UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-Q

             (x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                  For the Quarterly Period Ended June 30, 2002
                         Commission File Number 1-13165

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

                                    ---------
                      Florida                 59-2417093
         (State or other jurisdiction      (I.R.S. Employer
     of incorporation or organization)     Identification No.)

                           1655 Roberts Boulevard, NW
                             Kennesaw, Georgia 30144
                    (Address of principal executive offices)
                                   (zip code)

                                 (770) 419-3355
              (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 _____

The number of shares of common stock, par value $0.01 per share,  outstanding on
August 30, 2002 was 19,502,371.







Part I - FINANCIAL INFORMATION

INFORMATION WITH RESPECT TO FINANCIAL STATEMENTS

On April 11, 2002 CryoLife,  Inc. filed a Form 8-K, indicating that the Board of
Directors,  upon the  recommendation  of the audit committee,  had dismissed the
accounting  firm  Arthur  Andersen  LLP as the  Company's  independent  auditors
effective  April 9,  2002.  On May 10,  2002  CryoLife,  Inc.  filed a Form 8-K,
indicating  that the Board of Directors,  upon the  recommendation  of the audit
committee,  had  appointed  Deloitte & Touche LLP as the  Company's  independent
auditors effective May 7, 2002.

CryoLife,  Inc.'s Form 10-Q for the  quarterly  period  ended March 31, 2002 was
previously filed without a review of the financial  statements for the quarterly
period ended March 31, 2002, by an independent  public  accountant in accordance
with Rule 10-01(d) of Regulation S-X  promulgated by the Securities and Exchange
Commission.  CryoLife,  Inc.  elected not to obtain such a review from its prior
auditor, Arthur Andersen LLP.

Deloitte & Touche LLP has subsequently reviewed the financial statements for the
quarterly period ended March 31, 2002 in accordance with Rule 10-01(d).





                                       2




Item 1. Financial statements



                                                                                       

                                           CRYOLIFE, INC. AND SUBSIDIARIES
                                    SUMMARY CONSOLIDATED STATEMENTS OF OPERATIONS
                                        (IN THOUSANDS, EXCEPT PER SHARE DATA)


                                                   Three Months Ended                    Six Months Ended
                                                        June 30,                             June 30,
                                            -------------------------------       ------------------------------
                                                 2002              2001               2002              2001
                                            -------------------------------       ------------------------------
                                                       (Unaudited)                          (Unaudited)

Revenues:
   Human tissue preservation services, net  $       17,536    $      18,765       $      37,774    $      37,331
   Products                                          5,473            2,789              10,538            5,430
   Distribution and grant                              255              143                 423              368
                                            -------------------------------       ------------------------------
                                                    23,264           21,697              48,735           43,129
Costs and expenses:
   Human tissue preservation services
     (including write-down of
     $10,023 in 2002)                               17,203            7,697              25,266           15,370
   Products                                          1,843            1,423               4,078            2,855
   General, administrative, and marketing           11,447            8,120              20,925           16,279
   Research and development                          1,196            1,286               2,349            2,372
   Interest expense                                    196               16                 388               16
   Interest income                                    (239)            (576)               (537)          (1,138)
   Other (income) expense, net                         (16)              (5)                (72)             742
                                            --------------------------------      ------------------------------
                                                    31,630           17,961              52,397           36,496
                                            -------------------------------       ------------------------------
Income (loss) before income taxes                   (8,366)           3,736              (3,662)           6,633
Income tax (benefit) expense                        (2,844)           1,196              (1,244)           2,123
                                            -------------------------------       ------------------------------
Net (loss) income                           $       (5,522)   $       2,540       $      (2,418)   $       4,510
                                            ===============================       ==============================

Net (loss) earnings per share:
         Basic                              $       (0.28)    $        0.14       $      (0.13)    $        0.24
                                            ===============================       ==============================
         Diluted                            $       (0.28)    $        0.13       $      (0.13)    $        0.23
                                            ===============================       ==============================
Weighted average shares outstanding:
         Basic                                      19,538           18,780              19,318           18,761
                                            ===============================       ==============================
         Diluted                                    19,538           19,622              19,318           19,575
                                            ===============================       ==============================



See accompanying notes to summary consolidated financial statements.




                                       3




Item 1. Financial Statements





                                              CRYOLIFE, INC.
                                    SUMMARY CONSOLIDATED BALANCE SHEETS
                                              (IN THOUSANDS)
                                                                                   
                                                                             June 30,       December 31,
                                                                               2002             2001
                                                                       -----------------------------------
ASSETS                                                                    (Unaudited)
                                                                                     ---
Current Assets:
   Cash and cash equivalents                                           $        12,290    $          7,204
   Marketable securities, at market                                             18,659              26,483
   Trade receivables, net                                                       13,800              13,305
   Other receivables, net                                                        3,727               2,820
   Note receivable, net                                                            --                1,169
   Deferred preservation costs, net                                             21,039              24,199
   Inventories                                                                   7,352               6,259
   Prepaid expenses and other assets                                             2,976               2,341
   Deferred income taxes                                                         3,457                 688
                                                                       -----------------------------------
     Total current assets                                                       83,300              84,468
                                                                       -----------------------------------
Property and equipment, net                                                     39,574              39,246
Goodwill                                                                         1,399               1,399
Patents, net                                                                     4,998               2,919
Other, net                                                                       1,087               1,278
                                                                       -----------------------------------
     TOTAL ASSETS                                                      $       130,358    $        129,310
                                                                       ===================================

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
   Accounts payable                                                    $         1,826    $            555
   Accrued expenses and other current liabilities                                2,784               1,491
   Accrued compensation                                                          1,233               2,560
   Accrued procurement fees                                                      8,224               6,592
   Current maturities of capital lease obligations                                 628                 609
   Current maturities of long-term debt                                          6,400               1,600
   Convertible debenture                                                            --               4,393
                                                                       -----------------------------------
     Total current liabilities                                                  21,095              17,800
                                                                       -----------------------------------
Capital lease obligations, less current maturities                               2,821               3,140
Bank loan, less current maturities                                                  --               5,600
Deferred income taxes                                                              199                 449
Other long-term liabilities                                                        961                 882
                                                                       -----------------------------------
     Total liabilities                                                          25,076              27,871
                                                                       -----------------------------------
Shareholders' equity:
     Preferred stock                                                                --                  --
     Common stock (issued 20,864 shares in 2002 and
       20,172 shares in 2001)                                                      208                 202
     Additional paid-in capital                                                 73,336              66,828
     Retained earnings                                                          38,129              40,547
     Deferred compensation                                                         (27)                (33)
     Accumulated other comprehensive income (loss)                                 137                (145)
     Less:  Treasury stock at cost (1,309 shares in 2002 and
       1,286 shares in 2001)                                                    (6,501)             (5,960)
                                                                       -----------------------------------
          Total shareholders' equity                                           105,282             101,439
                                                                       -----------------------------------
     TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                           $    130,358        $    129,310
                                                                       ===================================

See accompanying notes to summary consolidated financial statements.



                                       4



Item 1. Financial Statements

                                 CRYOLIFE, INC.
                  SUMMARY CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


                                                                                    

                                                                                Six Months Ended
                                                                                    June 30,
                                                                       -----------------------------------
                                                                              2002             2001
                                                                       -----------------------------------
                                                                                  (Unaudited)

Net cash from operating activities:
     Net (loss) income                                                 $        (2,418)   $          4,510
     Adjustments to reconcile net (loss) income to net cash
     provided by operating activities:
       Loss on sale of marketable equity securities                                228                  --
       Depreciation and amortization                                             2,526               2,169
       Provision for doubtful accounts                                              48                  47
       Write-down of deferred preservation costs                                10,023                  --
       Other non-cash adjustments to income                                         --                 748
       Deferred income taxes                                                    (3,048)               (578)
       Tax effect of nonqualified option exercises                                 481                 114
        Changes in operating assets and liabilities:
          Receivables                                                               90              (1,645)
          Income taxes                                                          (1,540)                926
          Deferred preservation costs and inventories                           (7,956)             (2,053)
          Prepaid expenses and other assets                                       (635)               (814)
          Accounts payable, accrued expenses, and other liabilities              2,951                 889
                                                                       -----------------------------------
       Net cash flows provided by operating activities                             750               4,313
                                                                       -----------------------------------

Net cash flows from investing activities:
     Capital expenditures                                                       (2,735)             (9,072)
     Other assets                                                               (1,980)               (257)
     Purchases of marketable securities                                        (11,725)             (9,307)
     Sales and maturities of marketable securities                              19,391              10,664
     Proceeds from note receivable                                               1,169               1,605
                                                                       -----------------------------------
       Net cash flows provided by (used in) investing activities                 4,120              (6,367)
                                                                       -----------------------------------

Net cash flows from financing activities:
     Principal payments of debt                                                   (800)               (133)
     Proceeds from debt issuance                                                    --               1,165
     Payment of obligations under capital leases                                  (300)                (85)
     Proceeds from exercise of stock options and
         issuance of common stock                                                1,099                 540
                                                                       -----------------------------------
       Net cash (used in) provided by financing activities                          (1)              1,487
                                                                       -----------------------------------
Increase (decrease) in cash                                                      4,869                (567)
Effect of exchange rate changes on cash                                            217                (124)
Cash and cash equivalents, beginning of period                                   7,204              17,480
                                                                       -----------------------------------
Cash and cash equivalents, end of period                               $        12,290    $         16,789
                                                                       ===================================



See accompanying notes to summary consolidated financial statements.



                                       5


                         CRYOLIFE, INC. AND SUBSIDIARIES
               NOTES TO SUMMARY CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with (i) accounting  principles generally accepted in the
United States for interim  financial  information  and (ii) the  instructions to
Form  10-Q and Rule  10-01 of  Regulation  S-X of the  Securities  and  Exchange
Commission ("SEC").  Accordingly, they do not include all of the information and
disclosures  required by accounting  principles generally accepted in the United
States for a complete  presentation of financial  statements.  In the opinion of
management,  all  adjustments  (consisting  of  normal  recurring  accruals  and
estimated  write-downs  and accruals  resulting  from an order received from the
United States Food and Drug Administration  ("FDA")) considered  necessary for a
fair  presentation  have been  included.  Certain  prior year balances have been
reclassified to conform to the 2002 presentation.  CryoLife,  Inc.'s ("CryoLife"
or the  "Company")  unaudited  June 30, 2001 year to date results of  operations
have been revised from the amounts previously  reported in the Form 10-Q for the
quarter  ended  June  30,  2001,  as  indicated  in Note 20 to the  consolidated
financial statements included in the CryoLife,  Inc Form 10-K for the year ended
December 31, 2001. Operating results for the three and six months ended June 30,
2002 are not necessarily  indicative of the results that may be expected for the
year  ending  December  31,  2002.  For  further   information,   refer  to  the
consolidated  financial  statements and notes thereto  included in the CryoLife,
Inc. Form 10-K for the year ended December 31, 2001.

The  Company  anticipates  that the FDA  Order,  defined  in Note 2,  will  have
significant adverse effects on its financial position, results of operations and
cash flows. The Company expects its liquidity to decrease significantly over the
remainder of the year due to the anticipated significant decrease in revenues as
a result of the FDA Order and an expected use of cash due to the increased legal
and professional costs relating to the defense of lawsuits and to addressing the
FDA Order.  As a result,  the Company plans to reduce the number of personnel it
employs in several areas, as needed,  based in part on the Company's  success in
its efforts to appeal or obtain a modification of the FDA Order. On September 3,
2002 the Company  announced a reduction in employee force of  approximately  105
employees.  The Company  anticipates  that  severance  and related costs will be
approximately $625,000,  which will be recorded in the third quarter of 2002. As
a result of the employee reduction,  management anticipates personnel costs will
be reduced by  approximately  $360,000 per month.  The Company  anticipates that
after it has reduced the number of  employees  in response to the  reduction  in
revenues, the savings in resources will enable the Company to meet its liquidity
needs  through June 30, 2003.  Even if the Company is able to obtain a favorable
outcome of its appeal or requested  modification  of the FDA Order,  there is no
assurance  that the Company  would  experience a return to the current  level of
demand for its tissue  services  as a result of the  adverse  publicity  or as a
result of customers and tissue banks switching to competitors.

The  Company's  long term  liquidity and capital  requirements  will depend upon
numerous  factors,  including the resolution of the Company's  appeal of the FDA
Order as described in Note 2, the extent of the anticipated  revenue  decreases,
the costs  associated  with  becoming  compliant  with the FDA  requirements  as
outlined  in the FDA Order,  the  outcome of  litigation  against the Company as
described in Note 11, the level of demand for tissue based on adverse  publicity
in the event the FDA Order is resolved in a manner favorable to the Company, the
default on the Term Loan as described in Note 6, and the Company's  inability to
borrow on its line of credit as  described  in Note 12. The  Company may require
additional  financing or seek to raise additional funds through bank facilities,
debt or equity  offerings,  or other  sources of capital to meet  liquidity  and
capital requirements beyond June 30, 2003. Additional funds may not be available
when needed or on terms  acceptable to the Company,  which could have a material
adverse  effect on the  Company's  business,  financial  condition,  results  of
operations, and cash flows. These are factors that indicate that the Company may
be unable to continue operations.



                                       6



NOTE 2 - FDA ORDER ON HUMAN TISSUE PRESERVATION

On August 13,  2002 the  Company  received  an order from the  Atlanta  district
office of the FDA regarding the non-valved  cardiac,  vascular,  and orthopaedic
tissue processed by the Company since October 3, 2001 (the "FDA Order"). Revenue
from human  tissue  preservation  services  accounted  for 78% of the  Company's
revenues for the six months ended June 30,  2002,  and of those  revenues 67% or
$26.9 million are derived from preservation of tissues subject to the FDA Order.
The  Company  announced  the receipt of the FDA Order in a press  release  dated
August 14,  2002.  The FDA Order  follows an FDA warning  letter  dated June 17,
2002,  which the  Company  announced  in a press  release  dated June 24,  2002.
Subsequently,  the  Company  responded  to the  warning  letter and  requested a
meeting with the FDA. The FDA Order contains the following principal provisions:

     o    The  FDA  alleges  that,  based  on its  inspection  of the  Company's
          facility on March 25 through  April 12,  2002,  certain  human  tissue
          received and distributed by the Company may be in violation of 21 Code
          of Federal  Regulations ("CFR") Part 1270. (Part 1270 requires persons
          or entities engaged in the recovery,  screening,  testing, processing,
          storage,  or  distribution  of human tissue to perform certain medical
          screening  and testing on human tissue  intended for  transplantation.
          The  rule  also  imposes  requirements  regarding  procedures  for the
          prevention of contamination or  cross-contamination  of tissues during
          processing  and the  maintenance of certain  records  related to these
          activities.)

     o    The FDA alleges that the Company has not validated  procedures for the
          prevention of infectious disease contamination or  cross-contamination
          of tissue during processing at least since October 3, 2001.

     o    Non-valved cardiac,  vascular, and orthopaedic tissue processed by the
          Company since  October 3, 2001 must be retained  until it is recalled,
          destroyed,  the safety is  confirmed,  or an agreement is reached with
          the  FDA  for its  proper  disposition  under  the  supervision  of an
          authorized official of the FDA.

     o    The FDA strongly  recommends  that  CryoLife  perform a  retrospective
          review of all  tissue in  inventory  (i.e.  currently  in  storage  at
          CryoLife)  that is not  referenced  in the FDA Order to assure that it
          was recovered,  processed, stored, and distributed in conformance with
          21 CFR 1270

     o    The Center for Devices and Radiological Health ("CDRH"), a division of
          the FDA, is  evaluating  whether  there are similar  risks that may be
          posed by  CryoLife's  allograft  heart  valves,  and will take further
          regulatory action if appropriate.


Pursuant  to the FDA Order,  the  Company  has placed  all  non-valved  cardiac,
vascular,  and orthopaedic  tissue subject to the FDA Order on quality assurance
quarantine and is recalling all non-valved  cardiac,  vascular,  and orthopaedic
tissues  subject to the FDA Order (i.e.  processed  since  October 3, 2001) that
have  been  distributed  but not  implanted.  After  the FDA  issued  its  order
regarding  the recall,  Health  Canada also issued a recall on the same types of
tissue  and the United  Kingdom  Department  of Health  has begun  investigating
tissue exported by the Company.

The Company  appealed  the FDA Order on August 14, 2002 and  requested a hearing
with the FDA. No dates have been set for the hearing.  In addition,  the Company
has requested a modification  of the FDA Order to allow  distribution of certain
non-valved cardiac tissues and vascular tissues which are used in life saving or
limb  salvaging  surgical  procedures.  The  Company has met with the FDA and is
holding on-going  discussions  regarding its request for modification of the FDA
Order to accommodate  distribution of non-valved  cardiac and vascular tissue in
life saving and limb salvaging  situations.  The Company is unable to predict if
it will obtain a favorable  outcome to its appeal or request for modification of
the FDA Order or the timing of the resolution of these matters.

After receiving the FDA Order, the Company met with representatives of the FDA's
CDRH division regarding CDRH's review of the Company's processed allograft heart
valves,  which are not  required  to be recalled  pursuant to the FDA Order.  On
August 21, 2002 the FDA  publicly  stated that  allograft  heart valves have not


                                       7


been  included in the FDA recall order as these  devices are  essential  for the
correction of congenital  cardiac lesions in neonate and pediatric  patients and
no satisfactory alternative device exists. However, the FDA also publicly stated
that it still has serious  concerns  regarding  the  processing  and handling of
allograft  heart  valves.  The FDA  also  recommended  that  surgeons  carefully
consider using processed  allografts  from  alternative  sources,  that surgeons
inform prospective  patients of the FDA's concerns with the Company's  allograft
heart  valves,  and that  patients be  carefully  monitored  for both fungal and
bacterial infections.

Management has determined that, with respect to tissue subject to the FDA Order,
product liability claims and shareholder  litigation,  the FDA Order received on
August 13, 2002 is a type one subsequent event, as defined by generally accepted
auditing standards in the United States, which requires adjustment to the second
quarter financial  statements.  A type one subsequent event provides  additional
evidence about  conditions  which existed at the balance sheet date, and results
in changes to the estimates used to prepare the financial statements. Management
has made this  determination  because  the FDA Order  clarified  the  accounting
estimates  surrounding  the June 17, 2002 FDA  warning  letter,  which  stated a
recall was a possible  course of action for the FDA if the warning letter issues
were not resolved promptly.  The Company was working with the FDA to correct the
issues and did not believe a recall  would be instated.  Therefore,  the Company
previously  estimated that there was no material  accounting impact from the FDA
warning  letter.  This estimate was revised due to the receipt of the FDA Order.
Management has determined that the negative implications of the FDA Order to its
revenues  generated  from tissue not subject to the FDA Order and any  resulting
impairments of other assets or incurrence of liabilities do not represent a type
one subsequent event and therefore any necessary adjustments will be recorded in
future periods.

As a result of the FDA Order,  the  Company has  recorded a reduction  to pretax
income of $12.6  million,  in the quarter ended June 30, 2002. The reduction was
comprised  of a net $8.9 million  increase to cost of human tissue  preservation
services, a $2.4 million reduction to revenues (and accounts receivable) for the
estimated  return of the tissues subject to recall by the FDA Order,  and a $1.3
million accrual recorded in general, administrative,  and marketing expenses for
retention  levels under the  Company's  product  liability  and  directors'  and
officers'  insurance  policies of $1.2 million  (see Note 11) and for  estimated
expenses  of $75,000  for  packaging  and  handling  for the return of  affected
tissues under the FDA Order.

The net increase of $8.9 million to cost of  preservation  services is comprised
of a $10.0 million write-down of deferred preservation costs for tissues subject
to the FDA Order,  offset by a $1.1  million  decrease  in cost of  preservation
services due to the estimated  tissue returns  resulting from the FDA Order (the
costs of such recalled tissue are included in the $10.0 million write-down). The
Company  evaluated  many factors in  determining  the magnitude of impairment to
deferred preservation costs,  including the impact of the current FDA Order, the
possibility  of continuing  action by the FDA or other United States and foreign
government  agencies,  and the possibility of unfavorable actions by physicians,
customers,   procurement  organizations,   and  others.  As  a  result  of  this
evaluation, management believes that since all non-valved cardiac, vascular, and
orthopaedic  allograft  tissues processed since October 3, 2001 are under recall
pursuant  to the FDA Order,  and the  Company  does not know if it will obtain a
favorable  resolution  of its appeal and  request  for  modification  of the FDA
Order, the deferred preservation costs for tissues subject to the FDA Order have
been  significantly  impaired.  The Company has estimated  that this  impairment
approximates the full balance of the deferred  preservation costs of the tissues
subject to the FDA Order,  which  includes the tissues stored by the Company and
the  tissues  to be  returned  to the  Company,  and has  therefore  recorded  a
write-down of $10.0 million for these assets.

As of June 30, 2002  deferred  preservation  costs of tissues not subject to the
FDA Order (i.e.  tissue  processed  prior to October 3, 2001) were  $829,000 for
non-valved cardiac tissues,  $7.3 million for vascular tissues, and $4.7 million
for orthopaedic tissues. Deferred preservation costs for allograft heart valves,
which are not subject to the FDA Order,  were $8.5  million as of June 30, 2002.
The Company is continuing to ship these tissues.

The Company  evaluated many factors in determining  the potential  impairment of
the  deferred   preservation  costs  for  non-valved  cardiac,   vascular,   and
orthopaedic  tissues processed prior to October 3, 2001 and all of the Company's


                                       8


allograft heart valves,  as these tissue  populations are not subject to the FDA
Order. The allograft heart valve,  non-valved cardiac,  and vascular tissues are
principally used in life saving and limb salvaging  surgical  procedures and are
often used after all other avenues of treatment have been exhausted.  Therefore,
the Company  believes  that  non-valved  cardiac  tissues and  vascular  tissues
processed  prior to October 3, 2001 and allograft  heart valves will continue to
be in demand.  Although  management  believes  that the  demand  for  non-valved
cardiac  and  vascular  tissues  processed  prior  to  October  3,  2001 and all
allograft  heart  valves  stored by the Company  will be affected by the adverse
publicity  surrounding the FDA Order,  the Company cannot estimate the degree to
which these tissues have been impaired.  The Company may determine in the future
that a  write-down  of the  deferred  preservation  costs for these  tissues  is
necessary.  Management  will  continue  to monitor  the  Company's  progress  in
satisfying  the  FDA's  requirements  and the  effect  of the FDA  Order and the
related  adverse  publicity  on the demand for these  tissues  to  determine  if
additional write-downs of deferred preservation costs are required.

Management  has  reviewed  the current  circumstances  relating  to  orthopaedic
tissues not subject to the FDA order (i.e.  processed prior to October 3, 2001),
including whether there were indications of impairment of deferred  preservation
costs for such tissues as of June 30, 2002.  Management has determined  that the
demand for orthopaedic tissues had not been affected sufficiently as of June 30,
2002 to cause an impairment in the deferred  preservation costs related to these
tissues (i.e., cost was not in excess of market).  Accordingly,  the Company has
not recorded a  write-down  in the deferred  preservation  costs  related to the
orthopaedic  tissue  processed  prior to  October  3, 2001 in the June 30,  2002
financial statements. However, the adverse publicity following the FDA Order has
resulted in a significant  decrease in orthopaedic  tissue revenues since August
13, 2002. As a result,  management believes that the deferred preservation costs
for  orthopaedic  tissues not subject to the FDA Order have been impaired in the
third quarter of 2002 and expects that it will record a  substantial  write-down
of such costs in the third quarter of 2002.

As noted above,  the FDA Order strongly  recommends  that the Company  perform a
retrospective  review of all tissue in  inventory  not subject to the FDA Order.
The  Company  is  having  ongoing  discussions  with  the FDA to  establish  the
procedures to be followed in the retrospective review and therefore is currently
unable to  reasonably  estimate the costs for such review.  Once the Company and
the FDA agree on these procedures the Company will evaluate the costs associated
with performing the review and record an appropriate accrual for these costs.

The Company periodically evaluates the recoverability of noncurrent tangible and
intangible assets and measures the amount of impairment, if any. Management does
not believe an  impairment  of the  Company's  tangible  and  intangible  assets
relating to the tissue  preservation  business had occurred as of June 30, 2002.
However,  depending  on the  outcome of the FDA Order and the future  effects of
adverse  publicity   surrounding  the  FDA  Order  and  reported  infections  on
preservation  revenues,  these  assets  may  become  impaired.  Management  will
continue to evaluate the recoverability of these assets.

The  Company  anticipates  that the FDA Order  will also  affect  the  financial
position,  results of operations,  and cash flows of the Company for the quarter
ended September 30, 2002. In addition to the anticipated  write-down of deferred
preservation  costs for orthopaedic  tissue,  the Company expects a $1.0 million
reversal of revenues  recorded in July and August,  due to the estimated returns
of tissues subject to the FDA Order,  which were shipped in July and August. The
deferred  preservation  costs of tissues  processed  during the third quarter of
2002 that are subject to the FDA Order approximate $3.9 million as of August 14,
2002.  The deferred  preservation  costs of these tissues  processed  during the
third quarter are  anticipated to be fully  impaired and the Company  expects to
record a write-down approximating their full cost in the third quarter.


NOTE 3 - CASH EQUIVALENTS AND MARKETABLE SECURITIES

The Company maintains cash equivalents, which consist primarily of highly liquid
investments  with maturity dates of 90 days or less at the time of  acquisition,
and  marketable   securities  in  several  large,   well-capitalized   financial
institutions,  and the Company's policy  disallows  investment in any securities
rated less than "investment-grade" by national rating services.

                                       9


Management  determines the appropriate  classification of debt securities at the
time of purchase and  reevaluates  such  designations  as of each balance  sheet
date.  Debt securities are classified as  held-to-maturity  when the Company has
the  positive   intent  and  ability  to  hold  the   securities   to  maturity.
Held-to-maturity  securities are stated at amortized  cost.  Debt securities not
classified as  held-to-maturity  or trading and marketable equity securities not
classified as trading are classified as available-for-sale. At June 30, 2002 and
December 31, 2001, all marketable  equity  securities and debt  securities  were
designated as available-for-sale.

Available-for-sale  securities  are  stated  at  their  fair  values,  with  the
unrealized  gains and losses,  net of tax,  reported in a separate  component of
shareholders' equity. Interest income, dividends, realized gains and losses, and
declines in value judged to be other than  temporary  are included in investment
income.  The cost of  securities  sold is based on the  specific  identification
method.

The following is a summary of cash  equivalents  and  marketable  securities (in
thousands):



                                                                                       
                                                                                   Unrealized         Estimated
                                                Adjustments        Adjusted         Holding            Market
June 30, 2002                  Cost Basis      to Cost Basis      Cost Basis      Gains/(Losses)       Value
                             -----------------------------------------------------------------------------------
Cash equivalents:
   Money market funds        $       6,061     $          --    $       6,061     $          --    $       6,061
   Municipal obligations             3,454                --            3,454                --            3,454
                             -----------------------------------------------------------------------------------
                             $       9,515     $          --    $       9,515     $          --    $       9,515
                             ===================================================================================
Marketable securities:
   Municipal obligations     $      17,642     $          --    $      17,642     $         269    $      17,911
   Equity securities                 1,075             (284)              791              (43)              748
                             -----------------------------------------------------------------------------------
                             $      18,717     $       (284)    $      18,433     $         226    $      18,659
                             ===================================================================================

                                                                                   Unrealized         Estimated
                                                Adjustments        Adjusted         Holding            Market
December 31, 2001              Cost Basis      to Cost Basis      Cost Basis      Gains/(Losses)       Value
                             -----------------------------------------------------------------------------------
Cash equivalents:
   Money market funds        $       1,301     $          --    $       1,301     $          --    $       1,301
   Municipal obligations               500                --              500                --              500
                             -----------------------------------------------------------------------------------
                             $       1,801     $          --    $       1,801     $          --    $       1,801
                             ===================================================================================
Marketable securities:
   Municipal obligations     $      17,696     $          --    $      17,696     $         147    $      17,843
   Debt securities                   6,227           (1,217)            5,010                --            5,010
   Equity securities                 3,900             (343)            3,557                10            3,567
   Certificates of deposit              63                --               63                --               63
                             -----------------------------------------------------------------------------------
                             $      27,886     $     (1,560)    $      26,326     $         157    $      26,483
                             ===================================================================================


The  Adjustments  to Cost Basis column  includes a $284,000  loss as of June 30,
2002 recorded for an other than temporary  decline in the market value of equity
securities,  and a $1.6  million  loss as of December  31, 2001  recorded for an
other than temporary decline in the market value of debt and equity  securities.
Differences between cost and market listed above, consisting of a net unrealized
holding gain less  deferred  taxes of $77,000 at June 30, 2002 and $50,000 as of
December 31, 2001, are included in the accumulated  other  comprehensive  income
account of shareholders' equity.

At June 30, 2002 and  December  31,  2001  approximately  $2.0  million and $3.4
million,  respectively,  of marketable securities had a maturity date between 90
days and 1 year,  approximately $4.6 million and $14.5 million,  respectively of
marketable  securities  matured between 1 and 5 years, and  approximately  $12.1
million and $8.6 million of marketable  securities  matured in more than 5 years
or did not have a maturity date.


                                       10


NOTE 4 - INVENTORIES

Inventories are comprised of the following (in thousands):

                                          June 30,          December 31,
                                           2002                2001
                                       ---------------------------------

Raw materials                          $       2,402      $        1,987
Work-in-process                                  961               1,183
Finished goods                                 3,989               3,089
                                       ---------------------------------
                                       $       7,352      $        6,259
                                       =================================


NOTE 5 - EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):


                                                                                

                                                Three Months Ended                    Six Months Ended
                                                      June 30,                             June 30,
                                           -------------------------------       ------------------------------
                                               2002              2001               2002              2001
                                           -------------------------------       ------------------------------

Numerator for basic and diluted  earnings
 per share:
Net (loss) income available to   common
 shareholders                              $   (5,522)   $          2,540        $   (2,418)   $          4,510
                                           ===============================       ==============================

Denominator for basic earnings per share:
Weighted-average basis                         19,538              18,780            19,318              18,761
   Effect of dilutive stock options                --                 842                --                 814
                                            -------------------------------       ------------------------------
Denominator for diluted earnings per share:
Adjusted weighted-average shares               19,538              19,622            19,318              19,575
                                            ===============================       ==============================

Net (loss) earnings per share:
 Basic                                      $       (0.28)    $        0.14       $      (0.13)    $        0.24
                                            ===============================       ==============================
 Diluted                                    $       (0.28)    $        0.13       $      (0.13)    $        0.23
                                            ===============================       ==============================


The effects of stock options of 674,000 and 692,000 shares for the three and six
months ended June 30, 2002,  respectively,  were excluded  from the  calculation
because the amounts are antidilutive for the period presented.


NOTE 6 - DEBT

On April 25, 2000 the  Company  entered  into a loan  agreement  permitting  the
Company to borrow up to $8 million  under a line of credit  during the expansion
of the Company's corporate headquarters and manufacturing facilities. Borrowings
under  the line of credit  accrued  interest  equal to  Adjusted  LIBOR  plus 2%
adjusted  monthly.  On June 1, 2001,  the line of credit was converted to a term
loan (the "Term Loan") to be paid in 60 equal monthly  installments of principal
plus interest  computed at Adjusted LIBOR plus 1.5% (3.34% at June 30, 2002). At
June 30, 2002 the principal balance of the Term Loan was $6.4 million.  The Term
Loan is secured by  substantially  all of the  Company's  assets.  The Term Loan
contains  certain  restrictive   covenants   including,   but  not  limited  to,
maintenance  of  certain   financial   ratios,  a  minimum  tangible  net  worth
requirement,  and the requirement that no materially adverse event has occurred.
The lender has notified the Company that the FDA Order,  as described in Note 2,
and the  inquiries  of the SEC,  as  described  in Note 12,  have had a material
adverse effect on the Company that constitute an event of default.  As of August





                                       11





30, 2002 the lender has elected not to declare an event of default, but reserves
the  right to  exercise  any  such  right  under  the  terms  of the Term  Loan.
Therefore, all amounts due under the Term Loan as of June 30, 2002 are reflected
as a current liability on the Summary Consolidated Balance Sheet.

In March  1997  the  Company  issued a $5.0  million  convertible  debenture  in
connection with the Ideas for Medicine, Inc. acquisition.  The debenture accrued
interest at 7% and was convertible  into common stock of the Company at any time
prior to the due date of March 5, 2002 at $8.05 per common  share.  On March 30,
1998 $607,000 of the  convertible  debenture was converted into 75,000 shares of
the Company's  common stock, and on March 4, 2002 the remaining $4.4 million was
converted into 546,000 shares of the Company's common stock.


NOTE 7 - DERIVATIVES

The Company's Term Loan, which accrues interest  computed at Adjusted LIBOR plus
1.5%,  exposes the Company to changes in interest rates going forward.  On March
16, 2000, the Company entered into a $4 million notional amount forward-starting
interest swap agreement,  which took effect on June 1, 2001 and expires in 2006.
This swap agreement was designated as a cash flow hedge to effectively convert a
portion of the Term Loan balance to a fixed rate basis, thus reducing the impact
of interest rate changes on future income.  This agreement  involves the receipt
of floating rate amounts in exchange for fixed rate  interest  payments over the
life of the agreement,  without an exchange of the underlying principal amounts.
The  differential to be paid or received is recognized in the period in which it
accrues as an adjustment to interest expense on the Term Loan.

On January 1, 2001 the Company adopted SFAS No. 133,  "Accounting for Derivative
Instruments and Hedging  Activities" ("SFAS 133") as amended.  SFAS 133 requires
the Company to recognize all derivative instruments on the balance sheet at fair
value, and changes in the derivative's  fair value must be recognized  currently
in earnings or other comprehensive  income, as applicable.  The adoption of SFAS
133 impacts the accounting for the Company's forward-starting interest rate swap
agreement. Upon adoption of SFAS 133, the Company recorded an unrealized loss of
approximately  $175,000 related to the interest rate swap, which was recorded as
part of long-term  liabilities and accumulated other comprehensive income as the
cumulative  effect of adopting  SFAS 133 within the  Statement of  Shareholders'
Equity.

At June 30, 2002 the notional  amount of this swap  agreement  was $3.2 million,
and the fair value of the interest rate swap agreement, as estimated by the bank
based on its internal  valuation models,  was a liability of $269,000.  The fair
value of the swap agreement is recorded as part of long-term  liabilities and is
recorded net of tax as part of  accumulated  other  comprehensive  income within
shareholders' equity.


NOTE 8 -COMPREHENSIVE INCOME

Components of  comprehensive  income  consist of the  following,  net of tax (in
thousands):


                                                                            

                                                  Three Months Ended                     Six Months Ended
                                                        June 30,                             June 30,
                                            -------------------------------       ------------------------------
                                                 2002              2001               2002              2001
                                            -------------------------------       ------------------------------

Net (loss) income                           $      (5,522)   $       2,540        $      (2,418)   $       4,510
  Unrealized gain/(loss) on investments               128              115                   42              817
  Change in fair value of interest rate swap
  (including cumulative effect of adopting
    SFAS 133 in 2001)                                  15                5                   23             (158)
  Translation adjustment                              250             (121)                 217             (124)
                                            --------------------------------      -------------------------------
Comprehensive income                        $      (5,129)   $       2,539       $       (2,136)   $        5,045
                                            ===============================       ==============================


                                       12


The tax effect on the change in unrealized  gain/loss on  investments is $66,000
and $59,000 for the three months ended June 30, 2002 and 2001, respectively. The
tax  effect  for the six months  ended  June 30,  2002 and 2001 is  $27,000  and
$398,000,  respectively.  The tax  effect  on the  change  in fair  value of the
interest rate swap is $7,000 and $3,000 for the three months ended June 30, 2002
and 2001,  respectively.  The tax effect for the six months  ended June 30, 2002
and 2001 is $2,000 and a tax benefit of $81,000,  respectively.  The translation
adjustment  is not  currently  adjusted  for  income  taxes as it  relates  to a
permanent investment in a foreign subsidiary.


NOTE 9 - ACCOUNTING PRONOUNCEMENTS

On January 1, 2002 the Company was required to adopt SFAS No. 142, "Goodwill and
Other  Intangible  Assets" ("SFAS 142"),  and SFAS No. 144,  "Accounting for the
Impairment or Disposal of Long-Lived  Assets"  ("SFAS 144").  SFAS 142 specifies
that  goodwill and certain other  intangible  assets will no longer be amortized
but instead will be subject to periodic impairment  testing.  SFAS 144 clarifies
accounting and reporting for assets held for sale,  scheduled for abandonment or
other disposal, and recognition of impairment loss related to the carrying value
of  long-lived  assets.  The Company has  completed  its  impairment  testing as
required by FAS 142, and has  determined  that the  recognition of an impairment
loss on intangible assets is not required.  The adoption of these statements did
not have a  material  effect on the  consolidated  financial  statements  of the
Company.  However,  the adoption of SFAS 142 will increase the Company's  pretax
income  by  approximately  $100,000  in 2002 due to the  cessation  of  goodwill
amortization.

The  Company  will be  required  to adopt SFAS No.  143,  "Accounting  for Asset
Retirement  Obligations"  ("SFAS  143") on January 1, 2003.  SFAS 143  addresses
accounting  and  reporting  for  asset  retirement  costs of  long-lived  assets
resulting from legal obligations associated with acquisition,  construction,  or
development  transactions.  The Company has determined that the adoption of SFAS
143 will not have a material  effect on the results of  operations  or financial
position of the Company.

The  Company  will be  required  to adopt  SFAS  No.  145,  "Rescission  of FASB
Statements  4,  44 and  64,  Amendment  to  FASB  Statement  13,  and  Technical
Corrections"  ("SFAS 145") on January 1, 2003.  SFAS 145 changes the  accounting
for the  classification of gains and losses from the extinguishment of debt. The
Company is currently evaluating the impact of this Statement.

The  Company  will be  required  to adopt SFAS No.  146,  "Accounting  for Costs
Associated  with Exit or Disposal  Activities"  ("SFAS 146") on January 1, 2003.
SFAS 146 requires  that costs  associated  with exit or disposal  activities  be
recorded at their fair values when a liability has been incurred. Under previous
guidance,  certain exit costs were accrued upon  management's  commitment  to an
exit plan, which is generally before an actual liability has been incurred.  The
Company is currently evaluating the impact of this Statement.


NOTE 10 - SEGMENT INFORMATION

The Company has two reportable segments:  Human Tissue Preservation Services and
Implantable  Medical Devices.  The Company's segments are organized according to
services and products.

The HUMAN TISSUE  PRESERVATION  SERVICES segment includes  external revenue from
cryopreservation  services  of  cardiac,  vascular,  and  orthopaedic  allograft
tissues.  The IMPLANTABLE MEDICAL DEVICES segment includes external revenue from
product sales of BioGlue Surgical Adhesive and bioprosthetic devices,  including
stentless  porcine heart valves,  SynerGraft  treated porcine heart valves,  and
SynerGraft treated bovine vascular grafts. There are no intersegment revenues.

The  primary  measure  of  segment  performance,  as  viewed  by  the  Company's
management,  is segment  gross  margin,  or net external  revenues  less cost of
preservation  services and products.  The Company does not  segregate  assets by
segment;  therefore asset  information is excluded from the segment  disclosures
below.


                                       13



The following  table  summarizes  revenues,  cost of  preservation  services and
products, and gross margins for the Company's operating segments (in thousands):


                                                                            

                                                   Three Months Ended                    Six Months Ended
                                                        June 30,                             June 30,
                                            -------------------------------       ------------------------------
                                                 2002              2001               2002              2001
                                            -------------------------------       ------------------------------

Revenue:
   Human tissue preservation services, net a        17,536           18,765              37,774           37,331
   Implantable medical devices                       5,473            2,789              10,538            5,430
   All other b                                         255              143                 423              368
                                            -------------------------------       ------------------------------
                                            $       23,264    $      21,697       $      48,735    $      43,129
                                            -------------------------------       ------------------------------
Cost of Preservation Services and Products:
   Human tissue preservation services c             17,203            7,697              25,266           15,370
   Implantable medical devices                       1,843            1,423               4,078            2,855
   All other b                                          --               --                  --               --
                                            -------------------------------       ------------------------------
                                                    19,046            9,120              29,344           18,225
                                            -------------------------------       ------------------------------
Gross Margin (Loss):
   Human tissue preservation services                  333           11,068              12,508           21,961
   Implantable medical devices                       3,630            1,366               6,460            2,575
   All other b                                         255              143                 423              368
                                            -------------------------------       ------------------------------
                                            $        4,218    $      12,577       $      19,391    $      24,904
                                            -------------------------------       ------------------------------


a    Revenue  from human tissue  preservation  services  includes the  estimated
     effect of the return of tissues  subject to recall by the FDA Order of $2.4
     million in the three and six months  ended June 30, 2002.
b    The "All other"  designation  includes 1) grant revenue and 2) distribution
     revenue.

c    Cost of human  tissue  preservation  services  includes the  write-down  of
     deferred  preservation  costs for tissues subject to the FDA Order of $10.0
     million in the three and six months ended June 30, 2002.

The following table summarizes net revenues by product (in thousands):


                                                                            

                                                   Three Months Ended                    Six Months Ended
                                                        June 30,                             June 30,
                                            -------------------------------       ------------------------------
                                                 2002              2001               2002              2001
                                            -------------------------------       ------------------------------

Revenue:
Human tissue preservation services, net a:
   Cardiovascular tissue                    $        7,336    $       7,182       $      14,644    $      14,093
   Vascular tissue                                   4,641            6,017              11,658           12,429
   Orthopaedic tissue                                5,559            5,566              11,472           10,809
                                            -------------------------------       ------------------------------
Total preservation services                         17,536           18,765              37,774           37,331
                                            -------------------------------       ------------------------------

BioGlue surgical adhesive                            5,251            2,631              10,124            5,074
Bioprosthetic devices                                  222              158                 414              356
Distribution and grant                                 255              143                 423              368
                                            -------------------------------       ------------------------------
                                            $       23,264    $      21,697       $      48,735    $      43,129
                                            ===============================       ==============================


a    Revenue from tissue preservation  services includes the estimated effect of
     the return of tissues  subject  to recall by the FDA Order of  $340,000  in
     cardiovascular  tissue,  $1.7 million in vascular  tissue,  and $380,000 in
     orthopaedic  tissue,  totaling $2.4  million,  for the three and six months
     ended June 30, 2002.

                                       14



NOTE 11 - COMMITMENTS AND CONTINGENCIES

In the normal  course of business as a medical  device and services  company the
Company has product liability complaints filed against it. As of August 30, 2002
fifteen  product  liability cases had been filed against the Company between May
18, 2000 and August 15, 2002.  The cases are currently in the  pre-discovery  or
discovery  stages.  Of these cases, nine allege product liability claims arising
out of the Company's  orthopaedic  tissue,  four allege product liability claims
arising  out of the  Company's  allograft  heart  valve  tissue and one  alleges
product  liability  claims arising out of the non-tissue  products made by Ideas
for Medicine, when it was a subsidiary of the Company.

Included  in these  cases is the  complaint  filed  against  the  Company in the
Superior  Court of Cobb County,  Georgia,  on July 12, 2002 by Steve Lykins,  as
Trustee for the benefit of next of kin of Brian Lykins.  This complaint  alleges
strict liability, negligence,  professional negligence, and breach of warranties
related to tissue implanted in November of 2001. The plaintiff seeks unspecified
compensatory and punitive damages.

The Company maintains product liability  insurance  policies,  which the Company
believes to be adequate to defend against these suits.  The Company's  insurance
company has been notified of these  actions.  The Company  intends to vigorously
defend against these claims.  Nonetheless,  an adverse judgment in excess of the
Company's  insurance  coverage  could  have a  material  adverse  effect  on the
Company's financial position, results of operations, and cash flows.

Several putative class action lawsuits were filed in July 2002, one of which was
amended in August of 2002,  against  the  Company  and  certain  officers of the
Company  alleging that the defendants  violated  Sections 10(b) and 20(a) of the
Securities  Exchange  Act of 1934  and Rule  10b-5  promulgated  thereunder,  by
issuing a series of  materially  false and  misleading  statements to the market
throughout  the Class  Period of August of 2000  through  August of 2002,  which
statements  had the effect of  artificially  inflating  the market  price of the
Company's  securities.  The principal allegations of the complaints are that the
Company  failed to disclose  its alleged  lack of  compliance  with  certain FDA
regulations  regarding the handling and processing of certain  tissues and other
product safety matters. The plaintiffs seek unspecified  compensatory damages in
an amount  to be proven at trial.  The  Company  believes  these  cases  will be
consolidated  into one putative class action lawsuit.  The Company  believes the
claims made in the lawsuits are without merit and intends to  vigorously  defend
against these claims.  Management has retained the services of the Atlanta based
law  firm  of King &  Spalding  to  defend  the  Company.  The  Company  carries
director's and officer's  liability  insurance which the Company  believes to be
adequate to defend  against  these suits.  Nonetheless,  an adverse  judgment in
excess of the Company's  insurance coverage could have a material adverse effect
on the Company's financial position, results of operations, and cash flows.

The Company has concluded that it is probable that it will incur losses relating
to  claims  and  litigation  of at least  $1.2  million;  which  represents  the
aggregate amount of the Company's  deductibles  under its product  liability and
directors and officer's insurance  policies.  Therefore the Company has recorded
an accrual of $1.2 million as of June 30, 2002.


NOTE 12 - SUBSEQUENT EVENTS

On July 23, 2002 the Company's Board of Directors  authorized the purchase of up
to $10  million  of its Common  Stock.  As of August 13,  2002 the  Company  had
repurchased  68,000  shares  of its  Company  stock  for  $666,000.  No  further
purchases are anticipated in the near term.

On July 30, 2002 the Company  entered into a line of credit  agreement  with the
lender that made the Term Loan, as discussed in Note 6,  permitting  the Company
to  borrow up to $10  million.  Borrowings  under  the line of credit  agreement
accrue interest equal to Adjusted LIBOR plus 1.25% adjusted  monthly.  This loan
is secured by substantially  all of the Company's  assets. As of August 30, 2002
$6,900 has been drawn on the line of  credit.  As a result of the FDA Order,  as
discussed  in Note  2,  the  Company  is not in  compliance  with  the  lender's
requirements for advances of funds under the line of credit.  On August 21, 2002
the lender notified the Company that it was not entitled to any further advances
under the line of credit.

                                       15


On August 7, 2002 the Company announced the settlement of its ongoing litigation
with Colorado State  University  Foundation  ("CSURF") over the ownership of the
Company's  SynerGraft  technology.  The settlement resolves all disputes between
the  parties  and  extinguishes  all CSURF  ownership  claims  to any  aspect of
CryoLife's  SynerGraft  technology.  The  settlement  includes an  unconditional
assignment to CryoLife of CSURF tissue  engineering  patents,  trade secrets and
know-how  relating  to  tissue  decellularization  and  recellularization.   The
technology  assignment  supercedes  the  1996  technology  license,   which  was
terminated by the terms of the settlement. Payment terms include a nonrefundable
advance of $400,000  paid by the Company to CSURF that will be applied to earned
royalties  as they accrue  through  March 2011.  The Company  will record  these
amounts as prepaid  royalties  and will  expense  the  amounts as the  royalties
accrue.  The  earned  royalty  rate is a maximum of 0.75% of net  revenues  from
products or tissue  services  utilizing  the  SynerGraft  technology.  Royalties
earned under the agreement for revenues through June 30, 2002 were approximately
$27,000.

On August 14,  2002 the  compensation  committee  determined  to pay  bonuses to
Steven G.  Anderson,  Chairman,  President  and CEO, of  $225,000  and Sidney B.
Ashmore,  Vice  President  Marketing,   of  $15,000.  On  August  16,  2002  the
compensation  committee  determined  to pay a bonus to James  Vander  Wyk,  Vice
President Regulatory Affairs and Quality Assurance, of $60,000. In each case the
compensation  committee determined to grant the mid-year bonus in recognition of
the officer's  efforts on behalf of the Company in addressing  important Company
issues in difficult times,  the officer's long term service to the Company,  and
to accommodate  the economic needs of the officers  arising from their desire to
retain  Company  shares  rather than  permit them to be sold  pursuant to margin
calls.  These officers now have no margin loans against their shares.

On  Saturday,  August 17,  2002 the  Company  received a letter  from the United
States  Securities and Exchange  Commission  (the "SEC Letter") that stated that
the Company was subject to an investigation  related to the Company's August 14,
2002  announcement of the FDA Order and requesting  information from the Company
from the period  between  September  1, 2001  through the date of the  Company's
response to the SEC Letter.  The SEC Letter stated, in part, that "We are trying
to determine  whether there have been any  violations of the federal  securities
laws. The investigation and the subpoena do not mean that we have concluded that
anyone has broken the law. Also, the investigation  does not mean that we have a
negative  opinion  of any  person,  entity  or  security."  The staff of the SEC
subsequently confirmed that its investigation is informal in nature, and that it
does not have subpoena  power at this time. At the present time,  the Company is
unable to predict the outcome of this matter.



                                       16



Item 2. Management's  Discussion and Analysis of Financial Condition and Results
        of Operations.

RECENT EVENTS

On August 13,  2002 the  Company  received  an order from the  Atlanta  district
office of the FDA regarding the non-valved  cardiac,  vascular,  and orthopaedic
tissue processed by the Company since October 3, 2001 (the "FDA Order"). Revenue
from human  tissue  preservation  services  accounted  for 78% of the  Company's
revenues for the six months ended June 30,  2002,  and of those  revenues 67% or
$26.9 million are derived from preservation of tissues subject to the FDA Order.
The  Company  announced  the receipt of the FDA Order in a press  release  dated
August 14,  2002.  The FDA Order  follows an FDA warning  letter  dated June 17,
2002,  which the  Company  announced  in a press  release  dated June 24,  2002.
Subsequently,  the  Company  responded  to the  warning  letter and  requested a
meeting with the FDA. The FDA Order contains the following principal provisions:

     o    The  FDA  alleges  that,  based  on its  inspection  of the  Company's
          facility on March 25 through  April 12,  2002,  certain  human  tissue
          received and distributed by the Company may be in violation of 21 Code
          of Federal  Regulations  ("CFR") 1270.  Code 21, 1270 (PROVIDE A BRIEF
          DESCRIPTION OF WHAT THIS IS)

     o    The FDA alleges that the Company has not validated  procedures for the
          prevention of infectious disease contamination or  cross-contamination
          of tissue during processing at least since October 3, 2001.

     o    Non-valved cardiac,  vascular, and orthopaedic tissue processed by the
          Company since  October 3, 2001 must be retained  until it is recalled,
          destroyed,  the safety is  confirmed,  or an agreement is reached with
          the  FDA  for its  proper  disposition  under  the  supervision  of an
          authorized official of the FDA.

     o    The FDA strongly  recommends  that  CryoLife  perform a  retrospective
          review of all tissue in inventory  that is not  referenced  in the FDA
          Order  to  assure  that  it  was  recovered,  processed,  stored,  and
          distributed in conformance with 21 CFR 1270

     o    The Center for Devices and Radiological  Health ("CDRH") is evaluating
          whether  there  are  similar  risks  that may be  posed by  CryoLife's
          allograft  heart valves,  and will take further  regulatory  action if
          appropriate.


Pursuant  to the FDA Order,  the  Company  has placed  all  non-valved  cardiac,
vascular,  and orthopaedic  tissue subject to the FDA Order on quality assurance
quarantine and is recalling all non-valved  cardiac,  vascular,  and orthopaedic
tissues  subject to the FDA Order that have been  distributed but not implanted.
After the FDA issued its order regarding the recall, Health Canada also issued a
recall on the same types of tissue and the United  Kingdom  Department of Health
has begun investigating tissue exported by the Company.

The Company  appealed  the FDA Order on August 14, 2002 and  requested a hearing
with the FDA. No dates have been set for the hearing.  In addition,  the Company
has requested a modification  of the FDA Order to allow  distribution of certain
non-valved cardiac tissues and vascular tissues which are used in life saving or
limb  salvaging  surgical  procedures.  The  Company has met with the FDA and is
holding on-going  discussions  regarding its request for modification of the FDA
Order to accommodate  distribution of non-valved  cardiac and vascular tissue in
life saving and limb salvaging  situations.  The Company is unable to predict if
it will obtain a favorable  outcome to its appeal or request for modification of
the FDA Order or the timing of the resolution of these matters.

After receiving the FDA Order, the Company met with representatives of the FDA's
CDRH division regarding CDRH's review of the Company's processed allograft heart
valves,  which are not  required  to be recalled  pursuant to the FDA Order.  On
August 21, 2002 the FDA  publicly  stated that  allograft  heart valves have not


                                       17


been  included in the FDA recall order as these  devices are  essential  for the
correction of congenital  cardiac lesions in neonate and pediatric  patients and
no satisfactory alternative device exists. However, the FDA also publicly stated
that it still has serious  concerns  regarding  the  processing  and handling of
allograft  heart  valves.  The FDA  also  recommended  that  surgeons  carefully
consider using processed  allografts  from  alternative  sources,  that surgeons
inform prospective  patients of the FDA's concerns with the Company's  allograft
heart  valves,  and that  patients be  carefully  monitored  for both fungal and
bacterial infections.

Management has determined that, with respect to tissue subject to the FDA Order,
product liability claims and shareholder  litigation,  the FDA Order received on
August 13, 2002 is a type one subsequent event, as defined by generally accepted
auditing standards in the United States, which requires adjustment to the second
quarter financial  statements.  A type one subsequent event provides  additional
evidence about  conditions  which existed at the balance sheet date, and results
in changes to the estimates used to prepare the financial statements. Management
has made this  determination  because  the FDA Order  clarified  the  accounting
estimates  surrounding  the June 17, 2002 FDA  warning  letter,  which  stated a
recall was a possible  course of action for the FDA if the warning letter issues
were not resolved promptly.  The Company was working with the FDA to correct the
issues and did not believe a recall  would be instated.  Therefore,  the Company
previously  estimated that there was no material  accounting impact from the FDA
warning  letter.  This estimate was revised due to the receipt of the FDA Order.
Management has determined that the negative implications of the FDA Order to the
tissue  revenues not subject to the FDA Order and any resulting  impairments  of
other assets or incurrence of liabilities do not represent a type one subsequent
event  and  therefore  any  necessary  adjustments  will be  recorded  in future
periods.

As a result of the FDA Order,  the  Company has  recorded a reduction  to pretax
income of $12.6  million,  in the quarter ended June 30, 2002. The reduction was
comprised  of a net $8.9 million  increase to cost of human tissue  preservation
services, a $2.4 million reduction to revenues (and accounts receivable) for the
estimated  return of the tissues subject to recall by the FDA Order,  and a $1.3
million accrual recorded in general, administrative,  and marketing expenses for
retention  levels under the  Company's  product  liability  and  directors'  and
officers'  insurance  policies of $1.2 million  (see Note 11) and for  estimated
expenses  of $75,000  for  packaging  and  handling  for the return of  affected
tissues under the FDA Order.

The net increase of $8.9 million to cost of  preservation  services is comprised
of a $10.0 million write-down of deferred preservation costs for tissues subject
to the FDA Order,  offset by a $1.1  million  decrease  in cost of  preservation
services due to the estimated  tissue returns  resulting from the FDA Order. The
Company  evaluated  many factors in  determining  the magnitude of impairment to
deferred preservation costs,  including the impact of the current FDA Order, the
possibility  of continuing  action by the FDA or other United States and foreign
government  agencies,  and the possibility of unfavorable actions by physicians,
customers,   procurement  organizations,   and  others.  As  a  result  of  this
evaluation, management believes that since all non-valved cardiac, vascular, and
orthopaedic  allograft  tissues processed since October 3, 2001 are under recall
pursuant  to the FDA Order,  and the  Company  does not know if it will obtain a
favorable  resolution  of its appeal and  request  for  modification  of the FDA
Order, the deferred preservation costs for tissues subject to the FDA Order have
been  significantly  impaired.  The Company has estimated  that this  impairment
approximates the full balance of the deferred  preservation costs of the tissues
subject to the FDA Order,  which  includes the tissues stored by the Company and
the  tissues  to be  returned  to the  Company,  and has  therefore  recorded  a
write-down of $10.0 million for these assets.

As of June 30, 2002  deferred  preservation  costs of tissues not subject to the
FDA Order (i.e.  tissue  processed  prior to October 3, 2001) were  $829,000 for
non-valved cardiac tissues,  $7.3 million for vascular tissues, and $4.7 million
for orthopaedic tissues. Deferred preservation costs for allograft heart valves,
which are not subject to the FDA Order,  were $8.5  million as of June 30, 2002.
The Company is continuing to ship these tissues.

The Company  evaluated many factors in determining  the potential  impairment of
the  deferred   preservation  costs  for  non-valved  cardiac,   vascular,   and
orthopaedic  tissues processed prior to October 3, 2001 and all of the Company's
allograft heart valves,  as these tissue  populations are not subject to the FDA


                                       18


Order. The allograft heart valve,  non-valved cardiac,  and vascular tissues are
principally used in life saving and limb salvaging  surgical  procedures and are
often used after all other avenues of treatment have been exhausted.  Therefore,
the Company  believes  that  non-valved  cardiac  tissues and  vascular  tissues
processed  prior to October 3, 2001 and allograft  heart valves will continue to
be in demand.  Although  management  believes  that the  demand  for  non-valved
cardiac  and  vascular  tissues  processed  prior  to  October  3,  2001 and all
allograft  heart  valves  stored by the Company  will be affected by the adverse
publicity  surrounding the FDA Order,  the Company cannot estimate the degree to
which these tissues have been impaired.  The Company may determine in the future
that a  write-down  of the  deferred  preservation  costs for these  tissues  is
necessary.  Management  will  continue  to monitor  the  Company's  progress  in
satisfying  the  FDA's  requirements  and the  effect  of the FDA  Order and the
related  adverse  publicity  on the demand for these  tissues  to  determine  if
additional write-downs of deferred preservation costs are required.

Management  has  reviewed  the current  circumstances  relating  to  orthopaedic
tissues not subject to the FDA order (i.e.  processed prior to October 3, 2001),
including whether there were indications of impairment of deferred  preservation
costs for such tissues as of June 30, 2002.  Management has determined  that the
demand for orthopaedic tissues had not been affected sufficiently as of June 30,
2002 to cause an impairment in the deferred  preservation costs related to these
tissues (i.e., cost was not in excess of market).  Accordingly,  the Company has
not recorded a  write-down  in the deferred  preservation  costs  related to the
orthopaedic  tissue  processed  prior to  October  3, 2001 in the June 30,  2002
financial statements. However, the adverse publicity following the FDA Order has
resulted in a significant  decrease in orthopaedic  tissue revenues since August
13, 2002. As a result,  management believes that the deferred preservation costs
for  orthopaedic  tissues not subject to the FDA Order have been impaired in the
third quarter of 2002 and expects that it will record a  substantial  write-down
of such costs in the third quarter of 2002.

As noted above,  the FDA Order strongly  recommends  that the Company  perform a
retrospective  review of all tissue in  inventory  not subject to the FDA Order.
The  Company  is  having  ongoing  discussions  with  the FDA to  establish  the
procedures to be followed in the retrospective review and therefore is currently
unable to  reasonably  estimate the costs for such review.  Once the Company and
the FDA agree on these procedures the Company will evaluate the costs associated
with performing the review and record an appropriate accrual for these costs.

The Company periodically evaluates the recoverability of noncurrent tangible and
intangible assets and measures the amount of impairment, if any. Management does
not believe an  impairment  of the  Company's  tangible  and  intangible  assets
relating to the tissue  preservation  business has occurred as of June 30, 2002.
However,  depending  on the  outcome of the FDA Order and the future  effects of
adverse  publicity   surrounding  the  FDA  Order  and  reported  infections  on
preservation  revenues,  these  assets  may  become  impaired.  Management  will
continue to evaluate the recoverability of these assets.

The  Company  anticipates  that the FDA Order  will also  affect  the  financial
position,  results of operations,  and cash flows of the Company for the quarter
ended September 30, 2002. In addition to the anticipated  write-down of deferred
preservation  costs for orthopaedic  tissue,  the Company expects a $1.0 million
reversal of revenues  recorded in July and August,  due to the estimated returns
of tissues subject to the FDA Order,  which were shipped in July and August. The
deferred  preservation  costs of tissues  processed  during the third quarter of
2002 that are subject to the FDA Order approximate $3.9 million as of August 14,
2002.  The deferred  preservation  costs of these tissues  processed  during the
third quarter are  anticipated to be fully  impaired and the Company  expects to
record a write-down approximating their full cost in the third quarter.

On July 23, 2002 the Company's Board of Directors  authorized the purchase of up
to $10  million  of its Common  Stock.  As of August 13,  2002 the  Company  had
repurchased  68,000  shares  of its  Company  stock  for  $666,000.  No  further
purchases are anticipated in the near term.

On August 7, 2002 the Company announced the settlement of its ongoing litigation
with Colorado State  University  Foundation  ("CSURF") over the ownership of the
Company's  SynerGraft  technology.  The settlement resolves all disputes between
the  parties  and  extinguishes  all CSURF  ownership  claims  to any  aspect of
CryoLife's  SynerGraft  technology.  The  settlement  includes an  unconditional
assignment to CryoLife of CSURF tissue  engineering  patents,  trade secrets and


                                       19


know-how  relating  to  tissue  decellularization  and  recellularization.   The
technology  assignment  supercedes  the  1996  technology  license,   which  was
terminated by the terms of the settlement. Payment terms include a nonrefundable
advance of $400,000  paid by the Company to CSURF that will be applied to earned
royalties  as they accrue  through  March 2011.  The Company  will record  these
amounts as prepaid  royalties  and will  expense  the  amounts as the  royalties
accrue.  The  earned  royalty  rate is a maximum of 0.75% of net  revenues  from
products or tissue  services  utilizing  the  SynerGraft  technology.  Royalties
earned under the agreement for revenues through June 30, 2002 were approximately
$27,000.

On August 14,  2002 the  compensation  committee  determined  to pay  bonuses to
Steven G.  Anderson,  Chairman,  President  and CEO, of  $225,000  and Sidney B.
Ashmore,   Vice  President  Marketing,   of$15,000.   On  August  16,  2002  the
compensation  committee  determined  to pay a bonus to James  Vander  Wyk,  Vice
President Regulatory Affairs and Quality Assurance, of $60,000. In each case the
compensation  committee determined to grant the mid-year bonus in recognition of
the officer's  efforts on behalf of the Company in addressing  important Company
issues in difficult times,  the officer's long term service to the Company,  and
to accommodate  the economic needs of the officers  arising from their desire to
retain  Company  shares  rather than  permit them to be sold  pursuant to margin
calls. The officers now have no margin loans against their shares.

On  Saturday,  August 17,  2002 the  Company  received a letter  from the United
States  Securities and Exchange  Commission  (the "SEC Letter") that stated that
the Company was subject to an investigation  related to the Company's August 14,
2002  announcement of the FDA Order and requesting  information from the Company
from the period  between  September  1, 2001  through the date of the  Company's
response to the SEC Letter.  The SEC Letter stated, in part, that "We are trying
to determine  whether there have been any  violations of the federal  securities
laws. The investigation and the subpoena do not mean that we have concluded that
anyone has broken the law. Also, the investigation  does not mean that we have a
negative  opinion  of any  person,  entity  or  security."  The staff of the SEC
subsequently confirmed that the investigation is informal in nature, and that it
does not have subpoena  poser at this time. At the present time,  the Company is
unable to predict the outcome of this matter.

On  September  3, 2002 the Company  announced a reduction  in employee  force of
approximately 105 employees.  The Company anticipates that severance and related
costs  will be  approximately  $625,000,  which  will be  recorded  in the third
quarter of 2002. As a result of the employee reduction,  management  anticipates
personnel costs will be reduced by approximately $360,000 per month.


CRITICAL ACCOUNTING POLICIES

A summary of the Company's significant accounting policies is included in Note 1
to the  consolidated  financial  statements,  as filed in the Form  10-K for the
fiscal year ended  December 31, 2001.  Management  believes that the  consistent
application  of these  policies  enables  the  Company to  provide  users of the
financial  statements with useful and reliable  information  about the Company's
operating results and financial condition. The consolidated financial statements
are prepared in accordance with accounting  principles generally accepted in the
United States, which require the Company to make estimates and assumptions.  The
following are accounting policies that management believes are most important to
the portrayal of the Company's financial condition and results and may involve a
higher degree of judgment and complexity.

REVENUE RECOGNITION: The Company recognizes revenue in accordance with SEC Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"),  which  provides  guidance  on  applying  generally  accepted  accounting
principles to revenue recognition issues. Revenues for human tissue preservation
services are  recognized  when services are completed and tissue is delivered to
the  customer.  The Company  accepts  returned  human tissue  within 72 hours of


                                       20


original shipment. The Company has recorded the estimated revenues of tissues to
be recalled pursuant to the FDA Order as a service revenue return.  Revenues for
products are recognized at the time the product is shipped,  at which time title
passes  to the  customer.  There  are no  further  performance  obligations  and
delivery  occurs upon shipment.  Revenues from research grants are recognized in
the  period  the  associated  costs  are  incurred.  The  Company  assesses  the
likelihood  of  collection  based  on  a  number  of  factors,   including  past
transaction history with the customer and the credit-worthiness of the customer.

DEFERRED  PRESERVATION  COSTS:  Tissue is procured from deceased human donors by
organ  procurement  agencies and tissue  banks,  which consign the tissue to the
Company for processing and  preservation.  Preservation  costs related to tissue
held by the Company are deferred  until revenue is  recognized  upon shipment of
the tissue to the  implanting  hospital.  Deferred  preservation  costs  consist
primarily of laboratory  expenses,  tissue procurement fees, fringe and facility
allocations,  and  freight-in  charges,  and are stated,  net of  reserve,  on a
first-in,  first-out basis. As of June 30, 2002 the deferred  preservation costs
were $8.5 million for allograft  heart valve  tissues,  $829,000 for  non-valved
cardiac  tissues,  $7.3  million  for  vascular  tissues,  and $4.7  million for
orthopaedic  tissues,  excluding valuation  allowances of $300,000.  At June 30,
2002 the Company  recorded a write-down of deferred  preservation  costs of $1.6
million for non-valved cardiac tissues,  $5.0 million for vascular tissues,  and
$3.4 million for orthopaedic  tissue totaling $10.0 million.  These  write-downs
were  recorded as a result of the FDA Order as  discussed  in the Recent  Events
section. The amount of these write-downs reflects management's estimate based on
information currently available to it. These estimates may prove inaccurate,  as
the scope and impact of the FDA Order are  determined.  Management will continue
to evaluate the recoverability of these deferred preservation costs based on the
factors discussed in the Recent Events section and record additional write-downs
if it becomes clear that additional impairments have occurred.

INTANGIBLE  ASSETS:   Goodwill  resulting  from  business  acquisitions  is  not
amortized,  but is instead subject to periodic  impairment testing in accordance
with FAS 142.  Patent costs are amortized over the expected  useful lives of the
patents (primarily 17 years) using the straight-line  method. Other intangibles,
which consist  primarily of manufacturing  rights and agreements,  are amortized
over the expected useful lives of the related assets (primarily five years). The
Company  periodically  evaluates the  recoverability of noncurrent  tangible and
intangible assets and measures the amount of impairment, if any. Management does
not believe an impairment exists to the intangible assets relating to the tissue
preservation  business.  However,  depending on outcome of the FDA Order and the
future  effects  adverse  publicity  surrounding  the  FDA  Order  and  reported
infections  on  preservation   revenues,   these  assets  may  become  impaired.
Management  will  continue to evaluate the  recoverability  of these  intangible
assets.

NEW ACCOUNTING PRONOUNCEMENTS

On January 1, 2002 the Company was required to adopt SFAS No. 142, "Goodwill and
Other  Intangible  Assets" ("SFAS 142"),  and SFAS No. 144,  "Accounting for the
Impairment or Disposal of Long-Lived  Assets"  ("SFAS 144").  SFAS 142 specifies
that  goodwill and certain other  intangible  assets will no longer be amortized
but instead will be subject to periodic impairment  testing.  SFAS 144 clarifies
accounting and reporting for assets held for sale,  scheduled for abandonment or
other disposal, and recognition of impairment loss related to the carrying value
of  long-lived  assets.  The Company has  completed  its  impairment  testing as
required by FAS 142, and has  determined  that the  recognition of an impairment
loss on intangible assets is not required.  The adoption of these statements did
not have a  material  effect on the  consolidated  financial  statements  of the
Company.  However,  the adoption of SFAS 142 will increase the Company's  pretax
income  by  approximately  $100,000  in 2002 due to the  cessation  of  goodwill
amortization.

The  Company  will be  required  to adopt SFAS No.  143,  "Accounting  for Asset
Retirement  Obligations"  ("SFAS  143") on January 1, 2003.  SFAS 143  addresses
accounting  and  reporting  for  asset  retirement  costs of  long-lived  assets
resulting from legal obligations associated with acquisition,  construction,  or
development  transactions.  The Company has determined that the adoption of SFAS
143 will not have a  material  effect  on the  financial  position,  results  of
operations, and cash flows of the Company.

The  Company  will be  required  to adopt  SFAS  No.  145,  "Rescission  of FASB
Statements  4,  44 and  64,  Amendment  to  FASB  Statement  13,  and  Technical
Corrections"  ("SFAS 145") on January 1, 2003.  SFAS 145 changes the  accounting
for the  classification of gains and losses from the extinguishment of debt. The
Company is currently evaluating the impact of this Statement.



                                       21


The  Company  will be  required  to adopt SFAS No.  146,  "Accounting  for Costs
Associated  with Exit or Disposal  Activities"  ("SFAS 146") on January 1, 2003.
SFAS 146 requires  that costs  associated  with exit or disposal  activities  be
recorded at their fair values when a liability has been incurred. Under previous
guidance,  certain exit costs were accrued upon  management's  commitment  to an
exit plan, which is generally before an actual liability has been incurred.  The
Company is currently evaluating the impact of this Statement.


RESULTS OF OPERATIONS

REVENUES



                                                                                          

                                         Three Months Ended                                  Six Months Ended
                                              June 30,                                           June 30,
                               ------------------------------------------       ------------------------------------------
                                  2002                    2001                      2002                    2001
                               ------------------------------------------       ------------------------------------------

Revenues                       $      23,264        $      21,697               $       48,735        $       43,129

Revenues excluding recall      $      25,697        $      21,697               $       51,168        $       43,129



Revenues increased 7% and 13%, respectively,  for the three and six months ended
June 30, 2002.  Revenues were adversely  impacted by the estimated effect of the
return of  tissues  subject  to recall by the FDA Order,  which  resulted  in an
estimated  decrease of $2.4 million in preservation  service revenues during the
three and six months ended June 30, 2002.

Excluding  the  effect  of the  FDA  Order,  revenues  increased  18%  and  19%,
respectively, for the three and six months ended June 30, 2002. This increase in
revenues  for the three  month and six month  periods  ended  June 30,  2002 was
primarily due to increased sales of BioGlue Surgical  Adhesive and growth in the
Company's preservation  businesses.  The increases are primarily attributable to
the receipt of FDA approval for BioGlue in December  2001, a greater  acceptance
of these products by the surgical community and the Company's ability to procure
greater amounts of tissue. Management currently believes the FDA Order will have
an adverse impact on these trends.

The  Company has not yet  determined  the full impact of the FDA Order on future
revenues.  In the event the Company is not  successful  in its appeal of the FDA
Order  or is  unable  to reach a  satisfactory  agreement  with the FDA,  future
revenues can be expected to decrease  significantly.  Revenues from human tissue
preservation  services  accounted for 78% of the Company's  revenues for the six
months  ended  June 30,  2002,  and of those  revenues  67%  were  derived  from
preservation  of tissues  subject to the FDA Order.  In 2001  revenues for human
tissue  preservation  services  were  87% of the  Company's  revenues,  or $75.6
million,  and of  those  revenues  68%,  or $51.6  million,  were  derived  from
preservation of tissues subject to the FDA Order.

BIOGLUE SURGICAL ADHESIVE



                                                                                                                 

                                                         Three Months Ended                             Six Months Ended
                                                               June 30,                                     June 30,
                                                ------------------------------------------      ------------------------------------
                                                      2002               2001                       2002                 2001
                                                ------------------------------------------      ------------------------------------

Revenues                                        $      5,251         $     2,631                $    10,124             $   5,074
Percentage of total revenue                              23%                 12%                        21%                   12%

Percentage of total revenue excluding recall             20%                 12%                        20%                   12%



Revenues from the sale of BioGlue Surgical Adhesive increased 100% for the three
and six month  periods  ended June 30,  2002.  The  increase in revenues for the
three month and six month  periods ended June 30, 2002 was due to an increase in


                                       22


the milliliters of BioGlue shipped of 81% and 79%, respectively, and an increase
in the average selling price of the BioGlue  shipped.  The increase in shipments
was primarily due to the receipt of FDA approval in December 2001 for the use of
BioGlue in the United  States as an  adjunct  in open  surgical  repair of large
vessels for adult patients. Domestic revenues accounted for 77% and 64% of total
BioGlue   revenues   for  the  three  months  ended  June  30,  2002  and  2001,
respectively.  Domestic  revenues  accounted  for 78% and 65% of  total  BioGlue
revenues for the six months ended June 30, 2002 and 2001, respectively.

Although  BioGlue  was not  included in the FDA Order,  future  sales of BioGlue
could be adversely  affected due to the adverse publicity  surrounding the FDA's
review  of  and  correspondence  with  the  Company.  Additionally,  there  is a
possibility the Company's BioGlue operations could come under increased scrutiny
from the FDA as a result of their  review  of the  Company's  tissue  processing
laboratories.

PRESERVATION SERVICE REVENUES

Quarter over quarter statistics presented for tissues procured and processed for
human tissue  preservation  services are from the period February through April,
as such  procurement and processing of tissues  received during this time period
is  the  primary  generator  of  second  quarter  revenues.   Year-to-date  over
year-to-date  statistics  presented for tissues procured and processed for human
tissue  preservation  services are from the period  beginning in November of the
prior  year  through  April  of the  year  presented,  as such  procurement  and
processing of tissues received during this time period is the primary  generator
of  year-to-date  revenues.   During  the  time  period  for  which  procurement
statistics are discussed,  the Company  benefited from significant  increases in
procurement due to new  relationships  with tissue banks and competitive wins of
tissue  bank  contracts.   Additionally,  the  Company  changed  certain  tissue
acceptance  guidelines,  which  resulted in an increase in tissues  procured and
processed.  Tissue  acceptance  and  processing  guidelines  include  donor age,
gender,  manner  of  death,  time  of  procurement,  and  other  factors.  These
guidelines  are under  constant  review to allow the most  recipients to benefit
from  donated  tissues,  while  preserving  the quality of tissue  procured  and
processed.  Tissue acceptance  guidelines are changed  periodically  through the
general  course of business  based on the demand for  certain  types or sizes of
tissue and based on the scientific analysis of the viability of tissues procured
under the guidelines.  More stringent  guidelines have recently been implemented
for certain tissues.

The increases in procurement  surpassed the Company's  expectations  during this
period.  However,  the Company  expects  that future  procurement  levels of all
tissues will decrease as a result of the uncertainties surrounding the Company's
inability  to continue to ship  non-valved  cardiac,  vascular  and  orthopaedic
grafts as a result of the FDA Order and due to the  uncertainties  as to whether
tissue banks will continue to send tissues to the Company to process as a result
of the adverse  publicity  surrounding the FDA's review and the FDA Order. As of
August 14, 2002 the Company  reduced its acceptance of orthopaedic  and vascular
tissues for  processing  to minimal  levels until it receives  resolution of its
request for  modification or appeal of the FDA Order.  The Company is continuing
to accept  cardiac  tissues for processing  from tissue banks.  As of August 30,
2002 the Company estimates  approximately 50% of its cardiovascular  procurement
has been suspended due to the FDA Order and the surrounding publicity.

Due to a variety of factors,  primarily  the FDA Order,  but  including the time
required to process the greater  amounts of tissue,  the increase in  processing
time and complexity for tissues processed using the SynerGraft  technology,  the
focus of the  Company on the  marketing  and  rollout of  BioGlue,  and  adverse
publicity  resulting  from certain tissue  infections  and lawsuits  during this
period,  the increases in tissues  procured and processed did not translate into
equivalent increases in revenues from preservation services. As a result of this
increased  procurement,  the  level  of  deferred  preservation  costs  prior to
write-downs  increased in all of the Company's main tissue  service  categories:
cardiac, vascular, and orthopaedic. These higher levels of deferred preservation
costs are expected to result in some revenue  growth for  allograft  heart valve
tissues in the short term as the Company  provides  services related to the more
critical  implant needs.  The Company expects that the majority of this increase
in procurement  will generate more modest  increases in service  revenues over a
longer  period of time for cardiac  tissues,  as less  critical need tissues and
tissues of various sizes are properly matched with recipients.



                                       23


CARDIOVASCULAR PRESERVATION SERVICES





                                                                                                

                                          Three Months Ended                                  Six Months Ended
                                                June 30,                                           June 30,
                                   ------------------------------------------   ------------------------------------------
                                          2002                  2001                   2002                  2001
                                   ------------------------------------------   ------------------------------------------

Revenues                           $        7,336         $      7,182          $      14,644         $       14,093
Percentage of total revenue                   32%                  33%                    30%                    33%

Revenues excluding recall          $        7,676         $      7,182          $      14,984         $       14,093
Percentage of total revenue                   30%                  33%                    29%                    33%




Revenues  from  cardiovascular   preservation  services  increased  2%  and  4%,
respectively,  for the three and six months  ended June 30,  2002.  The revenues
from  cardiovascular  preservation  services  were  adversely  impacted  by  the
estimated  effect of the  tissues  returned  subject to the FDA Order on service
revenues for non-valved cardiac tissues, which resulted in an estimated decrease
of $340,000 in service  revenues  during the three and six months ended June 30,
2002.  At June 30,  2002 $9.3  million of cardiac  deferred  preservation  costs
related to tissue not subject to the FDA Order was available for shipment.

Excluding the effect of the FDA Order, revenues from cardiovascular preservation
services increased 7% and 6%,  respectively,  for the three and six months ended
June 30,  2002.  This  increase  in  revenues  for the three month and six month
periods  ended  June 30,  2002 was in part due to an  increase  in the number of
cardiovascular  allograft  shipments  of 3% in each such period as a result of a
20% and 23% increase in  cardiovascular  tissues procured and processed  quarter
over quarter and year-to-date  over  year-to-date,  respectively.  Additionally,
average  service fees were higher by 4% and 3%,  during the three and six months
ended June 30, 2002,  respectively,  due to an increase in shipments during 2002
as compared to 2001 of SynerGraft  processed  cardiovascular  grafts, which have
higher service fees than non-SynerGraft cardiovascular grafts.

The  Company  anticipates  a  future  decrease  in  cardiovascular  preservation
revenues as a result of the uncertainties  regarding the Company's  inability to
ship non-valved  cardiac tissue  processed since October 3, 2001 pursuant to the
FDA  Order  and the  adverse  publicity  surrounding  the  FDA's  review  of and
correspondence with the Company.

VASCULAR PRESERVATION SERVICES




                         


                                          Three Months Ended                                Six Months Ended
                                                June 30,                                        June 30,
                                  ------------------------------------------    ------------------------------------------
                                        2002                    2001                   2002                2001
                                  ------------------------------------------    ------------------------------------------

Revenues                          $      4,641        $         6,017           $       11,658        $      12,429
Percentage of total revenue                20%                    28%                      24%                  29%

Revenues excluding recall         $      6,354        $         6,017           $       13,371        $      12,429
Percentage of total revenue                25%                    28%                     26%                   29%




Revenues from human vascular tissue preservation  services decreased 23% and 6%,
respectively,  for the three and six months  ended June 30,  2002.  The revenues
from  vascular  tissue  preservation  services  were  adversely  impacted by the
estimated  effect of the return of  tissues  subject to recall by the FDA Order,
which  resulted in an  estimated  decrease of $1.7  million in service  revenues
during  the three and six  months  ended June 30,  2002.  At June 30,  2002 $7.3
million of vascular deferred preservation costs related to tissue not subject to
the FDA Order was available for shipment.



                                       24


Excluding  the effect of the FDA Order,  revenues  from  human  vascular  tissue
preservation  services increased 6% and 8%, respectively,  for the three and six
months  ended June 30, 2002.  This  increase in revenues for the three month and
six month  periods  ended June 30,  2002 was due to an increase in the number of
vascular allograft shipments of 8% and 3%,  respectively,  which resulted from a
17%  increase in vascular  tissues  procured  and  processed  year-to-date  over
year-to-date.

The Company anticipates a future decrease in vascular  preservation revenues due
to the  Company's  inability to ship  vascular  grafts  processed  subsequent to
October 2, 2001 pursuant to the FDA Order and the adverse publicity  surrounding
the FDA's  review of and  correspondence  with the  Company.  If the  Company is
unable  to  obtain  a  favorable   decision  from  its  appeal  or  request  for
modification  of the FDA Order  and/or to clear the  issues as  outlined  in the
FDA's warning letter and the FDA Order, future vascular  preservation  revenues,
if any, may be immaterial.

ORTHOPAEDIC PRESERVATION SERVICES




                                                                                                    
                                          Three Months Ended                                  Six Months Ended
                                                June 30,                                         June 30,
                                      ------------------------------------------   ------------------------------------------
                                           2002                    2001                 2002                    2001
                                      ------------------------------------------   ------------------------------------------

Revenues                              $      5,559         $        5,566           $           11,472      $     10,809
Percentage of total revenue                    24%                    26%                          24%               25%

Revenues excluding recall             $     5,939          $        5,566           $           11,852      $     10,809
Percentage of total revenue                   23%                     26%                           23%              25%




Revenues from human orthopaedic tissue preservation services increased 0% and 6%
for the three and six months ended June 30, 2002. The revenues from  orthopaedic
tissue preservation  services were adversely impacted by the estimated effect of
the return of tissues  subject to recall by the FDA Order,  which resulted in an
estimated  decrease  of $380,000  in service  revenues  during the three and six
months  ended  June 30,  2002.  At June 30,  2002 $4.7  million  of  orthopaedic
deferred  preservation  costs related to tissue not subject to the FDA Order was
available for shipment; see discussion of impairment of this asset in the Recent
Events section.

Excluding the effect of the FDA Order,  revenues from human  orthopaedic  tissue
preservation  services  increased  7% and 10% for the three and six months ended
June 30,  2002.  This  increase  in  revenues  for the three month and six month
periods  ended June 30, 2002 was  primarily  due to an increase in the number of
allograft  shipments of 6% and 8%,  respectively.  The  increase in  orthopaedic
shipments,  primarily  boned  tendons,  resulted  from a 76% and 62% increase in
orthopaedic  allograft  tissues procured and processed  quarter over quarter and
year-to-date over year-to-date,  respectively,  and an increasing  acceptance of
these tissues in the orthopaedic  surgeon community.  Shipments of boned tendons
increased  42%  and 52% in the  three  and  six  months  ended  June  30,  2002,
respectively,  due to increased  availability  of these higher  demand  tissues,
which  resulted  in an increase  of  $400,000  and $1 million in  revenues  with
respect  to these  tissues  for the  three  and six  months  ended  June 2002 as
compared  to the same  periods  in  2001,  partially  offset  by a  decrease  in
shipments  of  non-boned  tendons.  Additional  increases  in  revenues  in  the
six-month  period  were due to a more  favorable  product  mix,  with  increased
shipments of hemi-osteochondral  grafts, which carry higher average service fees
than other  orthopaedic  tissues.  The  increases in  orthopaedic  revenues were
smaller than anticipated,  due to the effects of adverse  publicity  surrounding
the reports of infections in some orthopaedic allograft recipients.

The Company anticipates a substantial  decrease in the orthopaedic  preservation
revenues in the future due to the Company's inability to ship orthopaedic grafts
processed since October 3, 2001 pursuant to the FDA Order, the adverse publicity
surrounding  the FDA's review of and  correspondence  with the Company,  and the
reported infections in some orthopaedic allograft recipients.  If the Company is
unable to clear the issues as outlined in the FDA's warning letter and FDA Order
or obtain a favorable appeal of the FDA Order,  future orthopaedic  preservation
revenue, if any, may be immaterial. These factors would be likely to result in a
substantial  decrease of revenues from tissues preserved both prior to and since
October 3, 2001.


                                       25


BIOPROSTHETIC DEVICES

Revenues from bioprosthetic cardiovascular devices increased 41% to $222,000 for
the three  months  ended June 30, 2002 from  $158,000 for the three months ended
June 30,  2001,  representing  1% of total  revenues  during  each such  period.
Revenues from bioprosthetic cardiovascular devices increased 16% to $414,000 for
the six months  ended June 30, 2002 from  $356,000 for the six months ended June
30, 2001, representing 1% of total revenues during each such period.

DISTRIBUTION AND GRANT REVENUES

Distribution and grant revenues increased to $255,000 for the three months ended
June  30,  2002  from  $143,000  for the  three  months  ended  June  30,  2001.
Distribution  and grant revenues  increased to $423,000 for the six months ended
June 30,  2002 from  $368,000  for the six  months  ended June 30,  2001.  Grant
revenues of $104,000 and  $143,000,  for the three and six months ended June 30,
2002 and 2001, respectively, and $131,000 and $368,000, for the six months ended
June  30,  2002  and  2001,  respectively,  are  primarily  attributable  to the
SynerGraft research and development programs.

COSTS AND EXPENSES

Cost of human tissue  preservation  services  aggregated  $17.2  million for the
three  months  ended June 30,  2002 as  compared  to $7.7  million for the three
months ended June 30, 2001,  representing  98% and 41%,  respectively,  of total
human tissue  preservation  service revenues for each such period. Cost of human
tissue  preservation  services aggregated $25.3 million for the six months ended
June 30,  2002 as compared  to $15.4  million for the six months  ended June 30,
2001,  representing 67% and 41%, respectively of total human tissue preservation
service revenues for each period. The cost of human tissue preservation services
for the three and six  months  ended  June 30,  2002  includes  a $10.0  million
write-down of deferred preservation costs related to the FDA Order, as discussed
in Recent  Events.  The Company  anticipates  a  reduction  in the cost of human
tissue  preservation  services  due to a reduction  in shipments of tissues as a
result of the FDA Order; however the cost of human tissue preservation  services
as a percent of revenue may increase due to  potential  write-downs  of deferred
preservation  costs if the Company is unable to meet the requirements of the FDA
as outlined in the FDA Order and if there is a significant decline in the demand
for the tissues.

Cost of products  aggregated  $1.8  million for the three  months ended June 30,
2002 as  compared  to $1.4  million for the three  months  ended June 30,  2001,
representing  34% and 51%,  respectively,  of  product  revenues  for each  such
period.  Cost of products  aggregated $4.1 million for the six months ended June
30,  2002 as compared to $2.9  million for the six months  ended June 30,  2001,
representing  39% and 53%,  respectively,  of total  product  revenues  for each
period.  The  decrease  in the 2002 cost of products  as a  percentage  of total
product revenues is due to a more favorable product mix during 2002. The product
mix was  impacted by an increase in revenues  from  BioGlue  Surgical  Adhesive,
which carries higher gross margins than bioprosthetic devices.

General,  administrative,  and marketing expenses increased 41% to $11.4 million
for the three months ended June 30, 2002, compared to $8.1 million for the three
months  ended June 30, 2001,  representing  49% and 37%,  respectively  of total
revenues  during  each  such  period.  General,  administrative,  and  marketing
expenses  increased 29% to $20.9 million for the six months ended June 30, 2002,
compared to $16.3  million for the six months ended June 30, 2001,  representing
43% and 38%,  respectively,  of total  revenues  during  each such  period.  The
increase in  expenditures  for the three and six months  ended June 30, 2002 was
primarily  due to an  increase  in  marketing  and  general  expenses to support
planned  revenue  growth,  increased  overhead  costs  in  connection  with  the
expansion of the corporate  headquarters and manufacturing  facility,  which was
substantially  completed in the first  quarter of 2002, an increase in insurance
premiums,  an increase in legal costs and a $1.3 million  accrual for  retention
levels under the  Company's  product  liability  and  directors'  and  officers'
insurance  policies of $1.2 million (see Legal Proceedings under Item 1) and for
estimated  expenses of $75,000 for packaging and handling fees for the return of
affected  tissues  subject  to the FDA  Order.  The  Company  expects  to  incur
significant increases in legal costs and professional fees over the remainder of
the year as a result of defending the lawsuits filed against the Company and the


                                       26


Company's appeal of the FDA Order. Additional marketing expenses may be incurred
to address the effects of the adverse publicity surrounding the FDA Order.

Research  and  development  expenses  decreased 7% to $1.2 million for the three
months ended June 30, 2002,  compared to $1.3 million for the three months ended
June 30, 2001, representing 5% and 6%, respectively,  of total revenues for each
such period.  Research and development expenses decreased 1% to $2.3 million for
the six months ended June 30, 2002,  compared to $2.4 million for the six months
ended June 30, 2001,  representing  5% of total  revenues for each such periods.
Research  and  development  spending for the three and six months ended June 30,
2002 was primarily  focused on the  Company's  SynerGraft  and Protein  Hydrogel
Technologies.

Interest income, net of interest expense, was $43,000 and $560,000 for the three
months  ended June 30,  2002 and 2001,  respectively.  Interest  income,  net of
interest  expense,  was  $149,000 and $1.1 million for the six months ended June
30, 2002 and 2001, respectively. The 2002 decrease in net interest income is due
to reduced  interest  rates in 2002 as compared to 2001 and the lack of interest
expense  capitalized  in 2002 in connection  with the expansion of the corporate
headquarters and manufacturing  facility,  which was substantially  completed in
the first quarter of 2002.

The effective income tax rate was 34% and 32% for the three and six months ended
June 30, 2002 and 2001, respectively.

SEASONALITY

The demand for the  Company's  cardiovascular  tissue  preservation  services is
seasonal, with peak demand generally occurring in the second and third quarters.
Management believes this trend for cardiovascular  tissue preservation  services
is  primarily  due to the high number of surgeries  scheduled  during the summer
months.  However,  the demand for the Company's  human vascular and  orthopaedic
tissue  preservation  services,  BioGlue Surgical  Adhesive,  and  bioprosthetic
cardiovascular  and  vascular  devices  does not appear to  experience  seasonal
trends.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2002 net working capital was $62.2 million,  with a current ratio of
4 to 1,  compared to $66.7 million at December 31, 2001.  The Company's  primary
capital  requirements  historically  arose out of general working capital needs,
capital  expenditures for facilities and equipment,  and funding of research and
development projects.  The Company funded these requirements through bank credit
facilities,  cash  generated by operations  and equity  offerings.  Based on the
anticipated  decrease in revenues  resulting  from the FDA Order and  associated
adverse  publicity,  the Company  expects that its cash  generated by operations
will decrease  significantly  over the near term,  and that net working  capital
will decrease.  The Company  anticipates that after it has reduced the number of
employees to reflect the  reduction in revenues,  the savings in resources  will
enable the Company to meet its liquidity needs through 2002. It is possible that
the  Company  will  not  have  sufficient  funds  to meet  its  primary  capital
requirements over the long term.

Net cash provided by operating  activities was $750,000 for the six months ended
June 30,  2002,  as compared to $4.3  million for the six months  ended June 30,
2001.  The $750,000 in current  year cash  provided  was  primarily  due to $7.8
million in net income before depreciation,  taxes, and excluding non-cash items,
partially  offset by a decrease  in cash of $7.1  million  due to an increase in
working  capital  requirements  from current and planned future revenue  growth,
expansion of product lines, and an increase in tissue  procurement.  Adjustments
to net income for the six months  ended June 30,  2002  include a $10.0  million
write-down for the impairment of deferred  preservation costs resulting from the
FDA Order.

Net cash  provided by investing  activities  was $4.1 million for the six months
ended June 30, 2002, as compared to cash used of $6.4 million for the six months
ended  June 30,  2001.  The $4.1  million  in  current  year cash  provided  was
primarily due to a net $7.7 million increase in cash from marketable securities,


                                       27


primarily due to the maturity of debt  securities,  and $1.2 million in proceeds
from  notes  receivable,  partially  offset by a $2.7  million  decrease  due to
capital  expenditures  in 2002, as the expansion and renovation of the Company's
corporate headquarters and manufacturing facilities approached completion, and a
decrease due to spending on patents of $2.3 million, primarily relating to costs
incurred to defend the SynerGraft  technology  patents.  For further information
please refer to the Recent Events section.

Net cash used by financing  activities  was $1,000 for the six months ended June
30, 2002,  as compared to cash provided of $1.5 million for the six months ended
June 30,  2001.  The  $1,000 in  current  year cash  used was  primarily  due to
$800,000  in  principal  payments  on the Term Loan and  $300,000  in  principal
payments on capital  leases,  offset by a $1.1 million  increase due to proceeds
from stock option exercises.

The Company's  Term Loan, of which the principal  balance was $6.1 million as of
August 30, 2002,  contains  certain  restrictive  covenants  including,  but not
limited to,  maintenance of certain  financial ratios and a minimum tangible net
worth  requirement,  and the  requirement  that no materially  adverse event has
occurred.  The lender has determined  that the FDA Order, as described in Note 2
to the Summary  Consolidated  Financial  Statements,  and the  inquiries  of the
Securities  and  Exchange  Commission,  as  described  in Note 12 to the Summary
Consolidated Financial Statements, have a material adverse effect on the Company
that  constitutes  an event of  default.  As of August  30,  2002 the lender has
elected not to declare an event of default,  but  reserves the right to exercise
any such right  under the terms of the Term Loan.  Therefore,  all  amounts  due
under the Term Loan as of June 30, 2002 are reflected as a current  liability on
the Consolidated Balance Sheet. In the event the lender calls the Term Loan, the
Company at present has adequate funds to pay the principal  amount  outstanding.
The Term Loan is secured by substantially all of the Company's assets.

The Company's Term Loan, which accrues interest  computed at Adjusted LIBOR plus
1.5%,  exposes the Company to changes in interest rates going forward.  On March
16, 2000, the Company entered into a $4 million notional amount forward-starting
interest swap agreement,  which took effect on June 1, 2001 and expires in 2006.
This swap agreement was designated as a cash flow hedge to effectively convert a
portion of the Term Loan balance to a fixed rate basis, thus reducing the impact
of interest rate changes on future income.  This agreement  involves the receipt
of floating rate amounts in exchange for fixed rate  interest  payments over the
life of the agreement,  without an exchange of the underlying principal amounts.
The  differential to be paid or received is recognized in the period in which it
accrues as an adjustment to interest expense on the Term Loan.

On January 1, 2001 the Company adopted SFAS No. 133,  "Accounting for Derivative
Instruments and Hedging  Activities" ("SFAS 133") as amended.  SFAS 133 requires
the Company to recognize all derivative instruments on the balance sheet at fair
value, and changes in the derivative's  fair value must be recognized  currently
in earnings or other comprehensive  income, as applicable.  The adoption of SFAS
133 impacts the accounting for the Company's forward-starting interest rate swap
agreement. Upon adoption of SFAS 133, the Company recorded an unrealized loss of
approximately  $175,000 related to the interest rate swap, which was recorded as
part of long-term  liabilities and accumulated other comprehensive income within
the Statement of Shareholders' Equity.

At June 30, 2002 the notional  amount of this swap  agreement  was $3.2 million,
and the fair value of the interest rate swap agreement, as estimated by the bank
based on its internal  valuation models,  was a liability of $269,000.  The fair
value of the swap agreement is recorded as part of long-term  liabilities and is
recorded net of tax as part of accumulated other comprehensive income within the
Statement of Shareholders' Equity.

On July 30, 2002 the Company  entered into a line of credit  agreement  with the
lender  that made the Term  Loan,  permitting  the  Company  to borrow up to $10
million.  Borrowings under the line of credit agreement accrue interest equal to
Adjusted   LIBOR  plus  1.25%  adjusted   monthly.   This  loan  is  secured  by
substantially all of the Company's assets. As of August 30, 2002 $6,900 has been
drawn on the line of credit.  As a result of the FDA Order, as discussed in Note
2 to the  Summary  Consolidated  Financial  Statements,  the  Company  is not in
compliance with the lender's  requirements  for advances of funds under the line
of credit.  On August 21, 2002 the lender  notified  the Company that it was not
entitled to any further advances under the line of credit.



                                       28


Since  October  1998  management  has been  seeking  to enter  into a  corporate
collaboration  or to  complete  a  potential  private  placement  of  equity  or
equity-oriented  securities to fund the commercial development of its Activation
Control  Technology  ("ACT").  This  technology  is now  held  by the  Company's
wholly-owned  subsidiary  AuraZyme  Pharmaceutical,  Inc.,  which was  formed on
February 26, 2001. This strategy, if successful, will allow an affiliated entity
to fund the ACT and should expedite the commercial  development of its oncology,
fibrin olysis (blood clot dissolving), and surgical sealant product applications
without additional  research and development  expenditures by the Company (other
than  through the  affiliated  company).  This  strategy,  if  successful,  will
favorably impact the Company's liquidity going forward.  However, if the Company
is unable to obtain funds for the  commercial  development  of the ACT and/or if
the Company decides to fund the technology itself, the expenses required to fund
the ACT could  adversely  impact the  Company's  liquidity  going  forward.  The
Company  expects  that  it will  reduce  its  efforts  to  fund  the  commercial
development of ACT in the near term until it has evaluated the financial  impact
of the recent FDA Order.

The Company expects its liquidity to decrease  significantly  over the remainder
of the year due to the anticipated  significant decrease in revenues as a result
of the FDA Order and an expected decrease in cash due to the increased legal and
professional  costs relating to the defense of lawsuits and the FDA Order.  As a
result,  the  Company  plans to reduce  the  number of  personnel  it employs in
several  areas,  with the  exact  number  to be  based in part on the  Company's
success in its efforts to appeal or obtain a modification  of the FDA Order.  On
September  3, 2002 the  Company  announced  a  reduction  in  employee  force of
approximately 105 employees.  The Company anticipates that severance and related
costs  will be  approximately  $625,000,  which  will be  recorded  in the third
quarter of 2002. As a result of the employee reduction,  management  anticipates
personnel costs will be reduced by approximately $360,000 per month. The Company
anticipates  that after it has  reduced the number of  employees  to reflect the
reduction in revenues,  the savings in resources will enable the Company to meet
its liquidity  needs  through the June 30, 2003.  Even if the Company is able to
obtain  a  favorable  outcome  of its  appeal  of the  FDA  Order  or  requested
modification,  there is no assurance that the Company would be able to return to
the current  level of demand for its tissue  services as a result of the adverse
publicity or as a result of customers and tissue banks switching to competitors.

The  Company's  long term  liquidity and capital  requirements  will depend upon
numerous  factors,  including the resolution of the Company's  appeal of the FDA
Order,  the extent of the anticipated  revenue  decreases,  the costs associated
with becoming  compliant with the FDA requirements as outlined in the FDA Order,
the outcome of litigation  against the Company as described in Part II Item 1 of
this Form 10-Q, the level of demand for tissue based on adverse publicity in the
event the FDA Order is resolved in a manner favorable to the Company, the timing
of the  Company's  receipt of FDA  approvals  to begin  clinical  trials for its
products  currently in development,  the  availability of resources  required to
further develop its marketing and sales  capabilities if and when those products
gain  approval,  the  extent to which the  Company's  products  generate  market
acceptance and demand and the resolution of the "Risk Factors"  discussed below.
The ultimate  impact of many of these factors will be affected by the outcome of
others.  There can be no  assurance  the  Company  will not  require  additional
financing or will not seek to raise  additional  funds through bank  facilities,
debt  or  equity  offerings,   or  other  sources  of  capital  to  meet  future
requirements.  Additional  funds may not be  available  when  needed or on terms
acceptable  to the Company,  which could have a material  adverse  effect on the
Company's business, financial condition, results of operations, and cash flows.



                                       29




                                  RISK FACTORS

FDA ORDER ON HUMAN TISSUE-DEPENDENCE ON PRESERVATION OF HUMAN TISSUE

On Tuesday,  August 13, 2002 the Company  received an order from the FDA calling
for  the  retention,  recall,  and/or  destruction  of all  non-valved  cardiac,
vascular and  orthopaedic  tissue  processed by the Company at its  headquarters
since at least October 3, 2001 based upon  allegations  of FDA violations by the
Company of its  handling of such tissue and  alleged  contamination  through the
Company's  processing  of  such  tissue  that  resulted  in  14  post-transplant
infections  including one death. A significant  portion of the Company's current
revenues is derived from the  preservation  of human tissues.  Revenues of human
tissue preservation  services for the six months ended June 30, 2002 were 79% of
the Company's revenues. Of those revenues, 67% were derived from preservation of
tissues subject to the FDA Order representing $26.9 million.  Revenues for human
tissue  preservation  services for the year ended 2001 were 86% of the Company's
revenues.  Of those  revenues,  68% were  derived from  preservation  of tissues
subject to the FDA Order.

The  Company  expects  the FDA Order to have a  material  adverse  effect on the
Company's business,  financial condition,  results of operations and cash flows.
As a result of the FDA Order,  the Company  expects to  experience  decreases in
revenues  and  profits  and  there is a  possibility  that the  Company  may not
generate sufficient cash from operations to fund its operations.

Even if the FDA Order is lifted or  modified  at some  future date such that the
Company may resume the  processing  of the types of human tissue  covered by the
FDA Order,  demand for such  tissue  may be  reduced  by the  adverse  publicity
generated from the recall or from implanting  physicians' decisions to use human
tissue  from the  Company's  competitors.  Therefore,  even if the FDA  Order is
lifted or modified,  the Company could still experience significant decreases in
revenues  and profits  and there is a  possibility  that the  Company  would not
generate sufficient cash from operations to fund its operations.

In the event that the Company resumes  successful  processing of human tissue in
accordance with FDA standards,  the success of the Company  depends upon,  among
other factors,  the  availability of sufficient  quantities of tissue from human
donors.  Any  material  reduction  in the supply of donated  human  tissue could
restrict the Company's growth.  The Company relies primarily upon the efforts of
third  party   procurement   agencies  and  tissue  banks  (most  of  which  are
not-for-profit)  and others to educate  the public and foster a  willingness  to
donate tissue. If the Company's relationships with procurement agencies continue
to be adversely affected,  the Company may be unable to obtain adequate supplies
of donated tissues to operate profitably.

EFFECTS OF FDA ORDER ON LIQUIDITY AND CAPITAL RESOURCES

Based upon the FDA Order, the Company anticipates a decrease in liquidity. Based
upon the  anticipated  decrease in revenues  and profits  from the FDA Order and
associated  adverse  publicity,  the  Company  expects  that cash  generated  by
operations could decrease over the near term and working capital could decrease.
Although the Company anticipates  reducing its level of operation and the number
of personnel  employed in response to the FDA Order, there is a possibility that
the  Company  may  not  have  sufficient  funds  to  fund  its  primary  capital
requirements or to meet its operating and development needs.

IMPLANTATION  OF  ORTHOPAEDIC  AND OTHER TISSUE MAY BECOME ILLEGAL OR SUBJECT TO
SIGNIFICANT ADDITIONAL RESTRICTIONS

As a result  of the  FDA's and the CDC's  ongoing  investigation  regarding  the
safety of cryopreserved  orthopaedic  tissue, and because  orthopaedic tissue is
generally not involved in life-saving or limb salvaging procedures,  this tissue
may no longer be legally  available for  implantation  or may become  subject to
significant  additional  restrictions before it is considered safe for use. As a


                                       30


result,  this portion of the Company's  business may have to be  discontinued or
may only continue at an extremely  reduced  level due to a restricted  supply of
tissue for transplant or increased costs that render the business  unprofitable.
Either  occurrence  would  result in a  significant  decrease  in the  Company's
revenues   and   profitability.   In   addition,   although   the  vascular  and
cardiovascular   tissues  preserved  by  the  Company  are  frequently  used  in
lifesaving  or  limb  salvaging  operations  and the  Company  has  requested  a
modification  of the  FDA  Order,  there  is also  the  possibility  that  their
implantation will be restricted or prohibited. Either of these occurrences would
also  result  in  a  significant   decrease  in  the   Company's   revenues  and
profitability.

PHYSICIANS MAY BE RELUCTANT TO IMPLANT CRYOLIFE PRESERVED TISSUES

Even if the FDA Order is lifted or  modified,  and the  Company  is  allowed  to
resume  shipping  the  tissues  subject to the FDA  Order,  there is a risk that
physicians will be reluctant to choose the Company's  preserved  tissues for use
in  implantation,  due to a perception  that they may not be safe or to a belief
that the  implanting  physician  or  hospital  may be  subject  to a  heightened
liability  risk if the  Company  tissues  are used.  In  addition,  for  similar
reasons,  hospital risk managers may forbid  implanting  surgeons to utilize the
Company tissues where  alternatives  are available.  If a significant  number of
implanting  hospitals  or  physicians  refused to use tissues  preserved  by the
Company,  the  Company's  revenues  and profits  would be  materially  adversely
affected.

HEART VALVES PROCESSED BY THE COMPANY MAY ALSO BE RECALLED

On August 21, 2002 the FDA publicly  stated that allograft heart valves have not
been  included in the FDA recall order as these  devices are  essential  for the
correction of congenital  cardiac lesions in neonate and pediatric  patients and
no satisfactory alternative device exists. However, the FDA also publicly stated
that it still has serious  concerns  regarding  the  processing  and handling of
allograft  heart  valves.  The FDA  also  recommended  that  surgeons  carefully
consider using processed  allografts  from  alternative  sources,  that surgeons
should  inform  prospective  patients of the FDA's  concerns  with the Company's
allograft heart valves, and that patients should be carefully monitored for both
fungal  and  bacterial  infections.  The FDA could  institute  a recall or other
corrective  measures  if it felt that the  Company  was not making  progress  in
complying with the FDA Order. Any adverse finding by the FDA regarding allograft
heart valves, including a recall, would cause further decreases in the Company's
revenue base and profits and  significantly  reduce the Company's  potential for
growth. If such a recall occurs,  the Company may also be required to write-down
all or a portion of the deferred  preservation costs for allograft heart valves,
which  could have a material  adverse  effect on the results of  operations  and
financial condition of the Company.

ESTIMATED COSTS OF RECALL AND RELATED WRITE-DOWNS

The  Company's  financial  statements  reflect the  estimated  cost of recalling
tissue pursuant to the FDA Order. The Company has recorded a write-down of $10.0
million of deferred  preservation costs for tissues subject to the FDA Order and
anticipates  a further  write-down of deferred  preservation  costs in the third
quarter of 2002 for additional  tissues  processed in the third quarter that are
subject to the FDA Order and  orthopaedic  tissue not  subject to the FDA Order.
Such  write-downs  could  have a  material  adverse  effect  on the  results  of
operations  and financial  condition of the Company.  While these  estimates are
based on the Company's best estimate of the costs associated with the recall and
the impairment of deferred  preservation  costs subject to the FDA Order,  there
can be no assurance that these costs and write-downs  will in fact be limited to
the amount estimated.

REGULATORY ACTION OUTSIDE OF THE UNITED STATES

After the FDA issued its order regarding the recall, Health Canada also issued a
recall on the same types of tissue and the United  Kingdom  Department of Health
has begun  investigating  tissue  exported by the  Company.  We expect that such
actions will further decrease revenues.  Although management is not aware of any
reports of contamination in Canada or the United Kingdom of tissues processed by
the  Company,  in the event that any tissue  processed  by the Company  that was
exported by the Company to other countries is found to be contaminated, it would
have a further material adverse impact on the Company's business and operations.



                                       31


THE COMPANY MAY BE FORCED TO CEASE TISSUE PRESERVATION

If the FDA Order is not  reversed  or  modified  in the near  future,  or if the
allograft heart valves  processed by the Company are also recalled,  the Company
may not be able to profitably continue its tissue processing  business.  In such
an event, the Company would attempt to continue as a smaller adhesives and valve
manufacturing company;  however, in order to do so the Company would be required
to divest itself of a number of assets related to its tissue processing business
and  would  have to  institute  large-scale  workforce  reductions.  There is no
guarantee  that  the  resulting  entity  would  be able to  generate  sufficient
revenues to operate  profitably,  and in any event,  the  Company  would be much
smaller and would likely be valued at a reduced level by the marketplace.

THE COMPANY'S COMMON STOCK IS POTENTIALLY AT RISK OF BEING DELISTED FROM THE NEW
YORK STOCK EXCHANGE

Because of the FDA Order and the current  trading price of the Company's  common
stock,  there is a possibility that the Company's common stock could be delisted
from the New York Stock Exchange. If the stock is delisted, there is no guaranty
that there will be a liquid  market for the stock and the  trading  price of the
stock would likely be adversely affected.

THE COMPANY IS THE SUBJECT OF AN ONGOING SEC INVESTIGATION

The Company  received  notice from the  Securities  and Exchange  Commission  on
Saturday,  August  17,  2002 that it is the  subject  of an  investigation  with
respect to accounting  issues and trades in the  Company's  stock related to the
FDA Order.  The  Company  does not know any  details of the  investigation,  but
believes that an adverse finding by the SEC could have a material adverse effect
on its business financial position,  results of operations,  and cash flows. The
staff of the SEC  subsequently  confirmed that its  investigation is informal in
nature,  and that it does not have  subpoena  power at this time. At the present
time, the Company is unable to predict the outcome of this matter.

EFFECTS OF THE FDA RECALL ON CREDIT FACILITY

The Term Loan contains certain restrictive covenants including,  but not limited
to,  maintenance  of certain  financial  ratios,  a minimum  tangible  net worth
requirement,  and the requirement that no materially adverse event has occurred.
The lender has  determined  that the FDA Order,  as  described  in Note 2 to the
Summary Consolidated  Financial Statements,  and the inquiries of the Securities
and Exchange  Commission,  as  described in Note 12 to the Summary  Consolidated
Financial  Statements,  have a  material  adverse  effect  on the  Company  that
constitutes  an event of  default.  As of August 30, 2002 the lender has elected
not to declare an event of default,  but reserves the right to exercise any such
right under the terms of the Term Loan.  There is no  assurance  the lender will
not  exercise  its  rights,  which could have a material  adverse  effect on the
Company's liquidity.

THE COMPANY'S  PRODUCT  LIABILITY AND INSURANCE  COVERAGE MAY BE INSUFFICIENT TO
COVER  CURRENT AND FUTURE  CLAIMS AND  ADDITIONAL  COVERAGE  MAY BE DIFFICULT OR
IMPOSSIBLE TO OBTAIN IN THE FUTURE

The Company's  products are used by health care providers in connection with the
treatment of patients, who will, on occasion,  sustain injury or die as a result
of their condition or medical  treatment.  As a result, the use of the Company's
products and human tissue  processed by the Company  involves the possibility of
adverse  effects  that could  expose the  Company to product  liability  claims,
including  the  lawsuits  filed  against the Company  relating to  infection  of
implanted tissue described below in Item 3 "Legal  Proceedings."  The recent FDA
Order could adversely  influence the outcome of current product liability claims
relating to infection of tissue processed by the Company.



                                       32


In addition,  a recent  United States  Supreme Court  decision held that product
liability may exist despite FDA  approval,  and future court  decisions may also
increase the Company's risk of product liability.

Whether or not the  Company is  ultimately  determined  to be liable for product
liability  claims,  the  Company  will  incur  significant  legal  expenses.  In
addition,  such litigation  could damage the Company's  reputation and therefore
impair its ability to market its products or obtain product liability  insurance
and could cause the  premiums  for such  insurance  to  increase.  Although  the
Company has incurred minimal losses due to product liability claims to date, the
Company  may incur  significant  losses in the  future.  The  Company  currently
maintains product liability insurance in the aggregate amount of $25 million per
year.  Management believes that the coverage is adequate to cover any losses due
to product claims if actually incurred  however,  there can be no assurance that
such coverage will be adequate. In addition, there can be no assurance that such
coverage  will  continue to be  available  on terms  acceptable  to the Company,
especially  in  light of the  recent  FDA  Order.  Furthermore,  if any  product
liability claims are successful,  it could have a material adverse effect on the
Company's business, financial condition, results of operations, and cash flows.

Because of the current  litigation and the adverse publicity from the FDA Order,
the Company may be unable to obtain additional insurance coverage in the future,
causing the Company to be subject to  additional  future  exposure  from product
liability claims.

INTENSE COMPETITION

The Company faces  competition  from other  companies  that  cryopreserve  human
tissue,  as well as companies  that market  mechanical  valves and synthetic and
animal tissue for implantation and companies that market wound closure products.
During the time that the Company is  restricted  from  processing  and marketing
human  tissue,  tissue  preservation  service  customers may be forced to obtain
tissue  from  the   Company's   competitors,   which  could  lead  to  permanent
substitution when, and if, the Company resumes processing tissues subject to the
FDA Order.

Management believes that at least four tissue banks offer preservation  services
for allograft  heart valves and many  companies  offer  processed  porcine heart
valves and mechanical  heart valves.  A few companies  dominate  portions of the
mechanical  and porcine heart valve markets,  including St. Jude Medical,  Inc.,
Medtronic,  Inc.  and Edwards Life  Sciences.  The Company is aware that several
companies  have  surgical  adhesive  products  under  development.   Competitive
products  may  also  be  under   development  by  other  large  medical  device,
pharmaceutical   and   biopharmaceutical   companies.   Many  of  the  Company's
competitors  have greater  financial,  technical,  manufacturing  and  marketing
resources than the Company and are well established in their markets.

There can be no assurance that the Company's  products and services will be able
to compete  successfully  with the  products  of these or other  companies.  Any
products  developed  by the Company that gain  regulatory  clearance or approval
would have to compete for market  acceptance  and market  share.  Failure of the
Company to compete  effectively  could  have a  material  adverse  effect on the
Company's business,  financial condition,  results of operations and cash flows.
The FDA Order and related  adverse  publicity will have an adverse effect on the
Company's  competitive  position,  which may have material adverse effect on the
Company's  results of  operations.  As a result of the FDA Order,  the Company's
competitors may gain competitive advantages that may be difficult to overcome.

RAPID TECHNOLOGICAL CHANGE

The technologies  underlying the Company's  products and services are subject to
rapid and profound  technological  change.  The Company  expects  competition to
intensify  as  technical  advances in each field are made and become more widely
known.  There can be no  assurance  that  others  will not  develop  products or
processes with  significant  advantages over the products and processes that the
Company  offers or is  seeking  to  develop.  Any such  occurrence  could have a
material adverse effect on the Company's business,  financial condition, results
of operations, and cash flows.



                                       33


UNCERTAINTIES REGARDING PRODUCTS IN DEVELOPMENT

The Company's growth and profitability will depend, in part, upon its ability to
complete  development  of and  successfully  introduce new  products,  including
additional  applications of its BioGlue and SynerGraft technologies and its ACT.
The Company may be required to undertake time  consuming and costly  development
activities  and seek  regulatory  clearance  or approval for new  products.  The
Company expects that it will have to reduce its development  efforts in the near
term  because  of the  impact  of the  FDA  Order  on  the  Company's  financial
condition.

Although the Company has conducted  pre-clinical studies on many of its products
under  development  which  indicate  that such  products  may be  effective in a
particular application, there can be no assurance that the results obtained from
expanded  clinical  studies will be consistent  with earlier trial results or be
sufficient  for the  Company  to obtain any  required  regulatory  approvals  or
clearances.  There can be no  assurance  that the  Company  will not  experience
difficulties   that  could   delay  or  prevent  the   successful   development,
introduction  and  marketing  of new  products,  that  regulatory  clearance  or
approval  of these or any new  products  will be granted on a timely  basis,  if
ever,  or that the new products will  adequately  meet the  requirements  of the
applicable market or achieve market acceptance.

The  completion  of the  development  of any of the Company's  products  remains
subject  to  all of the  risks  associated  with  the  commercialization  of new
products based on innovative technologies,  including unanticipated technical or
other problems, manufacturing difficulties and the possible insufficiency of the
funds  allocated  for the  completion  of such  development.  Consequently,  the
Company's  products  under  development  may not be  successfully  developed  or
manufactured or, if developed and manufactured, such products may not meet price
or  performance  objectives,  be  developed  on a timely basis or prove to be as
effective as competing products.

The  inability  to  complete  successfully  the  development  of  a  product  or
application,  or a  determination  by the Company,  for financial,  technical or
other  reasons,  not to  complete  development  of any  product or  application,
particularly  in  instances  in which the Company has made  significant  capital
expenditures,  could have a material  adverse effect on the Company's  business,
financial  condition,  results of  operations,  and cash  flows.  The  Company's
porcine heart valve products,  including its SynerGraft  treated porcine valves,
are currently only offered for sale outside of the United States.  The Company's
porcine  heart  valves are subject to the risk that the Company may be unable to
obtain regulatory approval necessary to permit commercial  distribution of these
products in the United States.  The Company's  research and development  efforts
are time  consuming  and  expensive  and there can be no  assurance  that  these
efforts will lead to  commercially  successful  products or  services.  Even the
successful commercialization of a new service or product in the medical industry
can be  characterized  by slow growth and high costs  associated with marketing,
under-utilized  production capacity and continuing research, and development and
education  costs.  Generally,  the  introduction  of new human  tissue  products
requires  significant  physician training and years of clinical evidence derived
from follow-up  studies on human implant  recipients in order to gain acceptance
in the medical community.

UNCERTAINTIES REGARDING THE FUNDING OF THE ACT TECHNOLOGY

The ACT is a reversible  linker  technology that has potential uses in the areas
of cancer therapy, fibrin olysis (blood clot dissolving) and other drug delivery
applications.  The Company has formed AuraZyme,  a wholly owned  subsidiary,  in
order to seek a  corporate  collaboration  or to  complete a  potential  private
placement  of  equity  or  equity-oriented  securities  to fund  the  commercial
development of the ACT.

This strategy is designed to allow the Company to continue  development  of this
technology without incurring  additional research and development  expenditures,
other than through AuraZyme.  There can be no guarantee that such funding can be
obtained on acceptable  terms, if at all,  especially in light of the recent FDA
Order. If such funding is not obtained, the Company may be unable to effectively
test and  develop  the  ACT,  and may  therefore  be  unable  to  determine  its
effectiveness.  Even if such  financing is obtained,  there is no guarantee that
the ACT will in fact prove to be effective in the above applications. Failure to
obtain the desired financing, or failure of the ACT to perform as anticipated in
future  tests,  could have a material  adverse  effect on the  Company's  future
expansion plans and could limit future growth.



                                       34


UNCERTAINTIES REGARDING THE SYNERGRAFT TECHNOLOGY

The Company  processes  porcine,  bovine and human  tissues with the  SynerGraft
process.  In animal studies,  explanted  porcine heart valves have been shown to
repopulate with the hosts' cells.  However,  should  SynerGraft-treated  tissues
implanted   in  humans  not   repopulate   with  the  human  host   cells,   the
SynerGraft-treated tissues may not have the longevity that the Company currently
expects. This could have a material adverse effect on future expansion plans and
could limit future growth.

EXTENSIVE GOVERNMENT REGULATION

Government  regulation  in the  United  States,  the EC and other  jurisdictions
represents a  potentially  determinative  factor in the success of the Company's
efforts to market and develop its products.  The allograft heart valves to which
the Company applies its preservation  services are currently  regulated as Class
II  medical  devices  by the FDA  and  are  subject  to  significant  regulatory
requirements,   including   Quality  System   Regulations   and  record  keeping
requirements.  Changes in regulatory  treatment or the adoption of new statutory
or regulatory requirements are likely to occur, which could adversely impact the
marketing or  development  of these  products or could  adversely  affect market
demand for these products.  Other allograft tissues processed and distributed by
the Company are currently regulated as "human tissue" under rules promulgated by
the FDA  pursuant to the Public  Health  Services  Act.  These  rules  establish
requirements  for donor testing and screening of human tissue and record keeping
relating to these activities and impose certain registration and product listing
requirements  on  establishments  that  process or  distribute  human  tissue or
cellular-based  products. The FDA has proposed and is refining a regulation that
will improve good tissue practices,  akin to good  manufacturing  practices,  on
tissue banks and processors of human tissue.  It is anticipated  that these good
tissue practices  regulations when promulgated will enhance regulatory oversight
of the Company and other processors of human tissue.

BioGlue  Surgical  Adhesive is regulated  as a Class III medical  device and the
Company believes that its ACT may be regulated as a biologic or drug by the FDA.
The ACT has not been approved for commercial  distribution in the United States.
or elsewhere.  Fixed porcine  heart valve  products are  classified as Class III
medical  devices.  There can be no  assurance  that the Company  will be able to
obtain the FDA approval  required to distribute its porcine heart valve products
in the United States.  Distribution of these products within the EC is dependent
upon the Company maintaining its CE Mark and ISO 9001  certifications,  of which
there can be no assurance.

Most of the Company's products in development,  if successfully developed,  will
require  regulatory   approvals  from  the  FDA  and  perhaps  other  regulatory
authorities  before  they  may  be  commercially  distributed.  The  process  of
obtaining required regulatory  approvals from the FDA normally involves clinical
trials and the  preparation of an extensive PMA application and often takes many
years.  The process is expensive and can vary  significantly  based on the type,
complexity  and  novelty  of the  product.  There can be no  assurance  that any
products  developed  by the  Company,  independently  or in  collaboration  with
others, will receive the required approvals for manufacturing and marketing.

Delays  in  obtaining  United  States  or  foreign  approvals  could  result  in
substantial  additional  cost to the Company and adversely  affect the Company's
competitive  position.  The FDA may also place  conditions on product  approvals
that could restrict commercial applications of such products.  Product marketing
approvals or clearances may be withdrawn if compliance with regulatory standards
is not  maintained or if problems  occur  following  initial  marketing.  Delays
imposed by the governmental  clearance  process may materially reduce the period
during  which the  Company has the  exclusive  right to  commercialize  patented
products.



                                       35


Also, delays or rejections may be encountered during any stage of the regulatory
approval  process  based  upon the  failure  of the  clinical  or other  data to
demonstrate  compliance  with,  or upon the failure of the product to meet,  the
regulatory  agency's  requirements for safety,  efficacy and quality,  and those
requirements  may  become  more  stringent  due to changes  in  applicable  law,
regulatory agency policy or the adoption of new regulations. Clinical trials may
also be delayed due to unanticipated side effects,  inability to locate, recruit
and qualify  sufficient numbers of patients,  lack of funding,  the inability to
locate or  recruit  clinical  investigators,  the  redesign  of  clinical  trial
programs,  the inability to manufacture or acquire sufficient  quantities of the
particular  product  candidate  or any other  components  required  for clinical
trials,  changes in the  Company's or its  collaborative  partners'  development
focus and disclosure of trial results by competitors.

Even if  regulatory  approval is obtained for any of the  Company's  products or
services,  the scope of the approval may significantly limit the indicated usage
for which such  products or services may be marketed.  Products  marketed by the
Company  pursuant  to FDA or  foreign  oversight  or  approvals  are  subject to
continuing  regulation.  In the United  States,  devices and  biologics  must be
manufactured  in  registered  establishments  (and,  in the  case of  biologics,
licensed  establishments) and must be produced in accordance with Quality System
Regulations.  Manufacturing facilities and processes are subject to periodic FDA
inspection.  Labeling and promotional activities are also subject to scrutiny by
the FDA and, in certain instances,  by the Federal Trade Commission.  The export
of devices  and  biologics  is also  subject to  regulation  and may require FDA
approval.  From time to time,  the FDA may  modify  such  regulations,  imposing
additional or different requirements.  Failure to comply with any applicable FDA
requirements,  which  may be  ambiguous,  could  result  in civil  and  criminal
enforcement  actions,  warnings,  citations,  product  recalls or detentions and
other  penalties  and could  have a  material  adverse  effect on the  Company's
business,  financial condition,  results of operations, and cash flows. As noted
above, the FDA Order may have such an effect.

In addition,  NOTA  prohibits  the  acquisition  or transfer of human organs for
"valuable  consideration"  for use in human  transplantation.  NOTA  permits the
payment of  reasonable  expenses  associated  with the removal,  transportation,
processing, preservation, quality control and storage of human organs. There can
be no assurance that restrictive  interpretations of NOTA will not be adopted in
the future that will  challenge one or more aspects of the Company's  methods of
charging for its preservation  services. The Company's laboratory operations are
subject to the United States Department of Labor, Occupational Safety and Health
Administration and Environmental  Protection Agency  requirements for prevention
of  occupational  exposure to  infectious  agents and  hazardous  chemicals  and
protection of the environment. Some states have enacted statutes and regulations
governing the processing, transportation and storage of human organs and tissue.

More restrictive state laws or regulations may be adopted in the future and they
could  have a  material  adverse  effect on the  Company's  business,  financial
condition, results of operations and cash flows.

UNCERTAINTIES RELATED TO PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY

The Company owns several patents,  patent  applications and licenses relating to
its technologies,  which it believes provide important  competitive  advantages.
There can be no assurance that the Company's  pending patent  applications  will
issue as  patents  or that  challenges  will not be  instituted  concerning  the
validity  or  enforceability  of  any  patent  owned  by  the  Company,  or,  if
instituted,  that such challenges will not be successful. The cost of litigation
to  uphold  the  validity  and  prevent   infringement  of  a  patent  could  be
substantial.  Furthermore,  there can be no assurance that  competitors will not
independently   develop   similar   technologies   or  duplicate  the  Company's
technologies   or  design   around  the  patented   aspects  of  the   Company's
technologies. There can be no assurance that the Company's proposed technologies
will not infringe patents or other rights owned by others.

In addition,  under certain of the Company's license agreements,  if the Company
fails to meet certain contractual obligations,  including the payment of minimum
royalty  amounts,  such  licenses may become  nonexclusive  or terminable by the
licensor,  which could have a material adverse effect on the Company's business,
financial condition,  results of operations, and cash flows.  Additionally,  the
Company  protects  its  proprietary   technologies  and  processes  in  part  by
confidentiality  agreements  with  its  collaborative  partners,  employees  and
consultants.  There  can be no  assurance  that  these  agreements  will  not be
breached,  that the Company will have  adequate  remedies for any breach or that
the Company's  trade secrets will not  otherwise  become known or  independently
discovered by competitors,  any of which could have a material adverse effect on
the Company's business,  financial  condition,  results of operations,  and cash
flows.

                                       36



UNCERTAINTIES REGARDING FUTURE HEALTH CARE REIMBURSEMENT

Even though the Company  does not receive  payments  directly  from  third-party
health care payors,  their reimbursement  methods and policies impact demand for
the  Company's  cryopreserved  tissue  and  other  services  and  products.  The
Company's  preservation services may be particularly  susceptible to third-party
cost containment  measures.  In particular,  the initial cost of a cryopreserved
allograft heart valve generally  exceeds the cost of a mechanical,  synthetic or
animal-derived valve. The Company is unable to predict what changes will be made
in the reimbursement  methods and policies  utilized by third-party  health care
payors or their effect on the Company.

Changes in the reimbursement methods and policies utilized by third-party health
care payors,  including Medicare, with respect to cryopreserved tissues provided
for implant by the Company and other Company services and products, could have a
material adverse effect on the Company. Significant uncertainty exists as to the
reimbursement  status of newly  approved  health care  products and services and
there can be no assurance that adequate  third-party  coverage will be available
for the  Company to maintain  price  levels  sufficient  for  realization  of an
appropriate return on its investment in developing new products.

Government,  hospitals, and other third-party payors are increasingly attempting
to  contain  health  care  costs by  limiting  both  coverage  and the  level of
reimbursement for new products approved for marketing by the FDA and by refusing
in some  cases to  provide  any  coverage  for  uses of  approved  products  for
indications for which the FDA has not granted  marketing  approval.  If adequate
coverage  and  reimbursement  levels are not  provided by  government  and other
third-party  payors for uses of the Company's new products and services,  market
acceptance of these  products  would be adversely  affected,  which could have a
material adverse effect on the Company's business,  financial condition, results
of operations and cash flows.

DEPENDENCE ON KEY PERSONNEL

The Company's  business and future operating  results depend in significant part
upon the  continued  contributions  of its key  technical  personnel  and senior
management,  many of who would be difficult to replace.  The Company's  business
and future operating results also depend in significant part upon its ability to
attract and retain qualified management, processing, technical, marketing, sales
and support  personnel  for its  operation.  Competition  for such  personnel is
intense and there can be no  assurance  that the Company will be  successful  in
attracting and retaining such personnel.  The loss of key employees, the failure
of any key employee to perform adequately or the Company's  inability to attract
and retain skilled  employees as needed could have a material  adverse effect on
the Company's  business,  financial  condition,  results of operations  and cash
flows.

VOLATILITY OF SECURITIES PRICES

The  trading  price of the  Company's  Common  Stock  has been  subject  to wide
fluctuations  recently and may continue to be subject to such  volatility in the
future.  Trading  price  fluctuations  can be caused by a  variety  of  factors,
including  regulatory  actions  such as the  recent FDA  Order,  recent  product
liability  claims,   quarter  to  quarter   variations  in  operating   results,
announcement of technological  innovations or new products by the Company or its
competitors,  governmental regulatory acts, developments with respect to patents
or  proprietary  rights,  general  conditions  in the medical  device or service
industries,   actions  taken  by  government  regulators,  changes  in  earnings
estimates by securities  analysts or other events or factors,  many of which are
beyond the Company's control.  If the Company's revenues or operating results in


                                       37


future  quarters  fall  below  the  expectations  of  securities   analysts  and
investors, the price of the Company's Common Stock would likely decline further,
perhaps  substantially.  Changes in the trading  price of the  Company's  Common
Stock may bear no relation to the  Company's  actual  operational  or  financial
results.  If the Company's share prices do not meet the  requirements of the New
York Stock Exchange, the Company's shares may be delisted. The Company's closing
stock price  since  January 1, 2002 has ranged from a high of $31.31 to a low of
$2.03.


ANTI-TAKEOVER PROVISIONS

The Company's  Articles of Incorporation and Bylaws contain  provisions that may
discourage  or make more  difficult  any  attempt by a person or group to obtain
control  of the  Company,  including  provisions  authorizing  the  issuance  of
preferred stock without  shareholder  approval,  restricting the persons who may
call a special meeting of the  shareholders  and prohibiting  shareholders  from
taking action by written consent. In addition, the Company is subject to certain
provisions of Florida law that may  discourage or make more  difficult  takeover
attempts or acquisitions of substantial  amounts of the Company's  Common Stock.
Further,  pursuant to the terms of a  shareholder  rights plan  adopted in 1995,
each  outstanding  share of Common Stock has one attached right. The rights will
cause  substantial  dilution of the ownership of a person or group that attempts
to  acquire  the  Company  on terms not  approved  by the Board and may have the
effect of deterring hostile takeover attempts.

ABSENCE OF DIVIDENDS

The Company has not paid, and does not presently  intend to pay, cash dividends.
The Company's major credit agreement contains,  and future credit agreements may
contain, financial covenants,  including covenants to maintain certain levels of
net  worth  and  certain  leverage  ratios,  which  could  have  the  effect  of
restricting  the amount of dividends  that the Company may pay. It is not likely
that any cash dividends will be paid in the foreseeable future.




                                       38




                           FORWARD-LOOKING STATEMENTS

This Form 10-Q  includes  "forward-looking  statements"  within  the  meaning of
Section 27A of the  Securities Act of 1933, as amended (the  "Securities  Act"),
Section 21E of the  Securities  Exchange Act of 1934, as amended (the  "Exchange
Act") and the Private Securities Litigation Reform Act of 1995.

All statements, other than statements of historical facts, included herein which
address  activities,  events  or  developments  which  the  Company  expects  or
anticipates will or may occur in the future,  including statements regarding the
impact  of recent  accounting  pronouncements,  adequacy  of  product  liability
insurance to defend against lawsuits,  the outcome of lawsuits filed against the
Company,  the impact of the FDA Order on future  revenues,  profits and business
operations,  the  effect of the FDA  Order on sales of  BioGlue,  future  tissue
procurement  levels  resulting from the FDA Order,  the outcome of the Company's
appeal of the FDA Order,  the estimates  underlying the charges  recorded in the
second  quarter due to the FDA Order,  the estimates  underlying  the accrual to
second  quarter  earnings  established to account for the cost to the Company of
the FDA Order and the legal and professional  fees necessary  because of the FDA
Order,  the estimates of the amounts accrued for the retention  levels under its
product liability and directors' and officers' insurance policies,  future costs
of  human  tissue  preservation  services,  changes  in  liquidity  and  capital
resources  as a result  of the FDA  Order,  the  outcome  of any  evaluation  of
allograft  heart  valves by the FDA,  the  possible  adverse  outcome of the SEC
investigation  referenced in the SEC Letter, future product development plans as
a result of the FDA Order, the Company's  competitive  position,  the successful
development  of its SynerGraft  porcine  valves,  funding  available to continue
development  of the ACT,  estimated  dates  relating to the  Company's  proposed
regulatory  submissions,  the Company's  expectations  regarding the adequacy of
current financing arrangements,  product demand and market growth, the potential
of the ACT for use in cancer  therapies,  fibrin olysis (blood clot dissolving),
and other drug delivery applications,  the outcome of litigation,  the impact on
the Company of adverse results of surgery  utilizing tissue processed by it, and
other statements  regarding future plans and strategies,  anticipated  events or
trends and similar expressions  concerning matters that are not historical facts
are forward-looking statements.

These  statements  are based on certain  assumptions  and  analyses  made by the
Company in light of its  experience  and its  perception of  historical  trends,
current conditions and expected future  developments as well as other factors it
believes are appropriate in the circumstances.  However,  whether actual results
and developments  will conform to the Company's  expectations and predictions is
subject to a number of risks and  uncertainties,  as is the Company's  business.
These  risks and  uncertainties,  which  could  cause  actual  results to differ
materially from the Company's  expectations,  include the risk factors discussed
in this Form 10-Q and other factors, many of which are beyond the control of the
Company.  Consequently,  all of the forward-looking statements made in this Form
10-Q are qualified by these cautionary  statements and there can be no assurance
that the actual  results or  developments  anticipated  by the  Company  will be
realized or, even if  substantially  realized,  that they will have the expected
consequences  to or effects on the Company or its  business or  operations.  The
Company  assumes  no  obligation  to update  publicly  any such  forward-looking
statements, whether as a result of new information, future events or otherwise.



                                       39




Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The Company's  interest  income and expense are most sensitive to changes in the
general level of United States interest rates. In this regard, changes in United
States  interest rates affect the interest earned on the Company's cash and cash
equivalents of $12.3 million and short-term investments in municipal obligations
of $18.7  million as of June 30, 2002,  as well as interest  paid on its debt. A
10% adverse  change in interest rates  affecting the Company's cash  equivalents
and  short-term  investments  would not have a material  impact on the Company's
interest income for 2002.

The  Company  manages  interest  rate risk  through the use of fixed debt and an
interest rate swap agreement. At June 30, 2002 approximately $3.2 million of the
Company's $6.4 million in debt charged interest at a fixed rate. This fixed rate
debt includes a portion of the Company's  outstanding term loan balance that has
been  effectively  converted  to fixed rate debt  through an interest  rate swap
agreement.  A 10% increase in interest  rates  affecting the Company's  variable
rate debt, net of the effect of the interest rate swap agreement, would not have
a material increase in the Company's interest expense for 2002.


Item 4. Controls and Procedures.
        Not applicable.


                                       40





Part II - OTHER INFORMATION

Item 1. Legal Proceedings.

     In the normal course of business as a medical  device and services  company
     the Company has product liability complaints filed against it. As of August
     30, 2002 fifteen product liability cases had been filed against the Company
     between May 18, 2000 and August 15,  2002.  The cases are  currently in the
     pre-discovery  or discovery  stages.  Of these cases,  nine allege  product
     liability  claims  arising out of the Company's  orthopaedic  tissue,  four
     allege  product  liability  claims  arising out of the Company's  allograft
     heart valve tissue and one alleges product  liability claims arising out of
     the  non-tissue  products  made  by  Ideas  for  Medicine,  when  it  was a
     subsidiary of the Company.

     Included in these cases is the  complaint  filed against the Company in the
     Superior Court of Cobb County,  Georgia,  on July 12, 2002 by Steve Lykins,
     as Trustee for the benefit of next of kin of Brian Lykins.  This  complaint
     alleges strict liability,  negligence,  professional negligence, and breach
     of warranties  related to tissue  implanted in November 2001. The plaintiff
     seeks unspecified compensatory and punitive damages.

     The Company  maintains  general  liability  insurance  policies,  which the
     Company  believes  to be  adequate  to  defend  against  these  suits.  The
     Company's insurance company has been notified of these actions. The Company
     intends to vigorously defend against these claims.  Nonetheless, an adverse
     judgment  in  excess  of the  Company's  insurance  coverage  could  have a
     material adverse effect on the Company's results of operations.

     Several  putative  class action  lawsuits  were filed in July 2002,  one of
     which was  amended  in August of 2002,  against  the  Company  and  certain
     officers of the Company  alleging  that the  defendants  violated  Sections
     10(b)  and  20(a) of the  Securities  Exchange  Act of 1934 and Rule  10b-5
     promulgated  thereunder,  by  issuing  a series  of  materially  false  and
     misleading  statements to the market  throughout the Class Period of August
     of 2000  through  August  of  2002,  which  statements  had the  effect  of
     artificially  inflating the market price of the Company's  securities.  The
     principal  allegations  of the  complaints  are that the Company  failed to
     disclose  its alleged  lack of  compliance  with  certain  FDA  regulations
     regarding the handling and processing of certain  tissues and other product
     safety matters. The plaintiffs seek unspecified  compensatory damages in an
     amount to be proven at trial.  The  Company  believes  these  cases will be
     consolidated  into one putative class action lawsuit.  The Company believes
     the claims made in the lawsuits are without merit and intends to vigorously
     defend  against these claims.  Management  has retained the services of the
     Atlanta  based law firm of King &  Spalding  to  defend  the  Company.  The
     Company  carries  director's and officer's  liability  insurance  which the
     Company  believes to be adequate to defend against this suit.  Nonetheless,
     an adverse  judgment in excess of the Company's  insurance  coverage  could
     have a material adverse effect on the Company's results of operations.

     On August 7, 2002 the  Company  announced  the  settlement  of its  ongoing
     litigation  with Colorado State  University  Foundation  ("CSURF") over the
     ownership of the Company's SynerGraft  technology.  The settlement resolves
     all  disputes  between  the parties and  extinguishes  all CSURF  ownership
     claims to any aspect of CryoLife's  SynerGraft  technology.  The settlement
     includes  an   unconditional   assignment   to  CryoLife  of  CSURF  tissue
     engineering  patents,   trade  secrets  and  know-how  relating  to  tissue
     decellularization   and   recellularization.   The  technology   assignment
     supercedes the 1996 technology  license,  which was terminated by the terms
     of the  settlement.  Payment  terms  include  a  nonrefundable  advance  of
     $400,000  paid by the  Company  to CSURF  that  will be  applied  to earned
     royalties as they accrue  through March 2011. The Company will record these
     amounts as prepaid  royalties and will expense the amounts as the royalties
     accrue.  The earned royalty rate is a maximum of 0.75% of net revenues from
     products or tissue services utilizing the SynerGraft technology.  Royalties
     earned  under  the  agreement  for  revenues  through  June 30,  2002  were
     approximately $27,000.

                                       41


     On Saturday,  August 17, 2002 the Company received a letter from the United
     States  Securities and Exchange  Commission  (the "SEC Letter") that stated
     that the Company was subject to an  investigation  related to the Company's
     August 14, 2002  announcement  of the FDA Order and requesting  information
     from the Company from the period between September 1, 2001 through the date
     of the  Company's  response to the SEC Letter.  The SEC Letter  stated,  in
     part,  that  "We are  trying  to  determine  whether  there  have  been any
     violations  of the  federal  securities  laws.  The  investigation  and the
     subpoena do not mean that we have concluded that anyone has broken the law.
     Also, the  investigation  does not mean that we have a negative  opinion of
     any  person,  entity  or  security."  The  staff  of the  SEC  subsequently
     confirmed that its  investigation  is informal in nature,  and that it does
     not have subpoena power at this time.

Item 2.  Changes in Securities.
         None


Item 3.  Defaults Upon Senior Securities.

     See Note 6 to the Summary Consolidated Financial Statements for information
     regarding a notification by the Company's lender that the FDA Order and the
     inquiries  of the SEC have had a material  adverse  effect on the  Company,
     which  constitutes  an event of  default.  The  lender has  elected  not to
     declare an event of default at this time.


Item 4.  Submission of Matters to a Vote of Security Holders.

          (a)  The Annual Meeting of Shareholders was held on May 29, 2002.

          (b)  Management's nominees for director were elected at the meeting by
               the holders of common stock. The election was uncontested.

               The  following  table shows the results of voting in the election
               of Directors:



                                                                                                       
                                                                     Shares Voted For                    Authority Withheld
                Steven G. Anderson                                      16,611,274                                875,356
                John M. Cook                                            17,366,243                                120,387
                Ronald C. Elkins, M.D.                                  17,351,146                                135,484
                Virginia C. Lacy                                        17,366,243                                120,387
                Ronald D. McCall, Esq.                                  16,561,274                                925,356
                Alexander C. Schwartz, Jr.                              17,366,243                                120,387
                Bruce J. Van Dyne, M.D.                                 17,351,146                                135,484

          (c)  A proposal was passed  which  approved the  CryoLife,  Inc.  2002
               Stock Incentive Plan.

               The following table shows the results of voting:


                                                                       Common Shares
                Voting for                                              16,261,220
                Voting against                                           1,078,559
                Abstain from voting                                        146,851
                                                                        ------------------
                Total                                                   17,486,630
                                                                        ==================



Item 5.  Other information.
         None.




                                       42


Item 6.  Exhibits and Reports on Form 8-K

          (a)  The exhibit index can be found below.


Exhibit
Number                                          Description

3.1       Restated  Certificate  of  Incorporation  of the Company,  as amended.
          (Incorporated by reference to Exhibit 3.1 to the  Registrant's  Annual
          Report on Form 10-K for the fiscal year ended December 31, 2000.)

3.2       ByLaws of the  Company,  as amended.  (Incorporated  by  reference  to
          Exhibit  3.2 to the  Registrant's  Annual  Report on Form 10-K for the
          fiscal year ended December 31, 1995.)

3.3       Articles of Amendment to the Articles of Incorporation of the Company.
          (Incorporated by reference to Exhibit 3.3 to the  Registrant's  Annual
          Report on Form 10-K for the fiscal year ended December 31, 2000.)

4.1       Form of Certificate for the Company's  Common Stock.  (Incorporated by
          reference to Exhibit 4.1 to the Registrant's Registration Statement on
          Form S-1 (No. 33-56388).)

10.1*     2002 Stock Incentive Plan

99.1*     Certification  Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant
          To Section 906 Of The Sarbanes-Oxley Act Of 2002.


          (b)  Current Reports on Form 8-K.

               The  Registrant  filed a  Current  Report  on Form  8-K  with the
               Commission  on April  11,  2002 with  respect  to a Change in the
               Registrant's Certifying Accountant.

               The  Registrant  filed a  Current  Report  on Form  8-K  with the
               Commission  on May 10,  2002  with  respect  to a  Change  in the
               Registrant's Certifying Accountant.


_____________
*  Filed herewith.

                                       43




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.

                                              CRYOLIFE, INC.
                                              (Registrant)

/s/ STEVEN G. ANDERSON                        /s/ DAVID ASHLEY LEE
- ---------------------------------             ----------------------------------
STEVEN G. ANDERSON                            DAVID ASHLEY LEE
Chairman, President, and                      Vice President and Chief Financial
Chief Executive Officer                       Officer
                                              (Principal Financial and
                                               Accounting Officer)

September 3, 2002
- ------------------------

DATE








                                       44





CERTIFICATIONS


I, Steven G. Anderson, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of CryoLife, Inc.;

2.   Based on my knowledge,  this  quarterly  report does not contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this quarterly report; and

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in this  quarterly  report,  fairly  present  in all
     material respects the financial  condition,  results of operations and cash
     flows of the  registrant  as of, and for,  the  periods  presented  in this
     quarterly report.

Date: September 3, 2002
                                               /s/STEVEN G. ANDERSON
                                               Chief Executive Officer

I, Ashley D. Lee, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of CryoLife, Inc.;

2.   Based on my knowledge,  this  quarterly  report does not contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this quarterly report; and

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in this  quarterly  report,  fairly  present  in all
     material respects the financial  condition,  results of operations and cash
     flows of the  registrant  as of, and for,  the  periods  presented  in this
     quarterly report.

Date: September 3, 2002
                                               /s/DAVID ASHLEY LEE
                                               Chief Financial Officer



EXPLANATORY  NOTE REGARDING  CERTIFICATIONS:  Representations  4, 5 and 6 of the
Certifications as set forth in Form 10-Q have been omitted,  consistent with the
Transition  Provisions  of SEC Exchange Act Release No.  34-46427,  because this
Quarterly  Report on Form 10-Q covers a period ending before the Effective  Date
of Rules 13a-14 and 15d-14.




                                       45