<PAGE>
 
                                   FORM 10-K
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
 
                                  (Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THESECURITIES EXCHANGE
   ACT OF 1934
 
                  For the fiscal year ended December 31, 1997
                                      OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
   EXCHANGE ACT OF 1934
 
          For the transition period from               to
 
                        Commission file number 1-13165
 
                                CRYOLIFE, INC.
            (Exact name of registrant as specified in its charter)
 
                Florida                              59-2417093
    (State or other jurisdiction of               (I.R.S. Employer
    incorporation or organization)               Identification No.)
 
                1655 Roberts Boulevard N.W., Kennesaw, GA 30144
              (Address of principal executive offices) (zip code)
 
       Registrant's telephone number, including area code (770) 419-3355
 
  Securities registered pursuant to Section 12(b) of the Act:
 

<TABLE>
<CAPTION>
                                                           NAME OF EACH EXCHANGE
             TITLE OF EACH CLASS                            ON WHICH REGISTERED
             -------------------                           ---------------------
<S>                                            <C>
        Common Stock, $.01 par value                      New York Stock Exchange
       Preferred Share Purchase Rights                    New York Stock Exchange
</TABLE>

 
  Securities registered pursuant to Section 12(g) of the Act:
 
  None
 
  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 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.
 
                               [X] Yes    [_] No
 
  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
 
  The aggregate market value of voting stock held by nonaffiliates of the
registrant was approximately $111,802,000 at February 18, 1998 (7,985,863
shares). The number of common shares outstanding at February 18, 1998 was
9,700,791 (exclusive of treasury shares).
 
                               ----------------

<PAGE>
 

                                    PART I
 

ITEM 1. BUSINESS.
 
OVERVIEW
 
CryoLife is the leader in the cryopreservation of viable human tissues for
cardiovascular, vascular and orthopaedic transplant applications, and develops
and commercializes additional implantable products and single-use medical
devices. The Company estimates that it provided approximately 80% of the
cryopreserved human tissue implanted in the U.S. in 1997. The Company uses its
expertise in biochemistry and cell biology, and its understanding of the needs
of the cardiovascular, vascular and orthopaedic surgery medical specialties,
to continue expansion of its core cryopreservation business and to develop or
acquire complementary implantable products and technologies for these fields.
The Company develops bioprosthetic cardiovascular devices including a novel
design stentless porcine heart valve currently marketed in the European
Community and a proprietary process for non-viable animal tissue designed to
improve human biocompatibility. The Company also develops proprietary
implantable surgical bioadhesives, including BioGlue surgical adhesive, which
it has begun commercializing for vascular applications within the European
Community. In addition, the Company manufactures and distributes, through its
Ideas For Medicine, Inc. ("IFM") subsidiary, single-use medical devices for
use in vascular surgical procedures. The Company has generated compound annual
growth rates in revenues and earnings per share, including contributions from
acquisitions, of 24% and 68%, respectively, since 1993.
 
CryoLife processes and distributes for transplantation cryopreserved human
heart valves and conduits, human vascular tissue and human connective tissue
for the knee. Revenues from these services, which were $44.2 million, or 87%,
of the total revenues in 1997, have grown at a compound annual growth rate of
24% since 1993. Based on detailed follow-up data available from approximately
1,700 documented implant procedures performed with the Company's cryopreserved
human heart valves and conduits, management believes that cryopreserved human
heart valves and conduits offer certain advantages over mechanical, synthetic
and animal-derived alternatives. Depending on the alternative, these
advantages include more natural functionality, elimination of a chronic need
for anti-coagulation drug therapy, reduced incidence of reoperation and
reduced risk of catastrophic failure, thromboembolism (stroke) or
calcification. The U.S. market for implantable products targeting indications
addressed by the Company's cryopreserved tissues was approximately $950
million in 1997. Since 1993, cryopreserved human tissues have captured an
increasing share of this market. For example, since 1993, the total U.S.
replacement heart valve market grew at a compound annual growth rate of
approximately 7%, while CryoLife's revenues from cryopreservation of human
heart valves and conduits grew at a compound annual growth rate of
approximately 21%. The Company seeks to expand the availability of human
tissue through its established relationships with over 250 tissue banks and
organ procurement agencies nationwide.
 
CryoLife develops and markets outside the U.S. bioprosthetic cardiovascular
devices for transplantation, currently consisting of fixed stentless porcine
heart valves. Fixed porcine heart valves are often preferred by surgeons for
procedures involving elderly patients because they eliminate the risk of
patient non-compliance with anti-coagulation drug therapy associated with
mechanical valves, are less expensive than human heart valves and their
shorter longevity is more appropriately matched with these patients' life
expectancies. Fixed porcine heart valves address a worldwide target market
estimated to have been $175 million in 1997. Unlike most other available
porcine heart valves, the Company's stentless porcine heart valves do not
contain synthetic materials which increase the risk of endocarditis, a
debilitating and potentially deadly bacterial infection. The Company's
CryoLife-O'Brien aortic heart valve, currently marketed in the European
Community and certain other territories outside the U.S., is a stentless
porcine heart valve which contains a matched composite leaflet design that
approximates human heart valve blood flow characteristics and requires only a
single suture line which simplifies surgical implantation. The Company intends
to submit a CE Mark application for the CryoLife-Ross pulmonary heart valve,
another of the Company's fixed stentless porcine valves, for marketing in the
European Community. The Company plans to apply its proprietary SynerGraft
technology to its stentless porcine heart valves. SynerGraft involves the
depopulation of living cells from the structure of non-viable animal heart
tissue and the repopulation of such tissue with human cells. This process is
designed to reduce calcification of porcine heart valves, thereby increasing
longevity, and more generally to improve the biocompatibility and
functionality of
 
                                       2

<PAGE>
 
such tissue. The Company believes that its porcine heart valves, when treated
with SynerGraft technology, will expand its opportunity to address the broader
international and U.S. heart valve markets, estimated to be $348 million and
$395 million, respectively, in 1997.
 
CryoLife is developing implantable biomaterials for use as surgical adhesives
and sealants. The Company's patent protected BioGlue surgical adhesive,
designed for cardiovascular and peripheral vascular applications, is a polymer
based on a derivative of a blood protein and a cross linking agent. The
Company's patent protected FibRx surgical sealant, designed for tissue
hemostasis and suture line sealing, is a light-activated, biodegradable
surgical sealant under development which is based on a derivative of the human
blood factors fibrinogen and thrombin. Both of these products may be used with
or without sutures or staples, and may offer advantages over sutures and
staples, including more effective sealing and easier application. The Company
estimates that the annual worldwide market for surgical sutures and staples in
1997 was in excess of $2 billion. The Company recently received CE Mark
Certification for its BioGlue surgical adhesive which permits the Company to
begin marketing this product in the European Community for vascular
applications.
 
CryoLife manufactures and distributes, through its IFM subsidiary, single-use
medical devices including endarterectomy surgical instruments, intravascular
shunts, infusion ports, accessories utilized in laparoscopic procedures and a
wide range of single and dual lumen balloon catheters. The Company believes
that many of its existing single-use medical devices have novel proprietary
features that offer clinical advantages over competing products. For example,
the Company's Pruitt-Inahara Shunt was the first endarterectomy shunt
available to surgeons which contains a barrier feature designed to reduce
migration of plaque particles to the brain during surgery. Another example is
the Company's dual lumen embolectomy catheter incorporating a novel water
irrigation mechanism which enables physicians to remove whole blood clots more
effectively than with single lumen embolectomy catheters. The Company is
benefiting from, and intends to utilize, its design and manufacturing
expertise to develop single-use medical devices for use in conjunction with
its cryopreserved human tissue and biomaterial products. Examples of such
devices under development include a family of balloon catheters designed to
assist in applying the BioGlue surgical adhesive and a human heart valve
holder designed to provide physicians greater control in implantation
procedures.
 
In the U.S., the Company markets its cryopreservation services for human heart
valves and conduits and human vascular tissue through its in-house technical
service representatives and relies on independent orthopaedic sales
representatives to market its cryopreservation services for human connective
tissue for the knee. Also in the U.S., the Company markets its single-use
medical devices through its in-house technical service representatives.
Internationally, cryopreserved human tissues, bioprosthetic cardiovascular
devices and single-use medical devices are distributed through independent
representatives located in several countries in Europe, South America and
Asia. The Company plans to market and distribute its BioGlue surgical adhesive
internationally through its existing independent representatives and, if
approved for sale in the U.S., through its in-house technical service
representatives.
 
GROWTH STRATEGY
 
The Company's primary objective is to continue its consistent growth in
revenues and profitability. The Company has generated compound annual growth
rates in revenues and net income of approximately 21% and 71%, respectively,
since 1993, excluding revenues and net income from IFM, which the Company
acquired in March 1997. The Company's strategy to generate continued growth is
based on increasing the use of cryopreserved tissues as an alternative to
mechanical and synthetic implantable products, developing new markets for
existing products and technologies and developing new products and
technologies for new and existing markets. The Company also selectively
considers strategic acquisitions of complementary technologies to supplement
its internal growth. The key elements of the Company's business and growth
strategy are to:
 
  .  Continue Leadership in Cryopreservation of Human Heart Valves and
     Conduits. The Company intends to increase the market penetration of its
     cryopreserved human heart valves and conduits by
 
                                       3

<PAGE>
 
     (i) expanding awareness of clinical advantages of cryopreserved human
     tissues through continuing educational efforts directed to physicians,
     prospective heart valve and conduit recipients and tissue procurement
     agencies, (ii) expanding its relationships with the more than 250 tissue
     banks and procurement agencies across the U.S. which direct tissue to
     the Company for cryopreservation and (iii) expanding its physician
     training activities.
 
  .  Expand Distribution of Cryopreserved Human Vascular Tissue and
     Connective Tissue for the Knee. Using the same strategy it has
     successfully employed to expand its distribution of cryopreserved human
     heart valves and conduits, the Company intends to increase its
     cryopreservation revenues from human vascular tissue and connective
     tissue for the knee through continuing educational efforts directed to
     vascular and orthopaedic surgeons about the clinical advantages of
     cryopreserved vascular and orthopaedic tissue, expanding its
     relationships with tissue banks and procurement agencies and expanding
     its programs for training physicians in the use of tissue cryopreserved
     by the Company.
 
  .  Broaden Application of Cryopreservation Services. The Company will
     continue to collect, monitor and evaluate implant data to (i) develop
     expanded uses for the human tissues currently cryopreserved by the
     Company and (ii) identify new human tissues as candidates for
     cryopreservation. The Company has recently begun providing cryopreserved
     human vascular tissue to be used as dialysis access replacement grafts
     for patients undergoing long-term dialysis, and separately, as venous
     valve replacements for patients suffering from diseases of the venous
     system. The Company has ongoing projects for cryopreserving the
     posterior tibialis and anterior tibialis tendons for use in knee
     repairs. The Company is also investigating the use of cryopreserved
     human osteochondral grafts to repair articular defects, and the use of
     cryopreserved human endothelial cells, peripheral nerves and spinal
     disks in various surgical applications.
 
  .  Develop and Commercialize Bioprosthetic Cardiovascular Devices. The
     Company intends to leverage its expertise with stentless human heart
     valves to expand commercialization of its stentless porcine heart valves
     and to use its stentless porcine heart valves as a platform for the
     development and commercialization of the Company's SynerGraft
     technology. The Company is expanding its production capacity for its
     bioprosthetic cardiovascular devices to address the increased demand it
     is currently experiencing. Separately, the Company's patent protected
     SynerGraft technology is being developed to expand the target market for
     the CryoLife-O'Brien aortic heart valve and the CryoLife-Ross pulmonary
     heart valve by minimizing calcification often associated with porcine
     tissues and thereby increasing their longevity.
 
  .  Develop and Commercialize Biomaterials for Surgical Adhesive and Sealant
     Applications. In the second quarter of 1998, the Company plans to
     commercialize its patent protected BioGlue surgical adhesive in the
     European Community through its existing independent representatives and
     to file an application to conduct clinical trials for BioGlue surgical
     adhesive in the U.S. The Company also plans to continue development of
     its patent protected FibRx surgical sealant. In addition to the adhesive
     and sealant applications of these biomaterials, the Company intends to
     pursue, either directly or through strategic alliances, certain drug
     delivery applications of BioGlue surgical adhesive and FibRx surgical
     sealant, such as administering antibiotics, attaching chemotherapy drugs
     to tumors, delivering growth agents or delivering bone chips for
     orthopaedic bone repair.
 
  .  Leverage Existing Capability across Product Lines. The Company plans to
     expand sales of its single-use medical devices by leveraging its
     established cryopreservation services marketing and sales staff and by
     introducing new complementary products. The Company intends to apply its
     expertise with stentless human heart valves to expand commercialization
     of its stentless porcine heart valves and to use its stentless porcine
     heart valves as a platform for the development and commercialization of
     the Company's SynerGraft technology. New complementary products under
     development include a stentless human heart valve holder being designed
     to provide greater physician control in implantation procedures and
     modified single and double lumen balloon catheters for use in delivering
     the Company's implantable bioadhesives.
 
                                       4

<PAGE>
 
SERVICES AND PRODUCTS
 
Cryopreservation of Human Tissue for Transplant/Living Biologic Devices
 
The Company's proprietary and patent protected cryopreservation process
involves the procurement of tissue from deceased human donors, the timely and
controlled delivery of such tissue to the Company, the screening,
disinfection, dissection and cryopreservation of the tissue by the Company,
the storage and shipment of the cryopreserved tissue and the controlled
thawing of the tissue. Thereafter, the tissue is surgically implanted into a
human recipient.
 
The transplant of human tissue that has not been preserved must be
accomplished within extremely short time limits (not to exceed eight hours for
transplants of the human heart). Prior to the advent of human tissue
cryopreservation, these time constraints resulted in the inability to use much
of the tissue donated for transplantation. The application by the Company of
its cryopreservation technologies to donated tissue expands the amount of
human tissue available to physicians for transplantation. Cryopreservation
also expands the treatment options available to physicians and their patients
by offering alternatives to implantable mechanical, synthetic and animal-
derived devices. The tissues presently cryopreserved by the Company include
human heart valves and conduits, vascular tissue and connective tissue for the
knee. The following table sets forth, for the types of tissues cryopreserved
by the Company, the cumulative number of units shipped, the number of units
shipped in 1997 and the total number of target market procedures performed
annually in the United States:
 

<TABLE>
<CAPTION>
                                                                     NUMBER OF TARGET
                            NUMBER OF CRYOLIFE UNITS SHIPPED         MARKET PROCEDURES
                            -------------------------------------    PERFORMED IN THE
                             SINCE INCEPTION       DURING 1997         U.S. IN 1997
                            ------------------    ---------------    -----------------
   <S>                      <C>                   <C>                <C>
   Human Heart Valves and
    Conduits...............               29,500               5,244       95,000
   Human Vascular Tissue...                9,300               2,621       34,000
   Human Connective Tissue
    for the Knee...........                4,800               1,859      270,000
</TABLE>

 
CryoLife maintains and collects extensive clinical data on the use and
effectiveness of implanted human tissues that it has cryopreserved, and shares
this data with implanting physicians. The Company also uses this data to help
direct its continuing efforts to improve its cryopreservation services through
ongoing research and development. Its research staff and technical
representatives assist physicians by providing educational materials, seminars
and clinics on methods for handling and implanting the tissue cryopreserved by
the Company and the clinical advantages, indications and applications for
those tissues. The Company has ongoing efforts to train and educate physicians
on the indications for and uses of its cryopreserved tissues, as well as its
programs whereby surgeons train other surgeons in necessary techniques. The
Company also assists organ procurement agencies through training and
development of protocols and provides necessary materials to improve their
internal tissue processing techniques and to increase efficiency and the yield
of usable tissue.
 
Human Heart Valves and Conduits. The Company's revenues have been primarily
derived from the cryopreservation of human heart valves and conduits for use
in reconstructive heart valve replacement surgery. CryoLife shipped
approximately 29,500 cryopreserved human heart valves and conduits from 1984
to 1997. Based on CryoLife's records of documented implants, management
believes that the Company's success in the allograft heart valve market is due
in part to physicians' recognition of the longevity and natural functionality
of the Company's cryopreserved human tissues as compared to mechanical and
porcine heart valve alternatives in certain applications. The Company
currently applies its cryopreservion services to human aortic, pulmonary and,
more recently, mitral heart valves for implantation by cardiac surgeons. In
addition, the Company provides cryopreserved conduit tissue, which is the only
source of tissue available to surgeons who wish to perform certain specialized
cardiac repair procedures. Each of these human heart valves and conduits
maintains a viable tissue structure which more closely resembles and performs
like the patient's own tissue than non-human tissue alternatives.
 
Based on available market data, the Company estimates that of all heart valve
replacement surgeries performed in the U.S. in 1997, 69%, 30% and 1% involved
the replacement of diseased or damaged aortic valves, mitral valves and
pulmonary valves, respectively. Due to the success of a procedure known as the
Ross Switch
 
                                       5

<PAGE>
 
Procedure, 53% of the valves which CryoLife shipped in 1997 were pulmonary
valves. In the Ross Switch Procedure, the surgeon replaces the patient's
damaged aortic valve with the patient's own pulmonary valve. The patient's
pulmonary valve is then replaced with a cryopreserved pulmonary valve. The
advantage of this procedure is the use of the patient's own valve in the more
stressful aortic position. The resulting benefit to CryoLife and the surgical
community is a more even demand and distribution of the processed human aortic
and pulmonary valves.
 
The Company estimates that the total heart valve and conduit replacement
market in the U.S. in 1997 was approximately $395 million. Management believes
that approximately 95,000 heart valve and conduit surgeries were conducted in
the U. S. in 1997. Of the total number of heart valve and conduit surgeries,
approximately 64,000, or 67%, involved mechanical heart valves, and
approximately 31,500, or 33%, involved tissue heart valves or conduits,
including porcine and cryopreserved human tissues. Of these tissue heart valve
or conduit replacements, management believes that approximately 6,500, or 21%,
involved cryopreserved human heart valve or conduit replacements. Over 5,200
human heart valves and conduits cryopreserved by the Company were shipped for
implantation in 1997. Since 1993, the total U.S. replacement heart valve
market grew at a compound annual growth rate of approximately 7%, while
CryoLife's revenues from cryopreservation of human heart valves and conduits
grew at a compound annual growth rate of approximately 21%.
 
Based on detailed follow-up data available from approximately 1,700 documented
implant procedures performed with the Company's cryopreserved human heart
valves and conduits, management believes cryopreserved human heart valves and
conduits have characteristics that make them the preferred replacement for
most patients. Specifically, human heart valves, such as those cryopreserved
by the Company, allow for more normal blood flow hemodynamics and provide
higher cardiac output than porcine and mechanical heart valves. Human heart
valves are not subject to progressive calcification, or hardening, as are
porcine heart valves, and do not require anti-coagulation drug therapy, as do
mechanical valves. The synthetic sewing rings contained in mechanical and
stented porcine valves are difficult to treat with antibiotics after they have
become infected, a condition which usually necessitates the surgical removal
of these valves at considerable cost, morbidity and risk of mortality.
Consequently, human heart valves are the preferred alternative to mechanical
and stented porcine valves for patients who have, or are at risk to contract,
endocarditis.
 
The following table sets forth the characteristics of alternative heart valve
implants that management believes make cryopreserved human heart valves the
preferred replacement for most patients:

<TABLE>
<CAPTION>
                                                    PORCINE
                          CRYOPRESERVED --------------------------------                    BOVINE
                              HUMAN         STENTED       STENTLESS(1)     MECHANICAL   PERICARDIUM(2)
                          ------------- ---------------  ---------------  ------------- ---------------
<S>                       <C>           <C>              <C>              <C>           <C>
Materials:                human tissue  glutaraldehyde-  glutaraldehyde-  pyrolitic     glutaraldehyde-
                                        fixed pig        fixed pig        carbon bi-    fixed cow
                                        tissue and       tissue           leaflet and   tissue and
                                        synthetic                         synthetic     synthetic
                                        sewing ring                       sewing ring   sewing ring

Blood Flow Dynamics:      normal        moderate         nearly normal    high          high elevation
                                        elevation                         elevation 

(Required Pressure) (3)   (0-5)         (10-20)          (5-15)           (10-25)       (10-30)

Mode of Failure:          gradual       gradual          expected to be   catastrophic  gradual
                                                         gradual

Longevity:                20 years      7-10 years       expected to      20 years      10-15 years
                                                         exceed stented
                                                         porcine valves
Increased Risk of
 Thromboembolic Events
 (strokes or other                                                      
 clotting):               no            occasional       expected to be   yes           occasional
                                                         rare           
Anti-Coagulation Drug
 Therapy Required:        none          short-term       short-term       chronic       short-term

Responsiveness to
 Antibiotic Treatment of
 Endocarditis:            high          low              low              low           low

Average Valve Cost in
 U.S.:                    $6,850        $4,228           $5,500           $4,100(4)     $4,500
</TABLE>

- --------
(1) Limited long-term clinical data is available since stentless porcine heart
    valves only recently became commercially available.
(2) Management believes that bovine pericardium heart valves have experienced
    mixed clinical results and are generally not considered a preferred
    alternative for most patients.
(3) Pressure measured in mm/Hg.
(4) Mechanical valves also require chronic anti-coagulation drug therapy at a
    cost of approximately $450 per year.
 
                                       6

<PAGE>
 
While the clinical benefits of cryopreserved human heart valves discussed
above are relevant to all patients, they are particularly important for (i)
pediatric patients (newborn to 14 years) who are prone to calcification of
porcine tissue, (ii) young or otherwise active patients who face an increased
risk of severe blood loss or death due to side effects associated as a result
of even with the anti-coagulation drug therapy required with mechanical valves
and (iii) women in their childbearing years for whom anti-coagulation drug
therapy would interfere with normal pregnancy.
 
Human Vascular Tissues. The Company cryopreserves human saphenous and
superficial femoral veins for use in vascular surgeries that require small
diameter conduits (3mm to 6mm), such as coronary bypass surgery and peripheral
vascular reconstructions. Failure to bypass or revascularize an obstruction in
such cases may result in death or the loss of a limb. The Company believes it
offers the only available small diameter conduit product for below-the-knee
vascular reconstruction and shipped approximately 9,300 human vascular tissues
from 1986 to 1997.
 
A surgeon's first choice for replacing diseased or damaged vascular tissue is
generally the patient's own tissue. However, in cases of advanced vascular
disease, the patient's own tissue is often unusable and the surgeon may
consider using synthetic grafts or transplanted human vascular tissue.
Synthetic small diameter vascular grafts are not available for below-the-knee
surgeries and, in other procedures, have a tendency to shut down due to
occlusion because the synthetic materials in these products attract cellular
material from the blood stream which in turn closes off the vessel to normal
blood flow. Cryopreserved vascular tissues tend not to occlude as quickly
because of the presence of an endothelial cell lining in the donor vein which
remains intact following the cryopreservation process. The Company's
cryopreserved human vascular tissues are used for coronary artery bypass
surgeries, peripheral vascular reconstruction, dialysis access graft
replacement and venous valve transplantation.
 
In 1986, the Company began a program to cryopreserve saphenous veins for use
in coronary artery bypass surgeries. Although the Company's cryopreserved
human tissue was used in only a small percentage of the nearly 310,000
coronary artery bypass procedures performed in 1997, it is the only
commercially available alternative to the patient's own tissue. Approximately
950 cryopreserved human saphenous veins for use in coronary artery bypass
surgeries were shipped for this application in 1997, representing
approximately 36% of all the human vascular tissue shipped by the Company
during such period. The Company estimates that, in 1997, approximately 20,000
coronary artery bypass surgeries were performed in which its cryopreserved
human vascular tissues could have been used.
 
In 1989, the Company began a program to cryopreserve long segment saphenous
veins for use in peripheral vascular reconstruction. In cases of peripheral
arteriosclerosis, a cryopreserved saphenous vein can be implanted as a bypass
graft for the diseased artery in order to improve blood flow and maintain a
functional limb. Analysis of clinical data has shown that 80% of patients
receiving CryoLife's preserved vascular tissues in this type of surgical
procedure still have the use of the affected leg three years after surgery.
The alternative for many of these patients was amputation. Approximately 1,570
cryopreserved human saphenous veins were shipped for this application in 1997.
The Company estimates that, in 1997, approximately 22,000 peripheral vascular
reconstruction surgeries were performed in which its cryopreserved human
vascular tissues could have been used.
 
In 1996, the Company began a program for the cryopreservation of human
superficial femoral veins for use in dialysis access graft replacement as an
alternative for synthetic grafts which have a higher risk of infection than
human tissue. The Company shipped less than 100 cryopreserved human
superficial femoral veins for this application in 1997. The Company estimates
that, in 1997, approximately 30,000 dialysis access graft replacements were
performed in which its cryopreserved human vascular tissues could have been
used.
 
In 1997, the Company began a program for the cryopreservation of human
superficial femoral veins for venous valve transplant. The cryopreservation of
these human tissues is designed for patients suffering from chronic venous
insufficiency, a condition in which the blood flow returning to the heart from
the legs is compromised due to absent, improperly functioning or destroyed
venous valves. Prior to the introduction of CryoLife's
 
                                       7

<PAGE>
 
cryopreserved venous valves, treatment for patients suffering from this
ailment generally was limited to drug therapy or compression stockings. The
Company shipped less than 100 cryopreserved human superficial femoral veins
for this application in 1997. The Company estimates that, in 1997,
approximately 20,000 patients with chronic venous insufficiency could have
benefitted from venous valve transplant procedures using its cryopreserved
human vascular tissues.
 
Human Connective Tissue for the Knee. The Company provides surgical
replacements for the meniscus and the anterior and posterior cruciate
ligaments, which are connective tissues critical to the proper operation of
the human knee. CryoLife has shipped approximately 4,800 human connective
tissues for the knee through 1997.
 
Human menisci cryopreserved by the Company provide orthopaedic surgeons with a
new treatment in cases where a patient's meniscus has been completely removed.
When a patient has a damaged meniscus, the current surgical alternatives are
to repair, partially remove or completely remove the patient's meniscus, with
partial removal being the most common procedure. Meniscal removal increases
the risk of premature knee degeneration and arthritis and typically results in
the need for knee replacement surgery at some point during the patient's life.
Management believes that the Company is the only provider of cryopreserved
meniscal tissue and that there are no synthetic menisci on the market. The
Company estimates that in 1997 approximately 683,000 partial and total
meniscectomies were performed in the U.S. The Company believes up to 30% of
these patients could become candidates for meniscal replacement within five
years.
 
Tendons cryopreserved by the Company are used for the reconstruction of
anterior cruciate ligaments in cases where the patient's ligaments are
irreparably damaged. Surgeons have traditionally removed a portion of the
patient's patellar tendon from the patient's undamaged knee for use in
repairing a damaged anterior cruciate ligament. Tendons cryopreserved by the
Company provide an alternative to this procedure. Because surgeries using
cryopreserved tissue do not involve the removal of any of the patient's own
patellar tendon, the patient recovery period is typically shorter. The Company
estimates that in 1997 approximately 175,000 cruciate ligament reconstruction
surgeries were performed.
 
Based on its experience with human heart valves and conduits, management
believes that as the body of clinical data builds regarding the use of
cryopreserved human connective tissues for the knee, the use of such tissues
will increase, although there can be no assurance that this will be the case.
 
Other Allograft Tissues Under Development. The Company currently has ongoing
projects for cryopreserving the posterior and anterior tibialis tendons for
use in the repair of anterior cruciate ligaments. The Company has other
projects for using preserved osteochondral grafts to repair articular defects
and for the use of cryopreserved human endothelial cells, peripheral nerves
and spinal discs, in various surgical applications.
 
Bioprosthetic Cardiovascular Devices
 
The Company is developing bioprosthetic cardiovascular devices based on its
experience with cryopreserved human tissue implants. Like human heart valves,
the Company's porcine heart valves are stentless with the valve opening, or
annulus, retaining a more natural flexibility. Stented porcine and mechanical
heart valves are typically fitted with synthetic sewing rings which are rigid
and can impede normal blood flow and hemodynamics. Unlike most other available
porcine heart valves, the Company's stentless porcine heart valves do not
contain synthetic materials which increase the risk of endocarditis, a
debilitating and potentially deadly bacterial infection.
 
Fixed porcine heart valves are often preferred by surgeons for procedures
involving elderly patients because they eliminate the risk of patient non-
compliance with anti-coagulation drug therapy associated with mechanical
valves, are less expensive than allograft valves and their shorter longevity
is more appropriately matched with these patients' life expectancies. Fixed
porcine heart valves address a worldwide target market estimated to have been
$175 million in 1997.
 
The Company's SynerGraft technology involves the removal of living cells from
the structure of non-viable animal tissue and the repopulation of such tissue
with human cells. This process is designed to reduce
 
                                       8

<PAGE>
 
calcification of porcine heart valves, thereby increasing their longevity, and
more generally to improve the biocompatibility and functionality of such
tissue. The Company believes that its porcine heart valves, when treated with
SynerGraft technology, will expand its opportunity to address the broader
international and U.S. heart valve markets, estimated to be $348 million and
$395 million, respectively, in 1997.
 
The following table sets forth the bioprosthetic cardiovascular devices
currently marketed or under development by the Company, along with the product
features and regulatory or market status for each.
 

<TABLE>
<CAPTION>
                                               FEATURES          REGULATORY/MARKET STATUS
                                        ---------------------  ----------------------------
   <C>                                  <C>                    <S>
   FIXED STENTLESS PORCINE VALVES
   CryoLife-O'Brien                     aortic valve of        currently marketed in Europe
                                        matched composite      with regulatory approval
                                        leaflet design;        under CE Mark
                                        single suture line
   CryoLife-Ross                        pulmonary valve with   application for CE Mark for
                                        attached conduit       European marketing approval
                                                               submitted; review of
                                                               application anticipated in
                                                               mid-1998
   DEPOPULATED STENTLESS PORCINE VALVES
   CryoLife-O'Brien S.G.                aortic valve, as       submission of application
                                        above, with antigen    for CE Mark for European
                                        reduction properties   marketing approval
                                                               anticipated in fourth
                                                               quarter 1998
   CryoLife-Ross S.G.                   pulmonary valve, as    submission of application
                                        above, with antigen    for CE Mark for European
                                        reduction properties   marketing approval
                                                               anticipated in fourth
                                                               quarter 1998
   REPOPULATED STENTLESS PORCINE VALVES
   CryoLife-O'Brien SynerGraft          aortic valve, as       pre-clinical
                                        above, repopulated
                                        with human cells
   CryoLife-Ross SynerGraft             pulmonary valve, as    pre-clinical
                                        above, repopulated
                                        with human cells
</TABLE>

 
The CryoLife-O'Brien aortic valve, the exclusive worldwide distribution rights
for which were acquired by the Company in July 1992, is a stentless porcine
valve with design features which management believes provide significant
advantages over other stentless porcine heart valves. The Company's CryoLife-
O'Brien aortic heart valve, currently marketed in the European Community and
certain other territories outside the U.S., contains a matched composite
leaflet design that approximates human heart valve blood flow characteristics
and requires only a single suture line thereby simplifying surgical
implantation. Other stentless porcine valves require a more complicated
implant procedure.
 
The CryoLife-Ross pulmonary valve, the patent for which the Company acquired
in October 1996, is an advanced design stentless porcine heart valve within an
attached conduit of porcine tissue, which mimics the structure of a human
heart valve which simplifies the surgical implantation. The Company intends to
submit a CE Mark application for marketing the Cryolife-Ross pulmonary heart
valve, another of the Company's fixed stentless porcine valves, in the
European Community.
 
The Company plans to apply its proprietary SynerGraft technology to its
stentless porcine heart valves. The first of the SynerGraft technology
applications involves developing depopulated stentless porcine heart valves
with antigen reduction properties. This technology removes viable cells from
animal tissues thereby reducing the transplant recipient's immune response to
the remaining depopulated tissues. The auto-immune response typically deposits
calcium which attaches to and hardens implanted porcine heart valve tissue, a
process known as calcification, which reduces the useful life of the implant.
By removing viable animal cells from the tissue while maintaining the
underlying structural strength of the porcine heart valve, this SynerGraft
application is designed to provide a platform for a patient's own cells to
naturally populate the implant. This SynerGraft depopulation technology is
being applied to both the CryoLife-O'Brien aortic heart valve and the
CryoLife-Ross pulmonary heart valve for products under development anticipated
to be known as the CryoLife-O'Brien S.G. and the CryoLife-Ross S.G.
 
                                       9

<PAGE>
 
The second of the SynerGraft technology applications involves developing
stentless porcine heart valves repopulated with viable human cells prior to
implantation. This technology uses porcine tissues that have been depopulated
of viable animal cells as in the CryoLife-O'Brien S.G. and the CryoLife-Ross
S.G. This SynerGraft repopulation technology is being applied to both the
CryoLife-O'Brien aortic heart valve and the CryoLife-Ross pulmonary heart
valve for products anticipated to be known as the CryoLife-O'Brien SynerGraft
and the CryoLife-Ross SynerGraft.
 
Implantable Biomaterials for Use as Surgical Adhesives and Sealants
 
The effective closure of internal wounds following surgical procedures is
critical to the restoration of the function of tissue and to the ultimate
success of the surgical procedure. Failure to effectively seal surgical wounds
can result in leakage of air in lung surgeries, cerebral spinal fluids in
neurosurgeries, blood in cardiovascular surgeries and gastrointestinal
contents in abdominal surgeries. Air and fluid leaks resulting from surgical
procedures can lead to significant post-surgical morbidity resulting in
prolonged hospitalization, higher levels of post-operative pain and a higher
mortality rate.
 
Sutures and staples facilitate healing by joining wound edges and allowing the
body to heal naturally. However, because sutures and staples do not have
inherent sealing capabilities, they cannot consistently eliminate air and
fluid leakage at the wound site. This is particularly the case when sutures
and staples are used to close tissues containing air or fluids under pressure,
such as the lobes of the lung, the dural membrane surrounding the brain and
spinal cord, blood vessels and the gastrointestinal tract. In addition, in
minimally invasive surgical procedures, where the physician must operate
through small access devices, it can be difficult and time consuming for the
physician to apply sutures and staples. The Company believes that the use of
surgical adhesives and sealants with or without sutures and staples could
enhance the efficacy of these procedures through more effective and rapid
wound closure.
 
In order to address the inherent limitations of sutures and staples, the
Company is developing and commercializing its BioGlue surgical adhesive and is
developing its FibRx surgical sealant. The BioGlue surgical adhesive is a
polymeric surgical bioadhesive based on a derivative of a blood protein and a
cross-linking agent. BioGlue surgical adhesive is nonbiodegradable and has a
tensile strength that is four to five times that of FibRx surgical sealant.
Target clinical applications for BioGlue surgical adhesive include
cardiovascular and vascular peripheral repair. FibRx surgical sealant is a
light-activated surgical sealant based on a derivative of the human blood
factors fibrinogen and thrombin. The Company believes that FibRx is the only
surgical sealant under development offering ease of use to the surgeon through
either single-syringe or spray applicators.
 
The following table summarizes certain important features, targeted
applications and regulatory and market status of BioGlue surgical adhesive and
FibRx surgical sealant:
 

<TABLE>
<CAPTION>
                               BIOGLUE SURGICAL ADHESIVE        FIBRX SURGICAL SEALANT
                             ------------------------------ ------------------------------
   <S>                       <C>                            <C>
   COMPOSITION:              animal albumin and             thrombin, fibrinogen and a
                             glutaraldehyde                 thrombin inhibitor
   METHOD OF APPLICATION:    double syringe; mixing device  light activated single
                             provided                       syringe; or light activated
                                                            spray applicator
   TARGETED CLINICAL         vascular repair; anastomotic   hemostasis in cardiovascular
    APPLICATIONS:            sealing; aortic dissection     procedures, skin grafts and
                             repair; carotid endarterectomy breast reconstruction;
                             patching; tissue bonding       adhesion for skin grafts and
                                                            breast reconstruction
   PERFORMANCE               high tensile strength; non-    strength of normal human blood
    CHARACTERISTICS:         biodegradable                  clot; biodegradable; flexible,
                                                            easily manipulated
   REGULATORY/MARKET STATUS
     Europe:                 CE Mark received for           regulatory pathway not
                             cardiovascular and vascular    determined; expected to be
                             repair applications; expect to evaluated in 1998
                             commence marketing in Europe
                             in second quarter 1998
     United States:          submission of application with submission of IND with the FDA
                             the FDA for approval to        for approval to conduct U.S.
                             conduct clinical trials        clinical trials anticipated in
                             anticipated in second quarter  third quarter 1998
                             1998
</TABLE>

 
 
                                      10

<PAGE>
 
The Company estimates that the worldwide market for surgical sutures and
staples in 1997 was in excess of $2 billion. The Company intends to begin
shipping BioGlue surgical adhesive for distribution in the European Community
in the second quarter of 1998. FibRx surgical sealant is progressing through
pre-clinical trials and is presently undergoing toxicology validation
procedures mandated by the FDA prior to the commencement of clinical trials.
 
Single-Use Medical Devices
 
CryoLife manufactures and distributes, through its IFM subsidiary, single-use
medical devices including endarterectomy surgical instruments, intravascular
shunts, infusion ports, accessories utilized in laparoscopic procedures and a
wide range of single and double lumen balloon catheters. The Company believes
that many of its existing single-use medical devices have novel proprietary
features that offer clinical advantages over competing products. For example,
the Company's Pruitt-Inahara Shunt was the first endarterectomy shunt
available to surgeons which contains a barrier feature designed to reduce
migration of plaque particles to the brain during surgery. Another example is
the Company's double lumen embolectomy catheter incorporating a novel water
irrigation mechanism which enables physicians to remove whole blood clots more
effectively than with single lumen embolectomy catheters. The Company is
benefiting from, and intends to utilize, its design and manufacturing
expertise in developing single-use medical devices for use in conjunction with
its human tissue and biomaterial products. Examples of such single-use medical
devices under development include a family of balloon catheters designed to
assist in applying the BioGlue surgical adhesive and a stentless human heart
valve holder designed to provide physicians greater control in implantation
procedures.
 
The Company plans to expand sales of its single-use medical devices by
leveraging its established cryopreservation services marketing and sales staff
to market existing products and by introducing new products. New complementary
products under development include a modified single and double lumen balloon
catheters to be used to deliver the Company's implantable bioadhesives. The
Company is working to develop single-use medical devices for use with its
BioGlue surgical adhesive. The Company believes that the introduction of
BioGlue surgical adhesive in the European Community for vascular repair will
create additional marketing opportunities for its single-use medical devices.
 
SALES, DISTRIBUTION AND MARKETING
 
Cryopreservation Services
 
CryoLife markets its cryopreservation services to tissue procurement agencies,
implanting physicians and prospective tissue recipients. The Company works
with tissue banks and organ procurement agencies to ensure consistent and
continued availability of donated human tissue for transplant and educates
physicians and prospective tissue recipients with respect to the benefits of
cryopreserved human tissues.
 
Procurement of Tissue. Donated human tissue is procured from deceased human
donors by organ procurement agencies and tissue banks. After procurement, the
tissue is packed and shipped, together with certain information about the
tissue and its donor, to the Company in accordance with the Company's
protocols. The tissue is transported to the Company's laboratory facilities
the Company's via commercial airlines pursuant to arrangements with qualified
courier services. Timely receipt of procured tissue is important, as tissue
that is not received promptly cannot be cryopreserved successfully. The
procurement agency receives a fee for its services, which is paid by the
Company. The procurement fee and related shipping costs are ultimately
reimbursed to the Company by the hospital with which the implanting physician
is associated. The Company has developed relationships with over 250 tissue
banks and organ procurement agencies throughout the U.S. Management believes
the establishment of these relationships is critical for a growing business in
the cryopreservation services industry and that the breadth of these existing
relationships provides the Company a significant advantage over potential new
entrants to this market. As a result of its maintaining and developing these
relationships, the Company has consistently increased its annual human heart
valve procurement since its inception. The Company employs approximately 14
individuals in the area of tissue procurement, seven of whom are employed as
procurement relations managers and are stationed throughout the country. The
Company's central procurement office is staffed 24 hours per day, 365 days per
year.
 
                                      11

<PAGE>
 
Preservation of Tissue. Upon receiving tissue, a Company technician completes
the documentation control for the tissue prepared by the procurement agency
and gives it a control/inventory number. The documentation identifies, among
other things, donor age and cause of death. A trained technician then removes
the portion or portions of the delivered tissue that will be cryopreserved.
These procedures are conducted under aseptic conditions in clean rooms. At the
same time, additional samples are taken from the donated tissue and subjected
to the Company's comprehensive quality assurance program. This program may
identify characteristics which would disqualify the tissue for
cryopreservation.
 
Human heart valves and conduits, vascular tissue and connective tissue for the
knee are cryopreserved in a proprietary freezing process conducted according
to strict Company protocols. After the cryopreservation process, the specimens
are transferred to liquid nitrogen freezers for long-term storage at
temperatures below -135(degrees)C. The entire cryopreservation process is
rigidly controlled by guidelines established by the Company.
 
Distribution of Tissue to Implanting Physicians. After cryopreservation,
tissue is stored by the Company or is delivered directly to hospitals at the
implanting physician's request. Cryopreserved tissue must be transported under
stringent handling conditions and maintained within specific temperature
tolerances at all times. Cryopreserved tissue is packaged for shipment using
the Company's proprietary processes. At the hospital, the tissue is held in a
liquid nitrogen freezer according to Company protocols pending implantation.
The Company provides a detailed protocol for thawing the cryopreserved tissue.
The Company also makes its technical personnel available by phone or in person
to answer questions. After the Company transports the tissue to the hospital,
the Company invoices the institution for its services, the procurement fee and
transportation costs.
 
The Company encourages hospitals to accept the cryopreserved tissue quickly by
providing Company-owned liquid nitrogen freezers to client hospitals without
charge. The Company has currently installed more than 300 of these freezers.
Participating hospitals pay the cost of liquid nitrogen and regular
maintenance. The availability of on-site freezers makes it easier for a
hospital's physicians to utilize the Company's cryopreservation services by
making the cryopreserved tissue more readily available. Because fees for the
Company's cryopreservation services become due upon the delivery of tissue to
the hospital, the use of such on-site freezers also reduces the Company's
working capital needs.
 
Marketing, Educational and Technical Support. The Company maintains active
relationships with approximately 1,600 cardiovascular, vascular and
orthopaedic surgeons who have active practices implanting cryopreserved human
tissues and markets to a broader group of physicians within these medical
specialties. Because the Company markets its cryopreservation services
directly to physicians, an important aspect of increasing the distribution of
the Company's cryopreservation services is educating physicians on the use of
cryopreserved human tissue and on proper implantation techniques. Trained
field support personnel provide back-up and support to implanting institutions
and surgeons. The Company currently has approximately 98 independent technical
service representatives and sub-representatives (who deal primarily with
orthopaedic surgeons and who are paid on a commission basis) as well as 37
persons employed as technical service representatives (who deal primarily with
cardiovascular and vascular surgeons and receive a base salary with a
performance bonus) all of whom provide field support.
 
The Company sponsors physician training seminars where physicians teach other
physicians the proper technique for handling and implanting cryopreserved
human tissue. The Company conducted seven of these seminars in 1997.
Physicians pay their own expenses to attend these seminars in addition to
paying the Company a fee for attendance. The Company also produces educational
videotapes for physicians. The Company coordinates live surgery demonstrations
at various medical schools. The Company also coordinates laboratory sessions
that utilize animal tissue to demonstrate the respective surgical techniques.
Members of the Company's Medical Advisory Board often lead the surgery
demonstrations and laboratory sessions. Management believes that these
activities improve the medical community's acceptance of the cryopreserved
human tissue processed by the Company.
 
In order to increase the Company's supply of human tissue for
cryopreservation, the Company educates and trains procurement agency personnel
in procurement, dissection, packaging and shipping techniques. The
 
                                      12

<PAGE>
 
Company also produces educational videotapes and coordinates laboratory
sessions on procurement techniques for procurement agency personnel. To
supplement its educational activities, the Company employs in-house technical
specialists that provide technical information and assistance and maintains a
staff 24 hours per day, 365 days per year for customer support.
 
Bioprosthetic Cardiovascular Devices
 
The Company markets the CryoLife-O'Brien stentless porcine heart valves in the
European Community. The Company's European sales, distribution and marketing
force consists of eight independent representatives, representing each of the
Benelux countries, France, Germany, Greece, Scandinavia, Turkey and the United
Kingdom. Each of these representatives is paid on a commission basis.
Marketing efforts are directed almost exclusively toward cardiovascular and
vascular surgeons, and the Company conducts educational seminars and
conferences to train these surgeons and educate them with respect to the uses
and benefits of its porcine stentless heart valves. In 1997, the Company
conducted one workshop and participated in three European conferences. The
Company intends to market its CryoLife-Ross stentless porcine heart valves, if
CE Mark approval is obtained, through this same European sales force.
 
BioGlue Surgical Adhesive
 
The Company plans to market and distribute its BioGlue surgical adhesive
internationally through its existing independent representatives, and if
approved for sale in the U.S., through its in-house technical service
representatives. The initial shipments of BioGlue surgical adhesive to
CryoLife's European distributors, which are currently distributing the
CryoLife-O'Brien stentless porcine heart valve and single-use medical devices
product lines, are scheduled for the second quarter of 1998. The Company
conducts training sessions for European doctors with respect to the
application and administration of BioGlue surgical adhesive.
 
Single-Use Medical Devices
 
Following its acquisition of IFM in March 1997, the Company terminated the
majority of IFM's sales representatives and began transitioning the sales and
distribution of single-use medical devices to its in-house technical service
representatives. The Company plans to expand sales of its single-use medical
devices by continuing new product development and leveraging its established
cryopreservation services marketing and sales staff to market the products.
The Company conducted two training seminars for these representatives during
1997.
 
RESEARCH AND DEVELOPMENT
 
The Company uses its expertise in biochemistry and cell biology, and its
understanding of the needs of the cardiovascular, vascular and orthopaedic
surgery medical specialties, to continue to expand its core cryopreservation
business in the U.S. and to develop or acquire implantable products and
technologies for these fields. The Company seeks to identify market areas that
can benefit from preserved living tissues and other related technologies, to
develop innovative techniques and products within these areas, to secure their
commercial protection, to establish their efficacy, and then to market these
techniques and products. The Company employs approximately 26 people in its
research and development department. There are seven PhDs with specialties as
diverse as immunology, molecular biology, protein chemistry, organic chemistry
and vascular biology.
 
In order to expand the Company's service and product offerings, the Company is
currently in the process of developing or investigating several technologies
and products, including FibRx surgical sealant, SynerGraft and additional
applications of BioGlue surgical adhesive. The Company is currently
investigating certain drug delivery applications for BioGlue surgical adhesive
and FibRx surgical sealant, such as administering antibiotics, attaching
chemotherapy drugs to tumors, delivering growth agents or delivering bone
chips for orthopaedic bone repair. To the extent the Company identifies
additional applications for these products, the Company may attempt to license
these products to corporate partners for further development of such
applications. The Company's
 
                                      13

<PAGE>
 
research and development strategy is to allocate available resources among the
Company's four core market areas of cryopreservation services, bioprosthetic
cardiovascular devices, implantable biomaterials and single-use medical
devices, based on the size of the potential market for any specific product
candidate and the estimated development time and cost required to bring the
product to market.
 
Research on these and other projects is conducted in the Company's research
and development laboratory or at universities or clinics where the Company
sponsors research projects. In 1995, 1996 and 1997, the Company spent
approximately $2.6 million, $2.8 million and $3.9 million, respectively, on
research and development activities on new and existing products. These
amounts represented approximately 9%, 8% and 8% of the Company's revenues for
those respective years. The Company's research and development program is
overseen by its medical and scientific advisory boards. The Company's pre-
clinical studies are conducted at universities and other locations outside the
Company's facilities by third parties under contract with the Company. In
addition to these efforts, the Company may, as situations develop, pursue
other research and development activities.
 
MANUFACTURING AND OPERATIONS
 
The Company's facilities (other than its single-use medical device
manufacturing plant) are located in suburban Atlanta, Georgia, and consist of
three separate locations totaling approximately 130,000 square feet of leased
office, laboratory and warehouse space. Approximately 17,500 square feet are
dedicated to laboratory work areas. The primary facility, which does not
include the bioadhesive laboratory and the bioprosthetic manufacturing
operation, has three main laboratory facilities: human tissue processing,
research and development and microbiology. Each of these areas consists of a
general technician work area and adjoining "clean rooms" for work with human
tissue and for aseptic processing. The clean rooms are supplied with highly
filtered air which provides a near-sterile environment.
 
Human Tissue Processing
 
The human tissue processing laboratory is responsible for the processing and
cryopreservation of human tissue for transplant. This includes all processing
of heart valves and conduits, vascular tissue and connective tissue for the
knee supplied by CryoLife. This laboratory contains approximately 7,700 square
feet with a suite of seven clean rooms. Currently there are 37 technicians
employed in this area, and the laboratory is staffed for two shifts, 365 days
per year. In 1997, the laboratory processed approximately 14,000 human tissues
for distribution and transplant. The current staffing level is estimated to be
at about half of total capacity. Increasing this capacity could be
accomplished by increasing employees and expanding to three shifts.
 
Bioprosthetic Cardiovascular Devices
 
The bioprosthesis laboratory is responsible for the manufacturing of the
CryoLife-O'Brien stentless porcine aortic heart valve. This laboratory is
located in Marietta, Georgia and contains approximately 13,000 square feet,
with about 3,500 square feet of laboratory space and a suite of four clean
rooms for tissue processing. The Company plans renovation to this facility in
1998 which would double the size of the processing area and plans to add the
production of the CryoLife-Ross stentless porcine pulmonary heart valve to its
product line this summer. Currently, this laboratory employs nine technicians
and is scheduled to manufacture approximately 1,500 CryoLife-O'Brien valves in
1998. The planned renovation, with additional staffing, is expected to expand
capacity at this facility to over 6,000 valves.
 
Implantable Biomedical Devices
 
The Company produces limited quantities of FibRx surgical sealant in the
biomedical products laboratory, which is located in Marietta, Georgia and
employs 11 technicians. This laboratory contains approximately 11,000 square
feet, including 4,000 square feet of laboratory space and a suite of eight
clean rooms. The Company is also planning an addition of about 8,000 to 15,000
square feet of laboratory and clean room space to support the manufacture of
BioGlue surgical adhesive. BioGlue surgical adhesive is presently manufactured
at the Company's headquarters facility, which has an annual capacity of
approximately 30,000 units. The facility expansion is expected to allow the
manufacture of over 300,000 units of BioGlue surgical adhesive each year, with
modest staff additions.
 
                                      14

<PAGE>
 
Single-Use Medical Devices
 
The manufacturing of single-use medical devices is conducted at the Company's
IFM subsidiary located in St. Petersburg, Florida. IFM was purchased by
CryoLife in 1997 and has recently moved to a renovated 30,000 square foot
facility. The Company has 91 employees at this facility. At nearly full
capacity in 1997, production was about 180,000 units. In the new facility, a
single shift can produce approximately 300,000 units annually with full
capacity expected to be nearly 800,000 units annually.
 
QUALITY ASSURANCE
 
The Company's operations encompass the provision of cryopreservation services
and the manufacturing of bioprosthetics, bioadhesives and single-use medical
devices. In all of its facilities, the Company is subject to regulatory
standards for good manufacturing practices, including current Quality System
Regulations, which are U.S. Food and Drug Administration ("FDA") regulatory
requirements for medical device manufacturers. The FDA periodically inspects
Company facilities to ensure Company compliance with these regulations. The
Company also operates according to ISO 9001 Quality System Requirements, an
internationally recognized voluntary system of quality management for
companies that design, develop, manufacture, distribute and service products.
The Company maintains a Certification of Approval to the ISO 9001, as well as
EN46001 and ANSI/ISO/ASQC/Q9001, the European and U.S. versions of the
international standard, respectively. This approval is issued by Lloyd's
Register Quality Assurance Limited ("LRQA"). LRQA is a Notified Body
officially recognized by the European Community to perform assessments of
compliance with ISO 9001 and its derivative standards. LRQA performs semi-
annual on-site inspections of the Company's quality systems.
 
The Company's quality assurance staff is comprised primarily of experienced
professionals from the medical device and pharmaceutical manufacturing
industries. The quality assurance department, in conjunction with the
Company's research and development and select university research staffs,
routinely evaluates the Company's processes and procedures.
 
Cryopreservation Services
 
The Company employs a comprehensive quality assurance program in all of its
tissue processing activities. The Company is subject to Quality System
Regulations, additional FDA regulations and ISO 9001. The Company's quality
assurance program begins with the development and implementation of training
courses for the employees of procurement agencies. To assure uniformity of
procurement practices among the tissue recovery teams, the Company provides
procurement protocols, transport packages and tissue transport liquids to the
donor sites.
 
Upon receipt by the Company, each tissue is assigned a unique control number
that provides traceability of tissue from procurement through the processing
and preservation processes, and ultimately to the tissue recipient. Blood
samples from each tissue donor are subjected to a variety of tests to screen
for infectious diseases. Samples of certain tissues are also sent to
independent laboratories for pathology testing. Following removal of the
tissue to be cryopreserved, a separate disinfection procedure is begun during
which the removed tissue is treated with proprietary antibiotic solutions. A
trained technician then removes samples from the disinfected tissue upon which
serial cultures are performed to identify bacterial or fungal growth.
 
The materials and solutions used by the Company in processing tissue are pre-
screened to determine if they are of desired quality as defined by Company
protocols. Only materials and solutions that meet the Company's requirements
are approved by quality assurance personnel for use in processing. Throughout
tissue processing, detailed records are maintained and reviewed by quality
assurance personnel.
 
The Company's tissue processing facilities are annually licensed by the States
of Georgia, New York, Florida and California as facilities that process, store
and distribute human tissue for implantation. The regulatory bodies of these
states perform appropriate inspections of the facilities to ensure compliance
with state law and regulations. In addition, the Company's human heart valve
operations are additionally regulated by the FDA and periodically inspected
for compliance to Quality System Regulations. Other human tissue processed by
the Company is periodically inspected for compliance with the Code of Federal
Regulation ("CFR") Part 1270.
 
                                      15

<PAGE>
 
CFR 1270 is a FDA regulation which sets forth the requirements with which the
Company must comply in determining the suitability of human tissue for
implantation.
 
Bioprosthetic, Bioadhesive and Single-Use Medical Device Manufacturing
 
The Company employs a comprehensive quality assurance program in all of its
manufacturing activities. The Company is subject to Quality System
Regulations, additional FDA regulations and ISO 9001.
 
All materials and components utilized in the production of the Company's
products are received and thoroughly inspected by trained quality control
personnel, according to written specifications and standard operating
procedures. Only materials and components found to comply with Company
procedures are accepted by quality control and utilized in production.
 
All materials, components and resulting sub-assemblies are traced throughout
the manufacturing process to assure that appropriate corrective actions can be
implemented if necessary. Each process is documented along with all inspection
results, including final finished product inspection and acceptance. Records
are maintained as to the consignee of product to facilitate product removals
or corrections, if necessary. All processes in manufacturing are validated by
quality engineers to assure that they are capable of consistently producing
product meeting specifications. The Company maintains a rigorous quality
assurance program of measuring devices used for manufacturing and inspection
to ensure appropriate accuracy and precision.
 
Each manufacturing facility is subject to periodic inspection by the FDA and
an LRQA Notified Body to independently assure the Company's compliance with
its systems and regulatory requirements.
 
PATENTS, LICENSES AND OTHER PROPRIETARY RIGHTS
 
The Company relies on a combination of patents, trade secrets, trademarks and
confidentiality agreements to protect its proprietary products, processing
technology, rights and know-how. The Company believes that its patents, trade
secrets, trademarks and technology licensing rights provide it with important
competitive advantages. The Company owns or has licensed rights to 14 U.S.
patents and three foreign patents, including but not limited to, patents
relating to its technology for human heart valve and conduit, vascular tissue
and connective tissue for the knee preservation; tissue revitalization prior
to freezing; tissue transport; fibrin adhesive; organ storage solution; and
packaging. Certain of the above patents relate to the Company's BioGlue
surgical adhesive and FibRx surgical sealant. The Company has eight pending
U.S. patent applications and in excess of 20 pending foreign applications that
relate to areas including heart valve and tissue processing technology for
transplantation and to delivery of bioadhesives for anastomosis and other
uses. The Company holds six patents and has seven patents pending with respect
to its single-use medical devices. There can be no assurance that any patents
pending will result in issued patents. The Company also has exclusive
licensing rights for technology relating to light-sensitive enzyme inhibitors.
The remaining duration of the Company's issued patents ranges from 5 to 17
years. The Company has licensed from third parties certain technologies used
in the development of its FibRx surgical sealant and SynerGraft technology.
These licenses call for the payment of both development milestones and
royalties based on product sales, when and if such products are approved for
marketing. The loss of these licenses could adversely affect the Company's
ability to successfully develop its FibRx surgical sealant and SynerGraft
technologies.
 
There can be no assurance that the claims allowed in any of the Company's
existing or future patents will provide competitive advantages for the
Company's products, processes and technologies or will not be successfully
challenged or circumvented by competitors. To the extent that any of the
Company's products are not patent protected, the Company's business, financial
condition and results of operations could be materially adversely affected.
Under current law, patent applications in the U.S. are maintained in secrecy
until patents are issued and patent applications in foreign countries are
maintained in secrecy for a period after filing. The right to a patent in the
U.S. is attributable to the first to invent, not the first to file a patent
application. The Company cannot be sure that its products or technologies do
not infringe patents that may be granted in the future pursuant to pending
patent applications or that its products do not infringe any patents or
proprietary rights of third parties. The
 
                                      16

<PAGE>
 
Company may incur substantial legal fees in defending against a patent
infringement claim or in asserting claims against third parties. In the event
that any relevant claims of third-party patents are upheld as valid and
enforceable, the Company could be prevented from selling certain of its
products or could be required to obtain licenses from the owners of such
patents or be required to redesign its products to avoid infringement. There
can be no assurance that such licenses would be available or, if available,
would be on terms acceptable to the Company or that the Company would be
successful in any attempt to redesign its products or processes to avoid
infringement. The Company's failure to obtain these licenses or to redesign
its products could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
The Company has entered into confidentiality agreements with all of its
employees and several of its consultants and third-party vendors to maintain
the confidentiality of trade secrets and proprietary information. There can be
no assurance that the obligations of employees of the Company and third
parties with whom the Company has entered into confidentiality agreements will
effectively prevent disclosure of the Company's confidential information or
provide meaningful protection for the Company's confidential information if
there is unauthorized use or disclosure, or that the Company's trade secrets
or proprietary information will not be independently developed by the
Company's competitors. Litigation may be necessary to defend against claims of
infringement, to enforce patents and trademarks of the Company, or to protect
trade secrets and could result in substantial cost to, and diversion of effort
by, the Company. There can be no assurance that the Company would prevail in
any such litigation. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as do the laws of
the U.S.
 
COMPETITION
 
Cryopreserved Human Tissues and Bioprosthetic Cardiovascular Devices
 
The Company faces competition from non-profit tissue banks that cryopreserve
and distribute human tissue, as well as from companies that market mechanical,
porcine and bovine heart valves for implantation. Many established companies,
some with resources greater than those of the Company, are engaged in
manufacturing, marketing and selling alternatives to cryopreserved human
tissue. Management believes that it competes favorably with other entities
that cryopreserve human tissue on the basis of technology, customer service
and quality assurance. As compared to mechanical, porcine and bovine heart
valves, management believes that the human heart valves cryopreserved by the
Company compete on the factors set forth above, as well as by providing a
tissue that is the preferred replacement alternative with respect to certain
medical conditions, such as pediatric cardiac reconstruction, valve
replacements for women in their child-bearing years and valve replacements for
patients with endocarditis. Although human tissue cryopreserved by the Company
is initially higher priced than are mechanical alternatives, these
alternatives typically require that the patient take anti-coagulation drug
therapy for the lifetime of the implant. As a result of the costs associated
with anti-coagulants, mechanical valves are generally, over the life of the
implant, more expensive than tissue cryopreserved by the Company.
Notwithstanding the foregoing, management believes that, to date, price has
not been a significant competitive factor.
 
Generally, for each procedure that may utilize other human tissue that the
Company cryopreserves, there are alternative treatments. Often, as in the case
of veins and ligaments, these alternatives include the repair, partial removal
or complete removal of the damaged tissue and may utilize other tissues from
the patients themselves or synthetic products. The selection of treatment
choices is made by the attending physician in consultation with the patient.
Any newly developed treatments will also compete with the use of tissue
cryopreserved by the Company.
 
Human and Stentless Porcine Heart Valves. Alternatives to human heart valves
cryopreserved by the Company include mechanical valves, porcine valves and
valves constructed from bovine pericardium. St. Jude Medical, Inc. is the
leading supplier of mechanical heart valves, and has a marketing and
distribution arrangement with a tissue bank for supplies of cryopreserved
human heart valves and Baxter International Inc. is the leading supplier of
porcine heart valves. In addition, management believes that at least three
tissue banks offer cryopreservation services for human heart valves in
competition with the Company. The Company presently distributes its
 
                                      17

<PAGE>
 
stentless porcine heart valves only outside the U.S. These stentless porcine
heart valves compete with mechanical valves, human heart valves and processed
bovine pericardium. The Company is aware of at least two other companies that
offer stentless porcine heart valves.
 
Human Vascular Tissue. Synthetic alternatives to veins cryopreserved by the
Company are available primarily in medium and large diameters. Currently,
management believes that there are no other providers of cryopreserved human
vascular tissue in competition with the Company. Companies offering either
synthetic or allograft products may enter this market in the future.
 
Human Connective Tissue for the Knee. The Company's competition in the area of
connective tissue for the knee varies according to the tissue involved. When
transplant is indicated, the principal competition for the human tissues
cryopreserved by the Company are freeze-dried and fresh frozen human
connective tissues. These alternative allografts are distributed by
distributors of Osteotech, Inc. and various tissue banks, among others.
Ligaments and tendons cryopreserved by the Company constitute the principal
treatment options for injuries which require anterior cruciate ligament
repair. To management's knowledge, there are presently no processed or
synthetic alternatives to menisci cryopreserved by the Company.
 
Implantable Biomedical Devices
 
The Company competes with many domestic and foreign medical device,
pharmaceutical and biopharmaceutical companies. In the surgical adhesive and
surgical sealant area, the Company will compete with existing methodologies,
including traditional wound closure products such as sutures and staples,
marketed by companies such as Johnson & Johnson, United States Surgical
Corporation, Sherwood, Davis & Geck and others. Other products currently being
marketed include fibrin glue, sold in Europe, and the Pacific Rim countries by
Immuno AG, a subsidiary of Baxter Health Care Company, Chemo-Sero Therapeutic
Research Institute, Hoechst GmbH and others, and management believes other
products are under development by Baxter Healthcare Corporation, Bristol-Myers
Squibb Company, V.I. Technologies, Inc. and others. Other competitors in the
surgical sealant market include Closure Medical Corporation, B. Braun GmbH and
Focal, Inc. Competitive products may also be under development by other large
medical device, pharmaceutical and biopharmaceutical companies. Many of the
Company's current and potential competitors have substantially greater
financial, technological, research and development, regulatory and clinical,
marketing and sales, and personnel resources than the Company.
 
These competitors may also have greater experience in developing products,
conducting clinical trials, obtaining regulatory approvals, and manufacturing
and marketing such products. Certain of these competitors may obtain patent
protection, approval or clearance by the FDA or foreign countries or product
commercialization earlier than the Company, any of which could materially
adversely affect the Company. Furthermore, if the Company commences
significant commercial sales of its products, it will also be competing with
respect to manufacturing efficiency and marketing capabilities, areas in which
it currently has limited experience.
 
Other recently developed technologies or procedures are, or may in the future
be, the basis of competitive products. There can be no assurance that the
Company's current competitors or other parties will not succeed in developing
alternative technologies and products that are more effective, easier to use
or more economical than those which have or are being developed by the Company
or that would render the Company's technology and products obsolete and non-
competitive in these fields. In such event, the Company's business, financial
condition and results of operations could be materially adversely affected.
See "Risk Factors--Rapid Technological Change."
 
Single-Use Medical Devices
 
The Company competes in this market with many larger companies such as Boston
Scientific's SciMed Life Systems, Guidant Corporation's Advanced
Cardiovascular Systems, C.R. Bard, Inc. and Baxter Healthcare Corporation.
Many of these companies are larger and carry broader product lines than
CryoLife which allows them to bundle products to hospitals. Bundling device
products has become a cost-effective way of marketing several products in a
line and of providing incentives for the customer to use several products in a
product line.
 
                                      18

<PAGE>
 
At present, CryoLife does not bundle its single-use medical devices but
instead offers novel product enhancement.
 
GOVERNMENT REGULATION
 
U.S. Federal Regulation
 
Because human heart valves are, and other Company products may be regulated in
the future as, medical devices, the Company and these products are subject to
the provisions of the Federal Food, Drug and Cosmetic Act ("FDCA") and
implementing regulations. Pursuant to the FDCA, the FDA regulates the
manufacture, distribution, labeling and promotion of medical devices in the
U.S. In addition, various foreign countries in which the Company's products
are or may be distributed impose additional regulatory requirements.
 
The FDCA provides that, unless exempted by regulation, medical devices may not
be distributed in the U.S. unless they have been approved or cleared for
marketing by the FDA. There are two review procedures by which medical devices
can receive such approval or clearance. Some products may qualify for
clearance to be marketed under a Section 510(k) ("510(k)") procedure, in which
the manufacturer provides a premarket notification that it intends to begin
marketing the product, and shows that the product is substantially equivalent
to another legally marketed product (i.e., that it has the same intended use
and that it is as safe and effective as a legally marketed device and does not
raise different questions of safety and effectiveness than does a legally
marketed device). In some cases, the submission must include data from
clinical studies. Marketing may commence when the FDA issues a clearance
letter finding such substantial equivalence.
 
If the product does not qualify for the 510(k) procedure (either because it is
not substantially equivalent to a legally marketed device or because it is a
Class III device required by the FDCA and implementing regulations to have an
approved application for premarket approval ("PMA"), the FDA must approve a
PMA application before marketing can begin. PMA applications must demonstrate,
among other matters, that the medical device is safe and effective. A PMA
application is typically a complex submission, usually including the results
of human clinical studies, and preparing an application is a detailed and
time-consuming process. Once a PMA application has been submitted, the FDA's
review may be lengthy and may include requests for additional data. By statute
and regulation, the FDA may take 180 days to review a PMA application although
such time may be extended. Furthermore, there can be no assurance that a PMA
application will be reviewed within 180 days or that a PMA application will be
approved by the FDA.
 
The FDCA also provides for an investigational device exemption ("IDE") which
authorizes distribution for clinical evaluation of devices that lack a PMA or
510(k). Devices subject to an IDE are subject to various restrictions imposed
by the FDA. The number of patients that may be treated with the device is
limited, as are the number of institutions at which the device may be used.
Patients must give informed consent to be treated with an investigational
device. The device must be labeled that it is for investigational use and may
not be advertised, or otherwise promoted, and the price charge for the device
may be limited. Unexpected adverse experiences must be reported to the FDA.
 
The FDCA requires all medical device manufacturers and distributors to
register with the FDA annually and to provide the FDA with a list of those
medical devices which they distribute commercially. The FDCA also requires
manufacturers of medical devices to comply with labeling requirements and to
manufacture devices in accordance with Quality System Regulations, which
require that companies manufacture their products and maintain their documents
in a prescribed manner with respect to good manufacturing practices, design,
document production, process, labeling and packaging controls, process
validaiton and other quality control activities. The FDA's medical device
reporting regulation requires that a device manufacturer provide information
to the FDA on death or serious injuries alleged to have been associated with
the use of its products, as well as product malfunctions that would likely
cause or contribute to death or serious injury if the malfunction were to
recur. The FDA's medical device tracking regulation requires the adoption of a
method of device tracking by manufacturers of life-sustaining or implantable
products, the failure of which would be reasonably likely to have serious
adverse health consequences. The manufacturer must adopt methods to ensure
that such devices can be
 
                                      19

<PAGE>
 
traced from the manufacturing facility to the ultimate user, the patient. The
FDA further requires that certain medical devices not cleared for marketing in
the U.S. follow certain procedures before they are exported.
 
The FDA inspects medical device manufacturers and distributors and has
authority to seize noncomplying medical devices, to enjoin and/or to impose
civil penalties on manufacturers and distributors marketing non-complying
medical devices, to criminally prosecute violators and to order recalls in
certain instances.
 
Human Heart Valves. The Company's human heart valves became subject to
regulation by the FDA in June 1991, when the FDA published a notice stating
that human heart valves are Class III medical devices under the FDCA. The June
1991 notice provided that distribution of human heart valves for
transplantation would violate the FDCA unless they were the subject of an
approved PMA or IDE on or before August 26, 1991.
 
On October 14, 1994, the FDA announced in the Federal Register that neither an
approved application for PMA nor an IDE is required for processors and
distributors who had marketed heart valve allografts before June 26, 1991.
This action by the FDA has resulted in the allograft heart valves being
classified as Class II Medical Devices and has removed them from clinical
trial status. It also allows the Company to distribute such valves to
cardiovascular surgeons throughout the U.S.
 
Other Tissue. Other than human and porcine heart valves, none of the Company's
other tissue services or products are currently subject to regulation as
medical devices under the FDCA or FDA regulation. Heart valves are one of a
small number of processed human tissues over which the FDA has asserted
medical device jurisdiction. In July 1997, the FDA published a final rule,
which became effective in January 1998, regulating "human tissue." The rule
clarifies and modifies an earlier interim rule and defines human tissue as any
tissue derived from a human body which is (i) intended for administration to
another human for the diagnosis, cure, mitigation, treatment or prevention of
any condition or disease and (ii) recovered, processed, stored or distributed
by methods not intended to change tissue function or characteristics. The FDA
definition excludes, among other things, tissue that currently is regulated as
a human drug, biological product or medical device and excludes kidney, liver,
heart, lung, pancreas or any other vascularized human organ. Human tissue is
regulated by the FDA in a manner the agency has deemed necessary to protect
the public health from the transmission of HIV infection and hepatitis
infection through transplantation of tissue from donors with or at risk for
these diseases. Unlike certain drugs, biologicals and medical devices, human
tissue is not subject to premarket notification or approval by the FDA. It is
likely, moreover, that the FDA will expand its regulation of processed human
tissue in the future. For example, the FDA may determine that the veins and
connective tissue that are currently processed by the Company are medical
devices, or the FDA may determine to regulate human heart valves as "human
tissue" rather than medical devices, but the FDA has not done so at this time.
Complying with FDA regulatory requirements or obtaining required FDA approvals
or clearances may entail significant time delays and expenses or may not be
possible, any of which may have a material adverse effect on the Company. In
addition, the U.S. Congress is expected to consider legislation that would
regulate human tissue for transplant or the FDA could impose a separate
regulatory scheme for human tissue. Such legislation or regulation could have
a material adverse effect on the Company.
 
Porcine Heart Valves. Porcine heart valves are Class III medical devices, and
FDA approval of a PMA is required prior to commercial distribution of such
valves in the U.S. The porcine heart valves currently marketed by the Company
have not been approved by the FDA for commercial distribution in the U.S. but
may be manufactured in the U.S. and exported to foreign countries if the
valves meet the specifications of the foreign purchaser, do not conflict with
the laws of and are approved by the country to which they will be exported,
and the FDA determines that their exportation is not contrary to the public
health and safety.
 
Single-Use Medical Devices. The products offered by the Company through IFM
are regulated as Class I and Class II medical devices by the FDA. These
products require clearance under a 510(k) procedure. All products currently
marketed by IFM have received a 510(k) clearance from the FDA. In addition,
the IFM facilities are subject to periodic review by the FDA, as are the
Company's records on returned products and reported problems.
 
                                      20

<PAGE>
 
BioGlue Surgical Adhesive. It is anticipated that BioGlue surgical adhesive
will be regulated as a Class III medical device, as a biologic or in some
other capacity by the FDA. The Company is currently preparing to submit an
application with the FDA for approval to conduct clinical trials for BioGlue
surgical adhesive. There can be no assurance that approval of this application
will be obtained.
 
Possible Other FDA Regulation. Other products and processes under development
by the Company are likely to be subject to regulation by the FDA (e.g.,
SynerGraft and FibRx surgical sealant). Some may be classified as medical
devices; others may be classified as drugs or biological products or subject
to a regulatory scheme for human tissue that the FDA may adopt in the future.
Regulation of drugs and biological products is substantially similar to
regulation of medical devices. Obtaining FDA approval to market these products
is likely to be a time consuming and expensive process, and there can be no
assurance that any of these products will ever receive FDA approval, if
required, to be marketed.
 
NOTA Regulation. The Company's activities in processing and transporting human
hearts and certain other organs are also subject to federal regulation under
the NOTA, which makes it unlawful for any person to knowingly acquire, receive
or otherwise transfer any human organ for valuable consideration for use in
human transplantation if the transfer affects interstate commerce. NOTA
excludes from the definition of "valuable consideration" reasonable payments
associated with the removal, transportation, implantation, processing,
preservation, quality control and storage of a human organ. The purpose of
this statutory provision is to allow for compensation for legitimate services.
The Company believes that to the extent its activities are subject to NOTA, it
meets this statutory provision relating to the reasonableness of its charges.
There can be no assurance, however, that restrictive interpretations of NOTA
will not be adopted in the future that would call into question one or more
aspects of the Company's methods of charging for its preservation services.
 
State Licensing Requirements
 
Some states have enacted statutes and regulations governing the processing,
transportation and storage of human organs and tissue. The activities engaged
in by the Company require it to be licensed as a clinical laboratory and
tissue bank under Georgia, New York, California and Florida law. The Company
has such licenses, and the Company believes it is in compliance with
applicable state laws and regulations relating to clinical laboratories and
tissue banks which store, process and distribute human tissue designed to be
used for medical purposes in human beings. There can be no assurance, however,
that more restrictive state laws or regulations will not be adopted in the
future that could adversely affect the Company's operations. Certain employees
of the Company have obtained other required licenses.
 
Foreign Approval Requirements
 
Sales of medical devices and biological products outside the U.S. are subject
to foreign regulatory requirements that vary widely from country to country.
Approval of a product by comparable regulatory authorities of foreign
countries must be obtained prior to commercialization of the product in those
countries. The time required to obtain foreign approvals may be longer or
shorter than that required for FDA approval. The European Community recognizes
a single approval, called a CE Mark, which allows for distribution of an
approved product throughout the European Community (15 countries) without
additional applications to each country. The CE Mark is awarded by third
parties called Notified Bodies. These Notified Bodies are approved and subject
to review by the Competent Authorities of their respective countries. A number
of countries outside of the European Community accept the CE Mark in lieu of
clinical data submission as an addendum to that country's application process.
The Company has been issued CE Marks for its CyroLife-O'Brien porcine heart
valves, BioGlue surgical adhesive and IFM single-use medical devices by LRQA.
The Company's porcine heart valves may be exported to specified developed
nations, including countries in the European Community, Australia, Canada,
Israel, Japan, New Zealand, South Africa and Switzerland if they comply with
the laws of that country and have valid marketing authorization by the
appropriate authority in that country. Beginning in July 1998, CE Mark
Certification will be required to market porcine heart valves and other
bioprosthetics in the European Community.
 
                                      21

<PAGE>
 
ENVIRONMENTAL MATTERS
 
The Company's tissue processing activities generate some biomedical wastes
consisting primarily of human pathological and biological wastes, including
human tissue and body fluids removed during laboratory procedures. The
biomedical wastes generated by the Company are placed in appropriately
constructed and labeled containers and are segregated from other wastes
generated by the Company. The Company contracts with third parties for
transport, treatment and disposal of biomedical waste. Although the Company
believes it is in compliance with applicable laws and regulations promulgated
by the U.S. Environmental Protection Agency and the Georgia Department of
Natural Resources, Environmental Protection Division, the failure by the
Company to comply fully with any such regulations could result in an
imposition of penalties, fines or sanctions, which could have a material
adverse effect on the Company's business.
 
EMPLOYEES
 
The Company presently has approximately 330 employees. These employees include
nine persons with PhD degrees. None of the Company's employees is represented
by a labor organization or covered by a collective bargaining agreement, and
the Company has never experienced a work stoppage or interruption due to labor
disputes. Management believes its relations with its employees are good.
 
LEGAL PROCEEDINGS
 
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. Management
believes that no currently ongoing litigation, if determined adversely to the
Company, will have a material adverse effect on the Company's business,
financial condition or results of operations.
 
                                 RISK FACTORS
 
DEPENDENCE ON CRYOPRESERVATION OF HUMAN TISSUE
 
A significant portion of the Company's current revenues is derived from the
cryopreservation of human tissue, particularly heart valves and conduits. The
success of this business depends upon, among other factors, the availability
of sufficient quantities of tissue from human donors. Any material reduction
in the supply of donated human heart tissue could restrict the Company's
growth. The Company relies primarily upon the efforts of third party
procurement agencies (all of which are not-for-profit) and others to educate
the public and foster a willingness to donate tissue. Based on the Company's
experience with human heart valves, management believes that once the use by
physicians of a particular transplantable tissue gains acceptance, demand for
that tissue will exceed the amount of tissue available from human donors.
While availability is not currently a limiting factor for most vascular tissue
and connective tissue for the knee, growth in these areas could ultimately be
limited by tissue availability, in addition to other factors. Failure of the
Company to maintain its supply of tissue for cryopreservation could have a
material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, a reduction in the demand for the
Company's cryopreserved human tissue could also have a material adverse effect
on the Company's business, financial condition and results of operations. Such
reduction could occur if competitors' products were perceived as either
functionally superior or more cost effective (see "--Intense Competition" and
"--Uncertainties Regarding Future Health Care Reimbursement"), if the number
of procedures in which cryopreserved tissues are used declines or if hospitals
acquire sufficient inventories of cryopreserved tissue to allow a reduction in
new orders.
 
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. Management believes that at least three tissue
banks offer cryopreservation services for human heart valves and many
companies offer processed porcine heart valves and mechanical heart valves. A
few companies dominate portions of the
 
                                      22

<PAGE>
 
mechanical and porcine heart valve markets, including St. Jude Medical, Inc.,
Medtronic, Inc. and Baxter International Inc. The Company also faces
competition from a number of competitors in the area of single-use medical
devices and 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 will 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 and results of
operations. See "Business--Competition."
 
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 and
results of operations.
 
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. The
Company may be required to undertake time consuming and costly development
activities and seek regulatory clearance or approval for new products. See "--
Extensive Government Regulation." 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, there can be no assurance that any of the Company's products
under development will be successfully developed or manufactured or, if
developed and manufactured, that such products will meet price or performance
objectives, be developed on a timely basis or prove to be as effective as
competing products. The inability to complete successfully the development of
a product or application, or a determination by the Company, for financial,
technical or other reasons, not to complete development of any product or
application, particularly in instances in which the Company has made
significant capital expenditures, could have a material adverse effect on the
Company's business, financial condition and results of operations.
 
The Company's porcine heart valve products are currently only offered for sale
outside of the U.S., and beginning in the second quarter of 1998, the Company
expects to begin shipping its BioGlue surgical adhesive for distribution in
the European Community. The Company's porcine heart valves and BioGlue
surgical adhesive 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 U.S.
 
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
 
                                      23

<PAGE>
 
commercialization of a new service or product in the medical industry can be
characterized by slow growth and high costs associated with marketing, under-
utilized production capacity and continuing research, and development and
education costs. Generally, the introduction of new human tissue products
requires significant physician training and years of clinical evidence derived
from follow-up studies on human implant recipients in order to gain acceptance
in the medical community.
 
EXTENSIVE GOVERNMENT REGULATION
 
Government regulation in the U.S., the European Community and other
jurisdictions represents a potentially determinative factor in the success of
the Company's efforts to market and develop its products. See "Business--
Government Regulation." The human heart valves to which the Company applies
its cryopreservation services are currently regulated as Class II medical
devices by the FDA and are subject to significant regulatory requirements,
including Quality System Regulations and recordkeeping requirements. There can
be no assurance that changes in regulatory treatment or the adoption of new
statutory or regulatory requirements will not 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 a rule promulgated by the FDA pursuant to
the Public Health Services Act. This rule establishes requirements for donor
testing and screening of human tissue and recordkeeping relating to these
activities. Although the Company's other human tissue allografts are not
currently regulated as medical devices, such tissue may in the future become
subject to more extensive FDA regulation, which could include PMA or product
licensing requirements.
 
Although the regulatory status of the Company's BioGlue surgical adhesive and
FibRx surgical sealant is not certain, the Company believes that FibRx
surgical sealant will be regulated as a biologic and anticipates that BioGlue
surgical adhesive will be regulated as a Class III medical device, as a
biologic or in some other capacity by the FDA. These products have not been
approved for distribution within the U.S. To date, the FDA has never approved
for sale in the U.S. a surgical adhesive or sealant which, like FibRx surgical
sealant, is composed of human blood components. Management believes that
concerns over viral transmission may have hindered FDA approval of such
products. There can be no assurance that CryoLife's quality control protocols
will sufficiently address FDA concerns or that CryoLife will be able to
develop viral inactivation processes acceptable to the FDA or license such
processes at an acceptable cost. 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
surgical adhesives, surgical sealants or porcine heart valve products in the
U.S. Distribution of these products within the European Community is dependent
upon the Company maintaining its CE Mark and ISO 9001 certifications, of which
there can be no assurance.
 
Most of the Company's products in development, if successfully developed, will
require regulatory approvals from the FDA and perhaps other regulatory
authorities before they may be commercially distributed. The process of
obtaining required regulatory approvals from the FDA normally involves
clinical trials and the preparation of an extensive PMA application and often
takes many years. The process is expensive and can vary significantly based on
the type, complexity and novelty of the product. There can be no assurance
that any products developed by the Company, independently or in collaboration
with others, will receive the required approvals for manufacturing and
marketing. Delays in obtaining U.S. 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
 
                                      24

<PAGE>
 
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 scientists, 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 a disclosure of trial results by
competitors. To date, the Company has never had to submit clinical trials for
any of its products. In the event that it should be required to perform
clinical trials, there can be no guarantee that it will be able to do so
effectively and efficiently. Even if regulatory approval is obtained for any
of the Company's products or services, the scope of the approval may
significantly limit the indicated usage for which such products or services
may be marketed.
 
Products marketed by the Company pursuant to FDA or foreign oversight or
approval are subject to pervasive and continuing regulation. In the U.S.,
devices and biologics must be manufactured in registered, 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, product recalls or detentions and
other penalties and could have a material adverse effect on the Company's
business, financial condition and results of operations. 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 cryopreservation services. The
Company's laboratory operations are subject to the U.S. 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. While management believes that the
Company is presently in compliance in all material respects with all such
applicable statutes and regulations, there can be no assurance that more
restrictive state laws or regulations will not be adopted in the future that
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Government Regulation."
 
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 and results of operations. 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 and results of operations.
 
                                      25

<PAGE>
 
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 cryopreservation services may be particularly susceptible to third-
party cost containment measures. In particular, the initial cost of a
cryopreserved human 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
and other third-party payors are increasingly attempting to contain health
care costs by limiting both coverage and the level of reimbursement for new
products approved for marketing by the FDA and by refusing in some cases to
provide any coverage for uses of approved products for indications for which
the FDA has not granted marketing approval. If adequate coverage and
reimbursement levels are not provided by government and other third-party
payors for uses of the Company's new products and services, market acceptance
of these products would be adversely affected, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
 
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 whom 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 and results of
operations.
 
PRODUCT LIABILITY AND INSURANCE
 
The use of the Company's products involves the possibility of adverse effects
that could expose the Company to product liability claims. A recent U.S.
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. From time to time, the Company is involved in legal
proceedings based on product liability claims of a nature considered normal to
its business. The Company is currently involved in one such proceeding. 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. If a lawsuit is filed because
of such an occurrence, the Company, along with physicians and nurses,
hospitals and other medical suppliers, may be named as a defendant, and
whether or not the Company is ultimately determined to be liable, the Company
may 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, there can be no assurance that
it will not incur significant losses in the future. The Company currently
maintains product liability insurance in the aggregate amount of $14 million
per year. There can be no assurance that such coverage will continue to be
available on terms acceptable to the Company or will be adequate to cover any
losses due to product claims if actually incurred. Furthermore, if any such
claim is successful, it could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--Legal
Proceedings."
 
                                      26

<PAGE>
 
USE AND DISPOSAL OF HAZARDOUS MATERIAL
 
The Company's research, development and processing activities involve the
controlled use of small quantities of radioactive compounds, chemical solvents
and other hazardous materials. The Company's activities also include the
preservation and growth of human cells and the processing of human tissue.
Although the Company believes that its safety procedures for handling,
processing and disposing of hazardous materials and human tissue comply with
the standards prescribed by federal, state and local regulations, the risk of
accidental contamination, injury or disease transmission from these materials
cannot be completely eliminated. In the event of such an accident or
transmission, the Company could be held liable for resulting damages and any
liability could have a material adverse effect on the Company's business,
financial condition and results of operations. Also, any failure to comply
with applicable regulations could result in the imposition of penalties, fines
and sanctions, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
 
VOLATILITY OF SECURITIES PRICES
 
The trading price of the Company's Common Stock has been subject to wide
fluctuations from time to time and may continue to be subject to such
volatility in the future. Trading price fluctuations can be caused by a
variety of factors, including 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, 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.
 
ANTI-TAKEOVER PROVISIONS
 
The Company's Articles of Incorporation and Bylaws contain provisions that may
discourage or make more difficult any attempt by a person or group to obtain
control of the Company, including provisions authorizing the issuance of
preferred stock without shareholder approval, restricting the persons who may
call a special meeting of the shareholders and prohibiting shareholders from
taking action by written consent. In addition, the Company is subject to
certain provisions of Florida law that may discourage or make more difficult
takeover attempts or acquisitions of substantial amounts of the Company's
Common Stock. Further, pursuant to the terms of a shareholder rights plan
adopted in 1995, each outstanding share of Common Stock has one attached
right. The rights will cause substantial dilution of the ownership of a person
or group that attempts to acquire the Company on terms not approved by the
Board and may have the effect of deterring hostile takeover attempts.
 
SHARES ELIGIBLE FOR FUTURE SALE
 
Substantially all of the Company's outstanding Common Stock is available for
sale in the public marketplace. As of January 31, 1998, there were also
outstanding stock options to purchase an aggregate of 747,000 shares of Common
Stock at various exercise prices per share. The majority of the shares to be
received upon exercise of these options will be available for immediate resale
in the public markets. No prediction can be made as to the effect, if any,
that sales of shares of Common Stock or the availability of such shares for
sale will have on the market prices prevailing from time to time. The
possibility exists that substantial amounts of Common Stock may be sold in the
public market, which may adversely affect prevailing market prices for the
Common Stock and could impair the Company's ability to raise capital through
the sale of its equity securities.
 
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.
 
 
                                      27

<PAGE>
 
                          FORWARD-LOOKING STATEMENTS
 
This Form 10-K 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 or
incorporated by reference in this Form 10-K which address activities, events
or developments which the Company expects or anticipates will or may occur in
the future, including approval of statements regarding the Company's
competitive position, the timing and of the application to the FDA for the
stentless CryoLife-O'Brien porcine heart valves, BioGlue surgical adhesive,
and FibRx surgical sealant, other estimated dates relating to the Company's
proposed regulatory submissions, estimates regarding 1998 research and
development expenditures, the Company's expectations regarding the adequacy of
current financing arrangements, product demand and market growth, 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 with the
Company's expectations and predictions is subject to a number of risks and
uncertainties which could cause actual results to differ materially from the
Company's expectations, including the risk factors discussed in this Form 10-K
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-K 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.
 

I
TEM 2. PROPERTIES.
 
The Company's facilities (other than its single use medical device
manufacturing plant) are located in suburban Atlanta, Georgia, and consist of
three separate locations totaling approximately 130,000 square feet of leased
office, laboratory and warehouse space. Approximately 17,500 square feet are
dedicated to laboratory work areas. The primary facility, which does not
include the bioadhesive laboratory and the bioprosthetic manufacturing
operation, has three main laboratory facilities: human tissue processing,
research and development, and microbiology. Each of these areas consists of a
general technician work area and adjoining "clean rooms" for work with human
tissue and for aseptic processing. The clean rooms are supplied with highly
filtered air which provides a near-sterile environment. The human tissue
processing laboratory contains approximately 7,700 square feet with a suite of
seven clean rooms. The research and development laboratory is approximately
5,500 square feet with a suite of five clean rooms. The microbiology
laboratory is approximately 3,200 square feet with a suite of three clean
rooms. The biomedical products laboratory facility contains approximately
11,000 square feet, including approximately 4,000 square feet of laboratory
space with a suite of eight clean rooms. The Company's porcine heart valves
are manufactured in the Company's bioprosthesis laboratory, which contains
approximately 13,000 square feet, with about 3,500 square feet of laboratory
space and a suite of four clean rooms for tissue processing. The Company's
single use medical devices are manufactured at the Company's IFM subsidiary
located in St. Petersburg, Florida. This facility is approximately 30,000
square feet.
 

ITEM 3. LEGAL PROCEEDINGS.
 
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. Management
believes that no currently ongoing litigation, if determined adversely to the
Company, will have a material adverse effect on the Company's business,
financial condition or results of operations.
 

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
 
Inapplicable.
 
                                      28

<PAGE>
 

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
 
Each of the executive officers of the Registrant was elected by the Board of
Directors to serve until the Board of Directors' meeting immediately following
the next annual meeting of shareholders or until their earlier removal by the
Board of Directors or their resignation. The following table lists the
executive officers of the Registrant and their ages, positions with the
Registrant, and the dates from which they have continually served in their
present positions with the Registrant.
 

<TABLE>
<CAPTION>
                                                             DATE FIRST ELECTED
 NAME                       AGE POSITION                     TO PRESENT OFFICE
 ----                       --- --------                     ------------------
 <C>                        <C> <S>                          <C>
 Steven G. Anderson          59 President, Chief Executive    February, 1984
                                Officer and Chairman
 Kirby S. Black, PhD         43 Vice President, Research      July, 1995
                                and Development
 Edwin B. Cordell, Jr., CPA  39 Vice President and Chief      December, 1994
                                Financial Officer
 Albert E. Heacox, PhD       47 Vice President, Laboratory    June, 1995
                                Operations
 Gerald B. Seery             41 Vice President, Marketing     August, 1995
 James C. Vander Wyk, PhD    53 Vice President, Regulatory    February, 1996
                                Affairs and Quality
                                Assurance
 Ronald D. McCall, Esq.      53 Director, Secretary and       January, 1984
                                Treasurer
</TABLE>

 
STEVEN G. ANDERSON, a founder of the Company, has served as the Company's
President, Chief Executive Officer and Chairman since its inception. Mr.
Anderson has more than 30 years of experience in the implantable medical
device industry. Prior to joining the Company, Mr. Anderson was Senior
Executive Vice President and Vice President, Marketing, from 1976 until 1982
of Intermedics, Inc., a manufacturer and distributor of pacemakers and other
medical devices. Mr. Anderson received his BA from the University of
Minnesota.
 
KIRBY S. BLACK, PHD, has served as Vice President of Research and Development
since July 1995. Dr. Black is responsible for the continued development of the
Company's current products as well as the evaluation of new technologies. Dr.
Black is listed on three patents and has authored 118 publications. Prior to
joining the Company, Dr. Black was Director, Medical Information and Project
Leader from July 1993 until July 1994 at Advanced Tissue Sciences, LaJolla,
California. Dr. Black has also held a number of positions at the University of
California at Irvine, including Director, Transplantation and Immunology
Laboratories, Department of Surgery. Dr. Black received his BS degree from the
University of California, Los Angeles, and his PhD degree from the University
of California at Irvine.
 
EDWIN B. CORDELL, JR., CPA, has served as Vice President and Chief Financial
Officer of the Company since November 1994. From August 1987 to November 1994,
Mr. Cordell served as Controller and Chief Financial Officer of Video Display
Corporation, a cathode ray tube remanufacturing and distribution company. Mr.
Cordell received his BS in Accounting from the University of Tennessee.
 
ALBERT E. HEACOX, PHD, has served as Vice President, Laboratory Operations
since June 1988 and has been with the Company since June of 1985. Dr. Heacox
has been responsible for developing protocols and procedures for both
cardiovascular and connective tissues, implementing upgrades in procedures in
conjunction with the Company's quality assurance programs, and overseeing all
production activities of the Company's laboratories. Prior to joining the
Company, Dr. Heacox worked as a researcher with the U.S. Department of
Agriculture and North Dakota State University, developing methods for the
cryopreservation of cells and animal germ plasm storage. Dr. Heacox received a
BA and an MS in Biology from Adelphi University, and received his PhD in
Biology from Washington State University and completed his post-doctorate
training in cell biology at the University of Cologne, West Germany.
 
GERALD B. SEERY has served as Vice President of Marketing since August 1995
and has been with the Company since July 1993. Mr. Seery is responsible for
developing and implementing the Company's sales and marketing plans and
supervising all tissue procurement activities. Prior to joining the Company,
Mr. Seery held senior
 
                                      29

<PAGE>
 
marketing management positions with Meadox Medicals from 1982 until 1985,
Electro Catheter Corporation from 1985 until 1989 and Daig Corporation from
1992 until 1993, accumulating fifteen years of specialized marketing
experience in cardiovascular medical devices. Mr. Seery received his BA in
International Economics at The Catholic University of America in Washington,
D.C. in 1978 and completed his MBA at Columbia University in New York in 1980.
 
JAMES C. VANDER WYK, PHD, has served as Vice President, Regulatory Affairs and
Quality Assurance of the Company since February 1996. Prior to joining the
Company, Dr. Vander Wyk held senior management positions at Schneider (USA),
Inc. from 1993 until 1996, Pharmacia Deltec, Inc. from 1985 until 1993,
Delmed, Inc. from 1980 until 1985 and Pharmaco, Inc. from 1975 to 1979,
gaining 20 years of experience in Regulatory Affairs and Quality Assurance.
Dr. Vander Wyk received his BS in Pharmacy from the Massachusetts College of
Pharmacy and his PhD in Microbiology from the University of Massachusetts. Dr.
Vander Wyk performed his NIH Postdoctoral Fellowship at the University of
Illinois.
 
RONALD D. MCCALL has served as a director of the Company and as the Secretary
and Treasurer of the Company since January 1984. From 1985 to the present, Mr.
McCall has been the proprietor of the law firm of Ronald D. McCall, Attorney
At Law, Tampa, Florida. Mr. McCall was admitted to the practice of law in
Florida in 1961. Mr. McCall received his BA and JD degrees from the University
of Florida.
 

                                    PART II
 

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
 
The Company's Common Stock is traded on the New York Stock Exchange (the
"NYSE") under the symbol "CRY." Prior to July 15, 1997, the Company's Common
Stock was traded on the Nasdaq National Market under the symbol "CRYL." The
following table sets forth, for the periods indicated, the intra-day high and
low sale prices per share of Common Stock on the NYSE or the Nasdaq National
Market, as applicable:
 

<TABLE>
<CAPTION>
                                                                HIGH      LOW
                                                              --------- --------
   <S>                                                        <C>       <C>
   1998
   First Quarter (through February 18, 1998)................. $17 15/16 $13 3/4
   1997
   Fourth Quarter............................................  19        13
   Third Quarter.............................................  16 1/8    11 1/4
   Second Quarter............................................  13 1/4     7 5/8
   First Quarter.............................................  14 1/4     8
   1996
   Fourth Quarter............................................  15 3/4    12 3/16
   Third Quarter.............................................  20 1/2    11 1/4
   Second Quarter............................................  20 3/4    10 4/5
   First Quarter.............................................  12 5/8     7
   1995
   Fourth Quarter............................................   9 1/16    6 1/8
   Third Quarter.............................................   9 1/8     5 3/8
   Second Quarter............................................   5 5/8     3 3/8
   First Quarter.............................................   4 1/4     3 1/8
</TABLE>

 
As of February 1, 1998, there were approximately 410 holders of record, and
approximately 7,000 beneficial holders, of the Company's Common Stock.
 
                                      30

<PAGE>
 

ITEM 6. SELECTED FINANCIAL DATA.
 
The following Selected Consolidated Financial Data should be read in
conjunction with the Company's Consolidated Financial Statements and the Notes
thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other financial information included elsewhere in
this Form 10-K or incorporated herein by reference. The data set forth below
with respect to the Company's Consolidated Income Statements and Balance
Sheets for, and as of the end of, the years ended December 31, 1996 and 1997
are derived from the Company's Consolidated Financial Statements which have
been audited by Ernst & Young LLP, independent auditors, and which are
included elsewhere in this Form 10-K and are qualified by reference to such
Consolidated Financial Statements and Notes thereto. The selected data
presented below for, and as of the end of, each of the years in the three-year
period ended December 31, 1995, are derived from the Consolidated Financial
Statements of the Company, which Consolidated Financial Statements have been
audited by KPMG Peat Marwick LLP, independent auditors. The Consolidated
Income Statement for the year ended December 31, 1995, and the report thereon,
are included elsewhere in this Form 10-K. The historical results are not
necessarily indicative of future results of operations.

<TABLE>
<CAPTION>
                                               YEAR ENDED DECEMBER 31,
                                       ---------------------------------------
                                        1993    1994    1995    1996    1997
                                       ------- ------- ------- ------- -------
                                        (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                    <C>     <C>     <C>     <C>     <C>
INCOME STATEMENT DATA:
Revenues:
  Cryopreservation.................... $18,938 $22,818 $27,994 $36,293 $44,242
  Bioprosthetic cardiovascular
   devices............................     933     414     263     385     576
  Single-use medical devices..........     --      --      --      --    5,591
  Other income........................   1,470     578     969     550     460
                                       ------- ------- ------- ------- -------
    Total Revenues....................  21,341  23,810  29,226  37,228  50,869
Expenses:
  Cost of cryopreservation and
   products...........................   8,759   8,965  10,485  12,593  17,764
  Research and development............   1,384   1,975   2,634   2,807   3,946
  General, administrative and
   marketing..........................  10,282  11,085  12,807  15,673  20,548
  Interest expense....................      23      21       4      72     978
                                       ------- ------- ------- ------- -------
    Total Expenses....................  20,448  22,046  25,930  31,145  43,226
Income before income taxes............     893   1,764   3,296   6,083   7,633
Income tax expense....................     339     498   1,094   2,156   2,908
                                       ------- ------- ------- ------- -------
  Net income.......................... $   554 $ 1,266 $ 2,202 $ 3,927 $ 4,725
                                       ======= ======= ======= ======= =======
Earnings per share of common stock:
  Basic............................... $   .06 $   .14 $   .23 $   .41 $   .49
                                       ======= ======= ======= ======= =======
  Diluted............................. $   .06 $   .14 $   .23 $   .40 $   .48
                                       ======= ======= ======= ======= =======
Weighted average number of shares of
 common stock outstanding:
  Basic...............................   9,018   9,312   9,379   9,505   9,642
  Diluted.............................   9,114   9,373   9,568   9,906   9,942
<CAPTION>
                                                    DECEMBER 31,
                                       ---------------------------------------
                                        1993    1994    1995    1996    1997
                                       ------- ------- ------- ------- -------
<S>                                    <C>     <C>     <C>     <C>     <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
 securities........................... $ 5,079 $ 6,366 $ 6,182 $ 1,370 $   111
Total assets..........................  20,075  21,417  24,132  34,973  53,749
Long-term debt, including current
 maturities...........................     --      --      --    3,326  18,362
Retained earnings.....................     506   1,773   3,975   7,902  12,627
Total shareholders' equity............  16,615  17,933  20,465  24,929  30,227
</TABLE>

 
                                      31

<PAGE>
 

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
 
OVERVIEW
 
The Company was organized in 1984 to address market opportunities in the area
of biological implantable products and materials, and today is the leader in
the cryopreservation of viable human tissue for cardiovascular, vascular and
orthopaedic applications. A majority of the Company's current revenues are
derived from the cryopreservation of human heart valves and conduits,
reflecting CryoLife's initial exclusive focus on this area. The Company began
cryopreserving aortic heart valves in 1984, pulmonary heart valves in 1986 and
mitral heart valves in 1995. CryoLife has also expanded into the
cryopreservation of other human tissue, including vascular tissue and
connective tissue for the knee.
 
The Company pays a fee to an organ procurement agency or tissue bank at the
time such organization consigns human tissue to the Company. The Company
generates revenues from cryopreservation services by charging hospitals a fee,
which covers the Company's services, the associated procurement fee and
applicable shipping expenses. The Company records revenue upon shipping
tissue. Costs associated with the procurement, processing and storage of
tissue are accounted for as deferred preservation costs on the Company's
balance sheet and are expensed when the tissue is shipped. The Company
continually monitors cryopreserved tissue in its possession to determine its
viability. Tissue determined not to be suitable for implantation is disposed
of properly, and the associated deferred preservation costs are expensed. As
part of an effort to reduce its working capital needs, while simultaneously
facilitating the use of cryopreserved tissue, the Company provides liquid
nitrogen freezers to a number of hospitals. The Company retains ownership of
the liquid nitrogen freezers and, consequently, incurs associated depreciation
charges. The hospitals are responsible for operating expenses related to the
use of the liquid nitrogen freezers.
 
The Company has expanded, and intends to continue to expand, its portfolio of
products and services. Much of this expansion has been accomplished through
acquisitions of intellectual property and companies. In 1992, the Company
purchased for $730,000 the exclusive distribution rights for a line of
stentless porcine heart valves which the Company currently markets in the
European Community. In 1996, the Company purchased for $275,000 a patent for
an advanced design stentless pulmonary porcine heart valve. Also in 1996, the
Company acquired the assets of UCFI, a tissue processor, for $750,000 in cash
and a $1.3 million note. In 1997, the Company acquired IFM and its line of
single-use medical devices for $4.5 million in cash, a $5.0 million
convertible debenture and a commitment to pay additional cash consideration
(not to exceed $1.8 million) if certain target net revenues of IFM are
exceeded.
 
The composition of the Company's revenues is expected to change in future
years, reflecting, among other things, the anticipated growth in shipments of
human vascular tissue and human connective tissue for the knee, the
acquisition of IFM and the introduction into the European Community of BioGlue
surgical adhesive as well as other expected new products.
 
The following table outlines product shipment and revenue data for the
Company's major product lines from 1995 to 1997:

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                         -----------------------
      UNITS SHIPPED AND REVENUES BY MAJOR PRODUCT LINE    1995    1996    1997
      ------------------------------------------------   ------- ------- -------
                                                         (DOLLARS IN THOUSANDS)
      <S>                                                <C>     <C>     <C>
      Human Heart Valves and Conduits:
        Units shipped..................................    3,499   4,528   5,244
        Revenues.......................................  $19,767 $24,763 $29,046
      Human Vascular Tissue:
        Units shipped..................................    1,765   2,147   2,621
        Revenues.......................................  $ 6,771 $ 8,172 $10,469
      Human Connective Tissue for the Knee:
        Units shipped..................................      573   1,562   1,859
        Revenues.......................................  $ 1,456 $ 3,358 $ 4,727
      Bioprosthetic Cardiovascular Devices:
        Units shipped..................................      198     256     532
        Revenues.......................................  $   263 $   385 $   576
</TABLE>

 
                                      32

<PAGE>
 
RESULTS OF OPERATIONS
 
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
 
Revenues increased 37% to $50.9 million in 1997 from $37.2 million in 1996.
The increase in revenues was primarily due to the growing acceptance in the
medical community of cryopreserved tissues, the Company's ability to procure
greater amounts of tissue, price increases for certain cryopreservation
services and revenues attributable to the Company's line of single-use medical
devices following the IFM acquisition in March 1997. Revenues attributable to
IFM were $5.6 million in 1997.
 
Revenues from human heart valve and conduit cryopreservation services
increased 17% to $29.0 million in 1997 from $24.8 million in 1996,
representing 57% and 67%, respectively, of total revenues during such years.
This increase in revenues was primarily due to a 16% increase in the number of
heart allograft shipments.
 
Revenues from human vascular tissue cryopreservation services increased 28% to
$10.5 million in 1997 from $8.2 million in 1996, representing 21% and 22%,
respectively, of total revenues during such years. This increase in revenues
was primarily due to a 22% increase in the number of vascular allograft
shipments resulting from the introduction of cryopreserved tissues for new
procedures and an increased demand for the Company's existing cryopreservation
services.
 
Revenues from human connective tissue for the knee cryopreservation services
increased 38% to $4.7 million in 1997 from $3.4 million in 1996, representing
9% of total revenues during each year. This increase in revenues was primarily
due to a 19% increase in the number of allograft shipments resulting from a
greater proportion of the 1997 revenues being derived from the implantation of
cryopreserved menisci, which have a significantly higher per unit revenue than
the Company's cryopreserved tendons.
 
Revenues from the sale of bioprosthetic cardiovascular devices in 1997 were
$576,000 compared to $385,000 in 1996, representing 1% of revenues during each
year. Other revenues decreased to $460,000 in 1997 from $550,000 in 1996.
Other revenues in 1997 consisted primarily of research grant award revenues
related to the Company's SynerGraft technology.
 
Cost of cryopreservation services and products increased to $17.8 million in
1997 from $12.6 million in 1996. Cost of cryopreservation services and
products as a percentage of revenues increased to 35% in 1997 from 34% in
1996. This increase was primarily due to the increased overhead costs
associated with the new corporate headquarters and the addition of the IFM
product line, partially offset by efficiencies gained with the increase in the
number of allografts processed.
 
General, administrative and marketing expenses increased 31% to $20.5 million
in 1997 from $15.7 million in 1996, representing 40% and 42%, respectively, of
total revenues during such years. The increased expenses of approximately $4.8
million were primarily attributable to increased costs associated with the
Company's new corporate headquarters, increased fees paid to technical
representatives and other related marketing expenses relating to the growth in
revenues and increases in general overhead expenses to support the growth in
revenues.
 
The Company has continued its commitment to research and development activity,
spending approximately $3.9 million in 1997 and $2.8 million in 1996,
representing 8% of total revenues during each year. The Company's research and
development expenditures during 1997 were primarily for the development of
bioadhesives for surgical applications and its SynerGraft technology.
 
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
 
Revenues increased 27% to $37.2 million in 1996 from $29.2 million in 1995.
The increase in revenues was primarily due to growing acceptance in the
medical community of cryopreserved tissues, the Company's ability to procure
greater amounts of tissue and price increases for certain services.
 
Revenues from human heart valve and conduit cryopreservation services
increased 25% to $24.8 million in 1996 from $19.8 million in 1995,
representing 67% and 68%, respectively, of total revenues during such years.
This increase in revenues was primarily due to a 29% increase in the number of
heart allograft shipments.
 
                                      33

<PAGE>
 
Revenues from human vascular tissue cryopreservation services increased 21% to
$8.2 million in 1996 from $6.8 million in 1995, representing 22% and 23%,
respectively, of total revenues during such years. This increase in revenues
was primarily due to a 22% increase in the number of vascular allograft
shipments.
 
Revenues from human connective tissue for the knee cryopreservation services
increased 127% to $3.4 million in 1996 from $1.5 million in 1995, representing
9% and 5%, respectively, of total revenues during each year. This increase in
revenues was primarily due to a 173% increase in the number of allograft
shipments partially offset by a decrease in the unit revenue of cryopreserved
tendons.
 
Revenues from the sale of bioprosthetic cardiovascular devices in 1996 were
$385,000 compared to $263,000 in 1995, representing 1% of revenues during each
year. This increase in revenues was primarily due to a 29% increase in the
number of units shipped.
 
Other revenues decreased to $550,000 in 1996 from $969,000 in 1995. Other
revenues in 1996 consisted primarily of research grant award revenues and a
fee from a terminated agreement with Bayer Corporation. Research grant award
revenues in 1996 were primarily related to the development of bioadhesives for
surgical application and the Company's SynerGraft technology. The decrease
compared to 1995 was primarily attributable to the sale of the Company's
patented Viral Inactivation Process ("VIP") technology to Osteotech, Inc. for
approximately $450,000 in 1995. The Company had developed its VIP technology
to eliminate potential viruses from human bone processed by the Company. The
Company sold its bone processing business in 1993.
 
Costs of cryopreservation services and products increased to $12.6 million in
1996 from $10.5 million in 1995. Cost of cryopreservation services and
products as a percentage of cryopreservation revenues decreased to 34% in 1996
from 36% in 1995. This decrease was primarily due to an increase in the volume
of processed tissue and more efficient processing methods.
 
General, administrative and marketing expenses increased 23% to $15.7 million
in 1996 from $12.8 million in 1995, representing 42% and 44%, respectively, of
total revenues during such years. The increased expenses of approximately $2.9
million were primarily attributable to additional regulatory and quality
assurance costs related to the Company's CE Mark and ISO 9001 certifications,
increased fees paid to technical representatives and other related marketing
expenses resulting from the growth in revenues and increases in general
overhead expenses to support the growth in revenues.
 
The Company continued its commitment to research and development activity,
spending approximately $2.8 million and $2.6 million in 1996 and 1995,
representing 8% and 9%, respectively, of total revenues during such years. The
Company's research and development expenditures during 1996 were primarily for
the development of bioadhesives for surgical applications and the SynerGraft
technology.
 
Seasonality
 
The demand for the Company's human heart valve and conduit cryopreservation
services is seasonal, with peak demand generally occurring in the second and
third quarters. Management believes that this demand trend for human heart
valve and conduit cryopreservation services is primarily due to the high
number of surgeries scheduled during the summer months. Management believes
that the trends experienced by the Company to date for its human connective
tissue for the knee cryopreservation services indicate that this business may
also be seasonal because it is an elective procedure that may be performed
less frequently during the fourth quarter holiday months. However, the demand
for the Company's vascular tissue cryopreservation services, bioprosthetic
cardiovascular devices and single-use medical devices does not appear to
experience this seasonal trend.
 
Quarterly Results
 
The Company achieved record revenues and earnings in both the year and three
months ended December 31, 1997, as compared to comparable prior periods, with
the fourth quarter of 1997 being the Company's tenth consecutive quarter of
record revenues and earnings as compared to the same quarter for prior years.
In the opinion of management, the information set forth in the table below has
been prepared on a basis consistent with the Company's audited Consolidated
Financial Statements appearing elsewhere in the Form 10-K, and all necessary
adjustments (consisting only of normal recurring adjustments) have been
included to present fairly the
 
                                      34

<PAGE>
 
unaudited quarterly results in accordance with generally accepted accounting
principles ("GAAP"). The results for any quarter are not necessarily
indicative of results to be expected in any future period.
 
The following table presents selected unaudited quarterly income statement
data for each of the eight quarters in the period ended December 31, 1997:
 

<TABLE>
<CAPTION>
                                                     QUARTER ENDED
                          -------------------------------------------------------------------
                                        1996                              1997
                          --------------------------------- ---------------------------------
                          MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
                          -------- ------- -------- ------- -------- ------- -------- -------
                                         (IN THOUSANDS EXCEPT PER SHARE DATA)
<S>                       <C>      <C>     <C>      <C>     <C>      <C>     <C>      <C>
REVENUES:
 Cryopreservation
  services..............   $8,103  $9,544  $10,067  $8,579   $9,725  $10,910 $12,689  $10,918
 Bioprosthetic
  cardiovascular
  devices...............      157      75       71      82      104      135     177      160
 Single-use medical
  devices...............      --      --       --      --       554    1,596   1,703    1,738
 Interest and other
  income................      174      79      273      24       30       82      72      276
                           ------  ------  -------  ------   ------  ------- -------  -------
 Total Revenues.........    8,434   9,698   10,411   8,685   10,413   12,723  14,641   13,092
EXPENSES:
 Cost of
  cryopreservation
  services and
  products..............    2,879   3,289    3,563   2,862    3,426    4,550   5,112    4,676
 Research and
  development...........      690     701      616     800      849      857   1,243      997
 General, administrative
  and marketing.........    3,626   4,181    4,239   3,627    4,479    5,165   5,620    5,284
 Interest expense.......      --      --        39      33      132      296     317      233
                           ------  ------  -------  ------   ------  ------- -------  -------
 Total Expenses.........    7,195   8,171    8,457   7,322    8,886   10,868  12,292   11,190
                           ------  ------  -------  ------   ------  ------- -------  -------
INCOME BEFORE INCOME
 TAXES..................    1,239   1,527    1,954   1,363    1,527    1,855   2,349    1,902
 Income tax expense.....      457     539      693     467      575      695     891      747
                           ------  ------  -------  ------   ------  ------- -------  -------
NET INCOME..............   $  782  $  988  $ 1,261  $  896   $  952  $ 1,160 $ 1,458  $ 1,155
                           ======  ======  =======  ======   ======  ======= =======  =======
EARNINGS PER SHARE OF
 COMMON STOCK:
 Basic..................   $  .08  $  .11  $   .13  $  .09   $  .10  $   .12 $   .15  $   .12
                           ======  ======  =======  ======   ======  ======= =======  =======
 Diluted................   $  .08  $  .10  $   .13  $  .09   $  .10  $   .12 $   .15  $   .12
                           ======  ======  =======  ======   ======  ======= =======  =======
WEIGHTED AVERAGE NUMBER
 OF SHARES OF COMMON
 STOCK OUTSTANDING:
 Basic..................    9,433   9,491    9,529   9,575    9,581    9,615   9,670    9,694
 Diluted................    9,756   9,933    9,925   9,943    9,877    9,889   9,978   10,023
</TABLE>

 
LIQUIDITY AND CAPITAL RESOURCES
 
At December 31, 1997, net working capital was $18.8 million, compared to $10.8
million at December 31, 1996, with a current ratio of 4 to 1 at December 31,
1997. The Company's primary capital requirements arise out of general working
capital needs, including capital expenditures for facilities and equipment,
and funding of research and development projects. The Company historically has
funded these requirements through bank credit facilities, cash generated by
operations and equity offerings.
 
Net cash used in operating activities was $2.2 million for the year ended
December 31, 1997, as compared to net cash provided by operating activities of
$3.2 million for the year ended December 31, 1996. This decrease resulted from
an increase in deferred cryopreservation costs to support the growing
acceptance of the Company's existing cryopreserved tissues as well as new
cryopreserved tissue offerings in 1997.
 
Net cash used in investing activities was $9.6 million for the year ended
December 31, 1997, as compared to $4.2 million for the year ended December 31,
1996. This increase primarily resulted from the Company's acquisition of IFM.
 
Net cash provided by financing activities was $10.6 million for the year ended
December 31, 1997, as compared to $1.8 million for the year ended December 31,
1996. This increase was primarily attributable to borrowings under the
Company's credit facility in connection with the acquisition of IFM and the
construction of the new Company and IFM facilities and increased deferred
cryopreservation costs.
 
                                      35

<PAGE>
 
The Company intends to file a registration statement with the Securities and
Exchange Commission in connection with a public offering of up to 2,500,000
shares of Common Stock (excluding over-allotments) (the "Offering"). The
Company anticipates that, even if the Offering is not consummated, borrowings
under its existing credit agreements and cash generated from operations will
be sufficient to meet its operating and development needs for the next 12
months. However, the Company's future liquidity and capital requirements
beyond that period will depend upon numerous factors, including the timing of
the Company's receipt of FDA approvals to begin clinical trials for its
products currently in development, the resources required to further develop
its marketing and sales capabilities if, and when, those products gain
approval, the resources required to expand manufacturing capacity and the
extent to which the Company's products generate market acceptance and demand.
There can be no assurance that 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. These 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 and results of operations.
 
INFLATION
 
Although the Company cannot determine the precise effects of inflation,
management does not believe it has had a significant effect on revenues or
results of operations and does not expect it to have a significant effect in
the near future.
 
YEAR 2000
 
The Company is aware of the issues that many computer systems will face as the
millennium (year 2000) approaches. The Company, however, believes that its own
internal software and hardware is year 2000 compliant. The Company believes
that any year 2000 problems encountered by procurement agencies, hospitals and
other customers and vendors are not likely to have a material adverse effect
on the Company's operations. The Company anticipates no other year 2000
problems which are reasonably likely to have a material adverse effect on the
Company's operations. There can be no assurance, however, that such problems
will not arise.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, Reporting Comprehensive Income ("Statement 130"). Statement
130 establishes new standards for the reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. These new standards require that all items recognized as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements.
Statement 130 is effective for fiscal years beginning after December 15, 1997.
The adoption of Statement 130 will not have a significant impact on the
Company's Consolidated Financial Statements.
 
In June 1997, the FASB issued Statement 131, Disclosures About Segments of an
Enterprise and Related Information ("Statement 131"). Statement 131 changes
the way public companies report segment information in annual financial
statements and also requires those companies to report selected segment
information in interim financial reports. Statement 131 is effective for years
beginning after December 15, 1997. The adoption of Statement 131 will not have
a significant impact on the Company's consolidated financial position and
results of operations, but will require additional disclosure in the notes to
the Company's Consolidated Financial Statements.
 

I
TEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Inapplicable
 
                                      36

<PAGE>
 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 

                        REPORT OF INDEPENDENT AUDITORS
 
Board of Directors and Shareholders
CryoLife, Inc.
 
We have audited the accompanying consolidated balance sheets of CryoLife, Inc.
as of December 31, 1997 and 1996, and the related consolidated statements of
income, shareholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. The consolidated financial statements of
CryoLife, Inc. for the year ended December 31, 1995 were audited by other
auditors whose report dated February 14, 1996 expressed an unqualified opinion
on those statements.
 
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
In our opinion, the 1997 and 1996 consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of CryoLife, Inc. at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
 
                                       Ernst & Young LLP
 
Atlanta, Georgia
February 9, 1998

 
                                      37

<PAGE>
 

                         INDEPENDENT AUDITORS' REPORT
 
Board of Directors and Shareholders
CryoLife, Inc.
 
We have audited the accompanying consolidated statements of income,
shareholders' equity and cash flows of CryoLife, Inc. and subsidiaries for the
year ended December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
 
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of CryoLife, Inc. and subsidiaries for the year ended December 31, 1995,
in conformity with generally accepted accounting principles.
 
                                          KPMG PEAT MARWICK LLP
 
Atlanta, Georgia
February 14, 1996

 
                                      38

<PAGE>
 
                                 CRYOLIFE, INC.
 
                          CONSOLIDATED BALANCE SHEETS
 

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                        -----------------------
                                                           1997        1996
                                                        ----------- -----------
<S>                                                     <C>         <C>
                        ASSETS
Current assets:
  Cash and cash equivalents............................ $   111,000 $ 1,370,000
  Receivables:
   Trade accounts, less allowance for doubtful accounts
    of $103,000 in 1997 and $94,000 in 1996............   9,224,000   6,572,000
   Income taxes........................................     230,000     404,000
   Other...............................................     311,000   1,518,000
                                                        ----------- -----------
    Total receivables..................................   9,765,000   8,494,000
                                                        ----------- -----------
  Deferred preservation costs, less allowances of
   $152,000 in 1997 and $278,000 in 1996...............  12,257,000   7,178,000
  Inventories..........................................   1,761,000     260,000
  Prepaid expenses.....................................   1,260,000     697,000
  Deferred income taxes................................         --       33,000
                                                        ----------- -----------
    Total current assets...............................  25,154,000  18,032,000
                                                        ----------- -----------
Property and equipment:
  Equipment............................................  10,533,000   8,515,000
  Furniture and fixtures...............................   1,828,000   1,493,000
  Leasehold improvements...............................   8,247,000   7,495,000
  Construction in progress.............................   2,509,000         --
                                                        ----------- -----------
                                                         23,117,000  17,503,000
  Less accumulated depreciation and amortization.......   7,630,000   5,788,000
                                                        ----------- -----------
    Net property and equipment.........................  15,487,000  11,715,000
                                                        ----------- -----------
Other assets:
  Goodwill, less accumulated amortization of $468,000
   in 1997 and $27,000 in 1996.........................   9,809,000   1,846,000
  Patents, less accumulated amortization of $531,000 in
   1997 and $352,000 in 1996...........................   2,196,000   2,081,000
  Other, less accumulated amortization of $483,000 in
   1997 and $289,000 in 1996...........................   1,103,000   1,299,000
                                                        ----------- -----------
    Total assets....................................... $53,749,000 $34,973,000
                                                        =========== ===========
</TABLE>

 
          See accompanying notes to consolidated financial statements.
 
                                       39

<PAGE>
 
                                 CRYOLIFE, INC.
 
                          CONSOLIDATED BALANCE SHEETS
 

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                      ------------------------
                                                         1997         1996
                                                      -----------  -----------
<S>                                                   <C>          <C>
        LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable................................... $ 1,612,000  $ 3,696,000
  Accrued expenses...................................     222,000      720,000
  Accrued compensation...............................   1,122,000      878,000
  Accrued fees to technical service representatives..     312,000      214,000
  Accrued procurement fees...........................   1,565,000    1,210,000
  Current maturities of long-term debt...............   1,496,000      527,000
                                                      -----------  -----------
    Total current liabilities........................   6,329,000    7,245,000
                                                      -----------  -----------
Deferred income taxes................................     327,000          --
Bank loans...........................................  10,777,000    1,250,000
Convertible debenture................................   5,000,000          --
Other long-term debt.................................   1,089,000    1,549,000
                                                      -----------  -----------
    Total liabilities................................  23,522,000   10,044,000
                                                      -----------  -----------
Commitments and Contingencies
Shareholders' equity:
  Preferred stock, $.01 par value per share;
   authorized 5,000,000 shares including 2,000,000
   shares of series A junior participating preferred
   stock; no shares issued...........................         --           --
  Common stock, $.01 par value per share; authorized
   50,000,000 shares; issued 10,242,961 shares in
   1997 and 10,110,326 shares in 1996................     102,000      101,000
  Additional paid-in capital.........................  17,694,000   17,128,000
  Retained earnings..................................  12,627,000    7,902,000
  Unrealized gain (loss) on marketable securities....         --        (1,000)
  Treasury stock, 543,000 shares, at cost............    (180,000)    (180,000)
  Notes receivable from shareholders.................     (16,000)     (21,000)
                                                      -----------  -----------
    Total shareholders' equity.......................  30,227,000   24,929,000
                                                      -----------  -----------
      Total liabilities and shareholders' equity..... $53,749,000  $34,973,000
                                                      ===========  ===========
</TABLE>

 
          See accompanying notes to consolidated financial statements.
 
                                       40

<PAGE>
 
                                 CRYOLIFE, INC.
 
                         CONSOLIDATED INCOME STATEMENTS
 

<TABLE>
<CAPTION>
                                                       DECEMBER 31,
                                            -----------------------------------
                                               1997        1996        1995
                                            ----------- ----------- -----------
<S>                                         <C>         <C>         <C>
Revenues:
  Cryopreservation and products............ $50,409,000 $36,678,000 $28,257,000
  Research grants, licenses and other
   revenues................................     460,000     361,000     713,000
  Interest income..........................         --      189,000     256,000
                                            ----------- ----------- -----------
                                             50,869,000  37,228,000  29,226,000
                                            ----------- ----------- -----------
Costs and Expenses:
  Cryopreservation and products............  17,764,000  12,593,000  10,485,000
  General, administrative and marketing....  20,548,000  15,673,000  12,807,000
  Research and development.................   3,946,000   2,807,000   2,634,000
  Interest expense.........................     978,000      72,000       4,000
                                            ----------- ----------- -----------
                                             43,236,000  31,145,000  25,930,000
                                            ----------- ----------- -----------
Income before income taxes.................   7,633,000   6,083,000   3,296,000
Income tax expense.........................   2,908,000   2,156,000   1,094,000
                                            ----------- ----------- -----------
Net income................................. $ 4,725,000 $ 3,927,000 $ 2,202,000
                                            =========== =========== ===========
Earnings per share:
  Basic.................................... $      0.49 $      0.41 $      0.23
                                            =========== =========== ===========
  Diluted.................................. $      0.48 $      0.40 $      0.23
                                            =========== =========== ===========
Weighted average shares outstanding:
  Basic....................................   9,642,000   9,505,000   9,379,000
  Diluted..................................   9,942,000   9,906,000   9,568,000
</TABLE>

 
 
          See accompanying notes to consolidated financial statements.
 
                                       41

<PAGE>
 
                                 CRYOLIFE, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 

<TABLE>
<CAPTION>
                                                       DECEMBER 31,
                                             ----------------------------------
                                                1997        1996        1995
                                             ----------  ----------  ----------
<S>                                          <C>         <C>         <C>
Net cash flows from operating activities:
 Net income................................  $4,725,000  $3,927,000  $2,202,000
 Adjustments to reconcile net income to net
  cash flows (used in) provided by
  operating activities:
  Depreciation and amortization of property
   and equipment...........................   1,842,000     973,000     769,000
  Amortization.............................     814,000     383,000     211,000
  Provision for doubtful accounts..........      46,000     167,000     266,000
  Deferred income taxes....................     360,000     242,000    (107,000)
  Changes in operating assets and
   liabilities:
   Trade and other receivables.............    (530,000) (2,561,000) (1,780,000)
   Income taxes............................     174,000    (614,000)    106,000
   Deferred preservation costs.............  (5,079,000) (1,053,000)    379,000
   Inventories.............................    (864,000)    163,000     432,000
   Prepaid expenses........................    (506,000)   (326,000)   (146,000)
   Accounts payable........................  (2,756,000)  1,197,000      38,000
   Accrued expenses........................    (468,000)    740,000      39,000
                                             ----------  ----------  ----------
 Net cash flows (used in) provided by
  operating activities.....................  (2,242,000)  3,238,000   2,409,000
                                             ----------  ----------  ----------
Net cash flows from investing activities:
 Capital expenditures......................  (5,059,000) (8,481,000) (1,573,000)
 Cash paid for acquisitions, net of cash
  acquired.................................  (4,418,000)   (722,000)        --
 Other assets..............................    (148,000)   (939,000) (1,002,000)
 Net sales (purchases) of marketable
  securities...............................         --    5,942,000  (2,175,000)
                                             ----------  ----------  ----------
 Net cash flows used in investing
  activities...............................  (9,625,000) (4,200,000) (4,750,000)
                                             ----------  ----------  ----------
Net cash flows from financing activities:
 Principal payments of debt................  (6,607,000)   (750,000)        --
 Proceeds from debt issuance...............  16,643,000   2,000,000         --
 Proceeds from exercise of options and
  issuance of stock........................     567,000     561,000     265,000
 Net payments on notes receivable from
  shareholders.............................       5,000       5,000         --
                                             ----------  ----------  ----------
 Net cash flows provided by financing
  activities...............................  10,608,000   1,816,000     265,000
                                             ----------  ----------  ----------
(Decrease) increase in cash................  (1,259,000)    854,000  (2,076,000)
Cash and cash equivalents, beginning of
 year......................................   1,370,000     516,000   2,592,000
                                             ----------  ----------  ----------
Cash and cash equivalents, end of year.....  $  111,000  $1,370,000  $  516,000
                                             ==========  ==========  ==========
Supplemental disclosures of cash flow
 information--cash paid during the year
 for:
  Interest.................................  $  920,000  $   34,000  $    4,000
                                             ==========  ==========  ==========
  Income taxes.............................  $2,380,000  $2,529,000  $1,089,000
                                             ==========  ==========  ==========
Noncash investing and financing activities:
 Purchases of property and equipment in
  accounts payable.........................  $  440,000  $  888,000
                                             ==========  ==========
 Note issued for patent....................              $  826,000
                                                         ==========
 Fair value of assets acquired.............  $1,768,000  $  534,000
 Cost in excess of assets acquired.........   8,541,000   1,873,000
 Liabilities assumed.......................    (891,000)   (435,000)
 Notes issued for assets acquired..........  (5,000,000) (1,250,000)
                                             ----------  ----------
 Net cash paid for acquisition.............  $4,418,000  $  722,000
                                             ==========  ==========
</TABLE>

 
                                       42

<PAGE>
 
                                 CRYOLIFE, INC.
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 

<TABLE>
<CAPTION>
                                                     DECEMBER 31,
                                          -------------------------------------
                                             1997         1996         1995
                                          -----------  -----------  -----------
<S>                                       <C>          <C>          <C>
Common Stock:
 Balance, beginning of year, (9,567,000,
  9,431,000 and 9,326,000 shares
  outstanding, at January 1, 1997, 1996
  and 1995, respectively)...............  $   101,000  $   100,000  $    99,000
 Issuances of common stock:
  Employee stock purchase plan (30,000
   and 2,000 shares in 1997 and 1996,
   respectively)........................          --           --           --
  Purchase of other assets (10,000
   shares in 1996)......................          --           --           --
  Exercise of options (105,000, 124,000,
   and 105,000 shares in 1997, 1996 and
   1995, respectively)..................        1,000        1,000        1,000
                                          -----------  -----------  -----------
 Balance, end of year...................      102,000      101,000      100,000
                                          -----------  -----------  -----------
Additional Paid-in Capital:
 Balance, beginning of year.............   17,128,000   16,568,000   16,304,000
 Issuances of common stock:
  Employee stock purchase plan..........      268,000       21,000          --
  Purchase of other assets..............          --       130,000          --
  Exercise of options...................      298,000      409,000      264,000
                                          -----------  -----------  -----------
 Balance, end of year...................   17,694,000   17,128,000   16,568,000
                                          -----------  -----------  -----------
Retained Earnings:
 Balance, beginning of year.............    7,902,000    3,975,000    1,773,000
 Net income.............................    4,725,000    3,927,000    2,202,000
                                          -----------  -----------  -----------
 Balance, end of year...................   12,627,000    7,902,000    3,975,000
                                          -----------  -----------  -----------
Unrealized Gain (Loss) on Marketable Se-
 curities:
 Balance, beginning of year.............       (1,000)      28,000      (38,000)
 Unrealized gain (loss).................        1,000      (29,000)      66,000
                                          -----------  -----------  -----------
 Balance, end of year...................          --        (1,000)      28,000
                                          -----------  -----------  -----------
Treasury Stock:
                                          -----------  -----------  -----------
 Balance, beginning and end of year.....     (180,000)    (180,000)    (180,000)
                                          -----------  -----------  -----------
Notes Receivable From Shareholders:

 Balance, beginning of year.............      (21,000)     (26,000)     (26,000)
 Additions to shareholder notes.........      (21,000)         --           --
 Payments on shareholder notes..........       26,000        5,000          --
                                          -----------  -----------  -----------
 Balance, end of year...................      (16,000)     (21,000)     (26,000)
                                          -----------  -----------  -----------
Total shareholders' equity, end of
 year...................................  $30,227,000  $24,929,000  $20,465,000
                                          ===========  ===========  ===========
</TABLE>

 
          See accompanying notes to consolidated financial statements.
 
                                       43

<PAGE>
 
                                CRYOLIFE, INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Nature of Business
 
Founded in 1984, CryoLife, Inc. (the "Company") is the leader in the
cryopreservation of viable human tissues for transplant, and is developing and
commercializing additional implantable and single-use non-implantable devices
for use in vascular, cardiovascular and orthopaedic applications. The Company
markets its viable human tissues in North and South America, Europe and Asia.
The Company's bioprosthetic cardiovascular devices include fixed stentless
porcine heart valves recently introduced into the European Community as well
as a proprietary project to transplant human cells onto the structure of
animal tissue. The Company also manufactures and distributes, principally
through its recently acquired Ideas for Medicine, Inc. ("IFM") of Clearwater,
Florida subsidiary, single-use medical devices for use in vascular surgical
procedures. In addition, the Company is developing and commercializing within
the European Community a proprietary surgical adhesive designed for vascular
sealing.
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany balances are eliminated.
 
Reclassifications
 
Certain prior year balances have been reclassified to conform to the 1997
presentation.
 
Use of Estimates
 
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and, as such, include amounts based
on informed estimates and judgments of management with consideration given to
materiality. Actual results could differ from those estimates.
 
Cash Equivalents
 
Cash equivalents consist primarily of highly liquid investments with
insignificant interest rate risk and maturity dates of 90 days or less at the
time of acquisition.
 
Deferred Preservation Costs and Revenue Recognition
 
Tissue is procured from deceased human donors by organ procurement
organizations and tissue banks which consign the tissue to the Company for
processing and preservation. Preservation costs related to tissue held by the
Company are deferred until shipment to the implanting hospital. Deferred
preservation costs consist primarily of laboratory expenses, tissue
procurement fees, and freight-in charges and are stated at average cost,
determined annually, on a first-in, first-out basis. When the tissue is
shipped to the implanting hospital, revenue is recognized and the related
deferred preservation costs are charged to operations. The Company does not
require collateral or other security for its receivables.
 
Inventories
 
Inventories are comprised of single-use medical devices and bioprosthetic
cardiovascular devices and are valued at the lower of cost (first-in, first-
out) or market.
 
 
                                      44

<PAGE>
 
                                CRYOLIFE, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment
 
Property and equipment are stated at cost. Depreciation is provided over the
estimated useful lives of the assets, generally 5 to 10 years, on a straight-
line basis. Leasehold improvements are amortized on a straight-line basis over
the lease term or the estimated useful lives of the assets, whichever is
shorter.
 
Intangible Assets
 
Goodwill resulting from business acquisitions is amortized on a straight-line
basis over 20 years. 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 being amortized over the expected useful lives of the related assets
(primarily five years).
 
The Company periodically evaluates the recoverability of intangible assets and
measures the amount of impairment, if any, by assessing current and future
levels of income and cash flows as well as other factors, such as business
trends and prospects and market and economic conditions.
 
Income Taxes
 
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted income tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
 
Research Grant and License Revenues
 
Revenues from research grants are recognized in the period the associated
costs are incurred. License revenues are recognized in the period the cash is
received and all licenser obligations have been fulfilled.
 
Earnings Per Share and Stock Split
 
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share ("Statement 128").
Statement 128 replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the Statement 128 requirements.
 
On May 16, 1996, the Board of Directors declared a two-for-one stock split,
effected in the form of a stock dividend, payable on June 28, 1996 to
shareholders of record on June 7, 1996. All share and per share information in
the accompanying consolidated financial statements have been adjusted to
reflect such split.
 
2. ACQUISITION OF IDEAS FOR MEDICINE
 
On March 5, 1997, the Company acquired the stock of IFM, a medical device
company specializing in the manufacture and distribution of single-use medical
devices, for approximately $9.5 million in cash ($4.5 million) and convertible
debentures ($5.0 million) plus related expenses. The cash portion of the
purchase price was financed by borrowings under the Company's loan agreement
described in Note 4. Additional consideration equal to 10 percent of IFM's net
revenues in excess of $7.5 million shall be payable each year for a 10 year
period, limited to $1.75 million in the aggregate. The acquisition has been
accounted for as a purchase; accordingly, the results of operations are
included in the accompanying 1997 consolidated income statement from the date
of acquisition. Based on the allocation of the purchase price, the Company's
unaudited condensed pro forma results
 
                                      45

<PAGE>
 
                                CRYOLIFE, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of operations for the years ended December 31, 1997 and 1996, assuming
consummation of the purchase as of January 1, 1997 and 1996, respectively, are
as follows:
 

<TABLE>
<CAPTION>
                                                            1997        1996
                                                         ----------- -----------
   <S>                                                   <C>         <C>
   Revenues............................................. $52,082,000 $43,574,000
   Net income...........................................   4,756,000   3,511,000
   Earnings per share:
     Basic.............................................. $      0.49 $      0.37
     Diluted............................................        0.48        0.35
</TABLE>

 
In connection with this acquisition, the Company also entered into a
consulting agreement with the former majority shareholder requiring monthly
payments of approximately $17,000 until March 2002.
 
3. INVENTORIES
 
Inventories at December 31 are comprised of the following:
 

<TABLE>
<CAPTION>
                                                                1997      1996
                                                             ---------- --------
   <S>                                                       <C>        <C>
   Raw material............................................. $  262,000 $    --
   Work-in-process..........................................    358,000      --
   Finished goods...........................................  1,141,000  260,000
                                                             ---------- --------
                                                             $1,761,000 $260,000
                                                             ========== ========
</TABLE>

 
4. LONG-TERM DEBT
 
Long-term debt at December 31 consists of the following:
 

<TABLE>
<CAPTION>
                                                            1997        1996
                                                         ----------- ----------
   <S>                                                   <C>         <C>
   Bank loans:
     Revolving loan..................................... $ 6,777,000 $1,250,000
     Term loan due in equal monthly installments of
      $83,000 plus interest at prime through December
      31, 2002..........................................   5,000,000        --
   7% convertible debenture, due in March 2002..........   5,000,000        --
   8.25% note payable due in equal annual installments
    of $250,000.........................................   1,000,000  1,250,000
   Note payable due in 2000 with an effective interest
    rate of 8%, net of unamortized discount of $35,000
    in 1997 and $84,000 in 1996.........................     585,000    826,000
                                                         ----------- ----------
                                                          18,362,000  3,326,000
   Less current maturities..............................   1,496,000    527,000
                                                         ----------- ----------
   Total long-term debt................................. $16,866,000 $2,799,000
                                                         =========== ==========
</TABLE>

 
On August 30, 1996, the Company executed a loan agreement (the "Agreement")
with a bank which, as amended on December 16, 1997, permits the Company to
borrow up to $10,000,000 under a revolving loan and includes $5,000,000 under
a term loan. Borrowings under the Agreement provide for interest at either the
bank's prime rate (8.5% at December 31, 1997) or at Adjusted LIBOR, as
defined, plus an applicable LIBOR margin. The Agreement expires on December
31, 1999; all borrowings outstanding on that date under the revolving loan
convert to a term loan to be paid in 60 equal monthly installments of
principal plus interest computed as described above. The Agreement contains
certain restrictive covenants including, but not limited to, maintenance of
certain financial ratios and a minimum tangible net worth requirement. The
Agreement is secured by
 
                                      46

<PAGE>
 
                                CRYOLIFE, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
substantially all of the Company's assets, including IFM's stock but excluding
intellectual property. Commitment fees are paid based on the unused portion of
the revolving loan. At December 31, 1997 an additional $3,223,000 was
available to be borrowed under the revolving loan.
 
In March 1997, the Company issued a $5,000,000 convertible debenture in
connection with the IFM acquisition. The debenture is convertible into common
stock of the Company at any time prior to the due date at $12.08 per common
share.
 
On September 12, 1996, the Company acquired the assets of United
Cryopreservation Foundation, Inc. ("UCFI"), a processor and distributor of
cryopreserved human heart valves and saphenous veins for transplant. The
Company issued a $1,250,000 note in connection with the acquisition. The note
bears interest at prime, as adjusted annually on the anniversary date of the
acquisition.
 
In April 1996 the Company issued a $910,000 non-interest bearing note in
connection with the technology underlying its BioGlue surgical adhesive. The
note is payable in four annual installments of $290,000, plus a final payment
of $40,000 at maturity.
 
Scheduled maturities of long-term debt for the next five years and thereafter
are as follows:
 

<TABLE>
   <S>                                                               <C>
   1998............................................................. $ 1,496,000
   1999.............................................................   1,516,000
   2000.............................................................   2,678,000
   2001.............................................................   2,605,000
   2002.............................................................   7,355,000
   Thereafter.......................................................   2,712,000
                                                                     -----------
                                                                     $18,362,000
                                                                     ===========
</TABLE>

 
5. FAIR VALUES OF FINANCIAL INSTRUMENTS
 
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments ("Statement 107"), requires the Company to
disclose estimated fair values for its financial instruments. The carrying
amounts of cash and cash equivalents, receivables and accounts payable
approximate their fair values due to the short term maturity of these
instruments.
 
The Company enters into short-term interest rate swap agreements with the
lender under the Agreement which effectively fix the interest rate on
$5,000,000 of borrowings. The estimated fair values of the Company's interest
rate swap agreements (which expired in January 1998) and outstanding debt
approximate their carrying amounts at December 31, 1997.
 
6. LEASES
 
The Company leases equipment and office space under various operating leases
with terms of up to 15 years. Certain leases contain escalation clauses and
renewal options for additional periods. Future minimum lease payments under
noncancelable operating leases as of December 31, 1997 are as follows:
 

<TABLE>
   <S>                                                               <C>
   1998............................................................. $ 1,443,000
   1999.............................................................   1,361,000
   2000.............................................................   1,220,000
   2001.............................................................   1,237,000
   2002.............................................................   1,205,000
   Thereafter.......................................................  10,390,000
                                                                     -----------
                                                                     $16,856,000
                                                                     ===========
</TABLE>

 
 
                                      47

<PAGE>
 
                                CRYOLIFE, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Total rental expense for operating leases amounted to $1,282,000, $714,000 and
$740,000 for 1997, 1996 and 1995, respectively.
 
Commencing January 5, 1998, IFM leases office and manufacturing facilities
under a capital lease for $28,500 per month through January 2008 from the
former majority shareholder of IFM.
 
7. STOCK OPTION PLANS
 
The Company has stock option plans which provide for grants of options to
employees and directors to purchase shares of the Company's Common Stock at
exercise prices generally equal to the fair values of such stock at the dates
of grant, which generally become exercisable over a five-year vesting period
and expire within ten years of the grant dates. Under the 1993 Employee
Incentive Stock Option Plan and the Non-employee Director's Plan, the Company
has authorized the grant of options of up to 700,000 and 360,000 shares of
Common Stock, respectively. A summary of stock option transactions under the
plans follows:
 

<TABLE>
<CAPTION>
                                                                    WEIGHTED
                                                      EXERCISE      AVERAGE
                                            SHARES      PRICE    EXERCISE PRICE
                                           --------  ----------- --------------
   <S>                                     <C>       <C>         <C>
   Outstanding at December 31, 1994.......  414,000  $ 2.25-4.13
   Granted................................  321,000    3.63-7.74     $ 4.90
   Exercised.............................. (105,000)   2.25-4.13       2.53
   Canceled...............................  (40,000)   2.25-4.13       3.10
                                           --------
   Outstanding at December 31, 1995.......  590,000    2.25-7.74       4.21
   Granted................................  247,000    8.5-18.43      15.70
   Exercised.............................. (124,000)   2.26-7.26       3.31
   Canceled...............................   (5,000)   2.25-3.75       3.68
                                           --------
   Outstanding at December 31, 1996.......  708,000   2.25-18.43       7.36
   Granted................................  201,000  10.25-15.88      11.97
   Exercised.............................. (105,000)   2.25-7.50       2.85
   Canceled...............................  (50,000)  2.25-16.75      10.06
                                           --------
   Outstanding at December 31, 1997.......  754,000   3.00-18.43       8.95
                                           ========
</TABLE>

 
The following table summarizes information concerning currently outstanding
and exercisable options:
 

<TABLE>
<CAPTION>
                     OPTIONS OUTSTANDING                   OPTIONS EXERCISABLE
    ---------------------------------------------------------------------------
                                       WEIGHTED
                                       AVERAGE    WEIGHTED             WEIGHTED
                                      REMAINING   AVERAGE              AVERAGE
   RANGE OF                NUMBER    CONTRACTUAL  EXERCISE   NUMBER    EXERCISE
   EXERCISE PRICES       OUTSTANDING LIFE (YEARS)  PRICE   EXERCISABLE  PRICE
   ---------------       ----------- ------------ -------- ----------- --------
   <S>                   <C>         <C>          <C>      <C>         <C>
   $ 3.00- 8.50.........   429,000       2.5       $ 4.93    248,000    $ 4.35
    10.25-13.50.........   181,000       5.0        11.88     23,000     10.75
    15.88-18.43.........   144,000       3.3        17.14     37,000     17.21
</TABLE>

 
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees and related Interpretations ("APB
25") in accounting for its employee stock options because, as discussed below,
the alternative fair value accounting provided for under Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("Statement 123") requires use of option valuation models that
were not developed for use in valuing employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market prices of the underlying stock on the date of the grant, no
compensation expense is recognized.
 
                                      48

<PAGE>
 
                                CRYOLIFE, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
Pro forma information regarding net income and earnings per share is required
by Statement 123, which also requires that the information be determined as if
the Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair
values for these options were estimated at the dates of grant using a Black-
Scholes option pricing model with the following weighted-average assumptions:
 

<TABLE>
<CAPTION>
                                                               1997  1996  1995
                                                               ----- ----- -----
   <S>                                                         <C>   <C>   <C>
   Expected dividend yield....................................    0%    0%    0%
   Expected stock price volatility............................  .591  .552  .515
   Risk-free interest rate.................................... 6.13% 6.48% 5.91%
   Expected life of options (years)...........................   4.3   4.8   4.0
</TABLE>

 
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
 
For purposes of pro forma disclosures, the estimated fair values of the option
are amortized to expense over the options' vesting periods. The Company's pro
forma information follows:
 

<TABLE>
<CAPTION>
                                                   1997       1996       1995
                                                ---------- ---------- ----------
   <S>                                          <C>        <C>        <C>
    Net income--as reported...................  $4,725,000 $3,927,000 $2,202,000
    Net income--pro forma.....................   4,308,000  3,632,000  2,123,000
    Earnings per share--as reported:
      Basic...................................  $     0.49 $     0.41 $     0.23
      Dilutive................................        0.48       0.40       0.23
    Earnings per share--pro forma:
      Basic...................................        0.45       0.38       0.23
      Dilutive................................        0.43       0.37       0.22
</TABLE>

Other information concerning stock options follows:

<TABLE>
<CAPTION>
                                                          1997    1996    1995
                                                         ------- ------- ------
   <S>                                                   <C>     <C>     <C>
    Weighted average fair value of options granted
     during the year...................................    $6.34   $7.97  $2.36
    Number of shares as to which options are
     exercisable at end of year........................  308,000 157,000 74,000
</TABLE>

 
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until
1999.
 
8. SHAREHOLDER RIGHTS PLAN
 
On November 27, 1995, the Board of Directors adopted a shareholder rights plan
to protect long-term share value for the Company's shareholders. Under the
plan, the Board declared a distribution of one Right for each outstanding
share of the Company's Common Stock to shareholders of record on December 11,
1995. Each Right entitles the registered holder to purchase from the Company
one-tenth of a share of a newly created Series A Junior Participating
Preferred Stock, at an exercise price of $100. The rights, which expire on
November 27, 2005, may be exercised only if certain conditions are met, such
as the acquisition of 15 percent or more of the Company's Common Stock by a
person or affiliated group ("Acquiring Person").
 
                                      49

<PAGE>
 
                                CRYOLIFE, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
In the event the Rights become exercisable, each Right will enable the owner,
other than the Acquiring Person, to purchase, at the Right's then current
exercise price, that number of shares of Common Stock with a market value
equal to twice the exercise price. In addition, unless the Acquiring Person
owns more than 50% of the outstanding shares of Common Stock, the Board of
Directors may elect to exchange all outstanding Rights (other than those owned
by such Acquiring Person) at an exchange ratio of one share of Common Stock,
or one-tenth of a Preferred Share per Right.
 
9. EMPLOYEE BENEFIT PLANS
 
The Company has a 401(k) savings plan (the "Plan") providing retirement
benefits to all employees who have completed at least six months of service.
The Company makes matching contributions of 50% of each participant's
contribution up to 5% of each participant's salary. Total Company
contributions approximated $139,000, $123,000 and $131,000 for 1997, 1996, and
1995, respectively. Additionally, the Company may make discretionary
contributions to the Plan that are allocated to each participant's account. No
such discretionary contributions were made in 1997, 1996 or 1995.
 
On May 16, 1996, the Company's shareholders approved the CryoLife, Inc.
Employee Stock Purchase Plan (the "ESPP"). The ESPP allows eligible employees
the right to purchase Common Stock on a quarterly basis at the lower of 85% of
the market price at the beginning or end of each three-month offering period.
As of December 31, 1997 and 1996 there were 568,000 and 598,000 shares of
Common Stock reserved for the ESPP and there had been 32,000 and 2,000 shares
issued under the plan, respectively.
 
10. EARNINGS PER SHARE
 
The following table sets forth the computation of basic and diluted earnings
per share:
 

<TABLE>
<CAPTION>
                                                  1997       1996       1995
                                               ---------- ---------- ----------
   <S>                                         <C>        <C>        <C>
   Numerator for basic and diluted earnings
    per share--income available to common
    shareholders.............................. $4,725,000 $3,927,000 $2,202,000
                                               ========== ========== ==========
   Denominator for basic earnings per share--
    weighted-average basis....................  9,642,000  9,505,000  9,379,000
   Effect of dilutive stock options...........    300,000    401,000    189,000
                                               ---------- ---------- ----------
   Denominator for diluted earnings per
    share--adjusted weighted-average shares...  9,942,000  9,906,000  9,568,000
                                               ========== ========== ==========
   Basic earnings per share................... $     0.49 $     0.41 $     0.23
                                               ========== ========== ==========
   Diluted earnings per share................. $     0.48 $     0.40 $     0.23
                                               ========== ========== ==========
</TABLE>

 
11. INCOME TAXES
 
Income tax expense consists of the following:
 

<TABLE>
<CAPTION>
                                                  1997       1996       1995
                                               ---------- ---------- ----------
   <S>                                         <C>        <C>        <C>
   Current:
     Federal.................................. $2,145,000 $1,573,000 $1,012,000
     State....................................    403,000    341,000    189,000
                                               ---------- ---------- ----------
                                                2,548,000  1,914,000  1,201,000
   Deferred...................................    360,000    242,000   (107,000)
                                               ---------- ---------- ----------
                                               $2,908,000 $2,156,000 $1,094,000
                                               ========== ========== ==========
</TABLE>

 
                                      50

<PAGE>
 
                                CRYOLIFE, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
Such amounts differ from the amounts computed by applying the U.S. Federal
income tax rate of 34% to pretax income as a result of the following:
 

<TABLE>
<CAPTION>
                                               1997        1996        1995
                                            ----------  ----------  ----------
   <S>                                      <C>         <C>         <C>
   Tax expense at statutory rate..........  $2,593,000  $2,068,000  $1,121,000
   Increase (reduction) in income taxes
    resulting from:
    Change in valuation allowance for
     deferred tax assets..................     (30,000)   (129,000)    (52,000)
    Entertainment expenses................      42,000      30,000      33,000
    State income taxes, net of federal
     benefit..............................     266,000     241,000     126,000
    Non-taxable interest income...........         --      (50,000)    (74,000)
    Other.................................      37,000      (4,000)    (60,000)
                                            ----------  ----------  ----------
                                            $2,908,000  $2,156,000  $1,094,000
                                            ==========  ==========  ==========
</TABLE>

 
The tax effects of temporary differences which give rise to deferred tax
liabilities and assets at December 31 are as follows:
 

<TABLE>
<CAPTION>
                                                                1997     1996
                                                              -------- --------
   <S>                                                        <C>      <C>
   Deferred tax liabilities:
     Depreciation............................................ $399,000 $ 99,000
     Other...................................................   80,000   44,000
                                                              -------- --------
                                                               479,000  143,000
   Deferred tax assets:
     Deferred preservation costs and inventory reserves......   58,000   87,000
     Intangible assets.......................................   38,000   62,000
     Other...................................................   56,000   57,000
                                                              -------- --------
                                                               152,000  206,000
     Less valuation allowance................................      --    30,000
                                                              -------- --------
     Net deferred tax assets.................................  152,000  176,000
                                                              -------- --------
   Net deferred tax liabilities (assets)..................... $327,000 $(33,000)
                                                              ======== ========
</TABLE>

 
12. FDA REGULATION
 
Human heart valves historically have not been subject to regulation by the
U.S. Food and Drug Administration (the "FDA"). However, in June 1991 the FDA
published a notice stating that human heart valves for transplantation are
medical devices subject to Premarket Approval (PMA) or an Investigational
Device Exemption (IDE). In October 1994 the FDA announced in the Federal
Register that neither an approved application for PMA nor an IDE is required
for processors and distributors who had marketed heart valve allografts before
June 1991. This action by the FDA has removed allograft heart valves from
clinical trial status thus allowing the Company to distribute such valves to
cardiovascular surgeons throughout the U.S.
 
13. EXECUTIVE INSURANCE PLAN
 
Pursuant to a supplemental life insurance program for certain executive
officers of the Company, the Company and the executives share in the premium
payments and ownership of insurance policies on the lives of such executives.
The Company's aggregate premium contributions under this program were $38,000,
$37,000 and $31,000 for 1997, 1996 and 1995, respectively.
 
                                      51

<PAGE>
 
                                CRYOLIFE, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
14. EQUIPMENT ON LOAN TO IMPLANTING HOSPITALS
 
The Company consigns liquid nitrogen freezers with certain implanting
hospitals for tissue storage. The freezers are the property of the Company. At
December 31, 1997 freezers with a total cost of approximately $1,339,000 and
related accumulated depreciation of approximately $781,000 were located at the
implanting hospitals' premises. Depreciation is provided over the estimated
useful lives of the freezers on a straight-line basis.
 
15. TRANSACTIONS WITH RELATED PARTIES
 
The Company expensed $65,000, $39,000 and $67,000 during 1997, 1996 and 1995,
respectively, relating to services performed by a law firm whose sole
proprietor is a member of the Company's Board of Directors and a shareholder
of the Company.
 
 
                                      52

<PAGE>
 

I
TEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
 
Inapplicable.
 

                                   PART III
 

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
 
The response to Item 10, applicable to the Directors of the Company, is
incorporated herein by reference to the information set forth under the
caption "Election of Directors" in the Proxy Statement for the Annual Meeting
of Shareholders to be filed with the Commission not later than April 30, 1998.
Information concerning executive officers is included in Part I, Item 4A of
this Form 10-K.
 
The response to Item 10, applicable to Section 16(a) of the Securities
Exchange Act of 1934, as amended, is incorporated herein by reference to the
information set forth under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement for the Annual Meeting of
Shareholders to be filed with the Commission not later than April 30, 1998.
 

ITEM 11. EXECUTIVE COMPENSATION.
 
The response to Item 11 is incorporated herein by reference to the information
set forth under the caption "Executive Compensation" in the Proxy Statement
for the Annual Meeting of Shareholders to be filed with the Commission not
later than April 30, 1998.
 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
 
The response to Item 12 is incorporated herein by reference to the information
set forth under the captions "Ownership of Principal Shareholders and Certain
Executive Officers" and "Election of Directors" in the Proxy Statement for the
Annual Meeting of Shareholders to be filed with the Commission not later than
April 30, 1998.
 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
The response to Item 13 is incorporated herein by reference to the information
set forth under the caption "Executive Compensation" in the Proxy Statement
for the Annual Meeting of Stockholders to be filed with the Commission not
later than April 30, 1998.
 

                                    PART IV
 

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
 
The following are filed as part of this report:
 
  (a) 1. Financial Statements
 
  The following consolidated financial statements are filed herewith.
 
  Report of Independent Auditors
 
  Independent Auditors' Report
 
  Consolidated Balance Sheets as of December 31, 1997 and 1996.
 
  Consolidated Statements of Income for each of the three years in the period
  ended December 31, 1997.
 
  Consolidated Statements of Shareholders' Equity for each of the three years
  in the period ended December 31, 1997.
 
 
                                      53

<PAGE>
 
  Consolidated Statements of Cash Flows for each of the three years in the
  period ended December 31, 1997.
 

  Notes to Consolidated Financial Statements
 
     2. Financial Statement Schedule
 

  Independent Auditors' Report on Schedule
 
 
 Schedule II--Valuation and Qualifying Accounts
 
                                       54

<PAGE>
 
All other financial statement schedules not listed above are omitted, as the
required information is not applicable or the information is presented in the
consolidated financial statements or related notes.
 
     3. A. Exhibits
 
The following exhibits are filed herewith or incorporated herein by reference:
 

<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER  DESCRIPTION
 ------- -----------
 <C>     <S>
 2.1     Sale Agreement dated August 16, 1996 between the Company and Donald
         Nixon Ross. (Incorporated by reference to Exhibit 2.1 to the
         Registrant's Quarterly report on form 10-Q for the quarter ended
         September 30, 1996.)
 2.2     Asset Purchase Agreement among the Company and United Cryopreservation
         Foundation, Inc., United Transplant Foundation, Inc. and QV, Inc.
         dated September 11, 1996. (Incorporated by reference to Exhibit 2.2 to
         the Registrant's Quarterly Report on Form 10-Q for the quarter ended
         September 30, 1996.)
 2.3     Agreement and Plan of Merger dated as of March 5, 1997 among Ideas for
         Medicine, Inc., J. Crayton Pruitt, Sr., M.D., Thomas Benham, Thomas
         Alexandris, Tom Judge, Natalie Judge, Helen Wallace, J. Crayton
         Pruitt, Jr., M.D., and Johanna Pruitt, and CryoLife, Inc. and CryoLife
         Acquisition Corporation. (Incorporated by reference to Exhibit 2.1 to
         the Registrant's Current Report on Form 8-K filed on March 19, 1997.)
 3.1     Restated Certificate of Incorporation of the Company, as amended.
         (Incorporated by reference to Exhibit 3.1 to the Registrant's
         Registration Statement on Form S-1 (No. 33-56388).)
 3.2     Amendment to Articles of Incorporation of the Company dated November
         29, 1995. (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     Amendment to the Company's Articles of Incorporation to increase the
         number of authorized shares of common stock from 20 million to 50
         million shares and to delete the requirement that all preferred shares
         have one vote per share. (Incorporated by reference to Exhibit 3.3 to
         the Registrant's Quarterly Report on Form 10-Q for the quarter ended
         June 30, 1996.)
 3.4     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.)
 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).)
 4.2*    Form of Certificate for the Company's Common Stock.
 10.1    Lease, by and between New Market Partners III, Laing Properties, Inc.,
         General Partner, as Landlord, and the Company, as Tenant, dated
         February 13, 1986, as amended by that Amendment to Lease, by and
         between the parties, dated April 7, 1986, as amended by that Amendment
         to Lease, by and between the parties, dated May 15, 1987, as amended
         by that Second Amendment to Lease, by and between the parties, dated
         June 22, 1988, as amended by that Third Amendment to Lease, by and

         between the parties, dated April 4, 1989, as amended by that Fourth
         Amendment to Lease, by and between the parties, dated April 4, 1989 as
         amended by that Fifth Amendment to Lease, by and between the parties,
         dated October 15, 1990. (Incorporated by reference to Exhibit 10.1 to
         the Registrant's Registration Statement on Form S-1 (No. 33-56388).)
 10.1(a) Seventh 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 May 15, 1996. (Incorporated
         by reference to Exhibit 10.1(a) to the Registrant's Annual Report on
         Form 10-K for the fiscal year ended December 31, 1996.)
</TABLE>

 
                                      55

<PAGE>
 

<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER  DESCRIPTION
 ------- -----------
 <C>     <S>
 10.2    Lease by and between Newmarket Partners I, Laing Properties, Inc. and
         Laing Management Company, General Partner, as Landlord, and the
         Company as Tenant, dated July 23, 1993. (Incorporated by reference to
         Exhibit 10.2 to the Registrant's Annual Report on Form 10-K for the
         fiscal year ended December 31, 1993.)
 10.3    1993 Employee Stock Incentive Plan adopted on July 6, 1993.
         (Incorporated by reference to Exhibit 10.3 to the Registrant's Annual
         Report on Form 10-K for the fiscal year ended December 31, 1993.)
 10.4    1989 Incentive Stock Option Plan for the Company, adopted on March 23,
         1989. (Incorporated by reference to Exhibit 10.2 to the Registrant's
         Registration Statement on Form S-1 (No. 33-56388).)
 10.5    Incentive Stock Option Plan, dated as of April 5, 1984. (Incorporated
         by reference to Exhibit 10.3 to the Registrant's Registration
         Statement on Form S-1 (No. 33-56388).)
 10.6    Form of Stock Option Agreement and Grant under the Incentive Stock
         Option and Employee Stock Incentive Plans. (Incorporated by reference
         to Exhibit 10.4 to the Registrant's Registration Statement on Form S-1
         (No. 33-56388).)
 10.7    CryoLife, Inc. Profit Sharing 401(k) Plan, as adopted on December 17,
         1991. (Incorporated by reference to Exhibit 10.5 to the Registrant's
         Registration Statement on Form S-1 (No. 33-56388).)
 10.8    Form of Supplemental Retirement Plan, by and between the Company and
         its Officers -- Parties to Supplemental Retirement Plans: Steven G.
         Anderson, Robert T. McNally, Gerald B. Seery, James C. Vander Wyk,
         Albert E. Heacox, Kirby S. Black, and Edwin B. Cordell, Jr.
         (Incorporated by reference to Exhibit 10.6 to the Registrant's
         Registration Statement on Form S-1 (No. 33-56388).)
 10.9(a) Employment Agreement, by and between the Company and Steven G.
         Anderson. (Incorporated by reference to Exhibit 10.9(a) to the
         Registrant's Annual Report on Form 10-K for the fiscal year ended
         December 31, 1995.)
 10.9(b) Employment Agreement, by and between the Company and Albert E. Heacox.
         (Incorporated by reference to Exhibit 10.7(c) to the Registrant's
         Registration Statement on Form S-1 (No. 33-56388).)
 10.9(c) Employment Agreement, by and between the Company and Edwin B. Cordell,
         Jr. (Incorporated by reference to Exhibit 10.9(f) to the Registrant's
         Annual Report on Form 10-K for the fiscal year ended December 31,
         1994.)
 10.9(d) Employment Agreement, by and between the Company and Gerald B. Seery.
         (Incorporated by reference to Exhibit 10.9(e) to the Registrant's
         Annual Report on Form 10-K for the fiscal year ended December 31,
         1995.)
 10.9(e) Employment Agreement, by and between the Company and James C. Vander
         Wyk, Ph.D. (Incorporated by reference to Exhibit 10.9(f) to the
         Registrant's Annual Report on Form 10-K for the fiscal year ended
         December 31, 1995.)
 10.9(f) Employment Agreement, by and between the Company and Kirby S. Black,
         Ph.D. (Incorporated by reference to Exhibit 10.9(g) to the
         Registrant's Annual Report on Form 10-K/A for the fiscal year ended
         December 31, 1996.)
 10.10   Form of Secrecy and Noncompete Agreement, by and between the Company
         and its Officers. (Incorporated by reference to Exhibit 10.9 to the
         Registrant's Registration Statement on Form S-1 (No. 33-56388).)
 10.11   Registration Rights Agreement, by and among the Company, Galen
         Partners, L.P., and Galen Partners International, L.P., both Delaware
         limited partnerships, dated August 22, 1991. (Incorporated by
         reference to Exhibit 10.13 to the Registrant's Registration Statement
         on Form S-1 (No. 33-56388).)
</TABLE>

 
                                       56

<PAGE>
 

<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER  DESCRIPTION
 ------- -----------
 <C>     <S>
 10.12   Technology Acquisition Agreement between the Company and Nicholas
         Kowanko, Ph.D., dated March 14, 1996. (Incorporated by reference to
         Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the
         fiscal year ended December 31, 1995.)
 10.13   Option Agreement, by and between the Company and Duke University,
         dated July 9, 1990, as amended by that Option Agreement Extension, by
         and between the parties, dated July 9, 1991. (Incorporated by
         reference to Exhibit 10.20 to the Registrant's Registration Statement
         on Form S-1 (No. 33-56388).)
 10.14   Research and License Agreement by and between Medical University of
         South Carolina and CryoLife dated November 15, 1985, as amended by
         Amendment to the Research and License Agreement dated February 25,
         1986 by and between the parties and an Addendum to Research and
         License Agreement by and between the parties, dated March 4, 1986.
         (Incorporated by reference to Exhibit 10.23 to the Registrant's
         Registration Statement on Form S-1 (No. 33-56388).)
 10.15   Technical Services Agreement by and between the Company and Validation
         Systems, Inc., dated as of January 1, 1994. (Incorporated by reference
         to Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the
         fiscal year ended December 31, 1993.)
 10.16   CryoLife, Inc. Non-Employee Directors Stock Option Plan adopted on
         March 27, 1995. (Incorporated by reference to Exhibit 10.26 to the
         Registrant's Annual Report on Form 10-K for the fiscal year ended
         December 31, 1994.)
 10.17   Settlement Agreement between the Company and Bravo Cardiovascular,
         Inc., dated February 14, 1995. (Incorporated by reference to Exhibit
         10.27 to the Registrant's Annual Report on Form 10-K for the fiscal
         year ended December 31, 1994.)
 10.18   Sale Agreement between the Company and Bravo Cardiovascular, Inc.
         dated February 14, 1995. (Incorporated by reference to Exhibit 10.28
         to the Registrant's Annual Report on Form 10-K for the fiscal year
         ended December 31, 1994.)
 10.19   Private Label Agreement between the Company and Bravo Cardiovascular,
         Inc. dated February 14, 1995. (Incorporated by reference to Exhibit
         10.29 to the Registrant's Annual Report on Form 10-K for the fiscal
         year ended December 31, 1994.)
 10.20   Consignment Agreement between the Company and Bravo Cardiovascular,
         Inc. dated February 14, 1995. (Incorporated by reference to Exhibit
         10.30 to the Registrant's Annual Report on Form 10-K for the fiscal
         year ended December 31, 1994.)
 10.21   Sale and Assignment Agreement between the Company and Osteotech, Inc.
         dated July 17, 1995. (Incorporated by reference to Exhibit 10.24 to
         the Registrant's Annual Report on Form 10-K for the fiscal year ended
         December 31, 1995.)
 10.22   Lease Agreement between the Company and Amli Land Development--I
         Limited Partnership, dated April 18, 1995. (Incorporated by reference
         to Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for
         the fiscal year ended December 31, 1995.)
 10.23   Preoccupancy and Construction Agreement between the Company and Amli
         Land Development--I Limited Partnership dated April 18, 1995.
         (Incorporated by reference to Exhibit 10.27 to the Registrant's Annual
         Report on Form 10-K for the fiscal year ended December 31, 1995.)
 10.24   Funding Agreement between the Company and Amli Land Development--I
         Limited Partnership dated April 18, 1995. (Incorporated by reference
         to Exhibit 10.28 to the Registrant's Annual Report on Form 10-K for
         the fiscal year ended December 31, 1995.)
</TABLE>

 
                                       57

<PAGE>
 

<TABLE>
<CAPTION>
  EXHIBIT
  NUMBER   DESCRIPTION
 --------- -----------
 <C>       <S>
 10.25*    CryoLife, Inc. Employee Stock Purchase Plan (Incorporated by
           reference to Exhibit "A" of the Registrant's Definitive Proxy
           Statement filed with the Securities and Exchange Commission on April
           10, 1996.)
 10.26     Noncompetition Agreement between the Company and United
           Cryopreservation Foundation, Inc. dated September 11,1996.
           (Incorporated by reference to Exhibit 10.1 to the Registrant's
           Quarterly Report on Form 10-Q for the quarter ended September 30,
           1996.)
 10.27     Noncompetition Agreement between the Company and QV, Inc. dated
           September 11, 1996. (Incorporated by reference to Exhibit 10.3 to
           the Registrant's Quarterly Report on Form 10-Q for the quarter ended
           September 30, 1996.)
 10.28     Revolving\Term Loan Facility between the Company and NationsBank
           N.A., dated August 30, 1996. (Incorporated by reference to Exhibit
           10.4 to the Registrant's Quarterly Report on Form 10-Q for the
           quarter ended September 30, 1996.)
 10.29     Research and Option Agreement between the Company and Biocompatibles
           Limited dated July 29, 1996. (Incorporated by reference to Exhibit
           10.1 to the Registrant's Quarterly Report on Form 10-Q for the
           quarter ended June 30, 1996.)
 10.30     Technology License Agreement between the Company and Colorado State
           University Research Foundation dated March 28, 1996. (Incorporated
           by reference to Exhibit 10.1 to the Registrant's Quarterly Report on
           Form 10-Q for the quarter ended March 31, 1996.)
 10.31     Noncompetition Agreement between the Company and United Transplant
           Foundation, Inc. dated September 11, 1996. (Incorporated by
           reference to Exhibit 10.2 to the Registrant's Quarterly Report on
           Form 10-Q for the quarter ended September 30, 1996.)
 10.32(a)  First Amendment of Third Amended and Restated Loan Agreement between
           CryoLife, Inc., as Borrower and NationsBank, N.A. (South), as
           Lender, dated April 14, 1997. (Incorporated by reference to Exhibit
           10.1 to the Registrant's Quarterly Report on Form 10-Q for the
           quarter ended June 30, 1997.)
 10.32(b)* Second Modification of Third Amended and Restated Loan Agreement
           dated December 16, 1997 by and between the Registrant and
           NationsBank, N.A.
 10.33*    Consulting Agreement dated January 1, 1998 by and between Robert T.
           McNally and the Registrant
 10.34*    CryoLife, Inc. 1998 Long-Term Incentive Plan
 10.35     Consulting Agreement dated March 5, 1997 between CryoLife
           Acquisition Corporation and J. Crayton Pruitt, Sr., M.D.
           (Incorporated by reference to Exhibit 10.2 to the Registrant's
           Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.)
 10.36     Subordinated Convertible Debenture dated March 5, 1997 between the
           Company and J. Crayton Pruitt, Sr., M.D. (Incorporated by reference
           to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q
           for the quarter ended March 31, 1997.)
 10.37     Lease Agreement dated March 5, 1997 between the Company and J.
           Crayton Pruitt, Sr., M.D. (Incorporated by reference to Exhibit 10.4
           to the Registrant's Quarterly Report on Form 10-Q for the quarter
           ended March 31, 1997.)
 10.38     Lease Guaranty dated March 5, 1997 between J. Crayton Pruitt Family
           Trust U/T/A and CryoLife, Inc., as Guarantor for CryoLife
           Acquisition Corporation. (Incorporated by reference to Exhibit 10.5
           to the Registrant's Quarterly Report on Form 10-Q for the quarter
           ended March 31, 1997.)
</TABLE>

 
                                       58

<PAGE>
 

<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER  DESCRIPTION
 ------- -----------
 <C>     <S>
 10.39   Form of Non-Competition Agreement dated March 5, 1997 between the
         Company and J. Crayton Pruitt, Sr., M.D., Thomas Benham, Thomas
         Alexandris, Tom Judge, Natalie Judge, Helen Wallace, J. Crayton
         Pruitt, Jr., M.D., and Johanna Pruitt. (Incorporated by reference to
         Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q for the
         quarter ended March 31, 1997.)
 21.1*   Subsidiaries of CryoLife, Inc.
 23.1*   Consent of Independent Auditors.
 23.2*   Consent of Independent Auditors.
 27.1*   Financial Data Schedule
</TABLE>

- --------
* Filed herewith.
 
  3.B. Executive Compensation Plans and Arrangements.
 
 1. 1993 Employee Stock Incentive Plan adopted on July 6, 1993. (Exhibit 10.2
    to the Registrant's Annual Report on Form 10-K for the fiscal year ended
    December 31, 1994.)
 
 2. 1989 Incentive Stock Option Plan for the Company, adopted on March 23,
    1989 (Exhibit 10.2 to the Registrant's Registration Statement on Form S-1
    (No. 33-56388).)
 
 3. Incentive Stock Option Plan, dated as of April 5, 1984 (Exhibit 10.3 to
    the Registrant's Registration Statement on Form S-1 (No. 33-56388).)
 
 4. Form of Stock Option Agreement and Grant under the Incentive Stock Option
    and Employee Stock Incentive Plans (Exhibit 10.4 to the Registrant's
    Registration Statement on Form S-1 (No. 33-56388).)
 
 5. CryoLife, Inc. Profit Sharing 401(k) Plan, as adopted on December 17, 1991
    (Exhibit 10.5 to the Registrant's Registration Statement on Form S-1 (No.
    33-56388).)
 
 6. Form of Supplemental Retirement Plan, by and between the Company and its
    Officers -- Parties to Supplemental Retirement Plans: Steven G. Anderson,
    Robert T. McNally, Gerald B. Seery, James C. Vander Wyk, Albert E. Heacox,
    Kirby S. Black and Edwin B. Cordell, Jr. (Exhibit 10.6 to the Registrant's
    Registration Statement on Form S-1 (No. 33-56388).)
 
 7. Employment Agreement, by and between the Company and Steven G. Anderson.
    (Exhibit 10.7(a) to the Registrant's Registration Statement on Form S-1
    (No. 33-56388).)
 
 8. Employment Agreement, by and between the Company and Robert T. McNally.
    (Exhibit 10.7(b) to the Registrant's Registration Statement on Form S-1
    (No. 33-56388).)
 
 9. Employment Agreement, by and between the Company and Albert E. Heacox.
    (Exhibit 10.7(c) to the Registrant's Registration Statement on Form S-1
    (No. 33-56388).)
 
10. Employment Agreement, by and between the Company and Gerald B. Seery.
    (Incorporated by reference to Exhibit 10.9(e) to the Registrant's Annual
    Report on Form 10-K for the year ended December 31, 1995.)
 
11. Employment Agreement, by and between the Company and James C. Vander Wyk,
    Ph.D. (Incorporated by reference to Exhibit 10.9(f) to the Registrant's
    Annual Report on Form 10-K for the year ended December 31, 1995.)
 
12. Employment Agreement, by and between the Company and Edwin B. Cordell, Jr.
    (Incorporated by reference to Exhibit 10.9(f) to the Registrant's Annual
    Report on Form 10-K for the fiscal year ended December 31, 1994.)
 
13. CryoLife, Inc. Non-Employee Directors Stock Option Plan adopted on March
    27, 1995. (Incorporated by reference to Exhibit 10.26 to the Registrant's
    Annual Report on Form 10-K for the fiscal year ended December 31, 1994.)
 
                                      59

<PAGE>
 
14. CryoLife, Inc. Employee Stock Purchase Plan. (Incorporated by reference to
    Exhibit "A" of the Registrant's Definitive Proxy Statement filed with the
    Securities and Exchange Commission on April 10, 1996.)
 
15. Employment Agreement by and between the Company and Kirby S. Black
    (Incorporated by reference to Exhibit 10.9(g) to the Registrant's Annual
    Report on Form 10-K/A for the fiscal year ended December 31, 1996.)
 
16. CryoLife, Inc. 1998 Long-Term Incentive Plan. (Exhibit 10.34 to this Form
    10-K).
 
  (b) Reports on Form 8-K
 
The Registrant did not file a report on Form 8-K during the fourth quarter of
the recently completed fiscal year.
 
                                      60

<PAGE>
 

                                  SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) 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.
 
February 18, 1998
                                              /s/ Steven G. Anderson
                                       By_____________________________________
                                                 Steven G. Anderson,
                                             President, Chief Executive
                                               Officer and Chairman of
                                               the Board of Directors
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
 

<TABLE>
<S>  <C>
              SIGNATURE                        TITLE
                                                                  DATE
 
      /s/ Steven G. Anderson           President, Chief     February 18, 1998
- -------------------------------------   Executive Officer
         STEVEN G. ANDERSON             and Chairman of the
                                        Board of Directors
                                        (Principal
                                        Executive Officer)
 
     /s/ Edwin B. Cordell, Jr.         Vice President and   February 18, 1998
- -------------------------------------   Chief Financial
        EDWIN B. CORDELL, JR.           Officer (Principal
                                        Financial and
                                        Accounting Officer)
 
       /s/ Ronald D. McCall            Director             February 18, 1998
- -------------------------------------
          RONALD D. MCCALL
 
       /s/ Benjamin H. Gray            Director             February 18, 1998
- -------------------------------------
          BENJAMIN H. GRAY
 
       /s/ Virginia C. Lacy            Director             February 18, 1998
- -------------------------------------
          VIRGINIA C. LACY
 
  /s/ Ronald Charles Elkins, M.D.      Director             February 13, 1998
- -------------------------------------
     RONALD CHARLES ELKINS, M.D.
</TABLE>

 
                                      61

<PAGE>
 

                         INDEPENDENT AUDITORS' REPORT
 
The Board of Directors and Shareholders
CryoLife, Inc.
 
Under date of February 14, 1996, we reported on the consolidated statements of
income, shareholders' equity, and cash flows of CryoLife, Inc. and
subsidiaries for the year ended December 31, 1995, as contained in the annual
report on Form 10-K for the year 1997. In connection with our audit of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule as listed in the accompanying index.
This financial statements schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audit.
 
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
 
                                          /s/ KPMG Peat Marwick LLP
 
Atlanta, Georgia
February 14, 1996

<PAGE>
 
                                  SCHEDULE II
                        CRYOLIFE, INC. AND SUBSIDIARIES
 
                       VALUATION AND QUALIFYING ACCOUNTS
 
                 YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
 

<TABLE>
<CAPTION>
                          BALANCE BEGINNING                      BALANCE END OF
       DESCRIPTION            OF PERIOD     ADDITIONS DEDUCTIONS     PERIOD
       -----------        ----------------- --------- ---------- --------------
<S>                       <C>               <C>       <C>        <C>
Year ended December 31,
 1997
 Allowance for doubtful
  accounts...............     $ 94,000      $ 46,000   $ 37,000     $103,000
 Deferred preservation
  costs..................      278,000           --     126,000      152,000
Year ended December 31,
 1996
 Allowance for doubtful
  accounts...............     $ 30,000      $ 88,000   $ 24,000     $ 94,000
 Allowance for doubtful
  note receivable........      225,000           --     225,000          --
 Deferred preservation
  costs..................      247,000       140,000    109,000      278,000
Year ended December 31,
 1995
 Allowance for doubtful
  accounts...............     $ 25,000      $ 41,000   $ 36,000     $ 30,000
 Allowance for doubtful
  note receivable........          --        225,000        --       225,000
 Deferred preservation
  costs..................      242,000       740,000    735,000      247,000
 Inventory...............      150,000           --     150,000          --
</TABLE>






<PAGE>
 
                                                                     EXHIBIT 4.2

                              CERTIFICATE OF STOCK

COMMON STOCK                                                      $.01 PAR VALUE

                       [PICTURE OF CORPORATE HEADQUARTERS]
                                                                          SHARES
  NUMBER
CL

            INCORPORATED UNDER THE
                  LAWS OF THE                                  CUSIP 228903 10 0
               STATE OF FLORIDA              SEE REVERSE FOR CERTAIN DEFINITIONS

                                 CryoLife, Inc.

               This Certifies that

               is the owner of

               FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF

[CRYOLIFE      CryoLife,  Inc. transferable only on the books of the Corporation
CORPORATE      by the  holder  hereof or person or by duly  authorized  Attorney
SEAL]          upon  surrender  of  this  Certificate  properly  endorsed.  This
               Certificate  is not valid  until  countersigned  by the  Transfer
               Agent and registered by the Registrar.

                    In Witness  Whereof,  the said  Corporation  has caused this
               certificate to be signed by its duly  authorized  officers and to
               be sealed with the Seal of the Corporation, by facsimile.

                                                   COUNTERSIGNED AND REGISTERED:
                                                         AMERICAN STOCK TRANSFER
                                                                 & TRUST COMPANY
                                                                  (NEW YORK, NY)
                            [CRYOLIFE LOGO]
                                                            BY:   TRANSFER AGENT
                                                                  AND REGISTRAR

                                                            AUTHORIZED SIGNATURE

SECRETARY                       CHAIRMAN/PRESIDENT

<PAGE>
 
                          CryoLife, Inc.

THE ARTICLES OF  INCORPORATION OF CRYOLIFE,  INC. (THE "COMPANY")  AUTHORIZE THE
ISSUANCE OF PREFERRED  STOCK,  WHICH MAY BE DIVIDED AND ISSUED IN SERIES AND THE
RELATIVE RIGHTS AND PREFERENCES OF WHICH
 MAY BE FIXED BY THE BOARD OF DIRECTORS.
THE  COMPANY  WILL  FURNISH TO THE HOLDER OF THIS  CERTIFICATE,  ON REQUEST  AND
WITHOUT  CHARGE,  A  FULL  STATEMENT  OF  THE  DESIGNATIONS,   RELATIVE  RIGHTS,
PREFERENCES, AND LIMITATIONS APPLICABLE TO EACH CLASS OF SHARES OF CAPITAL STOCK
OF THE  COMPANY  AND THE  VARIATIONS  IN RIGHTS,  PREFERENCES,  AND  LIMITATIONS
APPLICABLE  TO EACH  CLASS OF SHARES OF  CAPITAL  STOCK OF THE  COMPANY  AND THE
VARIATIONS IN RIGHTS,  PREFERENCES,  AND LIMITATIONS  DETERMINED FOR EACH SERIES
(AND THE AUTHORITY OF THE BOARD OF DIRECTORS TO DETERMINE  VARIATIONS FOR FUTURE
SERIES).

     The following  abbreviations,  when used in the  inscription on the face of
this  certificate,  shall be  construed  as though they were written out in full
according to applicable laws or regulations:

TEN COM-as  tenants  in common            UNIF GIFT MIN  ACT-____Custodian____  
TEN ENT-as  tenants by the  entireties                     (Cust)       (Minor) 
JT TEN-as joint tenants with right of                    under Uniform Gifts
       survivorship and not as tenants                   to Minors Act _____
       in common                                                      (State)

Additional abbreviations may also be used though not in the above list.

This certificate also evidences and entitles the holder hereof to certain Rights
as set forth in a Rights  Agreement  dated as of November  27, 1995 (the "Rights
Agreement")  as amended,  the terms of which are hereby  incorporated  herein by
reference and a copy of which is on file at the principal  executive  offices of
CryoLife,  Inc.  Under  certain  circumstances,  as  set  forth  in  the  Rights
Agreement,  such Rights will be evidenced by separate  certificates  and will no
longer be evidenced by this certificate.  CryoLife, Inc. will mail to the holder
of this certificate a copy of the Rights Agreement  without charge after receipt
of a written request therefor. Under certain circumstances,  as set forth in the
Rights  Agreement,  Rights issued to any Person who becomes an Acquiring  Person
(as defined in the Rights Agreement) may become null and void.

For value  received,  _________  hereby sell,  assign and  transfer  unto PLEASE
INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE

________________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF
ASSIGNEE)
________________________________________________________________________________

________________________________________________________________________________

<PAGE>
 
____________________________________________________________shares of the
capital stock represented by the within  Certificate,  and do hereby irrevocably
constitute and appoint  _________________________  Attorney to transfer the said
stock  on the  books  of  the  within  named  Corporation  with  full  power  of
substitution in the premises.

Dated___________________


                              __________________________________________________
                    NOTICE:   THE SIGNATURE TO THIS  ASSIGNMENT  MUST  
                              CORRESPOND WITH THE NAME AS WRITTEN  UPON 
                              THE FACE OF THE  CERTIFICATE  IN EVERY
                              PARTICULAR,  WITHOUT ALTERATION OR 
                              ENLARGEMENT OR ANY CHANGE WHATEVER.

SIGNATURE(S) GUARANTEED:      __________________________________________________
                              THE SIGNATURE(S) SHOULD BE GUARANTEED BY
                              AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
                              STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
                              AND CREDIT UNIONS WITH MEMBERSHIP IN AN
                              APPROVED SIGNATURE GUARANTEE MEDALLION
                              PROGRAM),PURSUANT TO S.E.C. RULE 17Ad-15.



<PAGE>
 
                                                                   EXHIBIT 10.25


                                CRYOLIFE, INC.

                         EMPLOYEE STOCK PURCHASE PLAN
                         ----------------------------

1.  PURPOSE.

  The CryoLife, Inc. Employee Stock Purchase Plan (the "Plan") is intended to
encourage employee stock ownership by offering employees of CryoLife, Inc. and
its subsidiaries Purchase Rights (as such term is defined in Section 2 hereof)
to purchase shares of Common Stock.  The Plan is intended to be an "employee
stock purchase plan" as defined in Section 423 of the Internal Revenue Code of
1986, as amended (the "Code").  The provisions of the Plan shall, accordingly,
be construed in a manner consistent with the requirements of Section 423 of the
Code.

2.  CERTAIN DEFINITIONS.

  "Base Pay" means regular straight-time and overtime earnings received from the
Company, excluding payments for incentive compensation, bonuses and other
special payments.

  "Board" means the Board of Directors of the Company.

  "Committee" means the Compensation Advisory Committee of the Board.

  "Common Stock" means the Common Stock, par value $.01 per share, of the
Company.

  "Company" means CryoLife, Inc. and each subsidiary thereof of which it owns
the majority of the outstanding voting shares.

  "Custodian" means Smith Barney, Inc., whose address is 398 Greenwich Street,
28th Floor, New York, New York
 10013, or such other person as the Committee
shall designate from time to time.

  "Exercise Date" means the last day of a Purchase Period (as such term is
defined in Section 4(b) hereof), on which date all Participants' outstanding
Purchase Rights will automatically be exercised.

  "Fair Market Value" means the closing sale price of a share of Common Stock
reported in the table entitled "NASDAQ National Market Issues" or any successor
table in The Wall Street Journal for such date or, if no shares of Common Stock
         -----------------------                                               
were traded on that date, on the next preceding day on which there was such a
trade.

  "NASDAQ" means the National Association of Securities Dealers Automated
Quotation System.

  "Participant" means an employee of the Company who has enrolled in the Plan by
filing a Participation Form (as such term is defined in Section 5 hereof) with
the Plan Administrator.

  "Plan Administrator" means the Vice President and Chief Financial Officer of
the Company, or any such other person so designated by the Committee.

  "Purchase Right" means a Participant's option to purchase shares of Common
Stock that is deemed to be outstanding during a Purchase Period.  A Purchase
Right represents an "option" as such term is used under Section 423 of the Code.

<PAGE>
 
  "Section 16(b) Insider" means those persons subject to the requirements of
Section 16(b) of the Securities Exchange Act of 1934, as amended.

  "Trading Day" refers to a day during which the NASDAQ National Market System
is available for trading shares of Common Stock.

3.  ELIGIBILITY.

    (a)  Participation in the Plan is voluntary.  All employees of the Company,
including officers and directors, whose customary employment is at least 20
hours per week and 5 months per year who have been employed for more than
six months are eligible to participate in the Plan.

    (b) Notwithstanding any provision of the Plan to the contrary, no employee
may participate in the Plan:

        (i) if following a grant of Purchase Rights under the Plan, the employee
     would own, directly or by attribution pursuant to Section 424(d) of the
     Code, stock, Purchase Rights or other stock options to purchase stock
     representing 5% or more of the total combined voting power or value of all
     classes of the Company's stock; or

        (ii) to the extent a grant of Purchase Rights under the Plan would
     permit the employee's rights to purchase stock under all the Company's Code
     Section 423 employee stock purchase plans to accrue at a rate exceeding
     $25,000.00, based on the Fair Market Value of the stock (at the time of
     grant), for each calendar year in which such Purchase Right is outstanding.

4.  SECURITIES SUBJECT TO THE PLAN AND PURCHASE PERIODS.

    (a) The Plan covers an aggregate of 300,000 shares of Common Stock (subject
to adjustment as provided in Section 15 hereof), which may be authorized but
unissued shares, reacquired shares or shares bought on the open market. If any
Purchase Right that shall have been granted shall expire or terminate for any
reason without having been exercised in full, the unpurchased shares of Common
Stock shall again become available for purposes of the Plan, unless the Plan
shall have been terminated.

    (b) Except as discussed below for the first year the Plan is in effect,
there will be four purchase periods (each a "Purchase Period") each calendar
year. There will be only two Purchase Periods in calendar 1996, the first of
which will begin on July 1, 1996 and end on September 30, 1996, and the second
of which will begin on October 1, 1996 and end on December 31, 1996. Thereafter,
in each year that the Plan is in effect, the first Purchase Period will begin on
January 1 and end on March 31. The second Purchase Period will begin on April 1
and end on June 30 of each year that the Plan is in effect. The third Purchase
Period will begin on July 1 and end on September 30 of each year the Plan is in
effect. The fourth Purchase Period will begin on October 1 and end on December
31 of each year the Plan is in effect.

5.  PARTICIPATION.

  Eligible employees become Participants in the Plan by authorizing payroll
deductions for that purpose through a form (the "Participation Form") filed with
the Plan Administrator no later than fifteen (15) days prior to the start date
of a Purchase Period.

                                      -2-

<PAGE>
 
6.  PAYROLL DEDUCTIONS.

    (a) In order to purchase Common Stock, an employee must indicate on the
Participation Form the contribution percentage he or she wishes to authorize the
Company to deduct at regular payroll intervals, in integral percentage amounts
ranging from 1% to 25% of such Participant's Base Pay for the applicable payroll
period, with a minimum deduction of $10.00 per payday, during each Purchase
Period. The Participation Form will include authorization for the Company to
make payroll deductions from the Participant's Base Pay.

    (b) In order to comply with the Federal tax laws, a Participant may not be
granted Purchase Rights under the Plan and any other Code Section 423 employee
stock purchase plan of the Company with respect to more than $25,000.00 worth of
Common Stock for any calendar year such Purchase Rights to purchase Common Stock
are outstanding pursuant to the terms of such plans. The $25,000.00 limit is
determined according to the Fair Market Value of the Common Stock on the first
day (grant date) of the Purchase Period. Participants will be notified if these
limitations become applicable to them.

    (c) The amounts deducted shall be credited to the Participant's account
under the Plan, but no actual separate account will be established by the
Company to hold such amounts. There shall be no interest paid on the balance
outstanding in a Participant's account. The deducted amounts may be commingled
with the general assets of the Company and may be used for its general corporate
purposes.

    (d) Payroll deductions begin on the first payday of each Purchase Period,
and end on the last payday of each Purchase Period. Eligible employees may
participate in the Plan and purchase shares only by means of payroll deductions,
except as set forth in the following sentence. A Participant may not make any
separate cash payment into his or her account, except that employees on an
approved leave of absence may continue participating in the Plan, at the sole
discretion of the Plan Administrator, by making cash payments to the Company on
a normal payday equal to the amount of the normal payroll deduction had a leave
of absence not occurred. The right of a Participant on an approved leave of
absence to continue participating in the Plan shall terminate if such leave of
absence exceeds 90 days, unless and so long as the Participant's right to re-
employment by the Company after a longer leave is guaranteed by statute or
contract.

    (e) Except as set forth below with respect to Section 16(b) Insiders, so
long as a Participant remains an employee of the Company, payroll deductions
will continue in effect from Purchase Period to Purchase Period, unless at least
fifteen (15) days prior to the first day of the next succeeding Purchase Period
the Participant:

        (i) elects a different rate by filing a new Participation Form with the
     Plan Administrator; or

        (ii) withdraws from the Plan in accordance with Section 9 hereof.

  A Section 16(b) Insider may not participate in the Plan until the beginning of
the first Purchase Period which begins at least six months after such Section
16(b) Insider has filed a Participation Form with the Plan Administrator.  In
addition, in order to elect a different rate of payroll deductions or to
withdraw from the Plan, such Section 16(b) Insider must file the election with
the Plan Administrator at least six months prior to the date upon which such
election or withdrawal is to take effect.  Any such election or withdrawal shall
be irrevocable by the Section 16 Insider for a period of six months following
the date of receipt by the Plan Administrator.

     (f) Unless a Participant files with the Plan Administrator a new
Participation Form electing to withdraw prior to 15 days (six months for Section
16(b) Insiders) before the beginning of the affected Purchase Period as
permitted under the Plan, such Participant's payroll deductions will continue
throughout such Purchase Period and his or her Purchase Right to purchase Common
Stock will be deemed to be fully and automatically exercised on the last day of
such Purchase Period with respect to payroll deductions made during that period.

                                      -3-

<PAGE>
 
7.  PURCHASE PRICE.

    (a) On the first day of each Purchase Period, a Participant is deemed to
have been granted a Purchase Right to purchase on the last day of the Purchase
Period as many full shares of Common Stock as such Participant will be able to
purchase with the payroll deductions credited to such Participant's account
during such period.

    (b)  The price at which each Purchase Right to purchase Common Stock may be
exercised is the lower of:

         (i) 85% of the Fair Market Value of the Common Stock on the NASDAQ
     National Market System on the first Trading Day of a Purchase Period; or

         (ii) 85% of the Fair Market Value of the Common Stock on the NASDAQ
     National Market System on the last Trading Day of such Purchase Period.

    (c) The number of shares purchasable by each Participant per Purchase Period
will be the number of whole shares obtained by dividing the amount collected
from the Participant (through payroll deductions during that Purchase Period) by
the purchase price in effect for that Purchase Period. Any amount remaining in
the Participant's account after such application will be held for the purchase
of Common Stock in the next Purchase Period.

    (d) A Participant may not purchase more than 1,000 shares of Common Stock
for any particular Purchase Period. The Committee has the power, exercisable at
any time prior to the start of a Purchase Period, to increase or decrease the
1,000-share maximum for that Purchase Period. The maximum, as thus adjusted,
will continue in effect from Purchase Period to Purchase Period until the
Committee once again exercises its power to adjust the maximum.

8.  EXERCISE OF PURCHASE RIGHT.

    (a) Each outstanding Purchase Right will be exercised automatically on the
Exercise Date. The exercise of the Purchase Right is to be effected by applying
the amount credited to each Participant's account as of the Exercise Date to the
purchase on the Exercise Date of whole shares of Common Stock (subject to the
1,000-share maximum) at the purchase price in effect for the Purchase Period.

    (b)  Fractional shares will not be issued under the Plan, and any amount
remaining in the Participant's account after such application will be held
for the purchase of Common Stock in the next Purchase Period.

    (c) If a Participant purchases the 1,000-share maximum, any amount not
applied to the purchase of Common Stock for that Purchase Period will be
refunded after the close of the Purchase Period.

    (d) If the number of shares for which Purchase Rights are exercised exceeds
the number of shares available in any Purchase Period under the Plan, the shares
available for sale will be allocated by the Plan Administrator pro rata among
the Participants in such Purchase Period in proportion to the relative amounts
in their accounts. Any amounts not thereby applied to the purchase of Common
Stock under the Plan will be refunded to the Participants after the end of the
Purchase Period.

9.  WITHDRAWAL AND TERMINATION OF PURCHASE RIGHTS.

    (a) Except as set forth in paragraph 6 with respect to Section 16(b)
Insiders, a Participant may withdraw from the Plan by providing written notice
to the Plan Administrator at any time prior to 15 days before the end of the
current Purchase Period. Such notice shall be on a form (the "Withdrawal Form")
provided by the 

                                      -4-

<PAGE>
 
Plan Administrator for that purpose. The Withdrawal Form will permit such a
Participant to make the following election:

        (i) The Participant may elect to immediately terminate his or her
     outstanding Purchase Rights, and such withdrawal will become effective by
     the tenth day following the Plan Administrator's receipt of the
     Participant's Withdrawal Form, at which time all outstanding Purchase
     Rights will be terminated and all accumulated payroll deductions will be
     refunded without penalty; or

        (ii) The Participant may elect to continue his or her participation in
     the Plan through the end of the current Purchase Period, and thus exercise
     such Participant's outstanding Purchase Rights on the following Exercise
     Date, but terminate his or her participation in the Plan for subsequent
     Purchase Periods. Payroll deductions for such a Participant will continue
     until the end of the current Purchase Period. After the applicable Exercise
     Date, no further Purchase Rights will be granted to the Participant, and no
     further payroll deductions will be made.

     (b) Any Participant who withdraws from the Plan pursuant to Section 9(a)
will not be eligible to rejoin the Plan for the Purchase Period underway at the
time of withdrawal, and will have to re-enroll in the Plan by completing and
filing a new Participation Form should such individual wish to resume
participation in a subsequent Purchase Period; provided, however, that such
Participant may not re-enroll in the Plan earlier than 90 days from the
effective date of such withdrawal.

     (c) In the event a Section 16(b) Insider Participant ceases participation
in the Plan, whether as a result of a withdrawal during a Purchase Period or of
such Participant's decision to discontinue his or her enrollment for subsequent
Purchase Periods, such insider may not re-enroll in the Plan prior to six (6)
months after the decision to cease participation.

     (d) If a Participant ceases to be an employee of the Company for any reason
during a Purchase Period, his or her outstanding Purchase Right will immediately
terminate, and all sums previously collected from such Participant during such
Purchase Period under the terminated Purchase Right will be refunded.

     (e) The Committee may, at its option, treat any attempt to borrow by an
employee on the security of his or her accumulated payroll deductions as an
election under Section 9(a)(I) hereof to withdraw such deductions.

10.  RIGHTS AS SHAREHOLDER.

     (a) A Participant is not a shareholder until the Participant exercises his
or her Purchase Right. Thus, a Participant will not have a right to any dividend
or distribution made prior to the Exercise Date.

     (b) Participants will be entitled to receive, as soon as practicable after
the Exercise Date, a stock certificate for the number of purchased shares upon a
written request made to the Custodian. The Custodian may impose upon, or pass
through to, the Participant a reasonable fee for withdrawal of shares of Common
Stock in the form of stock certificates. It is the responsibility of each
Participant to keep his or her address current with the Company through the Plan
Administrator and with the Custodian.

11.  SALE OF COMMON STOCK ACQUIRED UNDER THE PLAN.

     (a) Participants may sell the shares of Common Stock they acquire under the
Plan at any time without restriction, provided they are not Section 16(b)
Insiders. Section 16(b) Insiders should consult with legal counsel prior to
attempting to sell or otherwise dispose of any shares of Common Stock acquired
under the Plan.

                                      -5-

<PAGE>
 
     (b) A Participant shall immediately provide information to the Plan
Administrator if the Participant transfers any shares purchase through the Plan
within two (2) years from the date of grant of the related Purchase Right. Such
transfer shall include disposition by sale, gift or other manner. The
Participant may be requested to disclose the manner of the transfer, the date of
the transfer, the number of shares involved and the transfer price. By executing
the Participation Form, each Participant obligates himself or herself to provide
such information to the Plan Administrator.

     (c) The Company is authorized to withhold from any payment to be made to a
Participant, including any payroll and other payments not related to the Plan,
amounts of withholding and other taxes due in connection with any transaction
under the Plan, and a Participant's enrollment in the Plan will be deemed to
constitute his or her consent to such withholding.

12.  PLAN ADMINISTRATION.

     (a) The Plan shall be administered by the Committee. No member of the Board
will be eligible to participate in the Plan during his or her period of
Committee service.

     (b)  The Committee shall have the plenary power, subject to and within the
limits of the express provisions of the Plan:

          (i) to determine the commencement and termination date of the offering
     of Common Stock under the Plan; and

          (ii) to interpret the terms of the Plan, establish and revoke rules
     for the administration of the Plan and correct or reconcile any defect or
     inconsistency in the Plan.

     (c) The Committee may delegate all or part of its authority to administer
the Plan to the Plan Administrator, who may in turn delegate the day-to-day
operations of the Plan to the Custodian. The Custodian will establish and
maintain, as agent for the Participants, accounts for the purposes of holding
shares of Common Stock and/or cash contributions as may be necessary or
desirable for the administration of the Plan.

     (d) Except with respect to Section 16(b) Insiders, the Board may waive or
modify any requirement that a notice or election be made or filed under the Plan
a specified period in advance in an individual case or by adoption of a rule or
regulation under the Plan, without the necessity of an amendment to the Plan.

13.  TRANSFERABILITY.

     (a) Any account maintained by the Custodian for the benefit of a
Participant with respect to shares acquired pursuant to the Plan may only be in
the name of the Participant; provided, however, that the Participant may elect
to maintain such account with right of joint ownership with such Participant's
spouse. Such election may only be made on a form (the "Joint Account Form")
provided by the Company.

     (b) Neither payroll deductions credited to a Participant's account nor any
Purchase Rights of or other rights to acquire Common Stock under the Plan may be
assigned, transferred, pledged or otherwise disposed of by Participants other
than by will or the laws of descent and distribution, and during the lifetime of
a Participant, Purchase Rights may be exercised only by the Participant.

14.  MERGER OR LIQUIDATION OF THE COMPANY.

  In the event the Company merges with another corporation and the Company is
not the surviving entity, or in the event all or substantially all of the stock
or assets of the Company are acquired by another company, or 

                                      -6-

<PAGE>
 
in the event of certain other similar transaction, the Committee may, in
connection with such transaction, cancel each outstanding Purchase Right and
refund all sums previously collected from Participants under the canceled
Purchase Rights, or, in its discretion, cause each Participant with outstanding
Purchase Rights to have his or her outstanding Purchase Rights exercised
immediately prior to such transaction and thereby have the balance of his or her
account applied to the purchase of whole shares of Common Stock (subject to the
1,000-share maximum) at the purchase price in effect for the Purchase Period,
which would be treated as ending with the effective date of such transaction.
The balance of the account not so applied will be refunded to the Participant.
In the event of a merger in which the Company is the surviving entity, each
Participant is entitled to receive, for each share as to which such
Participant's Purchase Rights are exercised, the securities or property that a
holder of one share of Common Stock was entitled to receive upon the merger.

15.  ADJUSTMENT FOR CHANGES IN CAPITALIZATION.

  To prevent dilution or enlargement of the rights of Participants under the
Plan, appropriate adjustments may be made in the event any change is made to the
Company's outstanding Common Stock by reason of any stock dividend, stock split,
combination of shares, exchange of shares or other change in the Common Stock
effected without the company's receipt of consideration.  Adjustments may be
made to the maximum number and class of securities issuable under the Plan, the
maximum number and class of securities purchasable per outstanding Purchase
Right and the number and class of securities and price per share in effect under
such outstanding Purchase Right.  Any such adjustments will be made by the
Committee in its sole discretion.

16.  AMENDMENT AND TERMINATION.

  The Committee may terminate or amend the Plan at any time; provided, however,
such termination or amendment may not affect or change Purchase Rights
previously granted under the Plan without the consent of the affected
Participant, and any amendment that materially increases the benefits or number
of shares under the Plan (except for certain allowable adjustments in the event
of changes to the Company's capital structure or for changes authorized by the
Plan to be made by the Committee or the Plan Administrator) or materially
modifies the eligibility requirements of the Plan shall be subject to
shareholder approval.  If not sooner terminated by the Committee, the Plan shall
terminate at the time Purchase Rights have been exercised with respect to all
shares of Common Stock reserved for grant under the Plan.

17.  SHAREHOLDER APPROVAL.

The Plan is subject to the approval of shareholders of the Company in accordance
with the provisions of Florida law.

  Purchase Rights may be granted under the Plan for the Purchase Period
beginning on July 1, 1996, but such rights may not be exercised (and
Participants' payroll deductions will be returned to them) if shareholder
approval of the Plan is not obtained prior to September 30, 1996.

18.  NO EMPLOYMENT RIGHTS.

  Participation in the Plan will not impose any obligations upon the Company to
continue the employment of the Participant for any specific period and will not
affect the right of the Company to terminate such person's employment at any
time, with or without cause.

                                      -7-

<PAGE>
 
19.  STOCK LEGEND.

  All shares of Common Stock issued pursuant to the Plan shall contain the
following legend:  "The shares of Common Stock represented by this Certificate
have been issued on _____________ pursuant to the CryoLife, Inc. Employee Stock
Purchase Plan."

20.  COSTS.

  Except as set forth in Section 10(b), costs and expenses incurred in the
administration of the Plan and the maintenance of accounts with the Custodian
will be paid by the Company, to the extent provided in this Section 20.  Any
brokerage fees and commissions for the purchase of Common Stock under the Plan
(including shares of Common Stock purchased upon reinvestment of dividends and
distributions) will be paid by the Company, but any brokerage fees and
commissions for the sale of shares of Common Stock under the Plan by a
Participant will be borne by such Participant.

21.  REPORTS.

  After the close of each Purchase Period, each Participant in the Plan will
receive a report from the Custodian indicating the amount of the Participant's
contributions to the Plan during the Purchase Period, the amount of the
contributions applied to the purchase of Common Stock for the Purchase Period,
the purchase price per share in effect for the Purchase Period and the amount of
the contributions (if any) carried over to the next Purchase Period.

22.  GOVERNING LAW.

  The validity, construction and effect of the Plan and any rules and
regulations relating to the Plan will be determined in accordance with laws of
the State of Georgia, without giving effect to principles of conflicts of laws,
and applicable Federal law.

23.  COMPLIANCE WITH LEGAL AND OTHER REQUIREMENTS.

  The Plan, the granting and exercising of Purchase Rights hereunder, and the
other obligations of the Company, the Plan Administrator and the Custodian under
the Plan will be subject to all applicable federal and state laws, rules, and
regulations, and to such approvals by or registrations with any regulatory or
governmental agency as may be required.  The Company may, in its discretion,
postpone the issuance or delivery of shares of Common Stock upon exercise of
Purchase Rights until completion of such registration or qualification of such
shares of Common Stock or other required action under any federal or state law,
rule, or regulation, listing or other required action with respect to any
automated quotation system or stock exchange upon which the shares of Common
Stock or other Company securities are designated or listed, or compliance with
any other contractual obligation of the Company, as the Company may consider
appropriate in connection with the issuance or delivery of shares of Common
Stock in compliance with applicable laws, rules, and regulations, designation or
listing requirements, or other contractual obligations.

                                      -8-



<PAGE>
 
                                                                EXHIBIT 10.32(b)

                             SECOND MODIFICATION OF
                    THIRD AMENDED AND RESTATED LOAN AGREEMENT


          THIS MODIFICATION is made and entered into as of the 16th day of
December, 1997, by and between CRYOLIFE, INC., a Florida corporation
("Borrower"), and NATIONSBANK, N.A., a national banking association which is the
successor by merger to NationsBank, N.A. (South), the successor by merger to
Bank South, formerly known as Bank South, N.A. ("Lender").

                               STATEMENT OF FACTS

          Borrower and Lender are parties to that certain Third Amended and
Restated Loan Agreement, dated as of August 30, 1996, as amended by First
Modification of Third Amended and Restated Loan Agreement, dated as of April 14,
1997 (the "Loan Agreement").

          Borrower and Lender desire to further amend the Loan Agreement as
hereinafter provided.

          NOW, THEREFORE, for and in consideration of the premises and the
mutual agreements, warranties and representations herein made, as well as $10.00
in hand paid by each party hereto to the other, and other good and valuable
consideration, the receipt and sufficiency which are hereby acknowledged,
Borrower and Lender agree that all capitalized terms used herein (and not
otherwise defined herein) shall have the meanings given them in the Loan
Agreement as
 herein amended and Borrower and Lender further agree as follows:

                               STATEMENT OF TERMS

          1. The Loan Agreement is hereby amended by deleting from Section 101
thereof the definitions of the terms "Credit Expiration Date", "Debt Coverage
Ratio", "Final Maturity Date", "Financing Documents" and "Note" and substituting
in lieu thereof the following new and replacement definitions:

                    "Additional Term Loan" shall mean the Additional Term Loan
               made by Borrower to Lender pursuant to Section 201A hereof.

                    "Additional Term Note" means the Term Note substantially in
               the form of Exhibit A-2 attached hereto, to be executed by
               Borrower in favor of Lender to evidence the Additional Term Loan,
               and all renewals, extensions, modifications or replacements
               thereof.

                    "Credit Expiration Date" shall mean December 31, 1999, as
               such date may be extended, accelerated or amended pursuant to
               this Agreement.

                    "Debt Coverage Ratio" shall mean, with respect to any
               particular fiscal period of Borrower, the ratio of (a) Borrower's
               EBITDAR for the consecutive 4-quarter period ending therewith
               less Borrower's Maintenance Capital Expenditures during such
               period to (b) the sum (without duplication) of (i) Borrower's
               Current Maturities of Funded Debt for the immediately succeeding
               consecutive 4-quarter period plus (ii) Borrower's Interest
               Expense for the consecutive 4-quarter period ending therewith
               plus (iii) Borrower's Rental Expense for the immediately
               succeeding consecutive 4-quarter period, all as determined on a
               consolidated basis.

                    "Final Maturity Date" shall mean December 31, 2004, as such
               date may be extended, accelerated or amended pursuant to this
               Agreement.

                    "Financing Documents" means and includes this Agreement,
               each Note, the Security Agreement, each Stock Pledge Agreement,
               each Subsidiary Guaranty, each Subsidiary Security Agreement,
               each Hedge Agreement and any extensions, renewals, modifications
               or substitutions thereof or therefor, and all other associated
               loan and collateral documents including, without limitation, all
               guaranties, suretyship agreements, security agreements, pledge
               agreements, security deeds, subordination agreements, exhibits,
               schedules, attachments, financing statements, notices, consents,
               waivers, opinions, letters, reports, records, title certificates
               and applications therefor, assignments, stock powers or
               transfers, documents, instruments, information and other writings
               related thereto, or furnished by any Credit Party to Lender in
               connection therewith or in connection with any of the Collateral,
               including without limitation any such documents executed and
               delivered pursuant to Section 202 hereof; provided, however, that

<PAGE>
 
               this term shall not include the Prior Loan Agreements or the
               Prior Security Agreements.

                    "Guarantor" shall mean and include CryoLife International
               and Ideas for Medicine, and each other Person guaranteeing
               payment and performance of the obligations and liabilities of
               Borrower under this Agreement and the other Financing Documents,
               as the context may require.

                    "Hedge Agreement" means any agreement between Borrower and
               Lender or any affiliate of Lender now existing or hereafter
               entered into, which provides for an interest rate or commodity
               swap, cap, floor, collar, forward foreign exchange transaction,
               currency swap, cross-currency rate swap, currency option, or any
               combination of, or option with respect to, these or similar
               transactions, for the purpose of hedging Borrower's exposure to
               fluctuations in interest rates, currency valuations or commodity
               prices.

                    "Ideas for Medicine" shall mean Ideas for Medicine, Inc., a
               Florida corporation which is a Subsidiary of Borrower, and its
               successors and assigns.

                    "Maintenance Capital Expenditures" shall mean expenditures
               incurred for the replacement of existing equipment and fixtures
               with new or used equipment or fixtures which will continue to
               perform similar functions. Significant upgrades of existing
               equipment with new technology which increases the functionality
               of the equipment are not considered maintenance capital
               expenditures.

                    "Note" shall mean either the Revolving Note or the
               Additional Term Note, as the context may require.

                    "Revolving Note" shall mean the Revolving Note substantially
               in the form of Exhibit A-1 attached hereto, to be executed by
               Borrower in favor of Lender to evidence the Loans, and all
               renewals, extensions, modifications or replacements thereof.

                    "Second Modification" means the Second Modification of Third
               Amended and Restated Loan Agreement, dated as of December 16,
               1997.

                    "Second Modification Date" means December 16, 1997.

          2. The Loan Agreement shall be further amended by deleting the last
two sentences of Section 201(e) thereof in their entirety and substituting in
lieu thereof the following:

                  Such unused facility fees shall be payable by Borrower to
                  Lender monthly in arrears on the last day of each month during
                  the Revolving Loan Period as well as on the Credit Expiration
                  Date. Notwithstanding the foregoing, from and after the Second
                  Modification Date, the unused facility fee hereunder shall be
                  deemed waived for any fiscal month of Borrower during which
                  the average outstanding Loans during such month shall exceed
                  $3,500,000.

          3. The Loan Agreement is hereby further amended by adding a new
Section 201A thereto, immediately following Section 201 thereof:

                    SECTION 201A. THE ADDITIONAL TERM LOAN. (a) On the Second
               Modification Date, and subject to the terms and conditions of
               this Agreement, Lender agrees to advance to Borrower a term loan
               in the principal amount of $5,000,000, hereinafter called the
               "Additional Term Loan".

                    (b) The proceeds of the Additional Term Loan may be used by
               Borrower only to finance acquisitions by the Borrower and to
               finance Borrower's and its Subsidiaries' working capital and
               other general corporate needs.

                    (c) The Additional Term Loan is to be evidenced by the
               Additional Term Note. Interest on the Additional Term Loan will
               accrue at the rate or rates per annum set forth in the Additional
               Term Note, and principal and interest on the Additional Term Loan
               will be payable in the manner prescribed in the Additional Term
               Note.

                    (d) Borrower shall pay to Lender an origination fee for the
               Additional Term Loan facility provided by Lender to Borrower

<PAGE>
 
               under this Section 201A, which fee shall be in the amount of
               $12,500 and such fee shall be deemed fully earned by Lender upon
               the execution and delivery of the Second Modification by Borrower
               and shall be non-refundable.

                    (e) The Additional Term Loan shall constitute one loan by
               Lender to Borrower. Lender shall maintain a loan account on its
               books in which shall be recorded all advances of the Additional
               Term Loan, all payments made by Borrower on the Additional Term
               Loan and all other appropriate debits and credits as provided in
               this Agreement and the Additional Term Note with respect thereto,
               including without limitation all charges, expenses and interest.
               All entries in such account shall be made in accordance with the
               Lender's customary accounting practices as in effect from time to
               time. Lender shall render to Borrower a monthly statement setting
               forth the balance of such account, including principal, interest,
               expenses and fees, and each such statement shall, in the absence
               of manifest error or omissions, be presumed correct and binding
               upon Borrower and shall constitute an account stated unless,
               within thirty (30) days after receipt of any such statement from
               Lender, Borrower shall deliver to Lender a written objection
               thereto specifying the error or errors or omission or omissions,
               if any, contained in such statement.

                    (f) All interest owing by Borrower to Lender in respect of
               the Additional Term Loan shall be computed on the basis of a 360-
               day year and the actual days elapsed.

          4. The Loan Agreement is hereby further amended by deleting Section
507(b) thereof in its entirety.

          5. The Loan  Agreement is hereby further  amended by deleting  Section
507(e) thereof in its entirety and substituting in lieu thereof the following:

                    (e) Borrower shall not permit its Net Worth at any time
               after the Second Modification Date to be less than $25,000,000
               plus (i) 80% of the positive amount of Net Income of Borrower for
               each fiscal quarter ending after such date and (ii) the amount of
               any increase in Net Worth resulting from the issuance of stock,
               corporate reorganizations, recapitalizations or any similar
               event.

           6. The Loan Agreement is hereby further amended by deleting Exhibit A
originally attached to the Loan Agreement and substituting in lieu thereof the
new Exhibit A-1 and Exhibit A-2 attached hereto, and by deleting Schedule 305
originally attached to the Loan Agreement and substituting in lieu thereof the
new Schedule 305 attached hereto.

          7. The effectiveness of this Modification is subject to:

               (a) the prior or concurrent receipt by Lender of this
                   Modification, duly executed by Borrower;

               (b) the prior or concurrent receipt by Lender of the Revolving
                   Note and the Additional Term Note;

               (c) any and all guarantors of the Loans shall have consented to
                   the execution, delivery and performance of this Modification
                   and the new Notes and all of the transactions contemplated
                   hereby by signing one or more counterparts of this
                   Modification in the appropriate space indicated below and
                   returning same to Lender;

               (d) the prior or concurrent receipt by Lender of a certificate of
                   Borrower in the form of Exhibit B attached hereto, and a
                   certificate of each Guarantor in the form of Exhibit C
                   attached hereto;

               (e) the prior or concurrent receipt by Lender of an opinion of
                   counsel for Borrower in the form of Exhibit D;

               (f) the payment of all fees and expenses due from Borrower
                   hereunder as set forth in Section 10 below; and

               (g) the truth and accuracy in all material respects of Borrower's
                   representations and warranties in Section 9 below.

          8. Except as expressly modified herein, the Loan Agreement shall
remain in full force and effect. Nothing contained herein shall be deemed to be
or operate as a novation or an accord and satisfaction of the Loan Agreement or
of any indebtedness arising thereunder.

<PAGE>
 
          9. Borrower hereby represents and warrants to Lender that (a) this
Modification and the supplemental Financing Documents executed in connection
herewith have been duly authorized, executed and delivered by Borrower, (b)
after giving effect to this Modification, no Default or Event of Default has
occurred and is continuing as of this date and (c) all of the representations
and warranties made by Borrower in the Loan Agreement are true and correct in
all material respects on and as of the date of this Modification (except to the
extent that any such representations or warranties expressly referred to a
specific prior date). Any breach by Borrower of its representations and
warranties contained in this Section shall be an Event of Default for all
purposes of the Loan Agreement.

          10. In consideration of the amendments set forth herein, Borrower
shall pay to Lender an amendment fee in the amount of $5,000, which fee shall be
deemed fully earned by Lender upon the execution and delivery of this
Modification by Borrower, and shall be non-refundable, and shall also pay to
Lender the origination fee set forth in new Section 201A(d) above. Borrower
further agrees to reimburse Lender for all reasonable expenses (including
without limitation attorney's fees) incurred by Lender in the negotiation,
documentation or consummation of this Modification and the transactions
contemplated hereby.

          11. This Modification shall be governed and construed in accordance
with the laws of the State of Georgia and this Modification shall inure to the
benefit of and shall be binding upon the parties hereto and their respective
successors and permitted assigns.

          12. This Modification may be executed in multiple counterparts, each
of which shall be deemed to be an original and all of which when taken together
shall constitute one and the same instrument.

<PAGE>
 
          IN WITNESS WHEREOF, Lender has executed this Modification, and
Borrower has executed this Modification and placed its seal hereon, all as of
the day and year first above set forth.

                                     LENDER:

                                     NATIONSBANK, N.A.



                                     By:___________________________________
                                        Vice President


                                     BORROWER:

                                     CRYOLIFE, INC.



                                     By:___________________________________
                                        Title:_____________________________

                                               (CORPORATE SEAL)

<PAGE>
 
                              CONSENT OF GUARANTOR

          All capitalized terms used herein and not otherwise defined herein
shall have the meanings given such terms in the Third Amended and Restated Loan
Agreement, dated as of August 30, 1996, between CryoLife, Inc. ("Borrower") and
NationsBank, N.A., successor by merger to NationsBank, N.A. (South) ("Lender"),
as amended (the "Loan Agreement").

          The undersigned acknowledges that it is indebted to Lender under the
terms of the Guaranty Agreement, dated as of August 30, 1996, executed by the
undersigned in favor of Lender (the "Guaranty"), and that the Guaranty is in
full force and effect as of the date hereof, has not been amended, rescinded,
revoked or terminated by such party through the date hereof, and continues to
constitute the legal, valid and binding obligation of the undersigned
enforceable against the undersigned in accordance with its terms. The
undersigned hereby confirms and reaffirms all of its obligations and liabilities
to Lender under the Guaranty and further confirms and agrees that pursuant to
the Guaranty, the undersigned has guaranteed the payment and performance of the
Revolving Note, the Additional Term Note and each Hedge Agreement now or
hereafter in effect, and all obligations, liabilities and indebtedness of
Borrower arising thereunder or evidenced thereby.

          The undersigned also consents to and approves the execution, delivery
and performance of the Second Modification of Third Amended and Restated Loan
Agreement, dated as of the date hereof, between Lender and Borrower (the "Second
Modification"), each new Note and each Hedge Agreement executed and delivered in
connection therewith, and all the transactions contemplated thereby. The
undersigned also agrees that all indebtedness, obligations and liabilities of
Borrower to Lender which may now or hereafter arise under or by reason of the
Loan Agreement, including without limitation Borrower's obligations in respect
of Loans and/or the Additional Term Loan advanced pursuant to the Loan
Agreement, and all obligations arising under any Hedge Agreement, constitute
part of the obligations of Borrower to Lender which are guaranteed by the
undersigned under the terms and conditions of the Guaranty.

          SIGNED, SEALED AND DELIVERED as of this 16th day of December, 1997.


                            CRYOLIFE INTERNATIONAL, INC.



                             By:_______________________________
                                Title:_________________________

                                     (CORPORATE SEAL)

<PAGE>
 
                              CONSENT OF GUARANTOR


          All capitalized terms used herein and not otherwise defined herein
shall have the meanings given such terms in the Third Amended and Restated Loan
Agreement, dated as of August 30, 1996, between CryoLife, Inc. ("Borrower") and
NationsBank, N.A., successor by merger to NationsBank, N.A. (South) ("Lender"),
as amended (the "Loan Agreement").

          The undersigned acknowledges that it is indebted to Lender under the
terms of the Guaranty Agreement, dated as of April 14, 1997, executed by the
undersigned in favor of Lender (the "Guaranty"), and that the Guaranty is in
full force and effect as of the date hereof, has not been amended, rescinded,
revoked or terminated by such party through the date hereof, and continues to
constitute the legal, valid and binding obligation of the undersigned
enforceable against the undersigned in accordance with its terms. The
undersigned hereby confirms and reaffirms all of its obligations and liabilities
to Lender under the Guaranty and further confirms and agrees that pursuant to
the Guaranty, the undersigned has guaranteed the payment and performance of the
Revolving Note, the Additional Term Note and each Hedge Agreement now or
hereafter in effect, and all obligations, liabilities and indebtedness of
Borrower arising thereunder or evidenced thereby.

          The undersigned also consents to and approves the execution, delivery
and performance of the Second Modification of Third Amended and Restated Loan
Agreement, dated as of the date hereof, between Lender and Borrower (the "Second
Modification"), each new Note and each Hedge Agreement executed and delivered in
connection therewith, and all the transactions contemplated thereby. The
undersigned also agrees that all indebtedness, obligations and liabilities of
Borrower to Lender which may now or hereafter arise under or by reason of the
Loan Agreement, including without limitation Borrower's obligations in respect
of Loans and/or the Additional Term Loan advanced pursuant to the Loan
Agreement, and all obligations arising under any Hedge Agreement, constitute
part of the obligations of Borrower to Lender which are guaranteed by the
undersigned under the terms and conditions of the Guaranty.

          SIGNED, SEALED AND DELIVERED as of this 16th day of December, 1997.

                              IDEAS FOR MEDICINE, INC.



                              By:_______________________________
                                 Title:_________________________

                                        (CORPORATE SEAL)

<PAGE>
 
                                   EXHIBIT A-1

                                 REVOLVING NOTE


DECEMBER 16, 1997                                                    $10,000,000

          FOR VALUE RECEIVED, the undersigned (hereinafter referred to as
"Borrower") promises to pay to the order of NATIONSBANK, N.A., successor by
merger to NationsBank, N.A. (South) (hereinafter referred to as "Lender"), at
Lender's office located at 600 Peachtree Street, N.E., Atlanta, Georgia 30308,
or at such other place as the holder hereof may designate, the principal sum of
TEN MILLION DOLLARS ($10,000,000), or so much thereof as shall have been
advanced hereagainst and shall be outstanding, together with interest on so much
of the principal balance of this Note as may be outstanding and unpaid from time
to time, calculated on the basis of a 360-day year and actual days elapsed, at
the rate or rates per annum provided below.

          The unpaid principal balance of this Note shall bear interest at a
rate per annum equal to the Prime Rate (as defined below); provided, however,
that Borrower may, by a written notice (or by telephonic notice promptly
confirmed in writing) delivered to the Lender not later than 10:00 a.m. (Atlanta
time) on the second Business Day prior to any Interest Period (as defined below)
designated by the Borrower in such notice, direct that interest accrue on the
unpaid principal balance of this Note (or any portion thereof which is in an
amount of not less than $100,000 or any greater integral multiple thereof)
outstanding from time to time during such Interest Period at a rate per annum
equal to the sum of the Adjusted LIBOR (as defined below) for such Interest
Period plus the Applicable LIBOR Margin (as defined below); provided, further,
however, that upon the occurrence and during the continuation of any Event of
Default (as defined below), the Lender may, upon notice to the Borrower, suspend
Borrower's right to use the aforesaid Adjusted LIBOR option. Each such
designation by the Borrower of an interest rate for this Note based on the
Adjusted LIBOR and of an Interest Period applicable thereto shall be irrevocable
and shall remain in effect throughout such Interest Period. Upon determining any
interest rate based on the Adjusted LIBOR for an Interest Period requested by
the Borrower, the Lender shall promptly notify the Borrower by telephone (which
shall be promptly confirmed in writing by the Lender) of such determination, and
such determination shall, in the absence of manifest error, be final, conclusive
and binding for all purposes. Notwithstanding anything in this Note to the
contrary, a prepayment of any portion of the principal balance of this Note
which is then bearing interest based on the Adjusted LIBOR may be made without
penalty by the Borrower only on the last day of the Interest Period applicable
thereto and, if any such prepayment is made on a day that is not the last day of
the applicable Interest Period, the Borrower shall pay to the Lender, upon the
Lender's written request to the Borrower therefor (which request shall set forth
the basis for the request of such payment in reasonable detail and, in the
absence of manifest error, shall be final, conclusive and binding on the Lender
and the Borrower), an amount equal to any and all losses, expenses and
liabilities (including, without limitation, any interest paid by the Lender to
the extent not recovered by the Lender in connection with its re-employment of
the prepaid funds and including any loss of anticipated profits) which the
Lender may sustain as a result of such prepayment. The calculation of any and
all amounts payable to the Lender with respect to any portion of the principal
balance of this Note bearing interest based on the Adjusted LIBOR shall be made
as though the Lender had actually funded such portion through the purchase of
deposits in the London interbank market; provided, however, that the Lender may
fund such portion of this Note in any manner it sees fit and the foregoing
assumptions shall be used only for calculation of amounts which may be payable
under this Note.

          As used in this Note, the following terms shall have the following
meanings: (a) "Adjusted LIBOR" shall mean, for any Interest Period, the rate per
annum (rounded upwards to the nearest 1/16th of one percentage point (if
necessary)) equal to the quotient obtained by dividing (x) the offered rate for
United States dollar deposits for a period comparable to such Interest Period
appearing on the Telerate Screen Page 3750 (or as quoted or published by such
other recognized independent quote service as may be selected by the Lender from
time to time) as of 11:00 a.m. (Atlanta time) on the date that is two (2)
Business Days prior to the beginning of such Interest Period (but if at least
two such rates appear on such screen or are so quoted at such time, the offered
rate for such Interest Period shall be the arithmetic mean of such rates) by (y)
a percentage equal to one (1) minus the then average stated maximum amount
(stated as a decimal) of all reserve requirements applicable to any member of
the Federal Reserve System in respect of Eurocurrency liabilities as defined in
Regulation D of the Board of Governors of the Federal Reserve System (or any
successor categories for such liabilities under such Regulation D); (b)
"Applicable LIBOR Margin" shall mean (i) one hundred seventy-five basis points
(1.75%) during the period from the date of this Note through the Credit

<PAGE>
 
Expiration Date (as defined in the Loan Agreement referred to below) and (ii)
two hundred basis points (2.0%) thereafter; (c) "Business Day" shall mean any
day excluding a Saturday, Sunday, any other day on which banks are required or
permitted to be closed in the city in which Lender's address shown in this Note
is located, and any other day on which trading is not carried on by and between
banks in United States dollars in the London interbank market; (d) "Interest
Period" shall mean, in the case of the determination of any Adjusted LIBOR, a
one, two, three, four, six or twelve month period as selected by the Borrower
but (i) in the event any Interest Period would end on a day which is not a
Business Day, such Interest Period shall be deemed to end on the immediately
succeeding Business Day unless such extension would cause such Interest Period
to end on the next calendar month in which case such Interest Period shall be
deemed to end on the immediately preceding Business Day, (ii) any Interest
Period which begins on a day for which there is no numerically corresponding day
in the calendar month in which such Interest Period ends shall expire on the
immediately preceding Business Day, and (iii) the Borrower shall not be entitled
to select any Interest Period which extends beyond the final maturity date of
this Note; (e) "LIBOR Advance" means any portion of the principal balance of
this Note which bears interest based on Adjusted LIBOR for a particular Interest
Period; (f) "Prime Rate" shall mean the rate of interest announced by Lender
from time to time as its "prime rate," "prime lending rate," "base rate" or
similar reference rate (any such rate announced by Lender is a reference rate
only and does not necessarily represent the best or lowest rate actually charged
by it to any customer and the Lender may make loans at rates of interest which
are at, above or below such reference rate) and the Prime Rate in effect at the
close of business on each business day of Lender shall for the purposes of this
Note be the Prime Rate for that day and any immediately succeeding non-business
day or days of Lender, and in the event the Prime Rate is discontinued as a
standard, the holder hereof shall designate a comparable reference rate as a
substitute therefor; and (g) "Prime Rate Advances" means any and all portions of
the principal balance of this Note which bear interest based on the Prime Rate.

          This Note shall be payable as follows:

               (a) Accrued interest on this Note shall be payable as follows:
          (i) during the period from the date of this Note to the Credit
          Expiration Date, accrued interest shall be payable monthly in arrears
          on so much of the principal balance of this Note as then consists of
          Prime Rate Advances, which payments shall be due commencing on
          December 31, 1997, and shall continue to be on the last day of each
          month thereafter up to and including the Credit Expiration Date, and
          accrued interest shall be payable in arrears on so much of the
          principal balance of this Note as then consists of LIBOR Advances at
          the end of each Interest Period applicable thereto (and, in the case
          of any LIBOR Advance having an Interest Period in excess of three
          months, accrued interest thereon shall be due on each day which occurs
          every three months after the initial date of such Interest Period),
          and (ii) during the period from and after the Credit Expiration Date,
          accrued interest shall be payable in arrears on each date on which a
          payment of principal is due on this Note pursuant to paragraph (b)
          below; and

               (b) The principal balance of this Note shall be repayable in
          sixty (60) consecutive monthly installments each in an amount equal to
          one-sixtieth (1/60th) of the outstanding principal balance of this
          Note as of the opening of the Lender's business on the Credit
          Expiration Date, which installments shall be due commencing on the
          last day of the next succeeding calendar month, and shall continue to
          be due on the last day of each succeeding month thereafter up to and
          including the Final Maturity Date (as defined in the Loan Agreement
          referred to below), except that in all cases the final installment of
          principal due hereunder on such Final Maturity Date shall be in an
          amount equal to the entire remaining unpaid principal balance of this
          Note.

          This Note is the "Revolving Note" referred to in the Third Amended and
Restated Loan Agreement, dated as of August 30, 1996, between Borrower and
Lender (said agreement, as the same may be amended, supplemented, or restated
from time to time, being herein called the "Loan Agreement"; capitalized terms
used and not otherwise defined herein shall have the meanings given them in the
Loan Agreement), and this Note evidences any and all Loans now or hereafter made
by Lender to Borrower thereunder. This Note supersedes and replaces that certain
Promissory Note, dated August 30, 1996, executed by Borrower in favor of Lender
in the original principal amount of $10,000,000 (the "Prior Note"). This Note is
not intended, nor shall it be construed, to be a novation or an accord and
satisfaction of such Prior Note or of the indebtedness evidenced thereby.

          Borrower shall pay a late charge of five percent (5%) of any
installment payment hereunder which is not paid within ten (10) days after such
payment is due. During the existence of any Event of Default under this Note,
the unpaid principal and accrued interest balance of this Note shall bear

<PAGE>
 
interest on each day until paid at the Prime Rate (as defined above) plus, in
Lender's discretion, up to an additional two percentage points (2.0%), but in
each such period only to the extent that payment of such interest on such
principal or interest is enforceable under applicable law. All payments or
prepayments on this Note shall be applied, first, to interest accrued on this
Note through the date of such payment or prepayment and then to principal (and
any partial principal prepayments on this Note made prior to the date shown
above on which the initial principal installment is due hereunder shall be
applied to such installments in the inverse order of their maturity).

          Borrower may, upon thirty (30) days' prior written notice to Lender,
prepay the principal balance of this Note in whole or in part without premium or
penalty but any prepayment of any portion of this Note then bearing interest
based on Adjusted LIBOR will be subject to certain additional provisions set
forth above and any partial prepayment of this Note shall be applied as also
provided above. In addition, in the event Borrower sells, transfers, assigns or
otherwise conveys any of its property to another person, Borrower shall make a
mandatory principal prepayment on this Note, without premium or penalty, within
five (5) business days after the closing of such transaction, which prepayment
shall be in an amount equal to one hundred percent (100%) of the proceeds of
such transaction (net of the cost of such transaction, including any reasonable
sales commissions paid to persons who are not affiliated with the Borrower and
also net of any taxes payable by the Borrower on account of such transaction),
except that this principal prepayment requirement shall not apply to (i) any
sale by Borrower of its inventory in the ordinary course of its business, (ii)
any sale or other disposition by Borrower of any of its obsolete or unnecessary
equipment so long as the net proceeds of each such disposition are used by
Borrower to replace such equipment or purchase other equipment, or (iii) any
other sale or disposition of any property by Borrower which the Lender has
expressly agreed in writing will be exempt from this prepayment requirement.
Notwithstanding the foregoing, however, no prepayment pursuant to this paragraph
shall be due in any particular fiscal year of Borrower unless and until the
total amount of such net proceeds for all such sales or other conveyances made
during such fiscal year exceeds $500,000.

          Upon the occurrence of an Event of Default under (and as such term is
defined in) the Loan Agreement, Lender, at its option, without demand or notice
of any kind, may declare this Note immediately due and payable. In case this
Note is collected by or through an attorney-at-law, all costs of such collection
incurred by the Lender, including reasonable attorney's fees, shall be paid by
Borrower (but not to exceed actual fees and expenses incurred).

          Time is of the essence of this Note. Demand, presentment, notice,
notice of demand, notice for payment, protest and notice of dishonor are hereby
waived by each and every maker, guarantor, surety and other person or entity
primarily or secondarily liable on this Note. Lender shall not be deemed to
waive any of its rights under this Note unless such waiver be in writing and
signed by Lender. No delay or omission by Lender in exercising any of its rights
under this Note shall operate as a waiver of such rights and a waiver in writing
on one occasion shall not be construed as a consent to or a waiver of any right
or remedy on any future occasion.

          This Note shall be governed by and construed and enforced in
accordance with the laws of the State of Georgia (without giving effect to its
conflicts of law rules). Whenever possible, each provision of this Note shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Note shall be prohibited by or invalid under
applicable law, such provision shall be ineffective only to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Note.

          Words importing the singular number hereunder shall include the plural
number and vice versa, and any pronoun used herein shall be deemed to cover all
genders. "Person" as used herein means any individual, corporation, partnership,
joint venture, association, joint stock company, trust, unincorporated
association or government or any agency or political subdivision thereof. The
word "Lender" as used herein shall include transferees, successors and assigns
of Lender, and all rights of Lender hereunder shall inure to the benefit of its
transferees, successors and assigns. All obligations of Borrower hereunder shall
bind such Person's successors and assigns.

          SIGNED, SEALED AND DELIVERED by the undersigned Borrower as of the day
and year first above set forth.

                                       CRYOLIFE, INC.



                                        By:__________________________________
                                           Title:____________________________

                                                   (CORPORATE SEAL)

<PAGE>
 
                                   EXHIBIT A-2

                                    TERM NOTE

DECEMBER 16, 1997                                                     $5,000,000

          FOR VALUE RECEIVED, the undersigned (hereinafter referred to as
"Borrower") promises to pay to the order of NATIONSBANK, N.A., successor by
merger to NationsBank, N.A. (South) (hereinafter referred to as "Lender"), at
Lender's office located at 600 Peachtree Street, N.E., Atlanta, Georgia 30308,
or at such other place as the holder hereof may designate, the principal sum of
FIVE MILLION DOLLARS ($5,000,000), or so much thereof as shall have been
advanced hereagainst and shall be outstanding, together with interest on so much
of the principal balance of this Note as may be outstanding and unpaid from time
to time, calculated on the basis of a 360-day year and actual days elapsed, at
the rate or rates per annum provided below.

          The unpaid principal balance of this Note shall bear interest at a
rate per annum equal to the Prime Rate (as defined below); provided, however,
that Borrower may, by a written notice (or by telephonic notice promptly
confirmed in writing) delivered to the Lender not later than 10:00 a.m. (Atlanta
time) on the second Business Day prior to any Interest Period (as defined below)
designated by the Borrower in such notice, direct that interest accrue on the
unpaid principal balance of this Note (or any portion thereof which is in an
amount of not less than $100,000 or any greater integral multiple thereof)
outstanding from time to time during such Interest Period at a rate per annum
equal to the sum of the Adjusted LIBOR (as defined below) for such Interest
Period plus the Applicable LIBOR Margin (as defined below); provided, further,
however, that upon the occurrence and during the continuation of any Event of
Default (as defined below), the Lender may, upon notice to the Borrower, suspend
Borrower's right to use the aforesaid Adjusted LIBOR option. Each such
designation by the Borrower of an interest rate for this Note based on the
Adjusted LIBOR and of an Interest Period applicable thereto shall be irrevocable
and shall remain in effect throughout such Interest Period. Upon determining any
interest rate based on the Adjusted LIBOR for an Interest Period requested by
the Borrower, the Lender shall promptly notify the Borrower by telephone (which
shall be promptly confirmed in writing by the Lender) of such determination, and
such determination shall, in the absence of manifest error, be final, conclusive
and binding for all purposes. Notwithstanding anything in this Note to the
contrary, a prepayment of any portion of the principal balance of this Note
which is then bearing interest based on the Adjusted LIBOR may be made without
penalty by the Borrower only on the last day of the Interest Period applicable
thereto and, if any such prepayment is made on a day that is not the last day of
the applicable Interest Period, the Borrower shall pay to the Lender, upon the
Lender's written request to the Borrower therefor (which request shall set forth
the basis for the request of such payment in reasonable detail and, in the
absence of manifest error, shall be final, conclusive and binding on the Lender
and the Borrower), an amount equal to any and all losses, expenses and
liabilities (including, without limitation, any interest paid by the Lender to
the extent not recovered by the Lender in connection with its re-employment of
the prepaid funds and including any loss of anticipated profits) which the
Lender may sustain as a result of such prepayment. The calculation of any and
all amounts payable to the Lender with respect to any portion of the principal
balance of this Note bearing interest based on the Adjusted LIBOR shall be made
as though the Lender had actually funded such portion through the purchase of
deposits in the London interbank market; provided, however, that the Lender may
fund such portion of this Note in any manner it sees fit and the foregoing
assumptions shall be used only for calculation of amounts which may be payable
under this Note.

          As used in this Note, the following terms shall have the following
meanings: (a) "Adjusted LIBOR" shall mean, for any Interest Period, the rate per
annum (rounded upwards to the nearest 1/16th of one percentage point (if
necessary)) equal to the quotient obtained by dividing (x) the offered rate for
United States dollar deposits for a period comparable to such Interest Period
appearing on the Telerate Screen Page 3750 (or as quoted or published by such
other recognized independent quote service as may be selected by the Lender from
time to time) as of 11:00 a.m. (Atlanta time) on the date that is two (2)
Business Days prior to the beginning of such Interest Period (but if at least
two such rates appear on such screen or are so quoted at such time, the offered
rate for such Interest Period shall be the arithmetic mean of such rates) by (y)
a percentage equal to one (1) minus the then average stated maximum amount
(stated as a decimal) of all reserve requirements applicable to any member of
the Federal Reserve System in respect of Eurocurrency liabilities as defined in
Regulation D of the Board of Governors of the Federal Reserve System (or any
successor categories for such liabilities under such Regulation D); (b)
"Applicable LIBOR Margin" shall mean two hundred basis points (2.0%); (c)
"Business Day" shall mean any day excluding a Saturday, Sunday, any other day on

<PAGE>
 
which banks are required or permitted to be closed in the city in which Lender's
address shown in this Note is located, and any other day on which trading is not
carried on by and between banks in United States dollars in the London interbank
market; (d) "Interest Period" shall mean, in the case of the determination of
any Adjusted LIBOR, a one, two, three, four, six or twelve month period as
selected by the Borrower but (i) in the event any Interest Period would end on a
day which is not a Business Day, such Interest Period shall be deemed to end on
the immediately succeeding Business Day unless such extension would cause such
Interest Period to end on the next calendar month in which case such Interest
Period shall be deemed to end on the immediately preceding Business Day, (ii)
any Interest Period which begins on a day for which there is no numerically
corresponding day in the calendar month in which such Interest Period ends shall
expire on the immediately preceding Business Day, and (iii) the Borrower shall
not be entitled to select any Interest Period which extends beyond the final
maturity date of this Note; (e) "LIBOR Advance" means any portion of the
principal balance of this Note which bears interest based on Adjusted LIBOR for
a particular Interest Period; (f) "Prime Rate" shall mean the rate of interest
announced by Lender from time to time as its "prime rate," "prime lending rate,"
"base rate" or similar reference rate (any such rate announced by Lender is a
reference rate only and does not necessarily represent the best or lowest rate
actually charged by it to any customer and the Lender may make loans at rates of
interest which are at, above or below such reference rate) and the Prime Rate in
effect at the close of business on each business day of Lender shall for the
purposes of this Note be the Prime Rate for that day and any immediately
succeeding non-business day or days of Lender, and in the event the Prime Rate
is discontinued as a standard, the holder hereof shall designate a comparable
reference rate as a substitute therefor; and (g) "Prime Rate Advances" means any
and all portions of the principal balance of this Note which bear interest based
on the Prime Rate.

          This Note shall be payable as follows:

               (a) The principal balance of this Note shall be repayable in
          sixty (60) consecutive monthly installments each in an amount equal to
          Eighty-Three Thousand Three Hundred Thirty-Three and 33/100 Dollars
          ($83,333.33), which installments shall be due commencing on January
          31, 1998, and shall continue to be due on the last day of each
          succeeding month thereafter up to and including December 31, 2002,
          except that in all cases the final installment of principal due
          hereunder on December 31, 2002 shall be in an amount equal to the
          entire remaining unpaid principal balance of this Note; and

               (b) Accrued interest shall be payable in arrears on December 31,
          1997, and on each date on which a payment of principal is due on this
          Note pursuant to paragraph (a) above.

          This Note is the "Additional Term Note" referred to in the Third
Amended and Restated Loan Agreement, dated as of August 30, 1996, between
Borrower and Lender (said agreement, as the same may be amended, supplemented,
or restated from time to time, being herein called the "Loan Agreement";
capitalized terms used and not otherwise defined herein shall have the meanings
given them in the Loan Agreement), and this Note evidences the Additional Term
Loan made by Lender to Borrower thereunder.

          Borrower shall pay a late charge of five percent (5%) of any
installment payment hereunder which is not paid within ten (10) days after such
payment is due. During the existence of any Event of Default under this Note,
the unpaid principal and accrued interest balance of this Note shall bear
interest on each day until paid at the Prime Rate (as defined above) plus, in
Lender's discretion, up to an additional two percentage points (2.0%), but in
each such period only to the extent that payment of such interest on such
principal or interest is enforceable under applicable law. All payments or
prepayments on this Note shall be applied, first, to interest accrued on this
Note through the date of such payment or prepayment and then to principal (and
any partial principal prepayments on this Note made prior to the date shown
above on which the initial principal installment is due hereunder shall be
applied to such installments in the inverse order of their maturity).

          Upon the occurrence of an Event of Default under (and as such term is
defined in) the Loan Agreement, Lender, at its option, without demand or notice
of any kind, may declare this Note immediately due and payable. In case this
Note is collected by or through an attorney-at-law, all costs of such collection
incurred by the Lender, including reasonable attorney's fees, shall be paid by
Borrower (but not to exceed actual fees and expenses incurred).

          Time is of the essence of this Note. Demand, presentment, notice,
notice of demand, notice for payment, protest and notice of dishonor are hereby
waived by each and every maker, guarantor, surety and other person or entity
primarily or secondarily liable on this Note. Lender shall not be deemed to
waive any of its rights under this Note unless such waiver be in writing and
signed by Lender. No delay or omission by Lender in exercising any of its rights

<PAGE>
 
under this Note shall operate as a waiver of such rights and a waiver in writing
on one occasion shall not be construed as a consent to or a waiver of any right
or remedy on any future occasion.

          This Note shall be governed by and construed and enforced in
accordance with the laws of the State of Georgia (without giving effect to its
conflicts of law rules). Whenever possible, each provision of this Note shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Note shall be prohibited by or invalid under
applicable law, such provision shall be ineffective only to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Note.

          Words importing the singular number hereunder shall include the plural
number and vice versa, and any pronoun used herein shall be deemed to cover all
genders. "Person" as used herein means any individual, corporation, partnership,
joint venture, association, joint stock company, trust, unincorporated
association or government or any agency or political subdivision thereof. The
word "Lender" as used herein shall include transferees, successors and assigns
of Lender, and all rights of Lender hereunder shall inure to the benefit of its
transferees, successors and assigns. All obligations of Borrower hereunder shall
bind such Person's successors and assigns.

          SIGNED, SEALED AND DELIVERED by the undersigned Borrower as of the day
and year first above set forth.

                                   CRYOLIFE, INC.



                                   By:__________________________________
                                      Title:____________________________

                                                (CORPORATE SEAL)



<PAGE>
 
                                                                   EXHIBIT 10.33

                              CONSULTING AGREEMENT


          THIS  AGREEMENT is made and entered into as of the 1st day of January,
1998, between Robert T. McNally and CryoLife,  Inc., a Florida  corporation (the
"Company").

                              W I T N E S S E T H:

          WHEREAS, Dr. McNally is a founder and Senior Vice President, Clinical
Research of the Company;

          WHEREAS, Dr. McNally has special knowledge and expertise relating to
the Company's operations and technology;

          WHEREAS, Dr. McNally desires to retire from full time employment on
January 2, 1998; and,

          WHEREAS, the Company desires to engage Dr. McNally and Dr. McNally
desires to accept engagement after January 2, 1998 as a part-time consultant in
order to maintain the benefit of Dr. McNally's special knowledge and expertise.

          NOW THEREFORE, in consideration of the premises, the promises
hereinafter set forth and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:

1.        Duties.

          (a) Engagement. The Company hereby engages Dr. McNally as an
independent consultant to assist the Company as assigned by the Company
President in (i) evaluating new ideas and concepts for services and products,
(ii) maintaining and improving relationships with
 regulatory and governmental
agencies, (iii) maintaining and improving professional and medical community
relationships, (iv) making presentations to professional groups and governmental
agencies, (v) providing expert advice or testimony, (vi) facilitating in any
transition activities related to Dr. McNally's retirement from the Company's
fulltime employ, and (vii) facilitating continuation of the Company's annual
"Naugie" awards.

          (b) Scope of Engagement. Dr. McNally accepts the engagement and agrees
to make himself available when called upon to provide up to 60 days per year of
consulting services to the Company throughout the Term; provided, however, that
Dr. McNally may not be required to provide more than five days of service in any
one calendar month.

          (c) Liability Limitation. Company agrees not to hold Dr. McNally
responsible for any inaccuracies, errors and omissions, however caused, in the
information and advice given under this Agreement nor for loss or damage
resulting from the use of the information or

<PAGE>
 
advice so given, except for any information and advice given by Dr. McNally
which is known to Dr. McNally to be false.

2.        Duration. This Agreement shall commence on 3rd day of January, 1998
and, unless earlier terminated pursuant to Section 5 hereof, shall continue
until the 2nd day of January, 2001 (the "Term").

3.       Remuneration.

          (a) Monetary Remuneration. Dr. McNally shall be compensated for all
services rendered at the rate of $50,000 per year payable in bi-monthly
installments of $2,083.33. Any services performed in excess of 60 days per
calendar year must receive prior approval by the Company President and will be
reimbursed at a rate of $1,000.00 per day.

          (b) Expense Reimbursement. Subject to such policies as may from time
to time be established by the Company, the Company shall pay or reimburse Dr.
McNally for all reasonable and necessary expenses actually incurred or paid by
Dr. McNally during the Term in the performance of Dr. McNally's duties
hereunder, upon submission and approval of expense statements or other
supporting information in accordance with the then customary practices of the
Company. Air travel in the U.S. will be reimbursed for coach fare. Air travel
overseas will be reimbursed for business class.

          (c) Other Remuneration. At the Company's December 1997 Compensation
Advisory Committee meeting, the Company accelerated the vesting of options under
Dr. McNally's December 15, 1995 Incentive Stock Option Grant (copy attached) by
amending the vesting schedule in paragraph 2 thereof to read as follows:

                                                 Cumulative Percentage
                                                 of Option Shares
         Exercise Date                           Exercisable

         First Anniversary of Grant Date               20%
         Second Anniversary of Grant Date              60%
         January 1, 1998                              100%

In consideration of the foregoing acceleration, Dr. McNally agrees to the
foregoing amendment and to waive his right to exercise any vested option more
than three months after January 2, 1998, his last day of employment with the
Company.

4.        Independent Contractor. Dr. McNally is engaged hereunder as an
independent contractor of the Company and, accordingly, the Company shall not
withhold or be responsible for any federal or state income taxes, social
security payments or engagement

                                      -2-

<PAGE>
 
taxes with respect to the payment of compensation to Dr. McNally hereunder. As
an independent contractor, Dr. McNally shall not have any power or authority to
bind the Company to any obligations whatsoever to third parties.

5.        Termination. This Agreement may be terminated at any time by the
mutual agreement of the parties or by delivery of 30 days written notice from
either party to the other party. The provisions of Sections 4, 5, 6, 7, 8, 9, 10
and 11 shall survive any termination or expiration of this Agreement; provided,
however, that Section 8 shall not survive a termination on 30 days notice by the
Company if the Company's notice fails to identify a breach by Dr. McNally of the
terms of this Agreement as a cause for the termination.

6.        Notice. Any notice required to be given under the terms of this
Agreement may be given by letter, addressed and mailed, with postage paid, to
the other party at the address set forth below its signature below or such other
address as such party shall notify the other party in writing. Notices may also
be delivered by other means.

7.        Proprietary Rights Covenants of Dr. McNally.

          (a) Confidential Material. "Confidential Material", when used herein,
means the confidential, proprietary information of the Company which was
received, learned, produced or discovered by Dr. McNally during his prior
employment by the Company or which is received, learned, produced or discovered
by Dr. McNally in the course of his performing his duties under this Agreement.
Dr. McNally agrees that all drawings, recordings, notes, tapes, disks,
documents, and other media and all copies thereof relating to the Confidential
Material shall be and remain the sole and exclusive property of the Company.

          (b) Use Limitations. Dr. McNally agrees to utilize the Confidential
Material only for the purposes of the Company and in the manner provided herein
and not to disclose any of the Confidential Material to anyone other than
Company employees without the prior written consent of the Company's President
and then only under circumstances approved in writing by the Company.

          (c) Inventions and Discoveries. Dr. McNally hereby assigns to the
Company any and all rights he may have in and to the Confidential Material and
agrees to promptly disclose all Confidential Material to the Company. Dr.
McNally agrees to execute such further documents and instruments as the Company
may reasonably request in order to further evidence the transfer contemplated
hereunder. All inventions and designs relating to the Confidential Material and
the benefit of all patents obtainable with respect thereto shall be included in
the foregoing transfer and thereby belong to Company.


                                       -3-

<PAGE>
 
          (d) Return of Information. Upon request, and in any event upon
termination or expiration of this Agreement, Dr. McNally shall promptly deliver
or destroy all Confidential Material in his possession or under his control,
without retaining any copies or excerpts thereof.

          (e) Exclusions to Confidential Material. Confidential Material shall
not include information which (i) is or becomes generally available to the
public other than as a result of any improper action of Dr. McNally, (ii) is
known from a source independent of any restrictions imposed by the Company, or
becomes known to Dr. McNally from such a source, (iii) is reasonably
demonstrated to have been known to or hereafter developed by Dr. McNally
independently of any disclosure of Confidential Material by the Company or (iv)
is approved for release by the Company's publication review committee.

         (f) Publication Review. Dr. McNally agrees to submit to the Company's
publications review committee any articles or writings Dr. McNally proposes to
publish relating to the Confidential Material, whether or not the Confidential
Material is identified as the Company's in the article, and to permit the
committee a reasonable period of time consistent with its general practices to
review such material and to require deletions of Confidential Material prior to
publication. The review committee shall also be entitled delay publication of
any article up to nine months for the convenience of the Company or longer, if
necessary, to protect the Company's ability to file for patent protection.

          (g) Disclosure of Conflicting Activities. Dr. McNally agrees to
disclose promptly any outside activities or interests that conflict or may
conflict with the business of the Company.

8.        Exclusivity. Until January 2, 2001, Dr. McNally will not, directly or
indirectly, whether as owner, partner, shareholder, consultant, agent, employee,
co-venturer or otherwise, (i) compete with the Company's business by assisting
any other company or individual in the business of developing, producing or
marketing any (A) homograft or allograft heart valves, (B) homograft vein or
connective tissue, or (C) blood fraction derived adhesives or cross linking
agents, or (ii) attempt to hire any employee or agent of the Company or any of
its affiliates, assist in such hiring by any other person, encourage any such
employee or agent to terminate his or her relationship with the Company or any
of its affiliates, or solicit or encourage any customer of the Company or any of
its affiliates to terminate its relationship with the Company or any of its
affiliates or to conduct with any other person any business or activity which
such customer conducts or could conduct with the Company or any of its
affiliates. This exclusivity provision shall apply only within the United
States, the European Common Market, Argentina or Japan. This exclusivity shall
not prohibit Dr. McNally from assisting Kanto Biomedical in producing or
marketing any of the products or services identified in subpart (i) of the first
sentence of this paragraph provided those products or services are produced or
marketed pursuant to a license granted by the Company.


                                       -4-

<PAGE>
 
9.        Rights and Remedies Upon Breach. If Dr. McNally breaches any of
provisions of Sections 7 or 8 (collectively, the "Restrictive Covenants"), the
Company shall have the following rights and remedies, each of which shall be
independent of the other and severally enforceable, and all of which shall be in
addition to, and not in lieu of, any other rights and remedies available to the
Company under law or in equity:

          (a) Specific Performance. Dr. McNally recognizes and agrees that the
violation of any of the Restrictive Covenants may not be reasonably or
adequately compensated in monetary damages and that, in addition to any other
relief to which the Company may be entitled by reason of such violation, the
Company shall also be entitled to permanent and temporary injunctive and
equitable relief and, pending determination of any dispute with respect to such
violation, no bond or security shall be required in connection therewith.
Without limiting the generality of the foregoing, Dr. McNally specifically
acknowledges that a showing by the Company of any breach of any Restrictive
Covenant shall constitute, for the purposes of all judicial determinations on
the issue of injunctive relief, conclusive proof of all of the elements
necessary to entitle the Company to interim and permanent injunctive relief
against Dr. McNally with respect to such breach. Dr. McNally agrees that the
Restrictive Covenants shall be enforceable by a decree of specific performance.

          (b) Severability of Covenants. If any of the Restrictive Covenants, or
any part thereof, or any of the other provisions of this Section 7, 8 or 9 is
held by a court of competent jurisdiction or any other governmental authority to
be invalid, void, unenforceable or against public policy for any reason, the
remainder of the Restrictive Covenants or such other provisions shall remain in
full force and effect and shall in no way be affected, impaired or invalidated,
and such court or authority shall be empowered to substitute, to the extent
enforceable, provisions similar thereto or other provisions so as to provide to
the Company to the fullest extent permitted by applicable law, the benefits
intended by such provisions.

10.       Lock-Up Agreement. Dr. McNally has been advised that the Company
currently proposes to conduct an underwritten offering of securities during the
first half of 1998. Dr. McNally agrees that he will not, directly or indirectly,
without the prior written consent of the Company, from the date hereof through
May 15, 1998 (the "Lock-Up Period"), offer, sell, contract to sell, pledge,
grant any option for the sale of, or otherwise dispose or cause the disposition
of, any shares of Company Common Stock, or any securities convertible into or
exchangeable or exercisable for any shares of Company Common Stock, owned by the
undersigned, whether owned on the date hereof or hereafter acquired (other than
the disposal or disposition of any derivative securities upon the exercise of
stock options). In addition, Dr. McNally agrees to enter into any lock-up
arrangement required by the underwriters of any public offering of securities of
the Company conducted during calendar 1998, for a period of up to 120 days from
the date of the prospectus utilized in connection with such offering, or for
such shorter period as shall be required of the officers and directors of the

                                       -5-

<PAGE>
 
Company. The Company agrees to use its reasonable best efforts to enable Dr.
McNally to sell up to 24,000 shares of Company Common Stock during the Lock-Up
Period, either on the open market or through participation in an underwritten
public offering of the Company's Common Stock, to the extent that the
underwriters thereof allow the participation of selling shareholders and do not
object to the inclusion of Dr. McNally.

11.       Miscellaneous. This Agreement, and Dr. McNally's rights and
obligations hereunder, may not be assigned by Dr. McNally. If any provision of
this Agreement is held invalid or otherwise unenforceable, the enforceability of
the remaining provisions shall not be impaired thereby. This Agreement shall be
construed in accordance with the laws of the State of Georgia and contains the
entire agreement between the parties with respect to consulting services and
supersedes all prior contracts and other agreements, written or oral, with
respect thereto; provided, however, that this Agreement shall be in addition to
and shall not supersede any agreement, if any exists, between the parties
respecting confidentiality, invention rights, proprietary rights,
nonsolicitation or noncompetition. This Agreement may be changed only by an
agreement in writing. The waiver by one party of a breach of any provision of
this Agreement by the other party shall not operate or be construed as a waiver
of any subsequent breach of the same or any other provision by the other party.
If any action at law or in equity is necessary to enforce the terms of this
Agreement, the prevailing party shall be entitled to reasonable attorneys' fees,
costs, and expenses, in addition to any other relief to which such prevailing
party may be entitled.

          IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first hereinabove set forth.

CryoLife, Inc.                              Robert T. McNally, Ph.D.

/s/ Steven G. Anderson                      /s/ Robert T. McNally 
__________________________                  __________________________________
Steven G. Anderson                          Robert T. McNally, Ph.D.
Chairman, President and CEO                 4693 Karls Gate Drive
1655 Roberts Boulevard, NW                  Marietta, Georgia  30068-2025
Kennesaw, Georgia  30144
(770) 419-3355

                                       -6-



<PAGE>
 
                                                                   EXHIBIT 10.34
 
                                 CRYOLIFE, INC.

                          1998 Long-Term Incentive Plan

<PAGE>
 
                                TABLE OF CONTENTS


                                                                            Page

SECTION 1     GENERAL........................................................  1

         1.1      Purpose....................................................  1
         1.2      Participation..............................................  1

SECTION 2     OPTIONS AND SARS...............................................  1

         2.1      Definitions of Options and SARS............................  1
         2.2      Exercise Price.............................................  2
         2.3      Exercise...................................................  2
         2.4      Payment of Option Exercise Price...........................  2
         2.5      Expiration Date............................................  3
         2.6      Settlement of Award........................................  3

SECTION 3    OTHER STOCK AWARDS..............................................  3

         3.1      Definition.................................................  3
         3.2      Restrictions on Stock Awards...............................  3

SECTION 4     OPERATION AND ADMINISTRATION...................................  4

         4.1      Effective Date.............................................  4
         4.2      Shares Subject to Plan.....................................  4
         4.3      Limit on Distribution......................................  6
         4.4      Tax Withholding............................................  6
         4.5      Payment in Shares..........................................  6
         4.6      Dividends and Dividend Equivalents.........................  6
         4.7      Payments...................................................  6
         4.8      Transferability............................................  7
         4.9      Form and Time of Elections.................................  7
         4.10     Agreement With Company.....................................  7
         4.11     Limitation of Implied Rights...............................  7
         4.12     Evidence...................................................  7
         4.13     Action by Company or Related Company.......................  8
         4.14     Gender and Number..........................................  8
         4.15     Change of Control..........................................  8
         4.16     Liability for Cash Payment.................................  8
         4.17     Governing Law..............................................  8


                                        i

<PAGE>
 
SECTION 5     COMMITTEE......................................................  9

         5.1      Administration.............................................  9
         5.2      Selection of Committee.....................................  9
         5.3      Powers of Committee........................................  9
         5.4      Delegation by Committee.................................... 10
         5.5      Information to be Furnished to Committee................... 10

SECTION 6     AMENDMENT AND TERMINATION...................................... 10

         6.1      Board of Directors......................................... 10
         6.2      Committee.................................................. 11

SECTION 7     DEFINED TERMS.................................................. 11

SECTION 8    UNFUNDED STATUS OF THE PLAN..................................... 12



                                       ii

<PAGE>

 
                                 CRYOLIFE, INC.
                          1998 LONG-TERM INCENTIVE PLAN

                                    SECTION 1

                                     GENERAL

         1.1 Purpose. The CryoLife, Inc. 1998 Long-Term Incentive Plan (the
"Plan") has been established by CryoLife, Inc. (the "Company") to (i) attract
and retain persons eligible to participate in the Plan; (ii) motivate
Participants, by means of appropriate incentives, to achieve long-range goals;
(iii) provide incentive compensation opportunities that are competitive with
those of other similar companies; and (iv) further identify Participants'
interests with those of the Company's other stockholders through compensation
that is based on the Company's common stock; and thereby promote the long-term
financial interest of the Company and the Related Companies, including the
growth in value of the Company's equity and enhancement of long-term stockholder
return.

         1.2 Participation. Subject to the terms and conditions of the Plan, the
Committee shall determine and designate, from time to time, from among the
Eligible Persons, those persons who will be granted one or more Awards under the
Plan, and thereby become "Participants" in the Plan. In the discretion of the
Committee, a Participant may be granted any Award permitted under the provisions
of the Plan, and more than one Award may be granted to a Participant. Awards may
be granted as alternatives to or replacement of awards outstanding under the
Plan, or any other plan or arrangement of the Company or a Related Company
(including a plan or arrangement of a business or entity, all or a portion of
which is acquired by the Company or a Related Company).

         1.3 Operation, Administration, and Definitions. The operation and
administration of the Plan, including the Awards made under the Plan, shall be
subject to the provisions of Section 4 (relating to operation and
administration). Capitalized terms in the Plan shall be defined as set forth in
the Plan (including the definition provisions of Section 7 of the Plan).

                                    SECTION 2

                                OPTIONS AND SARS

         2.1      Definitions of Options and SARS.

         (a)      The grant of an "Option" entitles the Participant to purchase
                  shares of Stock at an Exercise Price established by the
                  Committee. Options granted under this Section 2 may be either
                  Incentive Stock Options or Non-Qualified Stock Options, as
                  determined in the discretion of the Committee. An "Incentive
                  Stock Option" is an Option that is intended to satisfy the
                  requirements applicable to an "incentive stock option"
                  described in section 422(b) of the Code. A "Non-

<PAGE>
 
                  Qualified Option" is an Option that is not intended to be an
                  "incentive stock option" as that term is described in section
                  422(b) of the Code.

         (b)      To the extent that the aggregate fair market value of Stock
                  with respect to which Incentive Stock Options are exercisable
                  for the first time by the Participant during any calendar year
                  (under all plans of the Company and all Related Companies)
                  exceeds $100,000, such options shall be treated as Non-
                  Qualified Stock Options, to the extent required by section 422
                  of the Code.

         (c)      A stock appreciation right (an "SAR") entitles the Participant
                  to receive, in cash or Stock (as determined in accordance with
                  subsection 2.6), value equal to all or a portion of the excess
                  of: (a) the Fair Market Value of a specified number of shares
                  of Stock at the time of exercise; over (b) an Exercise Price
                  established by the Committee.

         2.2 Exercise Price. The "Exercise Price" of each Option and SAR granted
under this Section 2 shall be established by the Committee or shall be
determined by a method established by the Committee at the time the Option or
SAR is granted; except that the Exercise Price shall not be less than the
greater of 100% of the Fair Market Value or the par value of a share of Stock as
of the Pricing Date. However, if the Participant owns more than 10% of the total
combined voting power of all classes of capital stock of the Company or any of
its subsidiary or parent corporations, the Exercise Price of an Incentive Stock
Option granted to such Participant shall not be less than 110% of the Fair
Market Value of a share of Stock as of the Pricing Date. For purposes of the
preceding sentences, the "Pricing Date" shall be the date on which the Option or
SAR is granted, except that the Committee may provide that: (i) the Pricing Date
is the date on which the recipient is hired or promoted (or similar event), if
the grant of the Option or SAR occurs not more than 90 days after the date of
such hiring, promotion or other event; and (ii) if an Option or SAR is granted
in tandem with, or in substitution for, an outstanding Award, the Pricing Date
is the date of grant of such outstanding Award.

         2.3 Exercise. An Option and an SAR shall be exercisable in accordance
with such terms and conditions and during such periods as may be established by
the Committee.

         2.4 Payment of Option Exercise Price. The payment of the Exercise Price
of an Option granted under this Section 2 shall be subject to the following:

         (a)      Subject to the following provisions of this subsection 2.4,
                  the full Exercise Price for shares of Stock purchased upon the
                  exercise of any Option shall be paid at the time of such
                  exercise (except that, in the case of an exercise arrangement
                  approved by the Committee and described in paragraph 2.4(c),
                  payment may be made as soon as practicable after the
                  exercise).

         (b)      The Exercise Price shall be payable in cash or by tendering
                  shares of Stock (by either actual delivery of shares or by
                  attestation, with such shares valued at Fair

                                       2

<PAGE>
 
                  Market Value as of the day of exercise), or in any combination
                  thereof, as determined by the Committee.

         (c)      The Committee may permit a Participant to elect to pay the
                  Exercise Price upon the exercise of an Option by authorizing a
                  third party to sell shares of Stock (or a sufficient portion
                  of the shares) acquired upon exercise of the Option and remit
                  to the Company a sufficient portion of the sale proceeds to
                  pay the entire Exercise Price and any tax withholding
                  resulting from such exercise, or the Company may choose to
                  retain such shares in satisfaction of the Exercise Price and
                  any tax withholding.

         2.5 Expiration Date. The "Expiration Date" with respect to an Option
means the date established as the Expiration Date by the Committee at the time
of the grant; provided, however, that unless otherwise established by Committees
at the time of grant, the Expiration Date with respect to any Option shall not
be later than the earliest to occur of:

         (a)      the ten-year anniversary of the date on which the Option is
                  granted;

         (b)      if the Participant's Date of Termination occurs for Cause, the
                  Date of Termination; or

         (c)      if the Participant's Date of Termination occurs for reasons
                  other than Cause, Retirement, Early Retirement, death or
                  Disability, the 30-day anniversary of such Date of
                  Termination.

         2.6 Settlement of Award. Distribution following exercise of an Option
or SAR, and shares of Stock distributed pursuant to such exercise, shall be
subject to such conditions, restrictions and contingencies as the Committee may
establish. Settlement of SARs may be made in shares of Stock (valued at their
Fair Market Value at the time of exercise), in cash, or in a combination
thereof, as determined in the discretion of the Committee. The Committee, in its
discretion, may impose such conditions, restrictions and contingencies with
respect to shares of Stock acquired pursuant to the exercise of an Option or an
SAR as the Committee determines to be desirable.

                                    SECTION 3

                               OTHER STOCK AWARDS

         3.1 Definition. A Stock Award is a grant of shares of Stock or of a
right to receive shares of Stock (or their cash equivalent or a combination of
both) in the future.

         3.2 Restrictions on Stock Awards. Each Stock Award shall be subject to
such conditions, restrictions and contingencies as the Committee shall
determine. These may include continuous service and/or the achievement of
Performance Measures. The Performance


                                        3

<PAGE>
 
Measures that may be used by the Committee for such Awards shall be measured by
revenues, income, or such other criteria as the Committee may specify. The
Committee may designate a single goal criterion or multiple goal criteria for
performance measurement purposes, with the measurement based on absolute Company
or business unit performance and/or on performance as compared with that of
other publicly-traded companies. If the right to become vested in a Stock Award
granted under this Section 3 is conditioned on the completion of a specified
period of service with the Company and the Related Companies, without
achievement of Performance Measures or other objectives being required as a
condition of vesting, then the required period of service for vesting shall be
not less than three years (subject to acceleration of vesting, to the extent
permitted by the Committee, in the event of the Participant's death, disability,
or involuntary termination or a Change in Control of the Company).

                                    SECTION 4

                          OPERATION AND ADMINISTRATION

         4.1 Effective Date. The Plan is subject to the approval of the
stockholders of the Company at the Company's next annual meeting of its
stockholders; therefore the Plan shall be effective as of the date such approval
is obtained (the "Effective Date"). The Plan shall be unlimited in duration and,
in the event of Plan termination, shall remain in effect as long as any Awards
under it are outstanding; provided, however, that, to the extent required by the
Code, no Incentive Stock Options may be granted under the Plan on a date that is
more than ten years from the date the Plan is approved by stockholders.

         4.2      Shares Subject to Plan.

         (a)      (i)    Subject to the following provisions of this subsection
                         4.2, the maximum number of shares of Stock that may be
                         delivered to Participants and their beneficiaries under
                         the Plan shall be 300,000.

                  (ii)   Anyshares of Stock granted under the Plan that are
                         forfeited because of the failure to meet an Award
                         contingency or condition shall again be available for
                         delivery pursuant to new Awards granted under the Plan.
                         To the extent any shares of Stock covered by an Award
                         are not delivered to a Participant or beneficiary
                         because the Award is forfeited or cancelled, or the
                         shares of Stock are not delivered because the Award is
                         settled in cash, such shares shall not be deemed to
                         have been delivered for purposes of determining the
                         maximum number of shares of Stock available for
                         delivery under the Plan.

                  (iii)  If the Exercise Price of any stock option granted under
                         the Plan or any Prior Plan is satisfied by tendering
                         shares of Stock to the Company (by either actual
                         delivery or by attestation), only the number of shares
                         of Stock issued net of the shares of Stock tendered
                         shall be deemed delivered


                                        4

<PAGE>
 
                         for purposes of determining the maximum number of
                         shares of Stock available for delivery under the Plan.

                  (iv)   Shares of Stock delivered under the Plan in settlement,
                         assumption or substitution of outstanding awards (or
                         obligations to grant future awards) under the plans or
                         arrangements of another entity shall not reduce the
                         maximum number of shares of Stock available for
                         delivery under the Plan, to the extent that such
                         settlement, assumption or substitution is a result of
                         the Company or a Related Company acquiring another
                         entity (or an interest in another entity).

         (b)      Subject to paragraph 4.2(c), the following additional maximums
                  are imposed under the Plan.

                  (i)    The maximum number of shares of Stock that may be
                         issued by Options intended to be Incentive Stock
                         Options shall be 300,000 shares.

                  (ii)   The maximum number of shares of Stock that may be
                         issued in conjunction with Awards granted pursuant to
                         Section 3 (relating to Stock Awards) shall be 100,000
                         shares.

                  (iii)  The maximum number of shares that may be covered by
                         Awards granted to any one individual pursuant to
                         Section 2 (relating to Options and SARs) shall be
                         100,000 shares during any consecutive 12 month period.

                  (iv)   The maximum payment that can be made for awards granted
                         to any one individual pursuant to Section 3 (relating
                         to Stock Awards) shall be $50,000 for any single or
                         combined performance goals established for any fiscal
                         year. If an Award granted under Section 3 is, at the
                         time of grant, denominated in shares, the value of the
                         shares of Stock for determining this maximum individual
                         payment amount will be the Fair Market Value of a share
                         of Stock on the first day of the applicable performance
                         period.

         (c)      In the event of a corporate transaction involving the Company
                  (including, without limitation, any stock dividend, stock
                  split, extraordinary cash dividend, recapitalization,
                  reorganization, merger, consolidation, split-up, spin-off,
                  combination or exchange of shares), the Committee may adjust
                  Awards to preserve the benefits or potential benefits of the
                  Awards. Action by the Committee may include adjustment of: (i)
                  the number and kind of shares which may be delivered under the
                  Plan; (ii) the number and kind of shares subject to
                  outstanding Awards; and (iii) the Exercise Price of
                  outstanding Options and SARs; as well as any other adjustments
                  that the Committee determines to be equitable.



                                        5

<PAGE>
 
         4.3 Limit on Distribution. Distribution of shares of Stock or other
amounts under the Plan shall be subject to the following:

         (a)      Notwithstanding any other provision of the Plan, the Company
                  shall have no liability to deliver any shares of Stock under
                  the Plan or make any other distribution of benefits under the
                  Plan unless such delivery or distribution would comply with
                  all applicable laws (including, without limitation, the
                  requirements of the Securities Act of 1933), and the
                  applicable requirements of any securities exchange or similar
                  entity.

         (b)      To the extent that the Plan provides for issuance of stock
                  certificates to reflect the issuance of shares of Stock, the
                  issuance may be effected on a non-certificated basis, to the
                  extent not prohibited by applicable law or the applicable
                  rules of any stock exchange.

         4.4 Tax Withholding. Whenever the Company proposes, or is required, to
distribute Stock under the Plan, the Company may require the recipient to remit
to the Company an amount sufficient to satisfy any Federal, state and local tax
withholding requirements prior to the delivery of any certificate for such
shares or, in the discretion of the Committee, the Company may withhold from the
shares to be delivered shares sufficient to satisfy all or a portion of such tax
withholding requirements. Whenever under the Plan payments are to be made in
cash, such payments may be net of an amount sufficient to satisfy any Federal,
state and local tax withholding requirements.

         4.5 Payment in Shares. Subject to the overall limitation on the number
of shares of Stock that may be delivered under the Plan, the Committee may use
available shares of Stock as the form of payment for compensation, grants or
rights earned or due under any other compensation plans or arrangements of the
Company or a Related Company, including the plans and arrangements of the
Company or a Related Company acquiring another entity (or an interest in another
entity).

         4.6 Dividends and Dividend Equivalents. An Award may provide the
Participant with the right to receive dividends or dividend equivalent payments
with respect to Stock which may be either paid currently or credited to an
account for the Participant, and may be settled in cash or Stock as determined
by the Committee. Any such settlements, and any such crediting of dividends or
dividend equivalents or reinvestment in shares of Stock, may be subject to such
conditions, restrictions and contingencies as the Committee shall establish,
including the reinvestment of such credited amounts in Stock equivalents.

         4.7 Payments. Awards may be settled through cash payments, the delivery
of shares of Stock, the granting of replacement Awards, or any combination
thereof as the Committee shall determine. Any Award settlement, including
payment deferrals, may be subject to such rules and procedures as it may
establish, which may include provisions for the payment or


                                        6

<PAGE>
 
crediting of interest, or dividend equivalents, including converting such
credits into deferred Stock equivalents.

         4.8 Transferability. Except as otherwise provided by the Committee,
Awards under the Plan are not transferable except as designated by the
Participant by will or by the laws of descent and distribution.

         4.9 Form and Time of Elections. Unless otherwise specified herein, each
election required or permitted to be made by any Participant or other person
entitled to benefits under the Plan, and any permitted modification, or
revocation thereof, shall be in writing filed with the Committee at such times,
in such form, and subject to such restrictions and limitations, not inconsistent
with the terms of the Plan, as the Committee shall require.

         4.10 Agreement With Company. At the time of an Award to a Participant
under the Plan, the Committee may require a Participant to enter into an
agreement with the Company (the "Agreement") in a form specified by the
Committee, agreeing to the terms and conditions of the Plan and to such
additional terms and conditions, not inconsistent with the Plan, as the
Committee may, in its sole discretion, prescribe.

         4.11     Limitation of Implied Rights.

         (a)      Neither a Participant nor any other person shall, by reason of
                  the Plan, acquire any right in or title to any assets, funds
                  or property of the Company or any Related Company whatsoever,
                  including, without limitation, any specific funds, assets, or
                  other property which the Company or any Related Company, in
                  their sole discretion, may set aside in anticipation of a
                  liability under the Plan. A Participant shall have only a
                  contractual right to the stock or amounts, if any, payable
                  under the Plan, unsecured by any assets of the Company or any
                  Related Company. Nothing contained in the Plan shall
                  constitute a guarantee that the assets of such companies shall
                  be sufficient to pay any benefits to any person.

         (b)      The Plan does not constitute a contract of employment, and
                  selection as a Participant will not give any employee the
                  right to be retained in the employ of the Company or any
                  Related Company, nor any right or claim to any benefit under
                  the Plan, unless such right or claim has specifically accrued
                  under the terms of the Plan. Except as otherwise provided in
                  the Plan, no Award under the Plan shall confer upon the holder
                  thereof any right as a stockholder of the Company prior to the
                  date on which the individual fulfills all conditions for
                  receipt of such rights.

         4.12 Evidence. Evidence required of anyone under the Plan may be by
certificate, affidavit, document or other information which the person acting on
it considers pertinent and reliable, and signed, made or presented by the proper
party or parties.



                                        7

<PAGE>
 
         4.13 Action by Company or Related Company. Any action required or
permitted to be taken by the Company or any Related Company shall be by
resolution of its board of directors, or by action of one or more members of the
board (including a committee of the board) who are duly authorized to act for
the board, or (except to the extent prohibited by applicable law or applicable
rules of any stock exchange) by a duly authorized officer of the Company.

         4.14 Gender and Number. Where the context admits, words in any gender
shall include any other gender, words in the singular shall include the plural
and the plural shall include the singular.

         4.15 Change of Control. Unless otherwise determined by the Committee,
if the Company is merged into or consolidated with another corporation under
circumstances in which the Company is not the surviving corporation, or if the
Company is liquidated, or sells or otherwise disposes of substantially all of
its assets to another corporation (any such merger, consolidation, etc., being
hereinafter referred to as a "Change of Control Transaction") while unexercised
Options are outstanding under the Plan, after the effective date of a Change of
Control Transaction, each holder of an outstanding Option shall be entitled,
upon exercise of such Option, to receive such stock, or other securities as the
holders of the same class of stock as those shares subject to the Option shall
be entitled to receive in such Change of Control Transaction based upon the
agreed upon conversion ratio or per share distribution. Unless otherwise
determined by the Committee, any limitations on exercisability of Options owned
by executive officers or the Company shall be waived, and Options of non-
executive officers may be waived (in the discretion of the Committee), so that
all such Options, from and after a date prior to the effective date of such
Change of Control Transaction shall be exercisable in full. Furthermore, unless
otherwise determined by the Committee, the right to exercise shall, in the case
of executive officers, and may (in the discretion of the Committee), in the case
of other option holders, be given to each holder (by written notice) of an
Option during a 15-day period preceding the effective date of such Change of
Control Transaction. Any outstanding Options not exercised within such 15-day
period may be cancelled by the Committee as of the effective date of any such
Change of Control Transaction, as specified in the 15-day notice. To the extent
that the foregoing adjustments relate to stock or securities of the Company,
such adjustments shall be made by the Committee, whose determination in that
respect shall be final, binding and conclusive.

         4.16 Liability for Cash Payment. Each Related Company shall be liable
for payment of cash due under the Plan with respect to any Participant to the
extent that such benefits are attributable to the services rendered for that
Related Company by the Participant. Any disputes relating to liability of a
Related Company for cash payments shall be resolved by the Committee.

         4.17 Governing Law. This Plan and all awards made and actions taken
hereunder shall be governed by and construed in accordance with (i) the laws of
the State of Georgia, excluding its conflict of law provisions and its General
Business Corporation Code, (ii) the applicable corporation law, which shall be
the general business corporation law of the State of Florida.


                                        8

<PAGE>
 
                                    SECTION 5

                                    COMMITTEE

         5.1 Administration. The authority to control and manage the operation
and administration of the Plan shall be vested in a committee (the "Committee")
in accordance with this Section 5.

         5.2 Selection of Committee. The Committee shall be selected by the
Board, and shall consist of two or more members of the Board.

         5.3 Powers of Committee. The authority to manage and control the
operation and administration of the Plan shall be vested in the Committee,
subject to the following:

         (a)      Subject to the provisions of the Plan, the Committee will have
                  the authority and discretion to select from among the Eligible
                  Persons those persons who shall receive Awards, to determine
                  the time or times of receipt, to determine the types of Awards
                  and the number of shares covered by the Awards, to establish
                  the terms, conditions, performance criteria, restrictions, and
                  other provisions of such Awards, and (subject to the
                  restrictions imposed by Section 6) to cancel or suspend
                  Awards. In making such Award determinations, the Committee may
                  take into account the nature of services rendered by the
                  individual, the individual's present and potential
                  contribution to the Company's success and such other factors
                  as the Committee deems relevant.

         (b)      Subject to the provisions of the Plan, the Committee will have
                  the authority and discretion to determine the extent to which
                  Awards under the Plan will be structured to conform to the
                  requirements applicable to performance-based compensation as
                  described in Code section 162(m), and to take such action,
                  establish such procedures, and impose such restrictions at the
                  time such Awards are granted as the Committee determines to be
                  necessary or appropriate to conform to such requirements.

         (c)      The Committee will have the authority and discretion to
                  establish terms and conditions of awards as the Committee
                  determines to be necessary or appropriate to conform to
                  applicable requirements or practices of jurisdictions outside
                  of the United States.

         (d)      The Committee will have the authority and discretion to
                  interpret the Plan, to establish, amend, and rescind any rules
                  and regulations relating to the Plan, to determine the terms
                  and provisions of any agreements made pursuant to the Plan,
                  and to make all other determinations that may be necessary or
                  advisable for the administration of the Plan.



                                        9

<PAGE>
 
         (e)      Any interpretation of the Plan by the Committee and any
                  decision made by it under the Plan is final and binding.

         (f)      Except as otherwise expressly provided in the Plan, where the
                  Committee is authorized to make a determination with respect
                  to any Award, such determination shall be made at the time the
                  Award is made, except that the Committee may reserve the
                  authority to have such determination made by the Committee in
                  the future (but only if such reservation is made at the time
                  the Award is granted and is expressly stated in the Agreement
                  reflecting the Award).

         (g)      In controlling and managing the operation and administration
                  of the Plan, the Committee shall act by a majority of its then
                  members, by meeting or by writing filed without a meeting. The
                  Committee shall maintain and keep adequate records concerning
                  the Plan and concerning its proceedings and acts in such form
                  and detail as the Committee may decide.

         5.4 Delegation by Committee. Except to the extent prohibited by
applicable law or the applicable rules of a stock exchange, the Committee may
allocate all or any portion of its responsibilities and powers to any one or
more of its members and may delegate all or any part of its responsibilities and
powers to any person or persons selected by it. Any such allocation or
delegation may be revoked by the Committee at any time.

         5.5 Information to be Furnished to Committee. The Company and Related
Companies shall furnish the Committee with such data and information as may be
required for it to discharge its duties. The records of the Company and Related
Companies as to an employee's or Participant's employment (or other provision of
services), termination of employment (or cessation of the provision of
services), leave of absence, reemployment and compensation shall be conclusive
on all persons unless determined to be incorrect. Participants and other persons
entitled to benefits under the Plan must furnish the Committee such evidence,
data or information as the Committee considers desirable to carry out the terms
of the Plan.

                                    SECTION 6

                            AMENDMENT AND TERMINATION

         6.1 Board of Directors. The Board may, at any time, amend or terminate
the Plan, provided that, subject to subsection 4.2 (relating to certain
adjustments to shares), no amendment or termination may, in the absence of
written consent to the change by the affected Participant (or, if the
Participant is not then living, the affected beneficiary), adversely affect the
rights of any Participant or beneficiary under any Award granted under the Plan
prior to the date such amendment is adopted by the Board; provided, however,
that the Board may not amend the provisions of Section 2.2 hereof to reduce the
minimum Exercise Price, nor may the Board increase the number of shares reserved
under the Plan, unless it obtains stockholder approval. Subject to the
foregoing, the Board shall have broad authority to amend the Plan to take into


                                       10

<PAGE>
 
account changes in applicable securities and tax laws and accounting rules, as
well as other developments.

         6.2 Committee. The Committee may amend the terms of any Award
theretofore granted, prospectively or retroactively, but, subject to subsection
4.2 (relating to certain adjustments to shares) no amendment or termination may,
in the absence of written consent to the change by the affected Participant (or,
if the Participant is not then living, the affected beneficiary), adversely
affect the rights of any Participant or beneficiary under any Award granted
under the Plan prior to the date such amendment is adopted by the Committee.

                                   SECTION 7

                                  DEFINED TERMS

         7.1 For purposes of the Plan, the terms listed below shall be defined
as follows:

         (a)      Award. The term "Award" shall mean any award or benefit
                  granted to any Participant under the Plan, including, without
                  limitation, the grant of Options, SARs, and Stock Awards.

         (b)      Board. The term "Board" shall mean the Board of Directors of
                  the Company.

         (c)      Cause. The term "Cause" means a felony conviction of a
                  Participant or the failure of a Participant to contest
                  prosecution for a felony, or a Participant's willful
                  misconduct or dishonesty, or other unauthorized activity
                  which, in the good faith opinion of the Committee, is directly
                  and materially harmful to the business or reputation of the
                  Company or a Related Company.

         (d)      Code. The term "Code" means the Internal Revenue Code of 1986,
                  as amended. A reference to any provision of the Code shall
                  include reference to any successor provision of the Code.

         (e)      Eligible Person. The term "Eligible Person" shall mean any
                  employee of the Company or a Related Company, any director of
                  the Company, and any consultant or other person providing key
                  services to the Company or a Related Company.

         (f)      Fair Market Value. For purposes of determining the "Fair
                  Market Value" of a share of Stock, the following rules shall
                  apply:

                  (i)      If the Stock is at the time listed or admitted to
                           trading on any stock exchange (including the Nasdaq
                           National Stock Market), then the "Fair Market Value"
                           shall be the mean between the lowest and highest
                           reported sale prices of the Stock on the date in
                           question on the principal exchange


                                       11

<PAGE>
 
                           on which the Stock is then listed or admitted to
                           trading. If no reported sale of Stock takes place on
                           the date in question on the principal exchange, then
                           the reported closing asked price of the Stock on such
                           date on the principal exchange shall be determinative
                           of "Fair Market Value."

                  (ii)     If the Stock is not at the time listed or admitted to
                           trading on a stock exchange, the "Fair Market Value"
                           shall be the mean between the lowest reported bid
                           price and highest reported asked price of the Stock
                           on the date in question in the over-the-counter
                           market, as such prices are reported in a publication
                           of general circulation selected by the Committee and
                           regularly reporting the market price of Stock in such
                           market.

                  (iii)    If the Stock is not listed or admitted to trading on
                           any stock exchange or traded in the over-the-counter
                           market, the "Fair Market Value" shall be as
                           determined in good faith by the Committee.

         (g)      Related Company. The term "Related Company" means any
                  subsidiary of the Company, and any business venture in which
                  the Company has a significant interest, as determined in the
                  discretion of the Committee.

         (h)      Stock. The term "Stock" shall mean shares of common stock of
                  the Company.

                                    SECTION 8

                           UNFUNDED STATUS OF THE PLAN

         8.1 The Plan is intended to constitute an "unfunded" plan for incentive
and deferred compensation. With respect to any payments not yet made to a
Participant or optionee by the Company, nothing contained herein shall give any
such Participant or optionee any rights that are greater than those of a general
creditor of the Company. In its sole discretion, the Committee may authorize the
creation of trusts or other arrangements to meet the obligations created under
the Plan to deliver Stock or payments in lieu of or with respect to awards
hereunder; provided, however, that, unless the Committee otherwise determines
with the consent of the affected Participant, the existence of such trusts or
other arrangements is consistent with the "unfunded" status of the Plan.




                                       12



<PAGE>
 
                                 EXHIBIT 21.1

                        SUBSIDIARIES OF CRYOLIFE, INC.



NAME                                              STATE OF INCORPORATION
- ----                                              ----------------------

CryoLife International Incorporated               Florida

Ideas for Medicine, Inc.                          Florida






<PAGE>
 
                                                                    EXHIBIT 23.1

                         CONSENT OF ERNST & YOUNG LLP

                             INDEPENDENT AUDITORS

We consent to the incorporation by reference in this Annual Report (Form 10-K) 
of CryoLife, Inc. of our report dated February 9, 1998, included in the 1997 
Annual Report to Shareholders of CryoLife, Inc.

Our audits also included the financial statement schedule of CryoLife, Inc.
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, as of the date of our report referred to in the preceding
paragraph, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.

We also consent to the incorporation by reference in Registration Statement No.
333-16581 on Form S-3 and Registration Statement Nos. 33-83996, 33-84048,
333-03513, 333-06141 and 333-34025 on Form S-8, of our report dated February 9,
1998, with respect to the consolidated financial statements incorporated herein
by reference, and our report included in the preceding paragraph with respect to
the financial statement schedule included in
 this Annual Report (Form 10-K) of
CryoLife, Inc.

                                        /s/ Ernst & Young LLP

Atlanta, Georgia
February 16, 1998





<PAGE>
 
                                                                    EXHIBIT 23.2

                             ACCOUNTANTS' CONSENT

The Board of Directors
CryoLife, Inc.

We consent to incorporation by reference in the registration statements (Nos. 
33-83996, 33-84048, 333-03513, 333-06141, and 333-34025) on Form S-8 and 
registration statement (No. 333-16581) on Form S-3 of CryoLife, Inc. of our 
reports dated February 14, 1996, relating to the consolidated statements of 
income, shareholders' equity and cash flows and related schedule for the year 
ended December 31, 1995, which reports are incorporated by reference in the 
December 31, 1997 annual report on Form 10-K of CryoLife, Inc.

                                /s/ KPMG Peat Marwick LLP
                                -----------------------------
                                KPMG PEAT MARWICK LLP

Atlanta, Georgia
February 16, 1998







<TABLE> <S> <C>


<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF CRYOLIFE, INC. FOR THE YEAR ENDED DECEMBER
31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1997
<PERIOD-START>                             JAN-01-1997
<PERIOD-END>                               DEC-31-1997
<CASH>                                         111,000
<SECURITIES>                                         0
<RECEIVABLES>                                9,868,000
<ALLOWANCES>                                   103,000
<INVENTORY>                                  1,761,000
<CURRENT-ASSETS>                            25,154,000
<PP&E>                                      23,117,000
<DEPRECIATION>                               7,630,000
<TOTAL-ASSETS>                              53,749,000
<CURRENT-LIABILITIES>                        6,329,000
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                       102,000
<OTHER-SE>                                  30,125,000
<TOTAL-LIABILITY-AND-EQUITY>                53,749,000
<SALES>                                      5,591,000
<TOTAL-REVENUES>                            50,869,000
<CGS>                                        2,403,000
<TOTAL-COSTS>                               17,764,000
<OTHER-EXPENSES>                            25,472,000
<LOSS-PROVISION>                                46,000
<INTEREST-EXPENSE>                             978,000
<INCOME-PRETAX>                              7,633,000
<INCOME-TAX>                                 2,908,000
<INCOME-CONTINUING>                          4,725,000
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                 4,725,000
<EPS-PRIMARY>                                      .49
<EPS-DILUTED>                                      .48
        

</TABLE>