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 September 30, 2001

                                       or

     [ ]  Transition  Report  Pursuant to Section 13 or 15(d) of the  Securities
     Exchange Act of 1934 For the Transition Period from            to
                                                         -----------  ----------

     Commission File Number 0-19278

                                 OSTEOTECH, INC.
             (Exact name of registrant as specified in its charter)

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

        51 James Way, Eatontown, New Jersey                    07724
      (Address of principal executive offices)              (Zip Code)

                                 (732) 542-2800
              (Registrant's telephone number, including 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 - 14,077,353 shares as of October 31, 2001.




<PAGE>




PART I.  FINANCIAL INFORMATION
ITEM 1.  Financial Statements




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

<TABLE>
<CAPTION>
                                                                                        September 30,           December 31,
                                                                                            2001                    2000
----------------------------------------------------------------------------------------------------------------------------
ASSETS
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>                   <C>
     Current assets:
       Cash and cash equivalents                                                            $   4,689              $  10,923
       Short-term investments                                                                   1,974                  1,935
       Accounts receivable, net                                                                17,799                 13,503
       Inventories                                                                              7,440                  3,584
       Deferred processing costs                                                                8,555                  5,914
       Prepaid expenses and other current assets                                                1,757                  4,710
                                                                                            --------------------------------
             Total current assets                                                              42,214                 40,569

     Property, plant and equipment, net                                                        59,881                 58,290
     Excess of cost over net assets of business acquired,
       net of accumulated amortization of $2,765 in 2001
       and $2,477 in 2000                                                                       3,006                  3,294
     Other assets                                                                               2,198                  2,285
----------------------------------------------------------------------------------------------------------------------------
             Total assets                                                                   $ 107,299              $ 104,438
============================================================================================================================

     LIABILITIES AND STOCKHOLDERS' EQUITY
----------------------------------------------------------------------------------------------------------------------------
     Current liabilities:
       Accounts payable and accrued liabilities                                             $  11,761              $   8,235
       Current maturities of long-term debt                                                     2,529                    101
                                                                                            --------------------------------
             Total current liabilities                                                         14,290                  8,336

     Long-term debt                                                                            18,912                 19,930
     Other liabilities                                                                          4,177                  4,321
----------------------------------------------------------------------------------------------------------------------------
             Total liabilities                                                                 37,379                 32,587
----------------------------------------------------------------------------------------------------------------------------

     Commitments and contingencies

     Stockholders' equity:
          Preferred stock, $.01 par value; 5,676,595 shares
              authorized; no shares issued or outstanding
          Common stock, $.01 par value; 70,000,000 shares
              authorized; issued and outstanding 14,077,353
              shares in 2001 and 13,989,307 shares in 2000                                        139                    138
          Additional paid-in capital                                                           46,965                 46,577
          Accumulated other comprehensive loss                                                   (612)                  (497)
          Retained earnings                                                                    23,428                 25,633
----------------------------------------------------------------------------------------------------------------------------
             Total stockholders' equity                                                        69,920                 71,851
----------------------------------------------------------------------------------------------------------------------------
             Total liabilities and stockholders' equity                                     $ 107,299              $ 104,438
============================================================================================================================
</TABLE>


   The accompanying notes are an integral part of these consolidated financial
                                   statements.



                                       -2-


<PAGE>





                        OSTEOTECH, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF 0PERATIONS
                                   (unaudited)
                 (dollars in thousands, except per share data)



<TABLE>
<CAPTION>
                                                                        Three Months                          Nine Months
                                                                     Ended September 30,                  Ended September 30,
                                                             -----------------------------------   ---------------------------
                                                                       2001              2000           2001            2000
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>            <C>            <C>              <C>
Net revenues:
       Service                                                       $    18,349    $    17,268    $     53,569     $    54,799
       Product                                                             1,278            648           3,592           2,382
                                                                     -----------    -----------    ------------     -----------
                                                                          19,627         17,916          57,161          57,181

     Cost of services                                                      7,341          6,132          21,289          17,934
     Cost of products                                                        710            864           2,931           2,015
                                                                     -----------    -----------    ------------     -----------
                                                                           8,051          6,996          24,220          19,949
                                                                     -----------    -----------    ------------     -----------

     Gross profit                                                         11,576         10,920          32,941          37,232

     Marketing, selling, general and
       administrative                                                      9,909          9,228          32,828          25,960
     Research and development                                              1,182          1,427           3,470           4,474
                                                                     -----------    -----------    ------------     -----------
                                                                          11,091         10,655          36,298          30,434
                                                                     -----------    -----------    ------------     -----------

     Income from litigation settlement                                                      250                             750
                                                                     -----------    -----------    ------------     -----------

     Operating income (loss)                                                 485            515          (3,357)          7,548

     Interest and other income, net                                          100            290             365             875
                                                                     -----------    -----------    ------------     -----------

     Income (loss) before income taxes                                       585            805          (2,992)          8,423

     Income tax provision (benefit)                                          353            574            (787)          3,699

-------------------------------------------------------------------------------------------------------------------------------
     Net income (loss)                                               $       232    $       231    $     (2,205)    $     4,724
===============================================================================================================================
     Net income (loss) per share:
          Basic                                                      $       .02    $       .02    $       (.16)    $       .34
          Diluted                                                    $       .02    $       .02    $       (.16)    $       .33
-------------------------------------------------------------------------------------------------------------------------------
     Shares used in computing net income (loss) per share:
          Basic                                                       14,045,427     13,960,228      14,023,012      14,085,310
          Diluted                                                     14,142,122     14,249,133      14,023,012      14,403,949

</TABLE>

     See accompanying notes to condensed consolidated financial statements.




                                      -3-
<PAGE>



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


<TABLE>
<CAPTION>

   Nine Months Ended September 30,                                                                    2001             2000
   ---------------------------------------------------------------------------------------------------------------------------
<S>                                                                                               <C>                 <C>
   Cash Flow From Operating Activities
        Net income (loss)                                                                         $ (2,205)           $  4,724
        Adjustments to reconcile net income (loss) to net cash
           provided by (used in) operating activities:
              Depreciation and amortization                                                          3,277               3,137
              Other non-cash charges                                                                 1,875                  46
              Changes in current assets and liabilities:
                    Accounts receivable                                                             (4,522)              2,388
                    Inventories                                                                     (4,344)                528
                    Deferred processing costs                                                       (2,780)               (415)
                    Prepaid expenses and other current assets                                        2,941               2,650
                    Accounts payable and other liabilities                                           4,279              (3,820)
   ---------------------------------------------------------------------------------------------------------------------------
     Net cash (used in) provided by operating activities                                            (1,479)              9,238

     Cash Flow From Investing Activities
        Capital expenditures                                                                        (7,979)            (20,509)
        Proceeds from sale of land                                                                   1,500
        Purchases of investments                                                                    (3,925)             (3,877)
        Proceeds from sale of investments                                                            3,886               5,888
        Increase in other assets                                                                       (75)               (540)
   ---------------------------------------------------------------------------------------------------------------------------
     Net cash used in investing activities                                                          (6,593)            (19,038)

     Cash Flow From Financing Activities
        Proceeds from issuance of common stock                                                         387                 608
        Repurchase of common stock                                                                                      (3,121)
        Proceeds from long-term debt                                                                 1,468               8,660
        Principal payments on long-term debt                                                          (188)
        Increase (decrease) in other liabilities                                                        79                (261)
   ---------------------------------------------------------------------------------------------------------------------------
     Net cash provided by financing activities                                                       1,746               5,886

     Effect of exchange rate changes on cash                                                            92                   1
   ---------------------------------------------------------------------------------------------------------------------------

     Net decrease in cash and cash equivalents                                                      (6,234)             (3,913)
     Cash and cash equivalents at beginning of period                                               10,923              16,770
   ---------------------------------------------------------------------------------------------------------------------------
     Cash and cash equivalents at end of period                                                   $  4,689            $ 12,857
   ---------------------------------------------------------------------------------------------------------------------------

     Supplementary cash flow data:
        Cash paid during the period for interest, excluding
           amounts capitalized                                                                    $     97            $    494
        Cash paid during the period for taxes                                                          962               1,882
</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 and
     certain non-cash charges in the nine month period ended September 30, 2001)
     considered  necessary  by  management  to present  fairly the  consolidated
     financial  position as of September 30, 2001, the  consolidated  results of
     operations for the three-month  and nine-month  periods ended September 30,
     2001 and 2000 and the  consolidated  cash flows for the nine  months  ended
     September 30, 2001 and 2000.  The results of operations  for the respective
     interim  periods  are  not  necessarily  indicative  of the  results  to be
     expected for the full year. The December 31, 2000 financial information has
     been  derived  from the  audited  financial  statements  for the year ended
     December 31, 2000. The condensed  consolidated  financial statements should
     be read in conjunction with the audited  financial  statements for the year
     ended  December 31, 2000 which were  included as part of  Osteotech  Inc.'s
     (the "Company") Annual Report on Form 10-K.


2.   Inventories

     Inventories, net of reserves, consist of the following:

                                                     September 30,  December 31,
     (dollars in thousands)                              2001           2000
     ---------------------------------------------------------------------------
     Supplies                                              $  281         $  202
     Raw materials                                            788            891
     Finished goods                                         6,371          2,491
     ---------------------------------------------------------------------------
                                                           $7,440         $3,584
     ===========================================================================

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


3.   Deferred Processing Costs

     Deferred processing costs consist of the following:


                                                     September 30,  December 31,
     (dollars in thousands)                              2001           2000
     ---------------------------------------------------------------------------
     Processed tissue to be distributed                    $3,969         $  424
      by the Company
     Processed tissue held for clients                      1,160          2,841
     Tissue in process                                      3,285          2,646
     Other                                                    141              3
     ---------------------------------------------------------------------------
                                                           $8,555         $5,914
     ===========================================================================



                                      -5-
<PAGE>


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


4.   Comprehensive Income

     Comprehensive  income for the  three-month  and  nine-month  periods  ended
     September 30, 2001 and 2000:

<TABLE>
<CAPTION>

                                                                          Three months ended               Nine months ended
                                                                             September 30,                   September 30,
                                                                 -------------------------------------------------------------
     (dollars in thousands)                                                 2001           2000           2001          2000
     -------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>            <C>            <C>          <C>
     Net income (loss)                                                      $ 232          $ 231          $(2,205)     $ 4,724

     Currency translation adjustments

                                                                              319            (77)            (115)        (203)
     -------------------------------------------------------------------------------------------------------------------------

     Comprehensive income (loss)                                            $ 551          $ 154          $(2,320)     $ 4,521
     =========================================================================================================================

</TABLE>


5.   Loan Receivable

     In  February,  2001,  the Company  entered into a Loan  Agreement  with the
     American Tissue Services  Foundation ("ATSF") which expires on December 31,
     2010. Pursuant to the Loan Agreement, loans made by the Company mature five
     (5) years from the date each loan is made and bear  interest  at a rate per
     annum  equal to the five year  Treasury  Bill rate plus one  percent  (1%).
     Interest is payable on a quarterly  basis.  As of September  30, 2001,  the
     Company had loaned ATSF an aggregate of $1,510,000  at an average  interest
     rate of 5.78%.

     The funds loaned to ATSF are being utilized by ATSF to fund its operations.
     In accordance with Generally Accepted Accounting Principles, the Company is
     providing a reserve  against  these  loans  equivalent  to the  accumulated
     operating  losses of ATSF  until  such  time that ATSF is able to  generate
     positive cash flow from operations. For the nine months ended September 30,
     2001, the Company has provided reserves totaling  $1,374,000  ($512,000 for
     the three  months ended  September  30, 2001)  against  these loans,  which
     charge is  included  in  marketing,  selling,  general  and  administrative
     expenses.  The Company expects that it will loan  additional  funds to ATSF
     throughout  the  remainder  of  the  fiscal  year  and  expects  to  record
     additional reserves against these loans.


6.   Commitments and Contingencies

     Litigation

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

     On October 31,  2001,  the trial  commenced in the United  States  District
     Court for the Central District of California.

     Musculoskeletal Transplant Foundation v. Osteotech, Inc.

     In  June,  2001,  the  Company  made a motion  for an  order  preliminarily
     enjoining  MTF and Synthes  from  selling or offering to sell their  DBX(R)
     products. On September 18, 2001, the Court denied that motion. Discovery is
     otherwise continuing in this case.


                                      -6-
<PAGE>




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



6.   Commitments and Contingencies (continued)

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

     In June, 2001, the Court sustained the Company's demurrer seeking dismissal
     of the  complaints,  but granted  plaintiffs  leave to amend the complaint,
     which they did. Defendants, including the Company, filed a demurrer seeking
     dismissal of both amended complaints. On October 1, 2001, the Court granted
     defendants', including the Company, demurrers for all but one of the claims
     in  the  Regner  action,  which  is  plaintiffs'  California  Business  and
     Professional Code claim.  Further, the Court has again permitted plaintiffs
     to amend their complaint.  No ruling was made on the demurrers filed in the
     Thacker action and plaintiffs have commenced limited discovery.

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

     On October 22,  2001,  the Company  received an amended  complaint  in this
     action,  wherein  plaintiffs  named as additional  defendants  unidentified
     "Roe"  parties and alleged  further  misconduct  on the part of the Company
     giving rise to the claims described therein. The Company denies any and all
     liability.

     The  foregoing is a  description  of material  developments  that  occurred
     during the quarter  ended  September  30, 2001 in lawsuits  reported in the
     Company's  Annual Report on Form 10-K for the year ended  December 31, 2000
     and the  Company's  Quarterly  Reports on Form 10-Q for the quarters  ended
     March 31,  2001 and June 30,  2001.  Additionally,  the Company is party to
     other litigation incidental to its business, none of which, individually or
     in the  aggregate,  are expected to have a material  adverse  effect on the
     Company.

     Litigation  is subject to many  uncertainties  and  management is unable to
     predict the outcome of the pending  suits and claims.  It is possible  that
     the results of operations or liquidity and capital resources of the Company
     could  be  adversely  affected  by the  ultimate  outcome  of  the  pending
     litigation or as a result of the costs of  contesting  such  lawsuits.  The
     Company is unable to estimate the  potential  liability,  if any,  that may
     result from the pending litigation and,  accordingly,  no provision for any
     liability (except for accrued legal costs for services previously rendered)
     has been made in the consolidated financial statements.


7.   Net Income (Loss) Per Share

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




                                      -7-
<PAGE>



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


7.   Net Income (Loss) Per Share (continued)

<TABLE>
<CAPTION>
                                                                              Three Months Ended          Nine Months Ended
                                                                                 September 30,              September 30,
                                                                        -------------------------------------------------------
     (dollars in thousands
      except per share data)                                                2001          2000           2001           2000
     --------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>           <C>           <C>             <C>
     Net income (loss) available to
      common shareholders                                               $       232   $       231   $     (2,205)   $     4,724
     --------------------------------------------------------------------------------------------------------------------------

     Denominator for basic net income (loss) per share:
         Weighted average common
         shares outstanding                                              14,045,427    13,960,228     14,023,012     14,085,310

     Effect of dilutive securities:
         Stock options                                                       96,695       288,905                       318,494
         Warrants                                                                                                           145
     --------------------------------------------------------------------------------------------------------------------------
     Denominator for diluted net income (loss)
     per share                                                           14,142,122    14,249,133     14,023,012     14,403,949
     --------------------------------------------------------------------------------------------------------------------------

         Basic earnings (loss)
         per share                                                      $       .02   $       .02   $       (.16)   $       .34
     --------------------------------------------------------------------------------------------------------------------------

         Diluted earnings (loss)
         per share                                                      $       .02   $       .02   $       (.16)   $       .33
     --------------------------------------------------------------------------------------------------------------------------

</TABLE>

     In the nine months ended  September  30, 2001,  common  equivalent  shares,
     consisting  solely of stock options,  are excluded from the  calculation of
     diluted net loss per share as their effects are antidilutive.


8.   Operating Segments

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

<TABLE>
<CAPTION>

                                                                      Three Months Ended                Nine Months Ended
                                                                         September 30,                    September 20,
                                                        ----------------------------------------------------------------------
     (dollars in thousands)                                            2001             2000              2001           2000
     ------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>             <C>             <C>             <C>
     Revenues:
       Grafton(R)DBM Segment                                          $ 11,012        $ 11,120        $ 31,958        $ 33,433
       Base Tissue Segment                                               6,945           5,872          20,529          20,471
       Other                                                             1,670             924           4,674           3,277
     ------------------------------------------------------------------------------------------------------------------------
       Consolidated                                                   $ 19,627        $ 17,916        $ 57,161        $ 57,181
     =========================================================================================================================
     Operating income (loss):
       Grafton(R)DBM Segment                                          $  2,033        $  2,219        $  4,672        $  8,110
       Base Tissue Segment                                                (628)           (415)         (3,670)          2,547
       Other                                                              (920)         (1,289)         (4,359)         (3,109)
     ------------------------------------------------------------------------------------------------------------------------
       Consolidated                                                   $    485        $    515        $ (3,357)       $  7,548
     =========================================================================================================================

</TABLE>


                                      -8-


<PAGE>




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



9.   Non Cash Charges

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


10. Reclassifications

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


11.  New Accounting Pronouncements

     In June,  2001, the Financial  Accounting  Standards  Board ("FASB") issued
     Statement of Financial  Accounting Standards ("SFAS") No. 142 "Goodwill and
     Other  Intangible  Assets".  The  provisions  of SFAS No. 142 indicate that
     goodwill  and  indefinite  life  intangible  assets  should  no  longer  be
     amortized but rather be tested for impairment  annually.  Intangible assets
     with a finite life shall continue to be amortized over the estimated useful
     life.  The  elimination of  amortization  is to be applied on a prospective
     basis and prior  periods are not to be restated.  SFAS No. 142 is effective
     for fiscal years beginning after December 15, 2001.

     In June,  2001,  the  FASB  issued  SFAS  No.  143  "Accounting  for  Asset
     Retirement Obligations".  SFAS No. 143 establishes accounting standards for
     the  recognition  and  measurement  of  a  liability  associated  with  the
     retirement   of  a  tangible   long-lived   asset  that  results  from  the
     acquisition,  construction,  or development and (or) normal  operation of a
     long-lived  asset.  SFAS No. 143 is effective  for fiscal  years  beginning
     after June 15, 2002.

     In  August,  2001,  the  FASB  issued  SFAS  No.  144  "Accounting  for the
     Impairment or Disposal of Long-Lived  Assets".  The  provisions of SFAS No.
     144 indicate that long-lived assets should be tested for any impairment and
     subsequent recoverability and that any impairment loss be recognized in the
     financial statements.  SFAS No. 144 is effective for fiscal years beginning
     after December 15, 2001.

     The Company will adopt these new pronouncements  effective January 1, 2002.
     Under the provisions of SFAS No. 142, beginning in 2002 the Company will no
     longer amortize goodwill, which will reduce marketing, selling, general and
     administrative  expenses  approximately  $400,000 annually.  The Company is
     currently  evaluating the potential impact, if any, of the other provisions
     under these new standards.



                                      -9-


<PAGE>


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

Information contained herein contains "forward-looking  statements" which can be
identified  by the  use  of  forward-looking  terminology  such  as  "believes",
"expects",  "may", "will", "should", or "anticipates" or the negative thereof or
variations thereon or comparable terminology,  or by discussions of strategy. No
assurance can be given that the future  results  covered by the  forward-looking
statements will be achieved. Some of the matters set forth in the "Risk Factors"
section of our Annual Report on Form 10-K for the year ended  December 31, 2000,
constitute  cautionary  statements  identifying  factors  with  respect  to such
forward-looking  statements,  including  certain risks and  uncertainties,  that
could cause actual results to vary materially from the future results  indicated
in such  forward-looking  statements.  Other  factors  could also  cause  actual
results  to  vary  materially   from  the  future  results   indicated  in  such
forward-looking statements.

FOR THE THREE MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

Results of Operations

Net Income (Loss)

Consolidated  net income in the third  quarter 2001 was $232,000 or $.02 diluted
net income per share as compared to consolidated  net income of $231,000 or $.02
diluted  net  income  per  share  in the  third  quarter  2000.  We  incurred  a
consolidated  net loss in the nine months ended September 30, 2001 of $2,205,000
or $.16  diluted net loss per share as compared  to  consolidated  net income of
$4,724,000  or $.33  diluted  net  income  per  share in the nine  months  ended
September 30, 2000. The nine months ended September 30, 2001 included charges of
$1,107,000,  net of tax, or $.08 diluted loss per share,  primarily to establish
provisions  for excess  inventory  and  instrumentation  associated  with spinal
implant  systems.  The three and nine months ended  September  30, 2000 included
$150,000   and  $450,000  or  $.01  and  $.03  diluted  net  income  per  share,
respectively, or $250,000 and $750,000 before provision for taxes, respectively,
related to the settlement  with DePuy Acromed,  Inc.  (DePuy) in connection with
the GenSci patent litigation. The periods in 2001 do not include any income from
the patent litigation  settlement  because the last required payment was made by
DePuy in December, 2000.

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

Net Revenues

Consolidated   net  revenues  in  the  third  quarter  2001   increased  10%  to
$19,627,000,  from  $17,916,000  in the third  quarter 2000 and were  relatively
unchanged at $57,161,000 in the nine months ended September 30, 2001 compared to
$57,181,000  in the nine months ended  September  30, 2000.  Third  quarter 2001
consolidated revenues were negatively affected by approximately  $500,000 by the
events of September  11, since we were limited in our ability to ship  processed
tissue  forms to our clients and  end-users  for several  days  following  those
events.  Domestic revenues increased 4% in the third quarter 2001 to $18,031,000
from  $17,375,000  in the third quarter 2000 and decreased 3% to  $52,558,000 in
the nine months ended  September  30, 2001 from  $54,093,000  in the nine months
ended September 30, 2000. The increase in domestic revenues in the third quarter
is due to  increased  unit  sales  volume in  bio-implants  and metal  implants,
partially  offset by decreased unit sales volume in Grafton(R) DBM and a decline
in base  tissue  processing  revenue  as a result of a decline  in  donors.  The
decrease in domestic  revenues in the nine months  resulted from  decreased unit
sales volume in Grafton(R) DBM and a decline in base tissue processing  revenues
as a result of a decline in donors,  partially  offset by  increased  unit sales
volume in bio-implants and metal implants. Foreign-based revenues increased 195%
in the third  quarter to  $1,596,000  compared to $541,000 in the third  quarter
2000 and increased 49% to $4,603,000 in the nine months ended September 30, 2001
compared to $3,088,000 in the nine months ended September 30, 2000. The increase
in  foreign-based   revenues  resulted  from  increased  sales  in  all  product
categories, with the majority of the increase resulting from Grafton(R) DBM unit
sales volume. Partially offsetting these increases,  foreign-based revenues were
adversely affected by the strength of the U.S.


                                      -10-

<PAGE>


dollar  compared to the Dutch Guilder and French Franc  resulting in a 4% and 5%
reduction of  foreign-based  revenues in the third quarter and nine months ended
September 30, 2001,  respectively,  versus the corresponding period in the prior
year.

Grafton(R)  Demineralized Bone Matrix (DBM) Segment,  or Grafton(R) DBM Segment,
revenues were  $11,012,000  in the third quarter 2001 compared to $11,120,000 in
the third quarter 2000 and decreased 4% to $31,958,000, in the nine months ended
September 30, 2001 from $33,433,000 in the nine months ended September 30, 2000.
The revenue  decrease in the nine months was  impacted  primarily  by one of our
clients  liquidating a portion of its on-hand  inventory and not replacing  that
inventory.  Growth  of our  Grafton(R)  DBM  tissue  forms  has been  negatively
affected by increasing competition as more companies have developed tissue forms
with  characteristics  similar to Grafton(R)  DBM.  Although we expect that this
competition will continue in the future, we expect demand for our Grafton(R) DBM
tissue  forms to grow as we  continue  to expand into Europe and as we sell such
tissue forms  domestically in conjunction with our bio-implant  tissue forms and
metal implants.

Base Allograft Tissue Segment, or Base Tissue Segment, revenues increased 18% in
the third quarter 2001 to $6,945,000  from  $5,872,000 in the third quarter 2000
and were  $20,529,000  in the nine months ended  September  30, 2001 compared to
$20,471,000 in the nine months ended September 30, 2000. The increased  revenues
are primarily  associated  with a 193% increase in  bio-implant  revenues in the
third  quarter,  and in the nine  months  ended  September  30, 2001 from a 270%
increase in  bio-implant  revenues and a 34% increase in  OsteoPure(TM)  Femoral
head processing revenue.  These increases were partially offset by a 17% and 33%
decrease in base tissue processing revenues resulting from a 23% and 35% decline
in the number of donors  processed  for our clients in the three months and nine
months ended September 30, 2001.

Other  revenues  increased  $746,000 and $1,378,000 in the three months and nine
months ended September 30, 2001, respectively,  as compared to the corresponding
periods in the prior year. The increases relate primarily to increased volume in
spinal metal implant systems and ceramic coatings and products.

During the third quarter and nine months ended  September  30, 2001,  two of our
clients in the  Grafton(R)  DBM and Base Tissue  Segments  accounted for 39% and
33%, and 39% and 39% of revenues, respectively.

Beginning in the second  quarter of 2001,  we began to ship directly to and bill
the end-user on behalf of our tissue recovery organization clients. Although the
increased  revenue  achieved  through this change in business model is not yet a
material  portion  of our  consolidated  revenue,  we  expect to see this have a
greater  impact on our  revenues  in the  future.  We expect that this change in
business  model will have no impact on gross profit  dollars or net income,  but
will negatively impact our gross profit margin percentage.


Gross Profit

Gross  profit  as a  percentage  of net  revenues  was 59% and 58% in the  third
quarter and nine months ended September 30, 2001,  respectively,  as compared to
61% and 65% in the corresponding  periods of 2000. The decrease results from the
aforementioned change in business model, the underabsorption of costs related to
increased capacity, costs related to new processing  technologies,  a decline in
the number of donors  processed  and  released to clients,  and  allograft  bone
tissue  forms that have not yet  achieved  revenue  levels  sufficient  to fully
absorb processing costs. In addition,  in June, 2001, we established a provision
of $655,000 for excess metal implant inventories.


                                      -11-

<PAGE>


Marketing, Selling, General and Administrative

Marketing,   selling,  general  and  administrative  expenses  increased  7%  to
$9,909,000  in the third  quarter 2001 compared to $9,228,000 in the same period
last year and increased 26% to  $32,828,000  in the nine months ended  September
30, 2001 compared to  $25,960,000  in the nine months ended  September 30, 2000.
These increases were primarily  attributable  to activities  related to securing
additional sources of donated allograft tissue ($671,000 in the three months and
$1,914,000 in the nine months ended September 30, 2001), increased legal fees in
connection  with various  lawsuits to which we are a party and  increased  costs
related  to  marketing,  selling  and  promotional  activities  associated  with
Grafton(R)  DBM and the new  bio-implant  tissue forms.  Additionally,  in June,
2001,  we  established  a provision of  $1,190,000  for excess  instrument  sets
associated with spinal implant systems.

Research and Development

Research and  development  expenses  decreased  17% to  $1,182,000  in the third
quarter 2001  compared to $1,427,000 in the third quarter 2000 and decreased 22%
to $3,470,000 in the nine months ended September 30, 2001 compared to $4,474,000
in the same period last year due to decreased  spending related primarily to the
completion of development of new bio-implant tissue forms which are currently in
launch mode and on new processing technology and packaging.

Operating Income (Loss)

Consolidated  operating  income  decreased to $485,000 in the third quarter 2001
from $515,000 in the third quarter 2000 and was a loss of $3,357,000 in the nine
months ended September 30, 2001,  compared to consolidated  operating  income of
$7,548,000  in the  same  period  in 2000  primarily  as a result  of  decreased
operating  income in the  Grafton(R) DBM Segment,  operating  losses in the Base
Tissue Segment,  provisions for excess inventory and instrumentation  associated
with spinal  implant  systems  and  reserves  for loans to ATSF of $512,000  and
$1,374,000  in the third  quarter  and nine months  ended  September  30,  2001,
respectively.  In  addition,  2001  does not  include  income  from  the  patent
litigation  settlement  because  DePuy made the last such  payment in  December,
2000, while the three and nine months ended September 30, 2000 included $250,000
and $750,000 of such payments, respectively.

Grafton(R) DBM Segment operating income, decreased 8% to $2,033,000 in the third
quarter 2001 compared to $2,219,000 in the same period in 2000 and decreased 42%
to $4,672,000 in the nine months ended September 30, 2001 compared to $8,110,000
in the same period in 2000.  The  decrease  results  primarily  from lower gross
margins due to  underabsorption of cost,  increased legal fees,  increased costs
associated with marketing, selling and promotional activities, and a decrease in
patent litigation settlement payments mentioned above.

The Base Tissue Segment incurred  operating losses of $628,000 and $3,670,000 in
the third  quarter and nine  months  ended  September  30,  2001,  respectively,
compared to an operating loss of $415,000 and operating  income of $2,547,000 in
the  corresponding  periods in 2000.  The operating  losses  resulted from lower
gross  margins  due  to  the  decline  in  donor  processing   revenue  and  the
underabsorption of processing costs,  increased legal fees,  reserves for excess
instrument  sets and  increased  costs for  marketing,  selling and  promotional
activities, primarily associated with the new bio-implant tissue forms.

Operating losses associated with other revenues  decreased  $369,000 to $920,000
in the third  quarter 2001 and increased  $1,250,000 to $4,359,000  for the nine
months ended  September  30, 2001.  The increase in the nine months is primarily
attributable   to  second   quarter   provisions   for  excess   inventory   and
instrumentation  associated  with metal spinal implant  systems and reserves for
our funding of ATSF.



                                      -12-
<PAGE>


Income Tax Provision (Benefit)

Our effective  income tax rate was 60% in the third quarter 2001 compared to 71%
in the same period in 2000. The lower  effective  income tax rate in 2001 is due
to a  decrease  in  non-deductible  foreign  losses.  In the nine  months  ended
September  30,  2001,  we  provided a benefit for income  taxes on our  domestic
losses due to our ability to carryback  these  losses and recover  taxes paid in
previous  years.  No income tax benefit  has been  recorded  for foreign  losses
during either period,  principally as a result of the uncertainty of realization
of such future tax benefits.

Liquidity and Capital Resources

At September  30, 2001,  we had cash and  short-term  investments  of $6,663,000
compared to  $12,858,000  at December  31, 2000.  We invest  excess cash in U.S.
Government-backed securities and investment grade commercial paper of major U.S.
corporations.  Working capital decreased  $4,309,000 to $27,924,000 at September
30, 2001 compared to  $32,233,000  at December 31, 2000. The decrease in working
capital  results  principally  from  the  utilization  of  cash  and  short-term
investments to partially fund capital  expenditures  and increased  requirements
for principal payments under our credit facility.

Net cash used in operating  activities  was  $1,479,000 in the nine months ended
September  30, 2001  compared to net cash  provided by operating  activities  of
$9,238,000  in the same period of 2000.  The decrease  resulted  primarily  from
decreases  in net  income  and  investments  in  metal  inventories  and  tissue
processing costs.

Net cash used in investing  activities  was  $6,593,000 in the nine months ended
September  30, 2001 and  $19,038,000  in the same period of 2000.  The  decrease
results  principally from a decline in capital  expenditure of $12,530,000 and a
decline in net proceeds from the sale of  investments  of  $2,050,000  offset by
proceeds  from  the  sale  of land  of  $1,500,000.  The  reduction  in  capital
expenditures is primarily due to reduced spending on the construction of our new
processing facility which is nearing completion.  In the fourth quarter of 1998,
we commenced construction of a new processing facility in Eatontown, New Jersey.
The estimated  aggregate cost for the  construction  of the building,  including
furniture,  fixtures and  equipment is  $42,000,000.  A portion of the aggregate
construction costs have been funded through a $4,500,000  building mortgage loan
and a $17,000,000  equipment  loan.  The remaining  balance has been and will be
funded through available cash reserves or anticipated cash flow from operations.
Through   September  30,  2001,  we  have   incurred   $38,510,000   of  capital
expenditures,  including capitalized interest of $1,790,000,  related to the new
processing facility.

Net cash  provided by financing  activities  was  $1,746,000  in the nine months
ended September 30, 2001 and $5,886,000 in the corresponding period in the prior
year.  The decrease is  primarily  due to a decrease of  $7,192,000  in proceeds
received  from long term debt  partially  offset by  $3,121,000  of cash used to
repurchase common stock.

We have a credit facility with a U.S. bank, that includes a $5,000,000 revolving
line of credit, a $4,500,000 building mortgage loan, and a $17,000,000 equipment
loan. At September 30, 2001,  there were no borrowings  under the revolving line
of credit,  $4,441,000  was  outstanding  under the building  mortgage  loan and
$17,000,000 was outstanding under the equipment loan.

We are currently a party to two distribution  agreements that require us to make
minimum  purchases over the next two years in an aggregate amount of $9,000,000.
Through  September  30,  2001,  we had  purchased  $4,579,000  pursuant to these
agreements.



                                      -13-
<PAGE>


In the nine months  ended  September  30,  2001,  we  experienced  a decrease in
available  cash and cash  equivalents  due to our  continued  investment  in our
business.  We expect to continue to make  investments  in our business  over the
next quarter which may further  deplete our available cash balances.  We believe
that our  available  cash  and  cash  equivalents,  short-term  investments  and
available  lines of credit,  together  with  anticipated  future  cash flow from
operations,  will be  sufficient to meet our cash needs for the remainder of the
current fiscal year. We anticipate we may need to seek additional  funds through
equity or debt  financing  to fund the future  growth of the Company  beyond the
current  fiscal year.  Towards  this end, we are  currently  exploring  possible
financing  options.  However,  there can be no assurances  that such  additional
funds will be available,  or if available,  that such funds will be available on
favorable terms.

Impact of Inflation and Foreign Currency Exchange Fluctuations

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

Litigation

Osteotech,  Inc. is  involved in various  legal  proceedings  involving  product
liability,  patent  infringement  and other  claims.  For a discussion  of these
matters see, Note 4 of "Notes to Condensed  Consolidated  Financial Statements",
PART II., ITEM 1. LEGAL  PROCEEDINGS  and our Annual Report on Form 10-K for the
year ended  December 31, 2000.  It is possible that our results of operations or
liquidity  and capital  resources  could be  adversely  affected by the ultimate
outcome of the pending litigation or as a result of the costs of contesting such
lawsuits.

New Accounting Pronouncements

In  June,  2001,  the  Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other
Intangible  Assets".  The  provisions of SFAS No. 142 indicate that goodwill and
indefinite  life  intangible  assets should no longer be amortized but rather be
tested for  impairment  annually.  Intangible  assets  with a finite  life shall
continue to be amortized  over the estimated  useful life.  The  elimination  of
amortization  is to be applied on a prospective  basis and prior periods are not
to be restated.  SFAS No. 142 is  effective  for fiscal  years  beginning  after
December 15, 2001.

In June,  2001, the FASB issued SFAS No. 143  "Accounting  for Asset  Retirement
Obligations".  SFAS No. 143 establishes accounting standards for the recognition
and  measurement  of a liability  associated  with the  retirement of a tangible
long-lived asset that results from the acquisition, construction, or development
and (or) normal operation of a long-lived  asset.  SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002.

In August,  2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of  Long-Lived  Assets".  The  provisions of SFAS No. 144 indicate that
long-lived   assets  should  be  tested  for  any   impairment   and  subsequent
recoverability  and that any  impairment  loss be  recognized  in the  financial
statements.  SFAS No. 144 is effective for fiscal years beginning after December
15, 2001.

We will adopt  these new  pronouncements  effective  January 1, 2002.  Under the
provisions  of SFAS No.  142,  beginning  in 2002,  we will no  longer  amortize
goodwill,  which will reduce  marketing,  selling,  general  and  administrative
expenses  approximately  $400,000  annually.  We are  currently  evaluating  the
potential impact, if any, of the other provisions under these new standards.



                                      -14-
<PAGE>



ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable

PART II. OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

The following is a description of material developments that occurred during the
quarter ended  September  30, 2001 in lawsuits  reported in our Annual Report on
Form 10-K for the year ended December 31, 2000 and our Quarterly Reports on Form
10-Q for the quarters ended March 31, 2001 and June 30, 2001.  Additionally,  we
are a party to other  litigation  incidental  to our  business,  none of  which,
individually  or in the  aggregate,  are  expected  to have a  material  adverse
effect.

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

On October 31, 2001, the trial commenced in the United States District Court for
the Central District of California.

Musculoskeletal Transplant Foundation v. Osteotech, Inc.

In June,  2001,  we made a motion for an order  preliminarily  enjoining MTF and
Synthes from selling or offering to sell their DBX(R) products. On September 18,
2001,  the Court denied that motion.  Discovery is otherwise  continuing in this
case.

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

In June,  2001,  the Court  sustained  our  demurrer  seeking  dismissal  of the
complaints, but granted plaintiffs leave to amend the complaint, which they did.
Defendants,  including  us, filed a demurrer  seeking  dismissal of both amended
complaints.  On October 1, 2001,  the Court granted  defendants',  including us,
demurrers  for  all  but  one of the  claims  in the  Regner  action,  which  is
plaintiffs'  California Business and Professional Code claim. Further, the Court
has again permitted  plaintiffs to amend their complaint.  No ruling was made on
the demurrers filed in the Thacker action and plaintiffs have commenced  limited
discovery.

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

On October 22, 2001,  we received an amended  complaint in this action,  wherein
plaintiffs named as additional defendants unidentified "Roe" parties and alleged
further misconduct on our part giving rise to the claims described  therein.  We
deny any and all liability.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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

Exhibit                                                                Page
Number            Description                                         Number
------            -----------                                         ------
                     None

(b)               Reports on Form 8-K

On July 13, 2001, we filed with the  Commission a Current  Report on Form 8-K to
announce that on June 15, 2001,  Wright  Medical  Technology,  Inc.,  one of our
competitors,  filed an action  against  us in  Federal  Court in New  Jersey for
alleged  false  advertising.  See Part II.  Item 1. Legal  Proceedings  for more
information.


                                      -15-

<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:     November 14, 2001         By:      /S/Richard W. Bauer
                                             ---------------------------------
                                             Richard W. Bauer
                                             Chief Executive Officer



Date:     November 14, 2001         By:      /S/Michael J. Jeffries
                                             ---------------------------------
                                             Michael J. Jeffries
                                             Executive Vice President
                                             Chief Financial Officer



                                      -16-