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 September 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
October 28, 2002 was 19,573,970.







Part I - FINANCIAL INFORMATION

Item 1. Financial statements


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



                                                                            
                                                   Three Months Ended                    Nine Months Ended
                                                      September 30,                       September 30,
                                            -------------------------------       ------------------------------
                                                 2002              2001               2002              2001
                                            -------------------------------       ------------------------------
                                                       (Unaudited)                          (Unaudited)

Revenues:
   Human tissue preservation services, net  $       11,300    $      19,737       $      49,074    $      57,069
   Products                                          5,354            2,600              15,892            8,029
   Distribution and grant                              235              230                 658              598
                                            -------------------------------       ------------------------------
                                                    16,889           22,567              65,624           65,696
Costs and expenses:
   Human tissue preservation services
     (including write-down of $22,691
     and $32,715 in the three and nine
     months ended September 30, 2002)               27,978            8,188              53,244           23,558
   Products                                          4,739            1,196               8,817            4,051
   General, administrative, and marketing           11,193            8,290              32,118           24,569
   Research and development                          1,347            1,232               3,696            3,604
   Goodwill impairment                               1,399               --               1,399               --
   Interest expense                                    155               37                 543               53
   Interest income                                    (188)            (449)               (725)          (1,587)
   Other expense (income), net                          35              114                 (37)             856
                                            -------------------------------       ------------------------------
                                                    46,658           18,608              99,055           55,104
                                            -------------------------------       ------------------------------
(Loss) income before income taxes                  (29,769)           3,959             (33,431)          10,592
Income tax (benefit) expense                       (10,123)           1,267             (11,367)           3,390
                                            -------------------------------       ------------------------------
Net (loss) income                           $      (19,646)   $       2,692       $     (22,064)   $       7,202
                                            ===============================       ==============================

Net (loss) earnings per share:
         Basic                              $       (1.01)    $        0.14       $      (1.14)    $        0.38
                                            ===============================       ==============================
         Diluted                            $       (1.01)    $        0.14       $      (1.14)    $        0.37
                                            ===============================       ==============================
Weighted average shares outstanding:
         Basic                                      19,526           18,832              19,388           18,785
                                            ===============================       ==============================
         Diluted                                    19,526           19,771              19,388           19,635
                                            ===============================       ==============================



See accompanying notes to summary consolidated financial statements.



                                       2



Item 1. Financial Statements
                                              CRYOLIFE, INC.
                                    SUMMARY CONSOLIDATED BALANCE SHEETS
                                              (IN THOUSANDS)


                                                                                    
                                                                           September 30,    December 31,
                                                                               2002             2001
                                                                       -----------------------------------
ASSETS                                                                     (Unaudited)
Current Assets:
   Cash and cash equivalents                                           $        12,227    $          7,204
   Marketable securities, at market                                             15,926              26,483
   Trade receivables, net                                                        5,851              13,305
   Other receivables, net                                                        5,095               2,820
   Note receivable, net                                                            --                1,169
   Deferred preservation costs, net                                              1,662              24,199
   Inventories                                                                   4,659               6,259
   Prepaid expenses and other assets                                             3,650               2,341
   Deferred income taxes                                                        12,292                 688
                                                                       -----------------------------------
     Total current assets                                                       61,362              84,468
                                                                       -----------------------------------
Property and equipment, net                                                     39,448              39,246
Goodwill                                                                            --               1,399
Patents, net                                                                     5,500               2,919
Other, net                                                                       1,128               1,278
                                                                       -----------------------------------
     TOTAL ASSETS                                                      $       107,438    $        129,310
                                                                       ===================================

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
   Accounts payable                                                    $         1,782    $            555
   Accrued expenses and other current liabilities                                2,739               1,491
   Accrued compensation                                                            762               2,560
   Accrued procurement fees                                                      6,153               6,592
   Current maturities of capital lease obligations                                 640                 609
   Current maturities of long-term debt                                          6,000               1,600
   Convertible debenture                                                            --               4,393
                                                                       -----------------------------------
     Total current liabilities                                                  18,076              17,800
                                                                       -----------------------------------
Capital lease obligations, less current maturities                               2,655               3,140
Bank loan, less current maturities                                                  --               5,600
Deferred income taxes                                                              433                 449
Other long-term liabilities                                                      1,049                 882
                                                                       -----------------------------------
     Total liabilities                                                          22,213              27,871
                                                                       -----------------------------------
Shareholders' equity:
     Preferred stock                                                                --                  --
     Common stock (issued 20,879 shares in 2002 and
       20,172 shares in 2001)                                                      208                 202
     Additional paid-in capital                                                 73,550              66,828
     Retained earnings                                                          18,483              40,547
     Deferred compensation                                                         (24)                (33)
     Accumulated other comprehensive income (loss)                                 172                (145)
     Less:  Treasury stock at cost (1,377 shares in 2002 and
       1,286 shares in 2001)                                                    (7,164)             (5,960)
                                                                       -----------------------------------
          Total shareholders' equity                                            85,225             101,439
                                                                       -----------------------------------
     TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                        $       107,438    $        129,310
                                                                       ===================================

See accompanying notes to summary consolidated financial statements.



                                       3



Item 1. Financial Statements

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


                                                                                    
                                                                                Nine Months Ended
                                                                                 September 30,
                                                                       -----------------------------------
                                                                              2002             2001
                                                                       -----------------------------------
                                                                                  (Unaudited)

Net cash from operating activities:
     Net (loss) income                                                 $       (22,064)   $          7,202
     Adjustments to reconcile net (loss) income to net cash
     provided by operating activities:
       Loss on sale of marketable equity securities                                240                  --
       Depreciation and amortization                                             3,926               3,294
       Provision for doubtful accounts                                              72                  72
       Write-down of deferred preservation costs and inventories                35,816                  --
       Other non-cash adjustments to income                                      1,399                 748
       Deferred income taxes                                                   (11,674)                (85)
       Tax effect of nonqualified option exercises                                 481                 179
       Changes in operating assets and liabilities:
          Receivables                                                            8,190              (2,821)
          Income taxes                                                          (3,083)                (97)
          Deferred preservation costs and inventories                          (11,679)             (3,746)
          Prepaid expenses and other assets                                     (1,309)               (800)
          Accounts payable, accrued expenses, and other liabilities                321                 671
                                                                       -----------------------------------
       Net cash flows provided by operating activities                             636               4,617
                                                                       -----------------------------------

Net cash flows from investing activities:
     Capital expenditures                                                       (3,877)             (9,531)
     Other assets                                                               (2,575)             (1,281)
     Purchases of marketable securities                                        (10,025)            (20,254)
     Sales and maturities of marketable securities                              20,496              16,489
     Proceeds from note receivable                                               1,169               1,846
                                                                       -----------------------------------
       Net cash flows provided by (used in) investing activities                 5,188             (12,731)
                                                                       -----------------------------------

Net cash flows from financing activities:
     Principal payments of debt                                                 (1,200)               (650)
     Proceeds from debt issuance                                                    --               1,165
     Payment of obligations under capital leases                                  (454)               (128)
     Proceeds from exercise of stock options and
         issuance of common stock                                                1,313               1,166
     Purchase of treasury stock                                                   (663)                 --
                                                                       -----------------------------------
       Net cash (used in) provided by financing activities                      (1,004)              1,553
                                                                       -----------------------------------
Increase (decrease) in cash                                                      4,820              (6,561)
Effect of exchange rate changes on cash                                            203                  52
Cash and cash equivalents, beginning of period                                   7,204              17,480
                                                                       -----------------------------------
Cash and cash equivalents, end of period                               $        12,227    $         10,971
                                                                       ===================================



See accompanying notes to summary consolidated financial statements.

                                       4



                         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,  the  statements  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  and  the
supplement  to  the  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
September 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 September 30,
2001, as indicated in Note 20 to the consolidated  financial statements included
in the  CryoLife  Form 10-K for the year  ended  December  31,  2001.  Operating
results  for the  three  and  nine  months  ended  September  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  Form 10-K for the year
ended December 31, 2001.

In  addition  to the  current  effects of the FDA Order,  defined in Note 2, the
Company  anticipates that the FDA Order will have significant adverse effects on
its future financial position, results of operations, and cash flows as compared
to  prior  year  periods.   The  Company   expects  its  liquidity  to  decrease
significantly  over  the  remainder  of  this  year  and  next  year  due to the
anticipated  significant  decrease  in  revenues  as compared to prior year 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 reduced its employee force by approximately
105   employees  on  September  3,  2002.   Severance   and  related  costs  are
approximately $690,000 and were recorded in the third quarter of 2002 in general
and administrative  expenses. As a result of the employee reduction,  management
anticipates personnel costs will be reduced by approximately $385,000 per month.
The Company believes that anticipated  revenue  generation,  expense management,
savings  resulting  from the reduction in the number of employees to reflect the
reduction in revenues,  tax refunds expected to be in excess of $10 million, and
the Company's existing cash and marketable securities will enable the Company to
meet its liquidity needs through September 30, 2003. Even if the Company is able
to satisfactorily  address the observations detailed in the FDA's Warning Letter
dated  June 17,  2002 (the  "Warning  Letter"),  as noted in Note 2, there is no
assurance  that the Company will  experience a return to the level of demand for
its tissue  services  that existed prior to the FDA Order because of the adverse
publicity  or  as a  result  of  customers  and  tissue  recovery  organizations
switching to competitors.

The  Company's  long term  liquidity and capital  requirements  will depend upon
numerous  factors,  including the Company's  ability to address the observations
detailed  in  the  FDA's  Warning  Letter,  the  extent  of any  future  revenue
decreases,   the  costs   associated  with  becoming   compliant  with  the  FDA
requirements  as outlined in the FDA  Warning  Letter and 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  whether or not the  Company  can find  suitable  funding  sources to
replace the funds no longer  available due to the Company's  inability to borrow
on its line of credit as described in Note 6. 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  September 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.



                                       5


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  were  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 processed 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 the Company  perform a retrospective
         review of all tissue in  inventory  (i.e.  currently  in storage at the
         Company) 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 the Company's  allograft  heart valves,  and will take further
         regulatory action if appropriate.


Pursuant to the FDA Order, the Company 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.  The Company appealed the FDA Order on August 14,
2002 and  requested a hearing with the FDA,  which has been set for December 12,
2002.  After the FDA issued its order  regarding the recall,  Health Canada also
issued a recall on the same types of tissue and other  countries  have  inquired
about the circumstances surrounding the FDA Order.

On  September  5,  2002,  the  Company  reached an  agreement  with the FDA (the
"Agreement")  that  supplements  the FDA Order and permits the Company to resume
processing  and  limited   distribution   of  its  life-saving  and  limb-saving
non-valved  cardiac and vascular tissues.  The Agreement allows the tissue to be
released for distribution  after the Company  completes steps to assure that the
tissue is used for approved purposes and that patients will be notified of risks
associated  with tissue use.  Specifically,  the Company  must obtain  physician
prescriptions and tissue packaging must contain  appropriate warning labels. The
Agreement  also  calls for the  Company to  undertake  to  identify  third-party
records of donor  tissue  testing,  and to destroy  tissue  from  donors in whom
microorganisms  associated  with  an  infection  are  found.  In  addition,  the
Agreement,  which has a  forty-five  working-day  term ending  November 7, 2002,
specifies  interim  operating  procedures  to permit the  Company to  distribute


                                       6


tissues  processed during the term of the Agreement.  The Company also agreed to
establish  a  corrective  action  plan  within  30 days with  steps to  validate
processing  procedures.  The corrective  action plan was submitted on October 5,
2002. The FDA will review records and other relevant  information related to the
Company's  release of tissue under the  Agreement,  as well as the status of the
Company's  corrective  action plan,  before  determining  whether this Agreement
should be  renewed or  modified  to provide  for any  further  release of tissue
subject to the FDA Order.

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
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.

As a result of the FDA Order,  the Company 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 as of
June 30,  2002,  including  the  impact of the 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 believed 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  did not know if it would  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 had been
significantly  impaired. The Company estimated that this impairment approximated
the full balance of the deferred  preservation  costs of the tissues  subject to
the FDA Order,  which included the tissues stored by the Company and the tissues
to be returned to the Company,  and  therefore  recorded a  write-down  of $10.0
million for these assets.

In the quarter  ended  September 30, 2002,  the Company  recorded a reduction to
pretax income of $24.6  million as a result of the FDA Order.  The reduction was
comprised of a net $22.2 million  increase to cost of human tissue  preservation
services, a $1.4 million write-down of goodwill, and a $1.0 million reduction to
revenues  (and  accounts  receivable)  for the  estimated  return of the tissues
shipped  during the third  quarter  subject to recall by the FDA Order.  The net
$22.2 million increase to cost of preservation  services is comprised of a $22.7
million  write-down  of deferred  preservation  costs,  offset by a $0.5 million
decrease in cost of preservation services due to the estimated and actual tissue
returns  resulting  from the FDA Order  (the costs of such  recalled  tissue are
included in the $22.7 million write-down).

The  Company  evaluated   multiple  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,  the possibility of unfavorable actions


                                       7


by physicians,  customers,  procurement organizations,  and others, the progress
made to date on the corrective action plan, and the requirement in the Agreement
that tissues  subject to the FDA Order be replaced with tissues  processed under
validated methods. As a result of this evaluation,  management believes that all
tissues  subject to the FDA Order as well as the  majority of tissues  processed
prior to October 3, 2001,  including  heart  valves which are not subject to the
FDA Order,  are fully impaired.  Management  believes that most of the Company's
customers  will  only  order  tissues  processed  under  the  interim  operating
procedures  established  under the Agreement or tissues  processed  under future
procedures  approved by the FDA once these  tissues are  available.  The Company
anticipates  the  tissues  processed  under  the  interim  operating  procedures
established  under the Agreement will be available early to mid-November.  Thus,
the  Company  has  recorded a  write-down  of  deferred  preservation  costs for
processed  tissues in excess of the supply  required to meet demand prior to the
release of these interim processed tissues. As of September 30, 2002 the balance
of the  deferred  preservation  costs  after  the  write-down  was  $545,000  of
allograft  heart valves,  $176,000 of non-valved  cardiac  tissues,  $931,000 of
vascular tissues, and $10,000 of orthopaedic tissues.

As a result of the write-down of deferred  preservation  costs,  the Company has
recorded a deferred tax asset of $12.2 million.  Upon destruction of the tissues
associated with the deferred  preservation costs, the deferred tax asset will be
reclassed  as an income tax  receivable.  An expected  refund will be  generated
through a carry back of losses  resulting  from the deferred  preservation  cost
write-downs.  In addition,  the Company has recorded  $4.2 million in income tax
receivables  related  to  $1.7  million  of tax  overpayments  for  2001  and an
estimated $2.5 million of tax overpayments for 2002.

Statement  of  Financial  Accounting  Standards  No.  144,  "Accounting  for the
Impairment  or  Disposal  of  Long-Lived  Assets"  ("SFAS  144"),  requires  the
write-down  of a long-lived  asset to be held and used if the carrying  value of
the asset or the asset group to which the asset belongs,  is not recoverable and
exceeds  its fair  value.  The asset or asset  group is not  recoverable  if its
carrying value exceeds the sum of the undiscounted future cash flows expected to
result from the use and eventual  disposition  of the asset or asset  group.  In
applying SFAS 144, the Company determined that the asset groups consisted of the
long-lived  assets  related to the Company's two  reporting  segments,  as these
represent  the  lowest  level  for which  identifiable  cash  flows are  largely
independent of the cash flows of other assets and liabilities.  The Company used
a fourteen-year  period for the undiscounted  future cash flows.  This period of
time was selected  based upon the  remaining  life of the primary  assets of the
asset  groups,  which  are  leasehold  improvements.   Based  on  its  analysis,
management  does not  believe an  impairment  of the  Company's  intangible  and
tangible  assets related to the tissue  preservation  business or medical device
business  had  occurred as of  September  30,  2002.  However,  depending on the
Company's ability to address the observations detailed in the Warning Letter 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.

Goodwill resulting from business  acquisitions is not amortized,  but is instead
subject  to  periodic  impairment  testing  in  accordance  with  SFAS No.  142,
"Goodwill and Other  Intangible  Assets"  ("SFAS  142").  As a result of the FDA
Order, the Company  determined that an evaluation of the possible  impairment of
intangible  assets  under  SFAS  142  was  necessary.  The  Company  engaged  an
independent  valuation  expert to perform the valuation  using a discounted cash
flow methodology,  and as a result of this analysis, the Company determined that
goodwill related to its tissue processing  reportable unit was fully impaired as
of September  30, 2002.  Therefore,  the Company  recorded a write-down  of $1.4
million in goodwill during the quarter ended September 30, 2002. Management does
not  believe  an  impairment  exists  related  to the other  intangible  assets.
Management  will  continue to evaluate the  recoverability  of these  intangible
assets.


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.

                                       8


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 September 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
September 30, 2002             Cost Basis      to Cost Basis      Cost Basis     Gains/(Losses)        Value
                             -----------------------------------------------------------------------------------
Cash equivalents:
   Money market funds        $          47     $          --    $          47     $          --    $          47
   Municipal obligations             5,636                --            5,636                --            5,636
                             -----------------------------------------------------------------------------------
                             $       5,683     $          --    $       5,683     $          --    $       5,683
                             ===================================================================================
Marketable securities:
   Municipal obligations     $      15,615     $          --    $      15,615     $         311    $      15,926
                             ===================================================================================

                                                                                   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 $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 $106,000 at
September  30, 2002 and $50,000 as of December  31,  2001,  are  included in the
accumulated other comprehensive income account of shareholders' equity.

The  marketable  securities  of $15.9  million on  September  30, 2002 and $26.5
million on December 31, 2001 had maturity dates as follows:  approximately  $1.3
million  and  zero,  respectively,  had a  maturity  date of less  than 90 days,
approximately $3.2 million and $3.4 million,  respectively,  had a maturity date
between  90 days and 1 year,  approximately  $11.4  million  and $14.5  million,
respectively,  had a maturity date between 1 and 5 years, and approximately zero
and $8.6 million matured in more than 5 years or did not have a maturity date.

                                       9


NOTE 4 - INVENTORIES

Inventories are comprised of the following (in thousands):

                                          September 30,       December 31,
                                              2002                2001
                                          ---------------------------------

Raw materials                             $       2,598      $        1,987
Work-in-process                                     264               1,183
Finished goods                                    1,797               3,089
                                          ---------------------------------
                                          $       4,659      $        6,259
                                          =================================

In the third quarter of 2002, the Company recorded a $3.1 million  write-down of
bioprosthetic valves, including SynerGraft(R) and non-SynerGraft treated porcine
heart valves, due to the Company's  decision to stop future  expenditures on the
development  and  marketing  of these  valves and to  maintain  its focus on its
preservation services business, and its BioGlue(R) and SynerGraft vascular graft
product lines.


NOTE 5 - EARNINGS/(LOSS) PER SHARE

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



                                                                            
                                                   Three Months Ended                    Nine Months Ended
                                                      September 30,                        September 30,
                                            -------------------------------       ------------------------------
                                                 2002              2001               2002              2001
                                            -------------------------------       ------------------------------

Numerator for basic and diluted earnings
   per share:
Net (loss) income available to common
   shareholders                             $     (19,646)    $       2,692       $    (22,064)    $       7,202
                                            ===============================       ==============================

Denominator for basic earnings per share:
Weighted-average basis                              19,526           18,832              19,388           18,785
     Effect of dilutive stock options                   --              939                  --              850
                                            -------------------------------       ------------------------------
Denominator for diluted earnings per share:
Adjusted weighted-average shares                    19,526           19,771              19,388           19,635
                                            ===============================       ==============================

Net (loss) earnings per share:
   Basic                                    $       (1.01)    $        0.14       $      (1.14)    $        0.38
                                            ===============================       ==============================
   Diluted                                  $       (1.01)    $        0.14       $      (1.14)    $        0.37
                                            ===============================       ==============================


The effects of stock  options of 791,000  and  975,000  shares for the three and
nine months ended  September  30, 2002,  respectively,  were  excluded  from the
calculation because the amounts are antidilutive for the periods presented.

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 common stock for $663,000. No further purchases
are anticipated in the near term.


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


                                       10


plus  interest  computed at Adjusted  LIBOR plus 1.5%  (3.32% at  September  30,
2002).  At September  30, 2002 the  principal  balance of the Term Loan was $6.0
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 11,  have had a material
adverse   effect  on  the  Company  that   constitutes   an  event  of  default.
Additionally,  as of September 30, 2002, the Company is in violation of the debt
coverage  ratio and net worth  financial  covenants.  As of October 28, 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  September  30,  2002 are  reflected  as a current
liability on the Summary Consolidated Balance Sheets.

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.

On July 30, 2002 the Company  entered into a line of credit  agreement  with the
same  lender as for 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 September 30, 2002 no amounts
were 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.


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  $4.0   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.

In August 2002 the Company  determined  that  changes in the  derivative's  fair
value could no longer be recorded in other comprehensive  income, as a result of
the  uncertainty of future cash payments on the Term Loan caused by the lender's
ability to declare an event of default  as  discussed  in Note 6.  Beginning  in
August  2002 the  Company  is  recording  all  changes  in the fair value of the
derivative  currently  in  other  expense/income  on  the  Summary  Consolidated


                                       11


Statements of Operation,  and is amortizing the amounts  previously  recorded in
other comprehensive  income into other expense/income over the remaining life of
the agreement. If the lender accelerates the payments due under the Term Loan by
declaring  an event of default,  any  remaining  balance in other  comprehensive
income will be reclassed into other expense/income during that period.

At  September  30,  2002 the  notional  amount of this swap  agreement  was $3.0
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 $305,000.
The  fair  value  of the  swap  agreement  is  recorded  as  part  of  long-term
liabilities.  For the three and nine months ended September 30, 2002 the Company
recorded a loss of $26,000 on the interest rate swap. The  unamortized  value of
the swap  agreement,  recorded in the  accumulated  other  comprehensive  income
account of shareholders' equity, was $279,000 at September 30, 2002.


NOTE 8 - COMPREHENSIVE INCOME/(LOSS)

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



                                                                            
                                                   Three Months Ended                    Nine Months Ended
                                                      September 30,                       September 30,
                                            -------------------------------       ------------------------------
                                                 2002              2001               2002              2001
                                            -------------------------------       ------------------------------

Net (loss) income                           $      (19,646)   $       2,692       $     (22,064)   $       7,202
   Unrealized gain/(loss) on investments                56              (45)                 98              772
   Change in fair value of interest rate swap
   (including cumulative effect of adopting
     SFAS 133 in 2001)                                  (6)             (67)                 17             (225)
   Translation adjustment                              (12)             176                 205               52
                                            -------------------------------       ------------------------------
Comprehensive income                        $      (19,608)   $       2,756       $     (21,744)   $       7,801
                                            ===============================       ==============================


The tax effect on the change in unrealized  gain/loss on  investments is $29,000
and zero for the three months ended  September 30, 2002 and 2001,  respectively.
The tax effect for the nine months ended  September 30, 2002 and 2001 is $56,000
and  $398,000,  respectively.  The tax effect on the change in fair value of the
interest  rate swap is $4,000 and $34,000 for the three months  ended  September
30,  2002 and 2001,  respectively.  The tax  effect  for the nine  months  ended
September  30,  2002  and  2001  is  $2,000  and  $115,000,   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 142 and 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.  See Note 2 for a discussion of the impact
of these two statements on the current quarter results.

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  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 rescinds SFAS No. 4, 44
and 64,  which  required  gains and losses  from  extinguishments  of debt to be


                                       12


classified as extraordinary  items. SFAS 145 also amends SFAS No. 13 eliminating
inconsistencies in certain sale-leaseback  transactions.  The provisions of SFAS
145 are effective for fiscal years  beginning after May 15, 2002. 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.

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                    Nine Months Ended
                                                      September 30,                       September 30,
                                            -------------------------------       ------------------------------
                                                 2002              2001               2002              2001
                                            -------------------------------       ------------------------------

Revenue:
   Human tissue preservation services, net a        11,300           19,737              49,074           57,069
   Implantable medical devices                       5,354            2,600              15,892            8,029
   All other b                                         235              230                 658              598
                                            -------------------------------       ------------------------------
                                            $       16,889    $      22,567       $      65,624    $      65,696
                                            -------------------------------       ------------------------------
Cost of Preservation Services and Products:
   Human tissue preservation services c             27,978            8,188              53,244           23,558
   Implantable medical devices                       4,739            1,196               8,817            4,051
   All other b                                          --               --                  --               --
                                            -------------------------------       ------------------------------
                                                    32,717            9,384              62,061           27,609
                                            -------------------------------       ------------------------------
Gross Margin (Loss):
   Human tissue preservation services              (16,678)          11,549              (4,170)          33,511
   Implantable medical devices                         615            1,404               7,075            3,978
   All other b                                         235              230                 658              598
                                            -------------------------------       ------------------------------
                                            $      (15,828)   $      13,183       $       3,563    $      38,087
                                            -------------------------------       ------------------------------


a    Revenue  from human tissue  preservation  services  includes the  estimated
     effect of the return of tissues  subject to recall by the FDA Order of $1.0
     million and $3.5 million,  respectively, in the three and nine months ended
     September 30, 2002.
b    The "All other"  designation  includes 1) grant revenue and 2) distribution
     revenue.


                                       13


c    Cost of human  tissue  preservation  services  includes the  write-down  of
     deferred  preservation  costs for tissues subject to the FDA Order of $22.7
     and  $32.7  million,  respectively,  in the  three  and nine  months  ended
     September 30, 2002.

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



                                                                            
                                                   Three Months Ended                    Nine Months Ended
                                                      September 30,                       September 30,
                                            -------------------------------       ------------------------------
                                                 2002              2001               2002              2001
                                            -------------------------------       ------------------------------

Revenue:
Human tissue preservation services, net a:
   Cardiovascular tissue                    $        5,487    $       8,209       $      20,131    $      22,307
   Vascular tissue                                   3,260            6,192              14,918           18,617
   Orthopaedic tissue                                2,553            5,336              14,025           16,145
                                            -------------------------------       ------------------------------
Total preservation services                         11,300           19,737              49,074           57,069
                                            -------------------------------       ------------------------------

BioGlue surgical adhesive                            5,183            2,431              15,308            7,505
Bioprosthetic devices                                  171              169                 584              524
Distribution and grant                                 235              230                 658              598
                                            -------------------------------       ------------------------------
                                            $       16,889    $      22,567       $      65,624    $      65,696
                                            ===============================       ==============================


a  Revenue from tissue  preservation  services  includes the estimated effect of
   the return of  tissues  subject  to recall by the FDA Order of  $170,000  and
   $510,000,  respectively, in cardiovascular tissue, $833,000 and $2.5 million,
   respectively, in vascular tissue, and $28,000 and $408,000,  respectively, in
   orthopaedic  tissue,  totaling $1.0 and $3.5 million,  respectively,  for the
   three and nine months ended September 30, 2002.


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 October 28,
2002 fifteen cases had been filed  against the Company  between May 18, 2000 and
October 8, 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,  one alleges  product  liability
claims arising out of the Company's  allograft  vascular 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  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 through September 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  there under, 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


                                       14


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  received  notice  in  October  that a  complaint  had  been  filed
instituting  a  shareholder  derivative  action  against the Company and Company
officers and  directors  Steven G.  Anderson,  Albert E.  Heacox,  John W. Cook,
Ronald C. Elkins, Virginia C. Lacy, Ronald D. McCall,  Alexander C. Schwartz and
Bruce J. Van Dyne. The suit was filed in the Superior Court of Gwinnett  County,
Georgia,  by Rosemary  Lichtenberger  but has not been served on the defendants.
The suit alleges the individual  defendants  breached their fiduciary  duties to
the  Company by causing or  allowing  the  Company to engage in  practices  that
caused  the  Company  to  suffer  damages  by being out of  compliance  with FDA
guidelines,  and by causing the Company to issue press releases that erroneously
portrayed  CryoLife's  products,   operations,   financial  results  and  future
prospects. The complainant seeks undisclosed damages, costs and attorney's fees,
punitive  damages and  prejudgment  interest  against the individual  defendants
derivatively  on behalf of the  Company  as a nominal  defendant.  Filing of the
complaint was preceded by a demand letter on behalf of the complainant dated one
day prior to the filing of the suit. Another derivative demand letter of similar
import was received on behalf of complainant Robert F. Fraley;  however,  to the
Company's  knowledge,  no suit has yet been filed by Mr.  Fraley.  The Company's
Board of Directors has  established an independent  committee to investigate the
claims  asserted in the  Lichtenberger  complaint  and the  demands  made in the
Fraley letter and report back to the Board with its  recommendations  for action
in response to the shareholders'  demands. The independent committee has engaged
independent legal counsel to assist in the investigation.

On August 7, 2002 the Company announced the settlement of its ongoing litigation
with Colorado State University Research 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
the Company's  SynerGraft  technology.  The settlement includes an unconditional
assignment to the Company 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  recorded 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 September 30, 2002 were approximately $33,000.

On  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.

                                       15


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 officers' insurance policies.  Therefore the Company has recorded
an accrual of $1.2 million as of June 30, 2002.


                                       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  were  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 processed 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 the Company  perform a retrospective
         review of all tissue in  inventory  (i.e.  currently  in storage at the
         Company) 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 the Company's  allograft  heart valves,  and will take further
         regulatory action if appropriate.


Pursuant to the FDA Order, the Company 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.  The Company appealed the FDA Order on August 14,
2002 and  requested a hearing with the FDA,  which has been set for December 12,
2002.  After the FDA issued its order  regarding the recall,  Health Canada also
issued a recall on the same types of tissue and other  countries  have  inquired
about the circumstances surrounding the FDA Order.

On  September  5,  2002,  the  Company  reached an  agreement  with the FDA (the
"Agreement")  that  supplements  the FDA Order and permits the Company to resume
processing  and  limited   distribution   of  its  life-saving  and  limb-saving
non-valved  cardiac and vascular tissues.  The Agreement allows the tissue to be
released for distribution  after the Company  completes steps to assure that the
tissue is used for approved purposes and that patients will be notified of risks
associated  with tissue use.  Specifically,  the Company  must obtain  physician
prescriptions and tissue packaging must contain  appropriate warning labels. The
Agreement  also  calls for the  Company to  undertake  to  identify  third-party
records of donor  tissue  testing,  and to destroy  tissue  from  donors in whom
microorganisms  associated  with  an  infection  are  found.  In  addition,  the
Agreement,  which has a  forty-five  working-day  term ending  November 7, 2002,


                                       17


specifies  interim  operating  procedures  to permit the  Company to  distribute
tissues  processed during the term of the Agreement.  The Company also agreed to
establish  a  corrective  action  plan  within  30 days with  steps to  validate
processing  procedures.  The corrective  action plan was submitted on October 5,
2002. The FDA will review records and other relevant  information related to the
Company's  release of tissue under the  Agreement,  as well as the status of the
Company's  corrective  action plan,  before  determining  whether this Agreement
should be  renewed or  modified  to provide  for any  further  release of tissue
subject to the FDA Order.

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
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.

As a result of the adverse  publicity  surrounding the FDA Warning  Letter,  the
Company's procurement of cardiac tissues, from which heart valves and non-valved
cardiac  tissues are  processed,  decreased 15% in September 2002 as compared to
September 2001. Although, the Company expects to be able to maintain the current
level  of  cardiac  tissue  procurement  if it  continues  to make  progress  in
addressing  the  observations  detailed  in  the  Warning  Letter,  there  is no
guarantee that sufficient tissue will be available. The Company has continued to
process and distribute heart valves since the receipt of the FDA Order, as these
tissues  are not  subject to the FDA Order.  The  Company  reduced  the level of
processing for non-valved  cardiac tissue to minimum levels after the receipt of
the FDA Order. After the Agreement, the Company resumed processing of non-valved
cardiac tissues under the interim operating procedures.

Upon receipt of the FDA Order, the Company ceased the procurement and processing
of vascular  tissues  until it entered into the  Agreement  allowing for interim
processing  and  distribution  of vascular  tissues.  On September  17, 2002 the
Company  resumed the  procurement  and processing of vascular  tissues under the
interim  operating  procedures.  The  Company  anticipates  it will  procure and
process  vascular tissues at reduced levels as compared to prior year periods at
least until it addresses  the  observations  detailed in the Warning  Letter and
evaluates the demand for the vascular tissues.

Upon receipt of the FDA Order, the Company ceased the procurement and processing
of orthopaedic tissues. The Company does not anticipate procuring and processing
additional  orthopaedic  tissues until after it has  satisfied the  observations
detailed in the Warning Letter.

As a result of the FDA Order,  the Company 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 as of
June 30,  2002,  including  the  impact of the 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 believed that since all non-valved cardiac, vascular, and orthopaedic
allograft  tissues  processed since October 3, 2001 are under recall pursuant to


                                       18


the FDA  Order,  and the  Company  did not know if it would  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 had been
significantly  impaired. The Company estimated that this impairment approximated
the full balance of the deferred  preservation  costs of the tissues  subject to
the FDA Order,  which included the tissues stored by the Company and the tissues
to be returned to the Company,  and  therefore  recorded a  write-down  of $10.0
million for these assets.

In the quarter  ended  September 30, 2002,  the Company  recorded a reduction to
pretax income of $24.6  million as a result of the FDA Order.  The reduction was
comprised of a net $22.2 million  increase to cost of human tissue  preservation
services, a $1.4 million write-down of goodwill, and a $1.0 million reduction to
revenues  (and  accounts  receivable)  for the  estimated  return of the tissues
shipped  during the third  quarter  subject to recall by the FDA Order.  The net
$22.2 million increase to cost of preservation  services is comprised of a $22.7
million  write-down  of deferred  preservation  costs,  offset by a $0.5 million
decrease in cost of preservation services due to the estimated and actual tissue
returns  resulting  from the FDA Order  (the costs of such  recalled  tissue are
included in the $22.7 million write-down).

The  Company  evaluated   multiple  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,  the possibility of unfavorable actions
by physicians,  customers,  procurement organizations,  and others, the progress
made to date on the corrective action plan, and the requirement in the Agreement
that tissues  subject to the FDA Order be replaced with tissues  processed under
validated methods. As a result of this evaluation,  management believes that all
tissues  subject to the FDA Order as well as the  majority of tissues  processed
prior to October 3, 2001,  including  heart  valves which are not subject to the
FDA Order,  are fully impaired.  Management  believes that most of the Company's
customers  will  only  order  tissues  processed  under  the  interim  operating
procedures  established  under the Agreement or tissues  processed  under future
procedures  approved by the FDA once these  tissues are  available.  The Company
anticipates  the  tissues  processed  under  the  interim  operating  procedures
established  under the Agreement will be available early to mid-November.  Thus,
the  Company  has  recorded a  write-down  of  deferred  preservation  costs for
processed  tissues in excess of the supply  required to meet demand prior to the
release of these interim processed tissues. As of September 30, 2002 the balance
of the  deferred  preservation  costs  after  the  write-down  was  $545,000  of
allograft  heart valves,  $176,000 of non-valved  cardiac  tissues,  $931,000 of
vascular tissues, and $10,000 of orthopaedic tissues.

As a result of the write-down of deferred  preservation  costs,  the Company has
recorded a deferred tax asset of $12.2 million.  Upon destruction of the tissues
associated with the deferred  preservation costs, the deferred tax asset will be
reclassed  as an income tax  receivable.  An expected  refund will be  generated
through a carry back of losses  resulting  from the deferred  preservation  cost
write-downs.  In addition,  the Company has recorded  $4.2 million in income tax
receivables  related  to  $1.7  million  of tax  overpayments  for  2001  and an
estimated $2.5 million of tax overpayments for 2002.

Statement  of  Financial  Accounting  Standards  No.  144,  "Accounting  for the
Impairment  or  Disposal  of  Long-Lived  Assets"  ("SFAS  144"),  requires  the
write-down  of a long-lived  asset to be held and used if the carrying  value of
the asset or the asset group to which the asset belongs,  is not recoverable and
exceeds  its fair  value.  The asset or asset  group is not  recoverable  if its
carrying value exceeds the sum of the undiscounted future cash flows expected to
result from the use and eventual  disposition  of the asset or asset  group.  In
applying SFAS 144, the Company determined that the asset groups consisted of the
long-lived  assets  related to the Company's two  reporting  segments,  as these
represent  the  lowest  level  for which  identifiable  cash  flows are  largely
independent of the cash flows of other assets and liabilities.  The Company used
a fourteen-year  period for the undiscounted  future cash flows.  This period of
time was selected  based upon the  remaining  life of the primary  assets of the
asset  groups,  which  are  leasehold  improvements.   Based  on  its  analysis,
management  does not  believe an  impairment  of the  Company's  intangible  and
tangible  assets related to the tissue  preservation  business or medical device
business  had  occurred as of  September  30,  2002.  However,  depending on the
Company's ability to address the observations detailed in the Warning Letter 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.

                                       19


Goodwill resulting from business  acquisitions is not amortized,  but is instead
subject  to  periodic  impairment  testing  in  accordance  with  SFAS No.  142,
"Goodwill and Other  Intangible  Assets"  ("SFAS  142").  As a result of the FDA
Order, the Company  determined that an evaluation of the possible  impairment of
intangible  assets  under  SFAS  142  was  necessary.  The  Company  engaged  an
independent  valuation  expert to perform the valuation  using a discounted cash
flow methodology,  and as a result of this analysis, the Company determined that
goodwill related to its tissue processing  reportable unit was fully impaired as
of September  30, 2002.  Therefore,  the Company  recorded a write-down  of $1.4
million in goodwill during the quarter ended September 30, 2002. Management does
not  believe  an  impairment  exists  related  to the other  intangible  assets.
Management  will  continue to evaluate the  recoverability  of these  intangible
assets.

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 $690,000, which was recorded in the third quarter of
2002. As a result of the employee reduction,  management  anticipates  personnel
costs will be reduced by approximately $385,000 per month.

See Part II, Item 1 "Legal  Proceedings"  for a discussion  of certain  material
legal proceedings.


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
original  shipment if certain quality  criteria are maintained.  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 and tissue procurement  agencies,  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  September  30, 2002 the  deferred  preservation  costs were  $545,000 for
allograft heart valve tissues, $176,000 for non-valved cardiac tissues, $931,000
for vascular  tissues,  and $10,000 for orthopaedic  tissues.  For the three and


                                       20


nine months ended  September  30,  2002,  respectively,  the Company  recorded a
write-down of deferred  preservation  costs of $8.7 million and $8.7 million for
valved cardiac  tissues,  $1.3 million and $2.9 million for  non-valved  cardiac
tissues,  $6.9 million and $11.9 million for vascular tissues,  and $5.8 million
and $9.2 million for orthopaedic tissue totaling $22.7 and $32.7 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.

VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL: The Company assesses
the impairment of its  long-lived,  identifiable  intangible  assets and related
goodwill whenever events or changes in circumstances  indicate that the carrying
value may not be recoverable.  Factors that management  considers important that
could trigger an impairment review include the following:

o    significant  underperformance  relative to expected historical or projected
     future operating results;

o    significant negative industry or economic trends;

o    significant  decline in the Company's  stock price for a sustained  period;
     and

o    the Company's market capitalization relative to net book value.

Statement  of  Financial  Accounting  Standards  No.  144,  "Accounting  for the
Impairment  or  Disposal  of  Long-Lived  Assets"  ("SFAS  144"),  requires  the
write-down  of a long-lived  asset to be held and used if the carrying  value of
the asset or the asset group to which the asset belongs,  is not recoverable and
exceeds  its fair  value.  The asset or asset  group is not  recoverable  if its
carrying value exceeds the sum of the undiscounted future cash flows expected to
result from the use and eventual  disposition  of the asset or asset  group.  In
applying SFAS 144, the Company determined that the asset groups consisted of the
long-lived  assets  related to the Company's two  reporting  segments,  as these
represent  the  lowest  level  for which  identifiable  cash  flows are  largely
independent of the cash flows of other assets and liabilities.  The Company used
a fourteen-year  period for the undiscounted  future cash flows.  This period of
time was selected  based upon the  remaining  life of the primary  assets of the
asset  groups,  which  are  leasehold  improvements.   Based  on  its  analysis,
management  does not  believe an  impairment  of the  Company's  intangible  and
tangible  assets related to the tissue  preservation  business or medical device
business  had  occurred as of  September  30,  2002.  However,  depending on the
Company's ability to address the observations detailed in the Warning Letter 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.

Goodwill resulting from business  acquisitions is not amortized,  but is instead
subject  to  periodic  impairment  testing  in  accordance  with  SFAS No.  142,
"Goodwill and Other Intangible Assets" ("SFAS 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).  As a result of the FDA
Order, the Company  determined that an evaluation of the possible  impairment of
intangible  assets  under  SFAS  142  was  necessary.  The  Company  engaged  an
independent  valuation  expert to perform the valuation  using a discounted cash
flow methodology,  and as a result of this analysis, the Company determined that
goodwill related to its tissue processing  reportable unit was fully impaired as
of September  30, 2002.  Therefore,  the Company  recorded a write-down  of $1.4
million in goodwill during the quarter ended September 30, 2002. Management does
not  believe  an  impairment  exists  related  to the other  intangible  assets.
Management  will  continue to evaluate the  recoverability  of these  intangible
assets.

                                       21



NEW ACCOUNTING PRONOUNCEMENTS

On January 1, 2002 the Company was  required to adopt SFAS 142 and SFAS 144. See
Critical   Accounting   policies  for  a  discussion  of  the  impact  of  these
pronouncements on current financial results.

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  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 rescinds SFAS No. 4, 44
and 64,  which  required  gains and losses  from  extinguishments  of debt to be
classified as extraordinary  items. SFAS 145 also amends SFAS No. 13 eliminating
inconsistencies in certain sale-leaseback  transactions.  The provisions of SFAS
145 are effective for fiscal years  beginning after May 15, 2002. 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.


RESULTS OF OPERATIONS

REVENUES


                                                                            
                                                   Three Months Ended                    Nine Months Ended
                                                      September 30,                       September 30,
                                            -------------------------------       ------------------------------
                                                 2002              2001               2002              2001
                                            -------------------------------       ------------------------------

Revenues as reported                        $       16,889    $      22,567       $      65,624    $      65,696
Reduction in revenues due to
  estimated tissue returns                           1,031               --               3,464              --
                                            --------------    -------------       -------------    ------------
Revenues prior to reduction for
  estimated tissue returns                  $       17,920    $      22,567       $      69,088    $      65,696
                                            ==============    =============       =============    =============

                                                     One Month Ended
                                                       September 30,
                                            -------------------------------
                                                 2002              2001
                                            -------------------------------
Revenues prior to reduction
  for estimated tissue returns              $        3,632    $       7,394


Revenues prior to the reduction for the estimated  effect of tissue returns as a
result of the FDA Order  decreased 51% and 21% and  increased 5%,  respectively,
for the one,  three,  and nine months ended September 30, 2002. This decrease in
revenues for the one and three months ended  September  30, 2002,  respectively,
was primarily due to a 72% and 38% decrease in human tissue preservation service
revenues  as a result of the FDA Order's  restriction  on  shipments  of certain
tissues and decreased  demand as a result of the adverse  publicity  surrounding
the FDA  Order,  partially  offset  by a 82% and  113%  increase  in  BioGlue(R)
Surgical  Adhesive  revenues for the one and three months  ended  September  30,
2002.  The increase in revenues for the nine month  period ended  September  30,
2002 was primarily due to a 104% increase in sales of BioGlue Surgical Adhesive,


                                       22


partially offset by a 14% decrease in human tissue preservation service revenues
as a result of the FDA Order's  restriction on shipments of certain  tissues and
decreased demand as a result of the adverse publicity  surrounding the FDA Order
and  reported  incidents  of  infection.  The BioGlue  increases  are  primarily
attributable to the receipt of FDA approval for BioGlue in December 2001.

Revenues as reported decreased 25% and less than 1%, respectively, for the three
and nine months ended  September 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 $1.0 million and $3.5 million,
respectively,  in preservation service revenues during the three and nine months
ended  September 30, 2002.  As discussed  herein,  the  estimated  effect of the
return of tissues  subject  to recall  includes  credits  for  tissues  actually
returned to the Company to date and the expected  credits for future  tissues to
be returned to the Company as a result of the FDA Order.

Although the Company has not yet  determined the full impact of the FDA Order on
future revenues,  the September  revenues for 2002 as compared to 2001 decreased
51%  primarily  as a result of the FDA Order and adverse  publicity.  Management
believes that a decrease in revenues as compared to prior periods will continue.
In the event the Company is not successful in addressing the issues  detailed in
the Warning  Letter as  described in the recent  events  section or is unable to
reach a satisfactory  agreement with the FDA, future revenues can be expected to
decrease significantly as compared to prior year periods.

BIOGLUE SURGICAL ADHESIVE


                                                                             
                                                   Three Months Ended                    Nine Months Ended
                                                      September 30,                       September 30,
                                            -------------------------------       ------------------------------
                                                 2002              2001               2002              2001
                                            -------------------------------       ------------------------------

Revenues as reported                        $        5,183    $       2,431       $      15,308    $       7,505
Percentage of total revenue as reported                31%              11%                 23%              11%

Percentage of total revenue prior to
  reduction for estimated tissue returns               29%              11%                 22%              11%

                                                     One Month Ended
                                                      September 30,
                                            -------------------------------
                                                 2002              2001
                                            -------------------------------
Revenues                                    $        1,786    $         981
Percentage of total revenue                            49%              13%


Revenues  from the sale of BioGlue  Surgical  Adhesive  increased  82%, 113% and
104%,  respectively,  for the one, three, and nine month periods ended September
30, 2002.  The increase in revenues for the one,  three,  and nine month periods
ended  September 30, 2002 was due to an increase in the  milliliters  of BioGlue
shipped  of 56%,  89% and 82%,  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 78% and 69% of total BioGlue
revenues for the three months ended  September 30, 2002 and 2001,  respectively.
Domestic  revenues  accounted for 78% and 67% of total BioGlue  revenues for the
nine months ended September 30, 2002 and 2001, respectively.

Although BioGlue revenue increased as compared to prior year and 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.

                                       23


CARDIOVASCULAR PRESERVATION SERVICES



                                                                            
                                                   Three Months Ended                    Nine Months Ended
                                                      September 30,                       September 30,
                                            -------------------------------       ------------------------------
                                                 2002              2001               2002              2001
                                            -------------------------------       ------------------------------

Revenues as reported                        $        5,487    $       8,209       $      20,131    $      22,307
Percentage of total revenue as reported                32%              36%                 31%              34%

Revenues prior to reduction for
  estimated tissue returns                  $        5,657    $       8,209       $      20,643    $      22,307
Percentage of total revenue prior to
  reduction for estimated tissue returns               32%              36%                 30%              34%

                                                     One Month Ended
                                                      September 30,
                                            -------------------------------
                                                 2002              2001
                                            -------------------------------
Revenues prior to reduction
  for estimated tissue returns              $        1,196    $       2,487
Percentage of total revenue                            33%              34%


Revenues from cardiovascular  preservation services,  prior to the reduction for
estimated returns of tissue subject to the FDA Order, decreased 52%, 31% and 7%,
respectively, for the one, three, and nine months ended September 30, 2002. This
decrease in revenues for the one, three,  and nine month periods ended September
30, 2002 was  primarily  due to a decline in customer  demand due to the adverse
publicity surrounding the FDA Order, certain reported tissue infections, and the
restrictions on shipments of certain tissues subject to the FDA Order.

Revenues as reported from cardiovascular preservation services decreased 33% and
10%,  respectively,  for the three and nine months ended September 30, 2002. The
revenues from  cardiovascular  preservation  services were adversely impacted by
the estimated  effect of the  non-valved  cardiac  tissues  returned  subject to
recall by the FDA Order, which resulted in an estimated decrease of $170,000 and
$510,000 in service  revenues  during the three and nine months ended  September
30, 2002.

The  Company  anticipates  a  future  decrease  in  cardiovascular  preservation
revenues as compared to prior year periods as a result of the adverse  publicity
surrounding  the FDA Warning  Letter,  FDA Order,  and certain  reported  tissue
infections. If the Company is unable to address the observations detailed in the
Warning Letter,  future non-valved cardiac preservation  revenue, if any, may be
immaterial.

VASCULAR PRESERVATION SERVICES


                                                                            
                                                   Three Months Ended                    Nine Months Ended
                                                      September 30,                       September 30,
                                            -------------------------------       ------------------------------
                                                 2002              2001               2002              2001
                                            -------------------------------       ------------------------------

Revenues as reported                        $        3,260    $       6,192       $      14,918    $      18,617
Percentage of total revenue as reported                19%              27%                 23%              28%

Revenues prior to reduction for
  estimated tissue returns                  $        4,093    $       6,192       $      17,464    $      18,617
Percentage of total revenue prior to
  reduction for estimated tissue returns               23%              27%                 25%              28%

                                       24


                                                     One Month Ended
                                                      September 30,
                                            -------------------------------
                                                 2002              2001
                                            -------------------------------
Revenues prior to reduction
  for estimated tissue returns              $          573    $       1,942
Percentage of total revenue                            16%              26%


Revenues from human vascular tissue  preservation  services,  prior to reduction
for estimated returns of tissue subject to the FDA Order, decreased 70%, 34% and
6%, respectively,  for the one, three, and nine months ended September 30, 2002.
This  decrease in revenues  for the one,  three,  and nine month  periods  ended
September 30, 2002 was primarily due to a decline in customer  demand due to the
adverse publicity surrounding the FDA Order, certain reported tissue infections,
and the restrictions on shipments of certain tissues subject to the FDA Order.

Revenues as reported from human vascular tissue preservation  services decreased
47% and 20%,  respectively,  for the three and nine months ended  September  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 $833,000  and $2.5
million,  respectively,  in vascular  preservation  service  revenues during the
three and nine months ended September 30, 2002.

The Company anticipates a future decrease in vascular  preservation  revenues as
compared to prior year periods as a result of the adverse publicity  surrounding
the FDA Warning Letter,  FDA Order, and certain reported tissue  infections.  If
the  Company is unable to  address  the  observations  detailed  in the  Warning
Letter, future vascular preservation revenues, if any, may be immaterial.

ORTHOPAEDIC PRESERVATION SERVICES


                                                                            
                                                   Three Months Ended                    Nine Months Ended
                                                      September 30,                       September 30,
                                            -------------------------------       ------------------------------
                                                 2002              2001               2002              2001
                                            -------------------------------       ------------------------------

Revenues as reported                        $        2,553    $       5,336       $      14,025    $      16,145
Percentage of total revenue as reported                15%              24%                 21%              25%

Revenues prior to reduction for
  estimated tissue returns                  $        2,581    $       5,336       $      14,433    $      16,145
Percentage of total revenue prior to
  reduction for estimated tissue returns               14%              24%                 21%              25%

                                                     One Month Ended
                                                      September 30,
                                            -------------------------------
                                                 2002              2001
                                            -------------------------------
(Credits) revenues prior to
  reduction for estimated tissue returns    $          (22)   $       1,870
Percentage of total revenue                            (1%)             25%


Revenues from human orthopaedic tissue preservation services, prior to reduction
for estimated  returns of tissue subject to the FDA Order,  decreased  101%, 52%
and 11% for the one,  three,  and nine months ended  September  30,  2002.  This
decrease in revenues for the one, three,  and nine month periods ended September
30, 2002 was  primarily  due to a decline in customer  demand due to the adverse
publicity surrounding the FDA Order, certain reported tissue infections, and the
restrictions on shipments of certain tissues subject to the FDA Order.

                                       25


Revenues  as  reported  from  human  orthopaedic  tissue  preservation  services
decreased  52% and 13% for the three and nine months ended  September  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 $28,000 and $408,000,
respectively,  in orthopaedic preservation service revenues during the three and
nine months ended September 30, 2002.

The Company anticipates a substantial  decrease in the orthopaedic  preservation
revenues as compared to prior year  periods due to the  Company's  inability  to
ship  orthopaedic  grafts  processed  since  October 3, 2001 pursuant to the FDA
Order,  the adverse  publicity  resulting  from the FDA  Warning  Letter and FDA
Order, and the reported infections in some orthopaedic allograft recipients.  If
the Company is unable to address the observations detailed in the Warning Letter
to enable the Company to process and ship orthopaedic  tissue,  or if demand for
these  tissues  does not return after the  observations  are  addressed,  future
orthopaedic preservation revenue, if any, may be immaterial.

BIOPROSTHETIC DEVICES

Revenues from bioprosthetic  cardiovascular devices increased 1% to $171,000 for
the three months  ended  September  30, 2002 from  $169,000 for the three months
ended  September 30, 2001,  representing  1% of total revenues  during each such
period.  Revenues from  bioprosthetic  cardiovascular  devices  increased 11% to
$584,000 for the nine months ended September 30, 2002 from $524,000 for the nine
months ended  September 30, 2001,  representing 1% of total revenues during each
such period.

DISTRIBUTION AND GRANT REVENUES

Distribution and grant revenues increased to $235,000 for the three months ended
September 30, 2002 from $230,000 for the three months ended  September 30, 2001.
Distribution and grant revenues  increased to $658,000 for the nine months ended
September 30, 2002 from  $598,000 for the nine months ended  September 30, 2001.
Grant revenues of $77,000 and $230,000, for the three months ended September 30,
2002 and 2001,  respectively,  and  $208,000 and  $598,000,  for the nine months
ended September 30, 2002 and 2001,  respectively,  are primarily attributable to
the SynerGraft(R)  research and development  programs.  Distribution revenues of
$158,000 for the three months ended September 30, 2002 and $450,000 for the nine
months  ended  September  30,  2002  are  for   commissions   received  for  the
distribution of orthopaedic tissues for another processor. Distribution revenues
for 2001 were zero.

COSTS AND EXPENSES

Cost of human tissue  preservation  services  aggregated  $28.0  million for the
three months ended  September 30, 2002 as compared to $8.2 million for the three
months ended September 30, 2001,  representing  248% and 41%,  respectively,  of
total human tissue  preservation  service revenues for each such period. Cost of
human tissue preservation  services aggregated $53.2 million for the nine months
ended  September 30, 2002 as compared to $23.6 million for the nine months ended
September  30,  2001,  representing  108% and 41%,  respectively  of total human
tissue  preservation  service revenues for each period. The cost of human tissue
preservation  services for the three and nine months ended  September  30, 2002,
respectively,  includes a $22.7 million and $32.7 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 current  cost of human  tissue  preservation  services as a
percent of  revenue  is likely to  increase,  especially  if the  decline in the
demand for the tissues continues.

Cost of products  aggregated  $4.7 million for the three months ended  September
30, 2002 as compared to $1.2 million for the three months  ended  September  30,
2001, representing 89% and 46%, respectively,  of product revenues for each such
period.  Cost of products  aggregated  $8.8  million  for the nine months  ended
September  30,  2002 as  compared  to $4.1  million  for the nine  months  ended
September 30, 2001,  representing  55% and 50%,  respectively,  of total product
revenues  for each  period.  The  increase  in the 2002  cost of  products  as a
percentage  of  total  product  revenues  is  primarily  due to a  $3.1  million
write-down of  bioprosthetic  valves,  including  SynerGraft and  non-SynerGraft
treated  porcine  valves,  in the  third  quarter  of 2002 due to the  Company's


                                       26


decision to stop future  expenditures  on the development and marketing of these
valves and to maintain its focus on its preservation services business,  and its
BioGlue and SynerGraft  vascular  graft product lines.  The decrease in the 2002
cost of products as a percentage of total product  revenues was partially offset
by a  favorable  product mix that 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 35% to $11.2 million
for the three months ended September 30, 2002,  compared to $8.3 million for the
three months ended September 30, 2001,  representing 66% and 37%,  respectively,
of  total  revenues  during  each  such  period.  General,  administrative,  and
marketing  expenses  increased  31% to $32.1  million for the nine months  ended
September  30,  2002,  compared  to  $24.6  million  for the nine  months  ended
September 30, 2001,  representing 49% and 37%,  respectively,  of total revenues
during each such  period.  The increase in  expenditures  for the three and nine
months ended September 30, 2002 was primarily due to 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 and  accounting  costs, a
$1.2 million  accrual for  retention  levels under the  Company's  liability and
directors' and officers'  insurance  policies (see Legal Proceedings at Part II,
Item 1), and additional  professional  fees required to address the observations
detailed  in the  Warning  Letter.  The  Company  expects  to incur  significant
increases in legal costs and professional fees over the remainder of the year to
defend the  lawsuits  filed  against the  Company,  to address the  observations
detailed in the Warning Letter and to appeal the FDA Order. Additional marketing
expenses  may also be incurred  to address the effects of the adverse  publicity
surrounding the FDA Order.

Research  and  development  expenses  increased 9% to $1.3 million for the three
months ended  September 30, 2002,  compared to $1.2 million for the three months
ended  September  30,  2001,  representing  8% and 5%,  respectively,  of  total
revenues for each such period. Research and development expenses increased 3% to
$3.7 million for the nine months  ended  September  30,  2002,  compared to $3.6
million for the nine months ended  September 30, 2001,  representing  6% and 5%,
respectively,  of total revenues for each such period.  Research and development
spending for the three and nine months ended  September  30, 2002 was  primarily
focused on the Company's SynerGraft and Protein Hydrogel Technologies.

As discussed in New Accounting  Pronouncements,  the Company has recorded a $1.4
million  write-down  of its  goodwill,  which is shown as a separate line on the
Summary Consolidated Statements of Operation for the three and nine months ended
September 30, 2002.

Interest income, net of interest expense, was $33,000 and $412,000 for the three
months ended September 30, 2002 and 2001, respectively.  Interest income, net of
interest  expense,  was  $182,000  and $1.5  million for the nine  months  ended
September  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 nine  months
ended September 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.

                                       27



LIQUIDITY AND CAPITAL RESOURCES

At  September  30, 2002 net working  capital was $43.3  million,  with a current
ratio of 3 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 believes that anticipated revenue generation,
expense  management,  savings  resulting  from the  reduction  in the  number of
employees to reflect the  reduction in revenues,  tax refunds  expected to be in
excess of $10 million, and the Company's existing cash and marketable securities
will enable the Company to meet its liquidity needs through  September 30, 2003.
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 $636,000 for the nine months ended
September  30,  2002,  as  compared to $4.6  million  for the nine months  ended
September 30, 2001. The $636,000 in current year cash provided was primarily due
to $8.2 million in net income before depreciation, taxes, and excluding non-cash
items, partially offset by a decrease in cash of $7.6 million due to an increase
in working  capital  requirements  from  planned  revenue  growth,  expansion of
product lines, and an increase in tissue  procurement.  Non-cash  adjustments to
net income for the nine months ended  September 30, 2002 include a $32.7 million
write-down for the impairment of deferred  preservation costs resulting from the
FDA Order as  discussed in Recent  Events,  a $3.1  million  write-down  for the
impairment of inventory as discussed in Costs and  Expenses,  and a $1.4 million
write-down of goodwill as discussed in New Accounting Pronouncements.

Net cash provided by investing  activities  was $5.2 million for the nine months
ended September 30, 2002, as compared to cash used of $12.7 million for the nine
months ended  September 30, 2001. The $5.2 million in current year cash provided
was  primarily  due to a net $10.5  million  increase  in cash  from  marketable
securities,  primarily due to the maturity of debt securities,  and $1.2 million
in proceeds from notes  receivable,  partially offset by a $3.9 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 $2.6 million, primarily
relating  to costs  incurred to defend the  SynerGraft  technology  patents,  as
discussed in Legal Proceedings.

Net cash used by financing activities was $1.0 million for the nine months ended
September  30, 2002,  as compared to cash  provided of $1.6 million for the nine
months ended  September 30, 2001. The $1.0 million in current year cash used was
primarily due to $1.2 million in principal  payments on the Term Loan,  $663,000
for the  purchase of treasury  stock,  and  $454,000  in  principal  payments on
capital  leases,  offset by a $1.3 million  increase due to proceeds  from stock
option exercises.

The Company's  Term Loan, of which the principal  balance was $5.9 million as of
October 28, 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 11 to the Summary
Consolidated Financial Statements, have a material adverse effect on the Company
that  constitutes an event of default.  Additionally,  as of September 30, 2002,
the Company is in violation of the debt coverage  ratio and net worth  financial
covenants. As of October 28, 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  September
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.

                                       28


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.

In August 2002 the Company  determined  that  changes in the  derivative's  fair
value could no longer be recorded in other comprehensive  income, as a result of
the  uncertainty of future cash payments on the Term Loan caused by the lender's
ability to declare an event of default  as  discussed  in Note 6.  Beginning  in
August  2002 the  Company  is  recording  all  changes  in the fair value of the
derivative  currently  in  other  expense/income  on  the  Summary  Consolidated
Statements of Operation,  and is amortizing the amounts  previously  recorded in
other comprehensive  income into other expense/income over the remaining life of
the agreement. If the lender accelerates the payments due under the term load by
declaring  an event of default,  any  remaining  balance in other  comprehensive
income will be reclassed into other expense/income during that period.

At  September  30,  2002 the  notional  amount of this swap  agreement  was $3.0
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 $305,000.
The  fair  value  of the  swap  agreement  is  recorded  as  part  of  long-term
liabilities.  For the three and nine months ended September 30, 2002 the Company
recorded a loss of $26,000 on the interest rate swap. The  unamortized  value of
the swap  agreement,  recorded in the  accumulated  other  comprehensive  income
account of shareholders' equity, was $279,000 at September 30, 2002.

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 common stock for $663,000. 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,  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 October 28, 2002 no amounts
were 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.

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.(R), ("AuraZyme") 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.


                                       29


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 next year
due to the anticipated significant decrease in revenues as compared to the prior
year period,  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.  On  September  3, 2002 the  Company  announced  a
reduction  in employee  force of  approximately  105  employees.  Severance  and
related costs are approximately  $690,000 and were recorded in the third quarter
of 2002. As a result of the employee reduction, management anticipates personnel
costs will be reduced by approximately  $385,000 per month. The Company believes
that anticipated revenue generation,  expense management including the cessation
of the  development  of the  bioprosthetic  valves,  savings  resulting from the
reduction in the number of employees to reflect the  reduction in revenues,  tax
refunds  expected to be in excess of $10 million  (consisting of $1.7 million of
overpayments  from 2001  received in October of 2002,  $2.5  million of expected
overpayments for the 2002 tax year which is expected to be received in the first
quarter of 2003,  and at least $5.8 million of loss  carrybacks  generated  from
deferred  preservation  cost write-downs the receipt of which will be based upon
the  timing  of the  destruction  of the  related  tissues),  and the  Company's
existing  cash and  marketable  securities  will  enable the Company to meet its
liquidity  needs  through  September  30,  2003.  Even if the Company is able to
address the  observations  detailed  in the FDA's  Warning  Letter,  there is no
assurance that the Company will be able to return to the level of demand for its
tissue  services  that existed prior to the FDA Order 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  ability  of  the  Company  to  address  the
observations  detailed in the Warning Letter,  the ability to have the Agreement
with the FDA extended,  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.


                                       30


                                  RISK FACTORS

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

On 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,  the last period
ending prior to the issuance of FDA Order,  were 78% 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.  On  September  30,  2002,  the first full month in which the Company was
subject to the FDA Order as supplemented by the Agreement, revenues derived from
the preservation of tissues for the Company were $1.7 million, a 72% decrease in
revenues from September 2001.

The FDA Order has had 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 has  experienced,  and continues to expect 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.
Although the Agreement that supplements the FDA Order has allowed the Company to
process  vascular and non-valve  cardiac patch tissues  subject to the FDA Order
with certain  restrictions,  the Company has  continued to  experience a reduced
demand for such tissues due to the adverse  publicity  generated from the recall
and from  implanting  physicians'  or risk managers at  implanting  institutions
decisions  to use  human  tissue  from the  Company's  competitors.  Even if the
Company  is able to  address  the  observations  detailed  in the FDA's  Warning
Letter,  demand for such tissue has been, and may continue to be, reduced by the
adverse publicity  generated from the recall or from implanting  physicians' and
risk  managers'  decisions to use human tissue from the  Company's  competitors.
Therefore,  even if the Company is able to address the observations  detailed in
the FDA's  Warning  Letter,  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.  Even
if the Company is able to address the observations detailed in the FDA's Warning
Letter, the Company currently believes that the time for processing human tissue
and the costs of such  processing  are likely to  increase,  which  could have a
material  adverse  affect on the Company's  business,  results of operations and
financial position.

In the event that the  Company is able to address the  observations  detailed in
the FDA's Warning Letter,  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.  Because
of the adverse  publicity  associated with the recall and uncertainty  regarding
future tissue processing,  some procurement  agencies have ceased sending tissue
to the Company for processing.  If the Company's  relationships with procurement
agencies  continue to be  adversely  affected or the Company is unable to obtain
tissues from procurement agencies that have ceased sending tissue to the Company
for processing, 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  continued  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 will continue to decrease over the near term and working
capital could decrease.  Although the Company has reduced 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.

                                       31


CURRENT DEMAND FOR OUR ORTHOPAEDIC TISSUE  PRESERVATION  SERVICES IS MINIMAL AND
MAY NOT RETURN

As a result of the FDA Order and  related  adverse  publicity  the  Company  has
received only nominal revenue from the  cryopreservation  of orthopaedic tissues
since  August  14,  2002.  For  the  year  ended  December  2001,  human  tissue
preservation services revenues for orthopaedic tissues were $22.5 million, which
represented  26% of the  Company's  revenues.  For the six months ended June 30,
2002,  revenues for  preservation  services for  orthopaedic  tissues were $11.9
million, which represented 23% of the Company's revenues. Even if the Company is
able to address the  observations in the FDA's Warning Letter and the Company is
allowed to resume  processing  and  shipping  of  orthopaedic  tissues,  because
orthopaedic  tissue is generally  not  involved in  life-saving  or  limb-saving
procedures and due to the adverse  publicity,  the demand for orthopaedic tissue
from the Company may be minimal and may never  return to the levels in existence
before the FDA Order.  As a result,  this portion of the Company's  business may
have to be permanently discontinued or may only continue at an extremely reduced
level. Any of these  occurrences  would result in a significant  decrease in the
Company's  revenues and  profitability  in the future as compared to  historical
results.

PHYSICIANS MAY BE RELUCTANT TO IMPLANT THE COMPANY'S PRESERVED TISSUES

Even if the  Company is able to address the  observations  detailed in the FDA's
Warning Letter, and the Company is allowed to resume shipping all of the tissues
subject to the FDA Order without the  restrictions  set forth in the  Agreement,
there is a risk that physicians or implanting  institutions 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's  tissues are used.  In addition,  for similar  reasons,  hospital risk
managers may forbid  implanting  surgeons to utilize the Company's 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.

DEMAND FOR HEART VALVES  PROCESSED BY THE COMPANY HAS DECREASED AND MAY CONTINUE
TO DECREASE

Possibly as a result of the FDA's public  statement on August 21, 2002 regarding
allograft heart valves, and due to the adverse publicity associated with the FDA
Order, some physicians and implanting institutions have been reluctant to choose
the  Company's  allograft  heart  valves  for  use  in  implantation,  due  to a
perception  that  they  may not be  safe  or to a  belief  that  the  implanting
institutions  or hospitals may be subject to a heightened  liability risk if the
Company's preserved tissues are used,  especially if alternatives are available.
If adverse  publicity  continues,  and if the  Company is unable to address  the
observations  in the FDA's Warning Letter and the FDA's public  statement is not
retracted,  the demand for Company's  allograft  heart valves could  continue to
decrease and may never return to the levels  exhibited  before the FDA Order. In
such an event, the Company's revenues and profits would be materially  adversely
affected as compared to historical results.

                                       32


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 $32.7
million of deferred  preservation  costs for  tissues  subject to the FDA Order.
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.

RISKS RELATED TO PRODUCTS NOT AFFECTED BY THE FDA RECALL

Even though the Company's  BioGlue products and its porcine heart valve products
(which are not sold in the United  States)  are not  included  in the FDA Order,
there is a possibility  that surgeons or risk managers at institutions  that use
such  products  may be  reluctant  to use such  products  because of the adverse
publicity  associated  with the FDA Order.  Decreased  demand for such products,
particularly  BioGlue,  could have a material  adverse  effect on the  Company's
business, results of operations and financial position.

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.  In addition,  other countries have inquired
as to the tissues exported by the Company,  although their inquiries are now, to
the  Company's  knowledge,  complete.  In addition,  the Company has not shipped
tissue out of the United States without  following the restrictions set forth in
the FDA Order as supplemented by the Agreement. In the event that the Company is
unable  address  the  observations  detailed  in the  FDA's  Warning  Letter  or
additional  regulatory  concerns raised by other  countries,  the Company may be
unable to export tissues subject to the FDA Order.

THE COMPANY MAY BE FORCED TO CEASE TISSUE PRESERVATION

If the Company is not able to address the  observations  detailed in the Warning
Letter,  or if the  allograft  heart  valves  processed  by the Company are also
recalled,  or if the Agreement expires and is not extended,  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
guarantee 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
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  what  the  SEC is  specifically
investigating,  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.

                                       33


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.  Additionally,  as of September 30, 2002,  the
Company  is in  violation  of the debt  coverage  ratio and net worth  financial
covenants. As of October 28, 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 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 Part II, Item 1 "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.  In
addition,  due to the  publicity  surrounding  the recent FDA Order more product
liability  claims  relating  to alleged  infection  of tissue  processed  by the
Company could be filed.

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. 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 FDA
Order and the  number of  product  liability  claims  the  Company  has had made
against it.  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  has been  restricted  in its  processing  and
distribution  of  human  tissue  due to the FDA  Order  as  supplemented  by the
Agreement,  tissue  preservation  service  customers  have been forced to obtain
tissue  from  the   Company's   competitors,   which  could  lead  to  permanent
substitution  when, and if, the Company resumes  processing  tissues without the
restrictions of the FDA Order, as supplemented by the Agreement.

                                       34


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  have had an adverse effect on the
Company's competitive  position,  which has had a material adverse effect on the
Company's results of operations. The FDA Order and related adverse publicity may
continue to have an adverse effect on the Company's competitive position,  which
may  continue  to have a 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.

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 has had minimal  reduction in its development  efforts since the receipt
of the FDA Order. The Company may have to further reduce its development efforts
in the future because of the impact of the FDA Order on the Company's  financial
condition or if it is unable to address the observations detailed in the Warning
Letter.

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.

                                       35


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.  The  introduction  of new human  tissue  products may require
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.

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 improved longevity over the CryoLife
standard  processing  technology 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


                                       36


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,
followed by 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   premarket   approval  ("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.

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  or services
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 has had, and may continue to have such an effect.

                                       37


In  addition,   The  National  Organ  Transplant  Act  ("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.

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  with  respect to its cardiac,  vascular,  and
orthopaedic  tissues  may  be  particularly   susceptible  to  third-party  cost
containment measures. For example, 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


                                       38


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
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
$1.89.

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 of  Directors  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.



                                       39



                           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 and related  Agreement 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
Company's  ability to address the  observations  detailed in the Warning Letter,
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 heart 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.


                                       40



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 $12.2 million and short-term investments in municipal obligations
of $15.9 million as of September 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 September 30, 2002  approximately $3.0 million
of the  Company's  $6.0 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.

With  the  participation  of  management,  the  Company's  President  and  Chief
Executive  Officer along with the Company's  Vice President of Finance and Chief
Financial  Officer  evaluated the Company's  disclosure  controls and procedures
within 90 days of the  filing  date of this  quarterly  report.  Based upon this
evaluation,  the Company's  President and Chief Executive Officer along with the
Company's Vice President of Finance and Chief Financial  Officer  concluded that
the Company's  disclosure controls and procedures are effective in ensuring that
material information required to be disclosed is included in the reports that it
files with the Securities and Exchange Commission.

There were no significant  changes in the Company's internal controls or, to the
knowledge  of the  management  of the  Company,  in  other  factors  that  could
significantly affect these controls subsequent to the evaluation date.


                                       41


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 October 28, 2002 fifteen  cases had been filed against the Company
        between May 18, 2000 and October 8, 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,  one alleges product liability claims arising out of
        the  Company's  allograft  vascular  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 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  through
        September  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 there under,
        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  received  notice in October that a complaint had been filed
        instituting  a  shareholder  derivative  action  against the Company and
        Company  officers and directors  Steven G.  Anderson,  Albert E. Heacox,
        John W. Cook,  Ronald C.  Elkins,  Virginia C. Lacy,  Ronald D.  McCall,
        Alexander C.  Schwartz and Bruce J. Van Dyne.  The suit was filed in the
        Superior Court of Gwinnett County,  Georgia,  by Rosemary  Lichtenberger
        but  has not  been  served  on the  defendants.  The  suit  alleges  the
        individual  defendants breached their fiduciary duties to the Company by
        causing or allowing the Company to engage in  practices  that caused the
        Company  to  suffer  damages  by  being  out  of  compliance   with  FDA
        guidelines,  and by causing  the Company to issue  press  releases  that
        erroneously portrayed CryoLife's products, operations, financial results
        and future prospects.  The complainant seeks undisclosed damages,  costs
        and attorney's fees,  punitive damages and prejudgment  interest against
        the  individual  defendants  derivatively  on behalf of the Company as a
        nominal  defendant.  Filing of the  complaint  was  preceded by a demand
        letter on behalf of the complainant dated one day prior to the filing of
        the suit.  Another  derivative  demand  letter  of  similar  import  was
        received on behalf of  complainant  Robert F.  Fraley;  however,  to the
        Company's  knowledge,  no suit has yet been  filed  by Mr.  Fraley.  The


                                       42


        Company's Board of Directors has established an independent committee to
        investigate the claims asserted in the  Lichtenberger  complaint and the
        demands made in the Fraley  letter and report back to the Board with its
        recommendations for action in response to the shareholders' demands. The
        independent committee has engaged independent legal counsel to assist in
        the investigation.

        On August 7, 2002 the Company  announced  the  settlement of its ongoing
        litigation with Colorado State University Research 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 the  Company's  SynerGraft
        technology.  The settlement includes an unconditional  assignment to the
        Company 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 recorded 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 September 30, 2002 were approximately $33,000.

        On 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.

        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.


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.
         None.


                                       43


Item 5.  Other information.
         Alexander  C. Schwartz,  Jr. resigned  from the  Board of  Directors on
         October 14,  2002 due  to health reasons following a lengthy illness.


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*     Second  Amendment  to  Construction   Loan  and  Permanent   Financing
          Agreement, dated July 30, 2002, by and between the Company and Bank of
          America.
10.2*     Promissory Note by and between the Company and Bank of America,  dated
          July 30, 2002.
10.3*     Settlement and Release Agreement, dated August 2, 2002, by and between
          Colorado State University Research Foundation,  the Company and Dr. E.
          Christopher Orton.
10.4*     Employment  Agreement,  by and  between the Company and D. Ashley Lee,
          dated September 3, 2002.
10.5*     Employment  Agreement,  by and  between  the  Company  and  Sidney  B.
          Ashmore, dated September 3, 2002.
10.6*     Employment  Agreement,  by and between the Company and Kirby S. Black,
          dated September 3, 2002.
10.7*     Employment Agreement, by and between the Company and Albert E. Heacox,
          dated September 3, 2002.
10.8*     Employment  Agreement,  by and between the Company and David M. Fronk,
          dated September 3, 2002.
10.9*     Employment  Agreement,  by and between the Company and James C. Vander
          Wyk, dated September 3, 2002.
10.10*    Employment  Agreement,  by and  between  the  Company  and  Steven  G.
          Anderson, dated September 3, 2002.

                                       44


10.11     Letter Agreement between the Company and FDA, dated September 5, 2002.
          (Incorporated by reference to Exhibit 10.38 to the registrant's report
          of Form 8-K filed on September 6, 2002).
10.12*    Eighth  Amendment to Lease dated February 13, 1986, by and between New
          Market  Partners III, Laing  Properties,  Inc.,  General  Partner,  as
          Landlord, and the Company as tenant, dated November 18, 1998.
10.13*    Ninth  Amendment to Lease dated  February 13, 1986, by and between New
          Market  Partners III, Laing  Properties,  Inc.,  General  Partner,  as
          Landlord, and the Company as tenant, dated July 25, 2001.
10.14*    Tenth  Amendment to Lease dated  February 13, 1986, by and between New
          Market  Partners III, Laing  Properties,  Inc.,  General  Partner,  as
          Landlord, and the Company as tenant, dated June 25, 2002.
10.15*    First Amendment to Lease dated July 23, 1993, by and between Newmarket
          Partners  I, Laing  Properties,  Inc.  and Laing  Management  Company,
          General Partner, as Landlord, and the Company as Tenant, dated June 9,
          1994.
10.16*    Second  Amendment  to  Lease  dated  July  23,  1993,  by and  between
          Newmarket  Partners I, Laing  Properties,  Inc.  and Laing  Management
          Company,  General  Partner,  as  Landlord,  and the Company as Tenant,
          dated June 6, 1998.
10.17*    Third Amendment to Lease dated July 23, 1993, by and between Newmarket
          Partners  I, Laing  Properties,  Inc.  and Laing  Management  Company,
          General Partner, as Landlord,  and the Company as Tenant, dated August
          3, 2001.
10.18*    Fourth  Amendment  to  Lease  dated  July  23,  1993,  by and  between
          Newmarket  Partners I, Laing  Properties,  Inc.  and Laing  Management
          Company,  General  Partner,  as  Landlord,  and the Company as Tenant,
          dated June 25, 2002.
99.1*     Certification  Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant
          To Section 906 Of The Sarbanes-Oxley Act Of 2002.

- --------
*  Filed herewith.


(b)   Current Reports on Form 8-K.

The  Registrant  filed a  Current  Report  on Form 8-K with  the  Commission  on
September 6, 2002 with respect to the Letter  Agreement  between the Company and
the FDA.


                                       45



                                   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)

October 29, 2002
- ------------------------

DATE





                                       46




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;

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.

4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed  such  disclosure  controls and  procedures  to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others  within those  entities,  particularly  during the
period in which this quarterly report is being prepared;

b) evaluated  the  effectiveness  of the  registrant's  disclosure  controls and
procedures  as of a date  within  90  days  prior  to the  filing  date  of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of
the  disclosure  controls  and  procedures  based  on our  evaluation  as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant  deficiencies in the design or operation of internal controls
which  could  adversely  affect the  registrant's  ability  to record,  process,
summarize and report  financial data and have  identified  for the  registrant's
auditors any material weaknesses in internal controls; and

b) any  fraud,  whether  or not  material,  that  involves  management  or other
employees who have a significant role in the registrant's internal controls; and

6. The  registrant's  other  certifying  officers  and I have  indicated in this
quarterly  report  whether or not there  were  significant  changes in  internal
controls or in other factors that could  significantly  affect internal controls
subsequent to the date of our most recent  evaluation,  including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: October 29, 2002
                                         /s/ STEVEN G. ANDERSON
                                         -------------------------------------
                                         Chief Executive Officer


                                       47




I, David Ashley 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;

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.

4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed  such  disclosure  controls and  procedures  to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others  within those  entities,  particularly  during the
period in which this quarterly report is being prepared;

b) evaluated  the  effectiveness  of the  registrant's  disclosure  controls and
procedures  as of a date  within  90  days  prior  to the  filing  date  of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of
the  disclosure  controls  and  procedures  based  on our  evaluation  as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant  deficiencies in the design or operation of internal controls
which  could  adversely  affect the  registrant's  ability  to record,  process,
summarize and report  financial data and have  identified  for the  registrant's
auditors any material weaknesses in internal controls; and

b) any  fraud,  whether  or not  material,  that  involves  management  or other
employees who have a significant role in the registrant's internal controls; and

6. The  registrant's  other  certifying  officers  and I have  indicated in this
quarterly  report  whether or not there  were  significant  changes in  internal
controls or in other factors that could  significantly  affect internal controls
subsequent to the date of our most recent  evaluation,  including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: October 29, 2002

                                           /s/ DAVID ASHLEY LEE
                                           -----------------------------------
                                           Chief Financial Officer



                                       48




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