080   $23,848
                           =======   =======
Operating income (loss):
   DBM Segment             $ 1,444   $   647
   Base Tissue Segment        (857)   (1,478)
   Other                      (276)     (110)
                           -------   -------
   Consolidated            $   311   $  (941)
                           =======   =======
</TABLE>


                                      -11-

<PAGE>

                        OSTEOTECH, INC. AND SUBSIDIARIES
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                  (dollars in thousands, except per share data)

     One of our clients, the Musculoskeletal Transplant Foundation accounted for
     20% and 29% of consolidated net revenues during the three months ended
     March 31, 2006 and 2005, respectively.

10.  OTHER INCOME (EXPENSE)

     During the three months ended March 31, 2006, the Company received $125
     related to a contingent consideration payment from the sale in 2002 of a
     foreign operation.


                                      -12-

<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 Item 1A, "Risk Factors", of our Annual Report on Form
     10-K for the year ended December 31, 2005 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 MONTHS ENDED MARCH 31, 2006 AND 2005

     RESULTS OF OPERATIONS

     Critical Accounting Policies and Estimates

     Critical accounting policies are those that involve subjective or complex
     judgments, often as a result of the need to make estimates. The following
     areas all require the use of judgments and estimates: product returns, bad
     debts, inventories including purchase commitments, deferred processing
     costs including reserves for rework, excess and obsolescence, current and
     deferred income taxes, asset retirement obligations, contingencies and
     litigation. Estimates in each of these areas are based on historical
     experience and various assumptions that we believe are appropriate. Actual
     results may differ from these estimates. Our accounting practices are
     discussed in more detail in "Management's Discussion and Analysis of
     Financial Condition and Results of Operations" and Note 2 of "Notes to
     Consolidated Financial Statements" in our Annual Report on Form 10-K for
     the year ended December 31, 2005.

     Net Income (Loss)

<TABLE>
<CAPTION>
                              Three Months Ended March 31,
                             ------------------------------
(dollars in thousands,                                  %
except per share amounts)    2006    2005   Change   Change
                             ----   -----   ------   ------
<S>                          <C>    <C>     <C>      <C>
Net income (loss)            $242   $(831)  $1,073    129%
Earnings (loss) per share:
   Basic                     $.01   $(.05)
   Diluted                   $.01   $(.05)
</TABLE>

     We generated net income in the first quarter of 2006 principally as a
     result of improved revenues, which generated slightly improved gross
     margins, a 3% decline in operating expenses, gains related to changes in
     exchange rates on foreign transactions denominated in US dollars,
     principally intercompany debt, and the receipt of an additional
     consideration payment related to one of our subsidiaries which was sold in
     2002, partially offset by an increase in interest expense.

     We incurred a net loss in the first quarter of 2005 primarily related to
     lower gross profit margins arising from the continued shift in our business
     model to direct distribution of allograft tissue forms and charges to
     increase reserves for expiring, excess and obsolete tissue. In addition,
     the net loss in the first quarter of 2005 was impacted by increased
     operating expenses related to the expansion of our international operations
     and administrative costs related to implementation of programs to turn
     around the domestic business and increased professional fees.


                                      -13-
<PAGE>

     Net Revenues

     Consolidated net revenues increased 5% in the first quarter of 2006 as
     compared to the first quarter of 2005, principally as a result of increased
     unit volumes in our DBM Segment and the direct distribution of traditional
     tissue in both our domestic and international operations. Consolidated net
     revenues were negatively impacted by a decline in the processing of donors
     for our clients, a decline in unit volumes related to Graftech(R)
     Bio-implants and the impact of pricing pressures on our domestic direct
     distribution efforts. Domestic revenues increased 3% in the first quarter
     of 2006 compared to the same respective period in 2005, primarily due to
     increased unit volumes in most product lines, partially offset by the
     processing of fewer donors for clients and the impact of pricing pressures
     on our direct distribution efforts. International revenues increased 16% in
     the first quarter of 2006 as compared to the first quarter of 2005,
     principally due to increased unit volumes across all product lines.

     The following table details the components of our net revenues for the
     three months ended March 31, 2006 and 2005:

<TABLE>
<CAPTION>
                                          Three Months Ended March 31,
                                     -------------------------------------
                                                                   Percent
(dollars in thousands)                 2006      2005     Change    Change
                                     -------   -------   -------   -------
<S>                                  <C>       <C>       <C>       <C>
DBM SEGMENT
   Domestic                           12,340    10,997     1,343      12%
   International                       2,149     1,898       251      13%
                                     -------   -------   -------     ---
      Total DBM Segment               14,489    12,895     1,594      12%
                                     -------   -------   -------     ---
BASE TISSUE SEGMENT
   Domestic:
      Client Processing                1,779     3,244    (1,465)    -45%
      Traditional Tissue               2,503     1,359     1,144      84%
      Graftech(R) Bio-implants         3,998     4,544      (546)    -12%
                                     -------   -------   -------     ---
                                       8,280     9,147      (867)     -9%
   International:
      Client Processing                  141       138         3       2%
      Traditional Tissue               1,596     1,258       338      27%
                                     -------   -------   -------     ---
                                       1,737     1,396       341      24%
                                     -------   -------   -------     ---
         Total Base Tissue Segment    10,017    10,543      (526)     -5%
                                     -------   -------   -------     ---
OTHER PRODUCT LINES                      574       410       164      40%
                                     -------   -------   -------     ---
NET REVENUES                         $25,080   $23,848   $ 1,232       5%
                                     =======   =======   =======     ===
</TABLE>

     Domestic Grafton(R) DBM revenues increased 12% in the first quarter of 2006
     compared to the same period in 2005 substantially as a result of increased
     unit sales volume, including increased unit sales from distribution of our
     proprietary products directly to end users for which we recognize higher
     per unit selling prices, partially offset by the impact of pricing
     pressures on our domestic direct sales efforts. As a result of these
     pricing pressures, we experienced an increase in our average discount rate
     in the first quarter of 2006 on our domestic direct distribution of
     Grafton(R) DBM compared to the first quarter of 2005. Revenues from the
     shipment of private label DBM tissue forms increased 14%, and international
     Grafton(R) DBM revenues increased 13%, for the three months ended March 31,
     2006 as compared to the three months ended March 31, 2005, primarily due to
     increased unit volumes.


                                      -14-

<PAGE>

     Revenues from the world-wide distribution of traditional tissue increased
     57% in the first quarter of 2006 compared to the first quarter of 2005,
     mainly from increased unit sales volume as we continue to expand our
     world-wide presence in this market and the impact of a January 1 price
     increase, partially offset by pricing pressures on the domestic direct
     distribution efforts. As a result of these pricing pressures, we
     experienced an increase in our average discount rate in the first quarter
     of 2006 on our domestic distribution of traditional tissue compared to the
     first quarter of 2005. Included in domestic traditional tissue revenues are
     revenues of $.4 million associated with our distribution of the Xpanse(TM)
     Bone Insert, which was introduced in the fourth quarter of 2005. Service
     fees generated by processing allograft bone tissue for clients declined 43%
     for the three months ended March 31, 2006 as compared to the same period in
     2005, primarily due to processing 338 fewer donors for clients. We continue
     to expect service fee revenue to continue to decline in 2006 as our
     processing agreements with our clients expire and are not replaced.
     Revenues generated from the distribution of Graftech(R) Bio-implants
     declined 12%, primarily due to continued lower demand and increased
     competition from polymer based spinal implants. We anticipate revenues from
     our Graftech(R) Bio-implant product line will continue to decline due to
     increased competition from non-allograft bone spinal implants.

     Revenues from other product lines in the first quarter of 2006 relate
     mainly to the distribution of our GraftCage(TM) Spacers in the United
     States and the processing and distribution of bovine tissue graft in Europe
     and the Middle East. Revenues from the GraftCage(TM) Spacers, which we
     began distribution of in the first quarter of 2006, were $.2 million. In
     2005, revenues from other product lines principally represented the
     processing and distribution of bovine tissue grafts.

     In the first quarter of 2006, we had one customer, the Musculoskeletal
     Transplant Foundation, which accounted for $5.0 million, or 20%, of net
     revenues. MTF accounted for $6.9 million, or 29% of net revenues, for the
     three months ended March 31, 2005.

Gross Profit Margin

<TABLE>
<CAPTION>
                         Three Months Ended
                              March 31,
                         ------------------
(dollars in thousands)     2006      2005
                         -------   --------
<S>                      <C>       <C>
Gross Profit             $11,579   $10,627
Gross Margin                  46%       45%
</TABLE>

     Gross margin increased slightly in the first quarter of 2006 as compared to
     the same period in 2005, mainly due to a reduced need for reserves in 2006
     compared to 2005 for expiring, excess and obsolete tissue inventories. We
     continue to implement the strategic initiatives started in 2005 to reduce
     tissue inventories, increase overall tissue inventory velocity and to
     reduce lead times. We expect gross profit margins to be constrained over
     the next several quarters as the tissue inventories produced in 2005 and
     first quarter 2006 are sold. As a result, we expect to begin to see
     improved gross margins from these strategic initiatives in the later part
     of 2006 and in 2007.

Operating Expenses

<TABLE>
<CAPTION>
                                  Three Months Ended March 31,
                              ------------------------------------
                                                           Percent
(dollars in thousands)          2006      2005    Change    Change
                              -------   -------   ------   -------
<S>                           <C>       <C>       <C>      <C>
Marketing, selling, general
   and administrative         $10,096   $10,606   $(510)     -5%
Research and development        1,172       962     210      22%
                              -------   -------   -----     ---
   Total                      $11,268   $11,568   $(300)     -3%
                              =======   =======   =====     ===
</TABLE>


                                      -15-

<PAGE>

     Marketing, selling, general and administrative expenses declined in the
     first quarter of 2006 compared to the first quarter of 2005, primarily as a
     result of lower salary and related costs due to a reduction in the number
     of administrative employees and the restructuring our commission programs,
     which reduced our commission costs even though commissionable revenues
     increased in 2006 compared to 2005.

     Research and development expenses increased 22% for the three months ended
     March 31, 2006 compared to the same period in 2005 due to our increased
     emphasis on product development projects and continuing technology
     programs. Our technology and product development projects for the Plexus P
     and Plexus M Bone Void Fillers and Enhanced Grafton(R) DBM continue to meet
     our expected project milestones.

     We anticipate that we will be able to control our marketing, selling,
     general and administrative expenses throughout the remainder of 2006,
     although we may experience incremental costs and expenses over the level
     recognized in the first quarter of 2006. We expect that research and
     development expenditures will continue to increase in 2006 and beyond due
     to new projects and programs and increased activity on existing projects
     and programs, including the continued development of Enhance Grafton(R) DBM
     and our Plexus Technology.

     Operating Income (Loss)

<TABLE>
<CAPTION>
                              Three Months Ended March 31,
                          -----------------------------------
                                                      Percent
(dollars in thousands)     2006      2005    Change    Change
                          ------   -------   ------   -------
<S>                       <C>      <C>       <C>      <C>
DBM Segment               $1,444   $   647   $  797     123%
Base Tissue Segment         (857)   (1,478)     621      42%
Other Product Lines         (276)     (110)    (166)   -151%
                          ------   -------   ------    ----
Operating Income (loss)   $  311   $  (941)  $1,252     133%
                          ======   =======   ======    ====
</TABLE>

     Operating income in the DBM Segment increased 123% for the three months
     ended March 31, 2006 as compared to the same respective period in 2005,
     mainly due to the increase in segment revenues and our ability to control
     operating expenses in 2006 as compared to 2005. Gross margins in the DBM
     Segment during the first quarter of 2006 were relatively flat with the
     first quarter of 2005. The operating loss decline in the Base Tissue
     Segment in the first quarter of 2006 compared to the first quarter of 2005
     is primarily due to slightly improved gross margins and reduced operating
     expenses, partially offset by the effects of the decline in revenues. We
     incurred an operating loss from Other Product Lines in both the first
     quarter of 2006 and 2005. The increase in this operating loss in 2006
     compared to 2005, principally related to the costs associated with the
     launch of our GraftCage(TM) Spacer product line in the first quarter of
     2006.

     Other Income (Expense)

     Other expense was $26,000 in the first quarter of 2006 compared to $.3
     million in the first quarter of 2005. For the three months ended March 31,
     2006 interest expense was $.4 million, which increased $.2 million over
     interest expense of $.2 million in first quarter 2005, and related to the
     capital lease obligation, which arose in the sale and leaseback of our
     principal processing facility in August, 2005. Interest income on the
     investment of available cash balances was $.2 million and $.1 million for
     the three months ended March 31, 2006 and 2005, respectively, and increased
     in 2006 compared to 2005, primarily due to an increase in interest rates.

     In the first quarter of 2006, we recognized gains related to changes in
     exchange rates on foreign transactions denominated in US dollars,
     principally intercompany debt, of $.1 million and received $.1 million
     related to a contingent consideration payment from the sale in 2002 of a
     foreign operation. We incurred a loss on changes in exchange rates on
     foreign transactions denominated in US dollars, principally intercompany
     debt, of $.2 million for the three months ended March 31, 2005.


                                      -16-

<PAGE>

     Income Tax Provision (Benefit)

     The effective tax rate for the three months ended March 31, 2006 was 15%
     and related mainly to certain domestic state income taxes and income taxes
     on our foreign income. At March 31, 2006, we provided a provision for
     domestic federal income taxes and for the majority of our domestic state
     income states, primarily related to state income taxes in New Jersey, which
     were fully offset by prior year net operating loss carryforwards, which
     carried a full valuation allowance. We did not recognize any additional
     federal or state income tax benefits, which were subject to full valuation
     allowances in accordance with Statement of Financial Accounting Standard
     ("SFAS") No. 109, "Accounting for Income Taxes", due to our continued
     assessment as to our ability to realize such benefits. We intend to
     maintain a valuation allowance related to domestic federal and state income
     taxes until sufficient positive evidence exists to support the reversal of
     any valuation allowances that we have established.

     We recognized an income tax benefit for the three months ended March 31,
     2005, primarily due to losses in our domestic operations, offset slightly
     by a provision for income taxes for our French subsidiary. We did not
     provide any benefit for domestic state tax benefits as it is more likely
     than not that the future tax benefits are not recoverable.

     Share-Based Compensation

     On January 1, 2006, we adopted SFAS No. 123(R), "Share-Based Payment",
     which requires the measurement and recognition of compensation expense for
     all share-based payment awards including employee stock options, based on
     estimated fair values. The adoption of this pronouncement did not have a
     material impact on our results of operations.

     Share-based non-cash compensation recognized under SFAS No. 123(R) for the
     three months ended March 31, 2006 was $.1 million. The share-based
     compensation expense is calculated on a straight-line basis over the
     vesting period of the related award and at March 31, 2006 total non-cash
     compensation cost of $.3 million related to nonvested stock option
     outstanding at that date will be recognized as a charge to operations over
     the next 46 months. Prior to the adoption of SFAS No. 123(R), we accounted
     for share-based awards using the intrinsic value method in accordance with
     Accounting Principles Board ("APB") No. 25, "Accounting for Stock Issued to
     Employees", as allowed under SFAS No. 123. Under the intrinsic value method
     as detailed in APB No. 25, no share-based compensation expense had been
     recognized in our condensed consolidated statements of operations because
     the exercise price of our stock options granted equaled the fair market
     value of the underlying stock at the date of grant.

     LIQUIDITY AND CAPITAL RESOURCES

     At March 31, 2006, we had cash and cash equivalents of $12.8 million
     compared to $13.5 million at December 31, 2005. Working capital increased
     slightly to $45.6 million at March 31, 2006 compared to $44.9 million at
     December 31, 2005. The increase in working capital in 2006 resulted
     primarily from an increase in accounts receivable as a result of the
     improvement in first quarter 2006 revenues to $25.1 million from fourth
     quarter 2005 revenues of $21.9 million, partially offset by an increase in
     accounts payable and accrued expenses, which resulted mainly from the
     acquisition of allograft bone tissue in the three months ended March 31,
     2006.

     Net cash provided by operating activities was $.3 million in the first
     quarter of 2006 compared to net cash used in operating activities of $.8
     million in the first quarter of 2005. The improvement resulted primarily
     from the generation of net income for the three months ended March 31, 2006
     of $.2 million compared to a net loss of $.8 million in the same respective
     period in 2005.

     Net cash used in investing activities was $1.0 million and $.2 million for
     the three months ended March 31, 2006 and 2005, respectively, and is
     principally due to capital expenditures.

     Net cash used in financing activities in the first quarter of 2006 and 2005
     of $.1 million and $.6 million, respectively, relates primarily to
     principal payments on our capital lease obligation and long-term debt,
     partially offset by proceeds from the exercise of stock options and the
     sale of common stock pursuant to our employee stock purchase plan.


                                      -17-
<PAGE>

Based on our current projections and estimates, we expect to continue to make
investments in our business to support our strategic initiatives and future
programs, which will reduce our currently available cash balances. We believe
that our currently available cash and cash equivalents and anticipated future
cash flow from operations will be sufficient to meet our forecasted cash needs
in 2006. Our future liquidity and capital requirements will depend upon numerous
factors, including the progress of our product development programs and the need
and associated costs relating to regulatory approvals, if any, which may be
needed to commercialize some of our products under development; and the
resources we devote to the development, manufacture and marketing of our
services and products. We may seek additional funding to meet the needs of our
long-term strategic initiatives. We can provide no assurance that such
additional funds will be available, or if available, that such funds will be
available on favorable terms.

Recent Accounting Developments

As of January 1, 2006, we adopted SFAS No. 123(R). We adopted SFAS No. 123(R)
using the modified prospective transition method. In accordance with the
modified prospective transition method, our consolidated financial statements
for prior periods have not been restated to reflect the impact of SFAS No.
123(R). Adoption of SFAS No. 123(R) did not have a material impact on our
results of operations for the three months ended March 31, 2006. See Note 5,
"Stock Compensation Plan", of "Notes to Consolidated Financial Statements" for a
detailed discussion of our adoption of SFAS No. 123(R).

As of January 1, 2006, we adopted SFAS No. 154, "Accounting Changes and Error
Corrections". SFAS No. 154 addresses the requirements for the accounting for and
reporting of a change in accounting principle. It requires retrospective
application to prior periods financial statements of changes in accounting
principles unless a pronouncement giving rise to a change in accounting
principle includes specific transition provisions, in which case those
provisions should be followed. There was no impact on our financial position,
results of operations or cash flows from the adoption of this pronouncement.

CONTRACTUAL OBLIGATIONS

As of March 31, 2006, there were no material changes in our contractual
obligations from that disclosed in Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in our Annual Report on Form
10-K for the year ended December 31, 2005.

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 related to the
translation of financial statements denominated in foreign currency to US
dollars. Gains related to changes in exchange rates on foreign transactions
denominated in US dollars, principally intercompany debt, were $.1 million for
the three months ended March 31, 2006. For the three months ended March 31,
2005, losses related to changes in exchange rates on foreign transactions
denominated in US dollars, principally intercompany debt, were $.2 million.

LITIGATION

Osteotech is involved in various legal proceedings. For a discussion of these
matters see, Note 16 of "Notes to Consolidated Financial Statements" and ITEM 3.
LEGAL PROCEEDINGS in our Annual Report on Form 10-K for the year ended December
31, 2005. There were no material developments that occurred during the three
months ended March 31, 2006 in the lawsuits reported in our Annual Report on
Form 10-K for the year ended December 31, 2005, except for the settlement of the
Tissue Transplant Technology, Ltd. d/b/a Bone Bank Allograft action in February
2006, which was disclosed in our 2005 Annual Report on From 10-K and for which
there was no impact on our financial condition or results of operations from
this settlement. In addition, we are not aware of any other matters or legal
proceedings initiated against us during the first quarter of 2006.

It is possible that our results of operations or liquidity and capital resources
could be adversely affected by the ultimate outcome of pending litigation or as
a result of the costs of contesting such lawsuits.


                                      -18-

<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For information regarding our exposure to certain market risks, see Item 7A,
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, in our Annual Report
on Form 10-K for the year ended December 31, 2005. There have been no
significant changes in our market risk exposures from the fiscal 2005 year-end.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

During the first three months of 2006, our management, including the principal
executive officer and principal financial officer, evaluated our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) related to the recording, processing,
summarization and reporting of information in our reports that we file with the
Securities Exchange Commission "(SEC"). These disclosure controls and procedures
have been designed to ensure that material information relating to us, including
our subsidiaries, is made known to our management, including these officers, by
other of our employees, and that this information is recorded, processed,
summarized, evaluated and reported, as applicable, within the time periods
specified in the SEC's rules and forms. Due to the inherent limitations of
control systems, not all misstatements may be detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. Our controls and procedures can only provide reasonable, not absolute,
assurance that the above objectives have been met.

Based upon their evaluation, our principal executive officer and principal
financial officer have concluded that our disclosure controls and procedures
were not effective as of March 31, 2006 since we have not yet completed the
remediation of the material weakness discussed in Item 9A, "Controls and
Procedures", of our Annual Report on Form 10-K ("2005 Form 10-K") for the year
ended December 31, 2005 filed with the SEC on March 31, 2006.

A material weakness is a control deficiency or combination of control
deficiencies that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. Management's internal control assessment as of December 31, 2005
and as detailed in our 2005 Form 10-K identified certain deficiencies in the
internal controls over the financial closing and reporting process of our
domestic financial group. As a result, management reported a material weakness
related to insufficient domestic and corporate personnel with appropriate
accounting knowledge and training.

Our management is treating the material weakness identified above very seriously
and in response, plans to continue to review and make necessary changes to the
overall design of our control environment, including roles and responsibilities
and policies and procedures to improve the overall internal control over
financial reporting. We have begun to remediate the material weakness described
above and as a result management has undertaken the following actions:

     1.   We have started a search for a senior level financial manager with an
          appropriate level of accounting knowledge, experience and training in
          the application of generally accepted accounting principles
          commensurate with our financial and reporting requirements. In the
          interim, we have engaged an outside consultant during the first
          quarter of 2006 to assist, under the supervision of our Executive Vice
          President and Chief Financial Officer, with our financial reporting
          process as of and for the three months ended March 31, 2006. This
          consultant will be retained until we are successful in the search
          detailed above. In addition, we hired an additional senior staff
          accountant in the first quarter of 2006 to assist in the preparation
          of journal entries and account analyses and reconciliations. In
          addition, our


                                      -19-

<PAGE>

          Executive Vice President and Chief Financial Officer assumed
          additional review and oversight responsibilities related to the
          financial closing process.

     2.   We have reorganized the reporting structures within our world-wide
          accounting and finance functions to have the senior level managers
          report directly to our Executive Vice President and Chief Financial
          Officer with indirect functional reporting to the business managers.

     3.   We have provided and will continue to provide additional and expanded
          training and education for all members of the world-wide accounting
          and finance functions, with an emphasis on improving account analysis
          preparation and documentation.

     4.   We have started a project to review and revise, as appropriate, our
          world-wide policies and procedures to provide for an increased level
          of management oversight and efficient use of finance and accounting
          staff.

Management is committed to the execution of this remediation plan and the
implementation of the necessary enhancements to the domestic and corporate
accounting departments and the world-wide policies and procedures. We will
continue to monitor the improvements in the internal control over financial
reporting to ensure the remediation of this material weakness. We anticipate
completing these remediation activities by the end of the second quarter of
2006, although no assurance can be made that we will be successful in these
endeavors.

Changes in Internal Control Over Financial Reporting

Except as discussed above, there were no changes made in our internal control
over financial reporting, as such term is defined in Rules 13a-15(f) and
15(d)-15(f) under the Exchange Act, during the period covered by this report
that have materially affected, or are reasonably likely to materially affect,
these controls subsequent to the date of their last evaluation.


                                      -20-

<PAGE>

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There were no material developments that occurred during the three months ended
March 31, 2006 in lawsuits reported in our Annual Report on Form 10-K for the
year ended December 31, 2005, except for the settlement of the Tissue Transplant
Technology, Ltd. d/b/a Bone Bank Allograft action in February 2006, which was
disclosed in our 2005 Annual Report on From 10-K and for which there was no
impact on our financial condition or results of operations from this settlement.
In addition, we are not aware of any other matters or legal proceedings
initiated against us during the first quarter of 2006. From time to time 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
on our results of operations or financial condition.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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

<TABLE>
<CAPTION>
Exhibit                                                                    Page
 Number                            Description                            Number
-------                            -----------                            ------
<S>       <C>                                                             <C>
 10.64    Employment Agreement, effective as of September 27, 2004,
          between Osteotech, Inc. and Robert Wynalek                         +

 10.65    Form of Indemnity Agreement executed by Officers and
          Directors of Osteotech, Inc. (incorporated by reference to
          Exhibit 10.54 to Registrants Current Report on Form 8-K filed
          on April 9, 2002)                                                  *

 31.1     Certification of Chief Executive Officer pursuant to Section
          302 of the Sarbanes-Oxley Act of 2002                              +

 31.2     Certification of Chief Financial Officer pursuant to Section
          302 of the Sarbanes-Oxley Act of 2002                              +

 32.1     Certification of Chief Executive Officer pursuant to Section
          906 of the Sarbanes-Oxley Act of 2002                              +

 32.2     Certification of Chief Financial Officer pursuant to Section
          906 of the Sarbanes-Oxley Act of 2002                              +
</TABLE>

+    Filed herewith

*    Previously filed; incorporated herein by reference


                                      -21-

<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.


Date: May 10, 2006                      Osteotech, Inc.
                                        ----------------------------------------
                                        (Registrant)


Date: May 10, 2006                      By: /s/ Sam Owusu-Akyaw
                                            ------------------------------------
                                            Sam Owusu-Akyaw
                                            President and Chief Executive
                                            Officer
                                            (Principal Executive Officer)


Date: May 10, 2006                      By: /s/ Mark H. Burroughs
                                            ------------------------------------
                                            Mark H. Burroughs
                                            Executive Vice President,
                                            Chief Financial Officer
                                            (Principal Financial Officer and
                                            Chief Accounting Officer)


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