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


                                    FORM 10-Q


                                   (Mark One)

[x]      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period Ended March 31, 1997


                                       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)

                                 (908) 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 - 7,930,259 shares as of April 30, 1997




<PAGE>

PART I.       FINANCIAL INFORMATION
ITEM 1.       Financial Statements


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

                                                                                               March 31,         December 31,
                                                                                                  1997               1996
----------------------------------------------------------------------------------------------------------------------------------
ASSETS
----------------------------------------------------------------------------------------------------------------------------------
Current assets:
<S>                                                                                                 <C>                   <C>    
     Cash and cash equivalents                                                                      $ 9,084               $ 7,290
     Short-term investments                                                                             987                 1,987
     Accounts receivable, net                                                                         6,615                 6,280
     Prepaid expenses and other current assets                                                        4,364                 4,374
                                                                                             -------------------------------------
        Total current assets                                                                         21,050                19,931

Equipment and leasehold improvements, net                                                             8,119                 8,170
Excess of cost over net assets of business acquired,
     less accumulated amortization of $1,260 in 1997 and
     $1,197 in 1996                                                                                   2,438                 2,501
Other assets                                                                                            921                   881
==================================================================================================================================
Total assets                                                                                        $32,528               $31,483
==================================================================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
----------------------------------------------------------------------------------------------------------------------------------
Current liabilities:
     Accounts payable and accrued liabilities                                                       $ 6,365               $ 6,247
     Notes payable                                                                                      489                   655
     Current maturities of long-term debt and
          obligations under capital leases                                                              725                   756
                                                                                             -------------------------------------
        Total current liabilities                                                                     7,579                 7,658

Long-term debt and obligations under capital leases                                                     671                   840
Other liabilities                                                                                       263                   268
----------------------------------------------------------------------------------------------------------------------------------
Total liabilities                                                                                     8,513                 8,766
----------------------------------------------------------------------------------------------------------------------------------

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 7,915,815
         shares in 1997 and 7,826,779 shares in 1996                                                     79                    78
     Additional paid-in capital                                                                      30,710                30,288
     Currency translation adjustments                                                                  (70)                 (113)
     Accumulated deficit                                                                            (6,704)               (7,536)
----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity                                                                           24,015                22,717
                                                                                             -------------------------------------
=============================================================================================
Total liabilities and stockholders' equity                                                          $32,528               $31,483
==================================================================================================================================
</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 Ended March 31,                                                                      1997           1996
---------------------------------------------------------------------------------------------------------------------------
Net Revenues:
<S>                                                                                                  <C>            <C>   
     Service                                                                                         $9,478         $7,523
     Product                                                                                            606            724
     Grant                                                                                                             162
                                                                                             ------------------------------
                                                                                                     10,084          8,409

Costs and expenses:
     Cost of services                                                                                 3,420          3,064
     Cost of products                                                                                   452            533
     Marketing, general and administrative                                                            3,798          3,156
     Research and development                                                                           936          1,061
                                                                                             ------------------------------
                                                                                                      8,606          7,814


Other income (expense):
     Interest income                                                                                    131            104
     Interest expense                                                                                  (48)            (68)
     Other                                                                                                9             20
                                                                                             ------------------------------
                                                                                                         92             56
                                                                                             ------------------------------

Income before income taxes                                                                            1,570            651

Income tax provision                                                                                    738            480

---------------------------------------------------------------------------------------------------------------------------
Net income                                                                                           $  832         $  171
---------------------------------------------------------------------------------------------------------------------------
Net income per share                                                                                 $  .10         $  .02
---------------------------------------------------------------------------------------------------------------------------

Shares used in computing net income per share                                                     8,554,489      8,396,677
============================================================================================================================
</TABLE>



     See accompanying notes to condensed consolidated financial statements.


                                       -3-

<PAGE>
                        OSTEOTECH, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (dollars in thousands)
<TABLE>
<CAPTION>

Three Months Ended March 31,                                                                      1997            1996
-----------------------------------------------------------------------------------------------------------------------------------
Cash Flow From Operating Activities
<S>                                                                                               <C>             <C>   
   Net income                                                                                     $  832          $  171
   Adjustments to reconcile net income to net cash
      provided by (used in) operating activities:
         Depreciation and amortization                                                               587             631
         Deferred income taxes                                                                      (50)             221
         Other items, net                                                                                              5
         Changes in assets and liabilities:
               Accounts receivable                                                                 (362)         (1,104)
               Prepaid expenses and other current assets                                            (56)             359
               Accounts payable and other liabilities                                                361             213
-------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                                          1,312             496

Cash Flow From Investing Activities
   Capital expenditures                                                                            (572)           (349)
   Purchases of investments                                                                        (986)         (1,987)
   Proceeds from sale of investments                                                               1,986           4,919
   Increase in other assets                                                                         (29)            (85)
-------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities                                                            399           2,498

Cash Flow From Financing Activities
   Proceeds from issuance of common stock                                                            418             116
   Proceeds from issuance of notes payable                                                            93              94
   Principal payments on notes payable                                                             (259)           (207)
   Principal payments on long-term debt
      and obligations under capital leases                                                         (196)           (196)
-------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities                                                   56           (193)

Effect of exchange rate changes on cash                                                               27              48
-------------------------------------------------------------------------------------------------------------------------

Net increase in cash and cash equivalents                                                          1,794           2,849
Cash and cash equivalents at beginning of period                                                   7,290           2,788
=========================================================================================================================
Cash and cash equivalents at end of period                                                        $9,084          $5,637
=========================================================================================================================
                                                                                        

Supplementary cash flow data:
   Cash paid during the period for interest                                                       $   47          $   67
   Cash paid during the period for taxes                                                             231               6
</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 March 31, 1997 and December 31,
         1996, and the  consolidated  results of operations and the consolidated
         cash flows for the  three-month  periods ended March 31, 1997 and 1996.
         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, 1996 which were included as part of the  Company's  Report
         on Form 10-K.


2.      Earnings Per Share
         In February  1997,  the  Financial  Accounting  Standards  Board issued
         Statement of Financial  Accounting  Standards  No. 128,  "Earnings  Per
         Share" ("SFAS 128").  SFAS 128 establishes  standards for computing and
         presenting  earnings per share ("EPS") and  supersedes  APB Opinion No.
         15,  "Earnings  Per  Share"  ("Opinion  15").  SFAS  128  replaces  the
         presentation  of  primary  EPS with a  presentation  of basic EPS which
         excludes  dilution  and is  computed by dividing  income  available  to
         common  stockholders  by the  weighted-average  number of common shares
         outstanding  during the  period.  This  statement  also  requires  dual
         presentation  of basic EPS and  diluted  EPS on the face of the  income
         statement for all periods presented.  Diluted EPS is computed similarly
         to fully  diluted EPS pursuant to Opinion 15, with some  modifications.
         SFAS 128 is  effective  for  financial  statements  issued for  periods
         ending after  December  15,  1997,  including  interim  periods.  Early
         adoption is not permitted and the statement requires restatement of all
         prior-period EPS data presented after the effective date.

         The Company will adopt SFAS 128 effective with its financial statements
         for the year ending  December 31, 1997. If SFAS 128 had been adopted at
         March 31, 1997, there would have been no change in the EPS as reflected
         in the  accompanying  financial  statements for the periods ended March
         31, 1997 and 1996.


3.      Commitments and Contingencies

         Service Agreements

         Effective  April 1,  1997,  the  Company  entered  into a new five year
         exclusive  agreement  with  one  of  its  major  allograft   processing
         customers,  the Musculoskeletal  Transplant Foundation ("MTF").  During
         the first three months of 1997 and 1996, MTF accounted for 63% and 65%,
         respectively, of revenues.

                                       -5-

<PAGE>
3.      Commitments and Contingencies (continued)

         Litigation

         The Company  has been named as a  defendant  in a number of lawsuits in
         which  patients  claim  that  they  have  suffered   damages  from  the
         implantation of allegedly  defective spinal fixation devices  allegedly
         distributed by the Company.  See Part II, Item 1, "Legal  Proceedings".
         Management  believes  that the suits and claims are  without  merit and
         intends to defend such actions vigorously. Pursuant to its distribution
         agreement with the Company,  the  manufacturer  of the spinal  fixation
         devices,  Heinrich C. Ulrich, KG ("Ulrich") has agreed to indemnify the
         Company for all costs and damages incurred by the Company in connection
         with its distribution of products  manufactured by Ulrich,  except such
         costs and damages which are caused by the Company's gross negligence or
         willful  misconduct  or  unauthorized  claim  made  by the  Company  in
         marketing the products.  Additionally,  the Company maintains  products
         liability   insurance  coverage  in  the  amount  of  $20  million  per
         occurrence  and per year in the  aggregate,  however,  there  can be no
         assurance that these claims will be covered by the Company's  insurance
         policy.  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 if the ultimate liability  materially exceeds the
         amount  that the Company  recovers  from  Ulrich  and/or its  insurance
         coverage. The Company is unable to estimate the potential liability, if
         any, that may result from the pending litigation and,  accordingly,  no
         provision for any  liability  (except for accrued legal costs) has been
         made in the consolidated financial statements.


     4.   Reclassifications 

          Certain of the 1996 amounts  have been  reclassified  for  comparative
          purposes.

                                       -6-

<PAGE>

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

FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1996

Results of Operations

Net Income

Net income in the first quarter of 1997  increased to $832,000 or $.10 per share
compared  to net income of  $171,000  or $.02 per share in the first  quarter of
1996.

Following is a discussion of factors which  affected  results of operations  for
the three-month periods ended March 31, 1997 and
1996.


Revenues

Revenues  in the  first  quarter  of  1997  increased  20% to  $10,084,000  from
$8,409,000 in the first  quarter of 1996.  During the first three months of 1997
and 1996, two of the Company's  major  customers  accounted for 63% and 29%, and
65% and 23%, respectively, of revenues.

Domestic revenues  increased 26% to $9,404,000 in the first quarter of 1997 from
$7,482,000 in the first quarter of 1996. The increase resulted  principally from
increased demand for the Company's  Grafton(R)  Demineralized  Bone Matrix (DBM)
Gel and Grafton DBM Flex and the  introduction  of Grafton DBM Putty in November
1996.

Foreign  revenues  declined  27% to $680,000  in the first  quarter of 1997 from
$927,000 in the first quarter of 1996. Foreign revenues were negatively impacted
by a  decrease  in grant  revenues  as a  result  of the  discontinuance  of the
Company's  PolyActive(TM) polymer research and development program in the fourth
quarter of 1996.  Additionally,  foreign  revenues in the first  quarter of 1997
were reduced by  approximately  12% as a result of the strength of the US dollar
compared to the Dutch Guilder.


Cost of Services

Cost of  services  as a  percentage  of  service  revenues  was 36% in the first
quarter of 1997  compared  to 41% in the first  quarter of 1996.  The decline in
costs as a percentage of revenues results  primarily from a shift in revenue mix
towards services with higher gross margins.


Marketing, General and Administrative

Marketing,  general and administrative expenses increased $642,000 or 20% in the
first  quarter of 1997  compared to the same period last year.  The increase was
primarily   attributable   to  expanded   marketing   activities  and  increased
administrative costs associated with the continued expansion of the business.

                                       -7-

<PAGE>
Research and Development

Research and development expenses decreased $125,000 or 12% in the first quarter
of 1997  compared  to the same  period  in 1996  principally  as a result of the
discontinuance  of the Company's  PolyActive  polymer  research and  development
program in the fourth quarter of 1996.


Other Income, net

Interest income  increased  $27,000 in the first quarter of 1997 compared to the
same  period in the prior  year due to a higher  level of  invested  funds and a
higher average return on such funds.

Interest expense  decreased $20,000 in the first quarter of 1997 compared to the
same  period  in the  prior  year as a  result  of  lower  outstanding  debt and
obligations under capital leases.


Provision for Income Taxes

The  provision  for income taxes  increased to $738,000 in the first  quarter of
1997  compared to $480,000 in the first quarter of 1996 as a result of higher US
taxable income.  The Company's  effective income tax rate declined to 47% in the
first quarter of 1997 from 74% in the first quarter of 1996. This decline is due
to a significant  decrease in foreign losses which are not deductible against US
taxable  income.  The Company  has  approximately  $10.1  million of foreign net
operating loss carryforwards (against which there is a full valuation allowance)
available to reduce certain future foreign income taxes.  Future  realization is
dependent on generating  sufficient  foreign taxable  income.  The provision for
income taxes in each period  reflects a rate in excess of the Federal  statutory
income  tax rate due to state  income  taxes  and  foreign  losses  for which no
current tax benefits were available.


Liquidity and Capital Resources

At  March  31,  1997,  the  Company  had  cash  and  short-term  investments  of
$10,071,000  compared  to  $9,277,000  at December  31,  1996.  Working  capital
increased $1,198,000 from $12,273,000 to $13,471,000 at March 31, 1997.

The Company has a loan and security  agreement with a US bank which provides for
borrowings of up to $3,000,000  under a revolving  line of credit and $4,000,000
under an equipment line of credit. At March 31, 1997, $1,200,000 was outstanding
under the  equipment  line of credit  and there were no  borrowings  outstanding
under the revolving line of credit. The Company also has a line of credit with a
Dutch bank which  provides  for  borrowings  of up to 5,000,000  Dutch  Guilders
("dfl"),  or  approximately  $2,653,000  at the March 31,  1997  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  has  agreed  with  the  bank to
temporarily  limit its  borrowings,  if any, to no more than  3,000,000  dfl, or
approximately $1,591,000 at the March 31, 1997 exchange rate.  Additionally,  in
connection with the Leiden

                                       -8-
<PAGE>
Liquidity and Capital Resources (continued)

facility  lease,  the Company is required to maintain a declining bank guarantee
which  reduced  the  amount  available  for  borrowings  to  2,512,000  dfl,  or
approximately  $1,333,000  at the March 31, 1997  exchange  rate.  There were no
borrowings under this credit line as of March 31, 1997.

The Company  believes  that its cash and  short-term  investments  and available
lines of credit,  together with anticipated  cash flow from operations,  will be
sufficient to meet its near-term requirements,  but may not be adequate to fully
develop and  commercialize  all  products  currently  under  development  by the
Company.  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.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.


PART II.         OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS

1.      Orthopedic Bone Screw Products Liability Litigation

The Company was  originally  named in as many as 177 cases but,  over time,  had
been  dismissed from 148 of such cases.  Subsequent to March 25, 1997,  however,
the District Court for the Eastern District of Pennsylvania  allowed  plaintiffs
to amend and/or refile their dismissed  cases and, as a result,  the Company has
been renamed in 50 of the cases that had previously been dismissed. Accordingly,
as of May 5,  1997,  the  Company  was aware of being  named as a  defendant  in
approximately  79 cases.  Of these cases, 77 have been  consolidated  with other
similar  actions  for  coordinated   proceedings  in  the  Eastern  District  of
Pennsylvania  under the caption In re Orthopedic  Bone Screw Products  Liability
Litigation,  MDL Dkt.  1014.  The two  remaining  cases are pending in the state
courts of Ohio and Pennsylvania.

These actions generally are based in products liability and involve  allegations
of  negligence,  conspiracy  or  other  concerted  actions,  either  alone or in
combination with other spinal implant manufacturers. As to all of these actions,
the  Company  believes  that  it has  affirmative  defenses,  including  without
limitation, defenses based on the learned intermediary defense, the failure of a
cause of action to exist where no  malfunction of a  Company-distributed  device
occurred,  the fact that the product at issue was  substantially  modified in an
unforeseeable  manner, the fact that the product  distributed by the Company was
not the  product  at  issue,  the fact that the  Company  has not  engaged  in a
conspiracy with other manufacturers or distributors and the fact that the claims
in all of these actions are without merit. Accordingly, all such cases are being
and will continue to be vigorously defended.

                                       -9-

<PAGE>

ITEM 1. LEGAL PROCEEDINGS (continued)

All of the actions seek monetary  damages of no less than $50,000 per plaintiff.
The aggregate  monetary  damages sought by all of the plaintiffs and the related
costs to defend such  actions  may be  substantial.  Pursuant  to the  Company's
distribution  agreement with Ulrich,  KG  ("Ulrich"),  the  manufacturer  of the
spinal  system  distributed  by the Company,  Ulrich has agreed to indemnify the
Company for liabilities incurred in connection with the distribution of Ulrich's
products.    Ulrich's    products    liability    insurance    carrier   Allianz
Versicherungs-Aktiengesellschaft   ("Allianz")   reviewed  the  possibility  of
extending  insurance  coverage to the Company  with  respect to certain of these
cases.  On May 2, 1997,  the Company was notified by Allianz  that,  although it
would not extend insurance  coverage directly to the Company,  it would continue
to provide  Ulrich with products  liability  coverage in furtherance of Ulrich's
indemnification obligations to the Company.  Additionally, the Company maintains
its own products liability  insurance coverage from Lexington  Insurance Company
("Lexington") and has notified Lexington of these actions.  Lexington has denied
coverage with respect to certain of these cases. 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  if the  ultimate  liability
materially  exceeds the amount that the Company  recovers from Ulrich and/or its
insurance coverage.


Kehr v. Musculoskeletal Transplant Foundation and Osteotech, Inc.,
Case No. 96-CV-334 (W.D. Mich.)

The plaintiffs in this case have tentatively  agreed to dismiss this action with
prejudice.  The Company  expects the agreement  will be finalized and filed with
the Court for approval on or about May 23, 1997.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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


 Exhibit                                                           Page
 Number            Description                                    Number
 ------            -----------                                    ------

 10.29             Agreement dated April 1, 1997 between      
                   Musculoskeletal Transplant Foundation
                   and the Company*                                 E-1

 11.1              Computation of Primary Net Income
                   Per Share                                        E-2

 11.2              Computation of Fully Diluted Net Income
                   Per Share                                        E-3

 27.0              Financial Data Schedule                          E-4


(b)   Reports on Form 8-K

      None

     *    Document for which the Company is  requesting  confidential  treatment
          pursuant to Rule 24b-2.

                                      -10-
<PAGE>


                                   SIGNATURES

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


                                                                 Osteotech, Inc.
                                                                    (Registrant)



Date:    May 13, 1997               By:              /S/ RICHARD W. BAUER
                                                     --------------------
                                                                Richard W. Bauer
                                                                President, Chief
                                                               Executive Officer



Date:    May 13, 1997               By:              /S/ MICHAEL J. JEFFRIES
                                                     -----------------------
                                                             Michael J. Jeffries
                                                        Executive Vice President
                                                         Chief Operating Officer
                                                         Chief Financial Officer


                                      -11-