UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2009March 31, 2010

OR

For the transition period from                      to                     

Commission file number: 1-13165

CRYOLIFE, INC.

(Exact name of registrant as specified in its charter)

(770) 419-3355

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Part I – FINANCIAL INFORMATION

Item 1. Financial StatementsStatements.

CRYOLIFE, INC. AND SUBSIDIARIES

SUMMARY CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

See accompanying Notes to Summary Consolidated Financial Statements.

2

CRYOLIFE, INC. AND SUBSIDIARIES

SUMMARY CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)

See accompanying Notes to Summary Consolidated Financial Statements.

3

CRYOLIFE, INC. AND SUBSIDIARIES

SUMMARY CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

See accompanying Notes to Summary Consolidated Financial Statements.

4

CRYOLIFE, INC. AND SUBSIDIARIES

NOTES TO SUMMARY CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Basis of Presentation

The accompanying summary consolidated financial statements include the accounts of CryoLife, Inc. and its subsidiaries (“CryoLife,” the “Company,” “we,” or “us”). All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying Summary Consolidated Balance Sheet as of December 31, 20082009 has been derived from audited financial statements. The accompanying unaudited summary consolidated financial statements as of and for the three and nine months ended September 30,March 31, 2010 and 2009 and 2008 have been prepared in accordance with (i) accounting principles generally accepted in the U.S. for interim financial information and (ii) the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, such statements do not include all of the information and disclosures required by accounting principles generally accepted in the U.S. for a complete presentation of financial statements. In the opinion of management, all adjustments (including those of a normal, recurring nature) considered necessary for a fair presentation have been included. Events subsequent to September 30, 2009 have been evaluated through October 29, 2009, the date the financial statements were issued. Operating results for the three and nine months ended September 30, 2009March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.2010. These summary consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in CryoLife’s Annual Report on Form 10-K for the year ended December 31, 2008.2009.

2. Financial Instruments

Financial instruments measured at fair value are recorded in accordance with the fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair values in their broad levels. These levels from highest to lowest priority are as follows:

A summary of the Company’s financial instruments measured at fair value as of March 31, 2010 is as follows (in thousands):

5

Changes in fair value of level 3 liabilities are listed in the table below (in thousands). Refer to Note 4 for further discussion of the derivative liability.

3. Cash Equivalents and MarketableRestricted Securities

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

As of March 31, 2010 $300,000 of the Company’s money market funds were designated as short-term restricted securities due to a contractual commitment to hold the securities as pledged collateral relating to international tax obligations. As of March 31, 2010 and December 31, 2009 $5.0 million of the Company’s money market funds were designated as restricted securities due to a financial covenant requirement under the Company’s credit agreement with General Electric Capital Corporation (“GE Capital”) as discussed in Note 7.

There were no gross realized gains or losses on sales of available-for-sale securities for the three and nine months ended September 30, 2009March 31, 2010 and 2008.2009. At March 31, 2010 $300,000 of restricted securities had a maturity date of between 90 days and one year. As of September 30,December 31, 2009 allnone of the Company’s restricted securities had a maturity date within 90 days.date.

4. Investment in Equity Securities

Medafor Common Stock

CryoLife currently distributes HemoStase^® (“HemoStase”) for Medafor, Inc. (“Medafor”), a privately held company incorporated in Minnesota, under a private label exclusive distribution agreement between the parties (the “Agreement”). In November 2009 and in January 2010 the Company executed stock purchase agreements to purchase a total of approximately 2.3 million shares of common stock in Medafor for $4.8 million. As Medafor’s common stock is not actively traded on any public stock exchange and as Medafor is a privately held company for which financial information is not readily available, the Company accounted for this investment using the cost method and recorded it as the long-term asset, investment in equity securities, on the Company’s Summary Consolidated Balance Sheet.

The carrying value of this investment was $6.1 million and $3.2 million as of March 31, 2010 and December 31, 2008 all2009, respectively, which includes the purchase price and adjustments to record certain of the stock purchase agreements’ embedded derivative liabilities on the purchase date, as discussed further below.

6

During the quarter ended March 31, 2010, the Company reviewed available information and determined that no factors were present indicating that the Company should evaluate its investment in Medafor common stock for impairment.

The Company’s restricted securities had a maturity date between 90 daysprevious attempt to purchase Medafor, the Company’s ongoing litigation with Medafor, and one year.Medafor’s current and prior attempts to terminate the agreement, may negatively impact the Company’s ability to distribute HemoStase, up to and including causing the Company to cease distribution of HemoStase. See also “Legal Action” below and Part I, Item 2, “Risks and Uncertainties.”

3.Medafor Derivative

Per the terms of certain of the stock purchase agreements for the Medafor shares discussed above, in the event that CryoLife acquires more than 50% of the diluted outstanding stock of Medafor or merges with Medafor within a three-year period from each respective agreement date (a “Triggering Event”), CryoLife will make a future per share payment (the “Purchase Price Make-Whole Payment”) to such sellers. The payment will be equal to the difference between an amount calculated using the average cost of any subsequent shares purchased, as defined in each respective agreement, and the price of the shares purchased pursuant to each applicable stock purchase agreement. The Company was required to account for these Purchase Price Make-Whole Payment provisions as embedded derivatives (the “Medafor Derivative”).

CryoLife performed a valuation of the Medafor Derivative using a Black-Scholes model to estimate the future value of the shares on the purchase date. Management’s assumptions as to the likelihood of a Triggering Event occurring coupled with the valuation of the Purchase Price Make-Whole Payment were then used to calculate the derivative liability. The fair value of the Medafor Derivative was initially recorded as an increase to the investment in equity securities and a corresponding derivative liability on the Company’s Summary Consolidated Balance Sheet. The Medafor Derivative is revalued quarterly, and any change in the value of the derivative subsequent to the purchase date is recorded in the Company’s Summary Consolidated Statement of Operations.

The assumptions used in the Black-Scholes model to value the Purchase Price Make-Whole Payment as of March 31, 2010 included the Company’s estimate of the current market value of Medafor stock of $2.00 per share, an expected stock price volatility of .75, and a risk free interest rate from 0.37% to 1.50%.

The value of the Medafor Derivative was $525,000 and $725,000 as of March 31, 2010 and December 31, 2009, respectively. The change in the value of derivative recorded on the Summary Consolidated Statement of Operations was a gain of $817,000 for the three months ended March 31, 2010. The non-cash gain on valuation of the Medafor Derivative was largely due to the Company’s offer to purchase Medafor being withdrawn in the first quarter of 2010 because it was less likely that CryoLife would make payments on the derivative. This gain was recorded as a decrease in the derivative liability on the Summary Consolidated Balance Sheet. This decrease in the liability was partially offset by an increase of $617,000 related to additional purchases of Medafor common stock during the quarter. See also the disclosure of the change in fair value of the derivative liability in Note 2.

The executed stock purchase agreements do not require the Company to pursue a Triggering Event or to purchase Medafor stock for a price higher than the price initially paid by CryoLife as set forth in the stock purchase agreements. The liability recorded for the Medafor Derivative will only result in a cash payment if a Triggering Event occurs, which is at the discretion of the Company. The Purchase Price Make-Whole Payment ultimately paid by the Company, if any, could be materially different from the amount accrued at March 31, 2010.

Legal Action

Overview

As previously reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, the Company has filed a lawsuit against Medafor, Inc. in the U.S. District Court for the Northern District of Georgia alleging claims for, among other things, breach of contract, fraud, negligent misrepresentation, and violations of Georgia Racketeer Influenced and Corrupt Organizations Act (“Georgia RICO”). The lawsuit arises out of a distribution agreement between the parties (“Agreement”), pursuant to which the Company has the right to distribute a product manufactured by Medafor (the “Product”) under the name HemoStase. On March 8, 2010, pursuant to the Court’s February 18, 2010 order that reinstated the Company’s fraud and negligent misrepresentation claims, the Company filed a Third Amended Complaint, asserting those claims, reasserting its recast Georgia RICO Claim, and reasserting its remaining claims for, among other things, breach of contract. On March 22, 2010 Medafor filed a partial motion to dismiss the Third Amended Complaint, asking the Court to dismiss only the Georgia RICO claim. On April 15, 2010, the Company filed its response brief in opposition to Medafor’s partial motion to dismiss the Third Amended Complaint.

7

Medafor has yet to file their reply brief in support of the partial motion to dismiss. The Company does not know when the Court will rule on the new partial motion to dismiss.

Medafor’s 2010 Notices of Termination

As previously reported in the Company’s Current Report on Form 8-K dated March 5, 2010, Medafor informed the Company on March 2, 2010 of its belief that the Company had materially breached its duties and obligations under the Agreement and gave the Company notice of its intent to terminate the Agreement if the alleged material breach was not cured by April 5, 2010. Medafor contends that the alleged material breach of the Agreement occurred because the Company’s employees and representatives in New Jersey were allegedly offering certain bundling packages beyond the scope of the Agreement and intentionally misrepresenting the scope of the Agreement and the nature of the relationship between the parties. On March 23, 2010, the Company sent a letter to Medafor responding to Medafor’s allegations contained in the March 2, 2010 letter, in which the Company explained, with evidentiary support, its contention that it did not materially breach the Agreement and that Medafor’s allegations of intentionally inappropriate marketing were without merit.

Medafor and the Company agreed on March 5, 2010 that if Medafor decides after April 5, 2010 that a material breach has occurred in reference to the matters discussed above, and that the Company has failed to cure the breach, Medafor will not terminate the Agreement from the date on which Medafor informs the Company of its decision but instead will give the Company three-weeks notice before terminating. In exchange, the Company has agreed that it will not, prior to being informed of Medafor’s decision, petition a court to enjoin the threatened termination of the Agreement. The parties also agreed that the three-week period would not begin to run until one of the two parties affirmatively and explicitly informs the other that it has begun.

As previously reported in the Company’s Current Report on Form 8-K dated March 19, 2010, Medafor informed the Company on March 18, 2010 of its belief that the Company repudiated the Agreement by failing to provide certain requested assurances within thirty days. Medafor alleges that it had reasonable grounds to demand, pursuant to Georgia law, that the Company take certain steps that Medafor asserts amounted to a request for “adequate assurances” of CryoLife’s performance with respect to the Agreement. On March 22, 2010 CryoLife informed Medafor that it disputed Medafor’s assertions and that Medafor had no right to terminate the Agreement. On March 19, 2010, the parties entered into an agreement whereby the parties agreed to an accelerated briefing schedule for CryoLife’s motion for emergency preliminary injunction to require Medafor to comply with the Agreement. The parties have already filed their respective briefs on the motion. The Court scheduled a hearing on the Company’s motion for a preliminary injunction for May 10, 2010. The Company does not know when the Court will rule on the motion for preliminary injunction.

5. Inventories

Inventories are comprised of the following (in thousands):

5

4.6. Deferred Income Taxes

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and tax return purposes. The Company generated deferred tax assets primarily as a result of write-downs of deferred preservation costs, accruals for tissue processing and product liability claims, and operating losses.

TheAs of March 31, 2010 the Company periodically assesses the recoverability of itshad a net deferred tax assets, as necessary, when the Company experiences changes that could materially affect its determinationasset of the recoverability$13.1 million, including a total of its$1.8 million in valuation allowances against deferred tax assets. Management provides a valuation allowance against its deferred tax assets when, as a result of this analysis, management believes it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The Company assessed the recoverability of its deferred tax assets and the appropriate level of its valuation allowance asAs of December 31, 2008. In conducting this assessment, management considered a variety of factors, including the Company’s operating profits for the years ended December 31, 2008 and 2007, the reasons for the Company’s operating losses in prior years, management’s judgment as to the likelihood of continued profitability and expectations of future performance, as well as other factors. Based on this analysis, as of December 31, 2008 the Company determined that maintaining a full valuation allowance on its deferred tax assets was no longer appropriate.

As a result, on December 31, 2008 the Company recorded a tax benefit of $20.1 million to reverse substantially all of the valuation allowance on its deferred tax assets and continued to maintain valuation allowances of $2.8 million on a portion of its deferred tax assets, primarily related to state tax net operating loss carryforwards that the Company does not believe it will be able to utilize based on its projections of profitability in certain states and state carryforward rules and limitations. In future periods, the Company will assess the recoverability of its deferred tax assets as necessary when the Company experiences changes that could materially affect its prior determination of the recoverability of its deferred tax assets.

During the nine months ended September 30, 2009, the Company reversed approximately $63,000 in valuation allowances related to tax credits that were previously expected to expire unused. The Company did not experience any other changes that caused it to reassess the recoverability of its deferred tax assets during the nine months ended September 30, 2009. As of September 30, 2009 the Company had a net deferred tax asset of $16.2$13.8 million, including a total of $2.7$1.8 million in valuation allowances against deferred tax assets, primarilyassets. Valuation allowances at March 31, 2010 and

8

December 31, 2009 related to state net operating loss carryforwards.

carryforwards are not expected to be fully utilized prior to their expiration. The realizability of the Company’s deferred tax assets could be limited in future periods following a change in control as mandated by Section 382 of the Internal Revenue Code of 1986, as amended, which relates to certain specified changes in control of taxpayers. The tax years 20052006 through 20082009 remain open to examination by the major taxing jurisdictions to which the Company is subject.

5.7. Debt

GE Credit Agreement

On March 26, 2008 CryoLife entered into a credit agreement with GE Capital as lender, as amended on January 12, 2010 (the “GE Credit Agreement”). The GE Credit Agreement provides for a revolving credit facility in an aggregate amount not to exceed the initial commitment of $15.0 million (including a letter of credit subfacility of up to an aggregate of $1.5 million)subfacility). The initial commitment may be reduced or increased from time to time pursuant to the terms of the GE Credit Agreement. In the second quarter of 2009, as requested by the German courts, the Company obtained a letter of credit relating to the Company’s patent infringement legal proceeding against Tenaxis, Inc. in Germany, which reduced the aggregate borrowing capacity to $14.8 million. The letter of credit has a one-year initial term and automatically renews for additional one-year periods. While the Company currently expects that its aggregate borrowing capacity under the GE Credit Agreement will remain at $14.8 million, there can be no assurance that the borrowing capacity will remain at this level. Also, if the current global financial and credit market difficulties continue, GE Capital may be unable or unwilling to lend money pursuant to this agreement.

The GE Credit Agreement places limitations on the amount that the Company may borrow and includes various affirmative and negative covenants, including financial covenants such as a requirement that CryoLife (i) not exceed a defined leverage ratio, (ii) maintain a minimum adjusted earnings subject to defined adjustments as of specified dates, and (iii) not make or commit capital expenditures in excess of a defined limitation. Further, since April 15, 2008 as required under the terms of the GE Credit Agreement, the Company ishas been maintaining cash and cash equivalents of at least $5.0 million in accounts in which GE Capital has a first priority perfected lien. These amounts are recorded as long-term restricted money market fundssecurities on the Company’s Summary Consolidated Balance Sheets, as they are restricted for the term of the GE Credit Agreement. The GE Credit Agreement also includes customary conditions on incurring new indebtedness and prohibits payments of cash dividends on the Company’s common stock. There is no restriction on the

6

payment of stock dividends. Commitment fees are paid based on the unused portion of the facility. The GE Credit Agreement expires on March 25, 2011, at which time theany outstanding principal balance will be due. Based on the expiration date, the Company has reclassified the amounts due under the GE Credit Agreement as short-term debt and the related restricted securities as a current asset on the March 31, 2010 Summary Consolidated Balance Sheet. As of September 30, 2009March 31, 2010 the Company was in compliance with the covenants of the GE Credit Agreement.

Amounts borrowed under the GE Credit Agreement are secured by substantially all of the tangible and intangible assets of CryoLife and its subsidiaries and bear interest at either LIBOR, plus 3.25%with a minimum rate of 3%, or GE Capital’s base rate, as defined,with a minimum rate of 4% each, plus 2.25%, as applicable.the applicable margin. As of September 30,March 31, 2010 the outstanding balance of the GE Credit Agreement was $315,000, the aggregate interest rate was 6.25%, and the remaining availability was $14.5 million. As of December 31, 2009 the outstanding balance of the GE Credit Agreement was $315,000, the aggregate interest rate was 5.50%, and the remaining availability was $14.5 million. As of December 31, 2008 the outstanding balance of the GE Credit Agreement was $315,000, the aggregate interest rate was 5.50%, and the remaining availability was $14.7 million.

On February 8, 2005 CryoLife and its subsidiaries entered into a credit agreement with Wells Fargo Foothill, Inc. (“Wells Fargo”) as lender which provided for a revolving credit facility in an aggregate amount equal to the lesser of $15.0 million or a borrowing base determined in accordance with the terms of the credit agreement. The credit agreement with Wells Fargo expired on February 8, 2008 in accordance with its terms, at which time the outstanding principal balance of $4.5 million was paid from cash on hand.Other

The Company routinely enters into agreements to finance insurance premiums for periods not to exceed the terms of the related insurance policies. In March 2010 the Company entered into an agreement to finance approximately $1.5 million in insurance premiums at a 2.707% annual interest rate, which was payable in equal monthly payments over a nine month period. In April 2009 the Company entered into an agreement to finance approximately $1.3 million in insurance premiums at a 3.695% annual interest rate, which is payable in equal monthly payments over a nine month period. In April 2008 the Company entered into an agreement to finance approximately $1.3 million in insurance premiums at a 4.632% annual interest rate, which was payable in equal monthly payments over a nine month period. As of September 30, 2009March 31, 2010 and December 31, 20082009 the aggregate outstanding balances under these agreements were $428,000$1.5 million and zero, respectively.

Total interest expense was $51,000 and $49,000 for the three months ended March 31, 2010 and 2009, respectively, which included interest on debt, capital leases, and uncertain tax positions.

9

6.8. Comprehensive Income

The following is a summary of comprehensive income (in thousands):

The tax effect on the change in unrealized loss on investments and the translation adjustment is zero for each period presented. The accumulated other comprehensive loss of $50,000$42,000 and $80,000$38,000 as of September 30, 2009March 31, 2010 and December 31, 2008,2009, respectively, consisted solely of currency translation adjustments.

7.9. Income perPer Common Share

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

7

In future periods, basic and diluted earningsincome per common share are expected to be affected by the fluctuations in the fair value of the Company’s common stock, the exercise and issuance of additional stock options, and the issuance of additional restricted stock awards.

8.10. Stock Compensation

Overview

The Company has stock option and stock incentive plans for employees and non-employee Directors that provide for grants of restricted stock awards and options to purchase shares of Company common stock at exercise prices generally equal to the fair values of such stock at the dates of grant. The Company also maintains a shareholder approved Employee Stock Purchase Plan (the “ESPP”) for the benefit of its employees. The ESPP allows eligible employees the right to purchase common stock on a quarterlyregular basis at the lower of 85% of the market price at the beginning or end of each three-month offering period.

10

Stock Awards

During the nine months ended September 30, 2009 theThe Compensation Committee of the Company’s Board of Directors authorized awards of stock from approved stock incentive plans to non-employee Directors and certain Company executives and officers totaling 160,000152,000 and 87,000 shares of common stock during the quarters ended March 31, 2010 and 2009, respectively, which had an aggregate market value of $1.1 million.

During the nine months ended September 30, 2008 the Compensation Committee of the Company’s Board of Directors authorized awards of stock from approved stock incentive plans to non-employee Directors$957,000 and certain Company executives, officers, and managers totaling 183,000 shares of common stock, which had an aggregate value of $1.8 million. These stock awards included 81,000 shares of common stock valued at $786,000 issued as part of the 2007 performance-based bonus plans for certain Company executives, officers, and managers. The Company recorded the expense related to the 2007 performance-based bonus plans during the year ended December 31, 2007.$717,000, respectively.

Stock Options

The Compensation Committee of the Company’s Board of Directors authorized grants of stock options from approved stock incentive plans to certain Company executivesofficers and employees totaling 438,000427,000 and 403,000438,000 shares during the nine monthsquarters ended September 30,March 31, 2010 and 2009, and 2008, respectively, with exercise prices equal to the stock prices on the respective grant dates.

Employees purchased common stock totaling 58,00015,000 and 38,00014,000 shares duringin the nine monthsquarters ended September 30,March 31, 2010 and 2009, and 2008, respectively, through the Company’s ESPP.

Stock Compensation Expense

The Company values its stock awards based on the stock price on the date of grant and expenses the related compensation cost using the straight-line method over the vesting period. The Company uses a Black-Scholes model to value its stock option grants and expenses the related compensation cost using the straight-line method over the vesting period. The fair value of the Company’s ESPP options is also determined using a Black-Scholes model and is expensed over the vesting period. The fair value of stock options is determined on the grant date using assumptions for the expected term, expected volatility, dividend yield, and the risk free interest rate. The period expense is then determined based on the valuation of the options and, at that time, an estimated forfeiture rate is used to reduce the expense recorded. Stock awards and stock options are valuedThe Company’s estimate of pre-vesting forfeitures is primarily based on

8

the stock price as of each grant date and are recorded as an expense on the Company’s Summary Consolidated Statements of Operations over the respective vesting periods. The fair valuerecent historical experience of the Company’s ESPP options is also determined using a Black-Scholes modelCompany and is expensed over the three monthadjusted to reflect actual forfeitures at each vesting period.date.

The following weighted-average assumptions were used to determine the fair value of options:

The following table summarizes stock compensation expenses (in thousands):

Included in thisthe total stock compensation expense were expenses related to common stock awards and stock options issued in the current year as well as those issued in prior years that continue to vest during the period, and compensation expense related to the Company’s ESPP. These amounts were recorded as compensation expense and were subject to the Company’s normal allocation of expenses to inventory and deferred preservation costs.costs and inventory. The Company capitalized $66,000 and $39,000$59,000 in each of the three months ended September 30,March 31, 2010 and 2009 and 2008, respectively, and $187,000 and $88,000 in the nine months ended September 30, 2009 and 2008, respectively, of the stock compensation expense into its deferred preservation costs and inventory costs.

As of September 30, 2009March 31, 2010 the Company had a total of $1.2$1.7 million in total unrecognized compensation costs related to unvested stock awards, before considering the effect of expected forfeitures. As of September 30, 2009March 31, 2010 this expense is expected to be recognized over a weighted average period of 1.41.8 years. As of September 30, 2009March 31, 2010 there was approximately $2.0$2.4 million in total unrecognized compensation costs related to unvested stock options, before considering the effect of expected forfeitures. As of September 30, 2009March 31, 2010 this expense is expected to be recognized over a weighted average period of 1.71.9 years.

11

9.11. Segment Information

The Company has two reportable segments organized according to its services and products: Preservation Services and Medical Devices.

The Preservation Services segment includes external services revenues from the preservation of cardiac and vascular tissues and from shipments of previously preserved orthopaedic tissues. The Medical Devices segment includes external revenues from product sales of BioGlue^® Surgical Adhesive (“BioGlue”), BioFoam^® Surgical Matrix (“BioFoam”), and related products, and HemoStase™,HemoStase, as well as sales of other medical devices. BioGlue related products include BioFoamincludes BIOGLUEAesthetic^® Surgical Matrix, and BIOGLUEAesthetic™ Medical Adhesive.There are no intersegment revenues.

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

9

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

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

12

10.12. Commitments and Contingencies

Liability Claims

In the normal course of business we are made aware of adverse events involving our tissuetissues and products. Any adverse event could ultimately give rise to a lawsuit against us.the Company. In addition, tissue processing and product liability claims may be asserted against usthe Company in the future based on events we areit is not aware of at the present time. As of October 23, 2009 there were no pending tissue processing or product liability lawsuits filed against the Company.

On April 1, 2009 the Company bound liability coverage for the 2009/2010 insurance policy year. This policy is a seven-year claims-made insurance policy, i.e. claims incurred during the period April 1, 2003 through March 31, 2010 and reported during the period April 1, 2009 through March 31, 2010 are covered by this policy. Claims incurred prior to April 1, 2003 that have not been reported are uninsured. Any punitive damage components of claims are uninsured.

10

The Company maintains claims-made insurance policies to mitigate its financial exposure to tissue processing and product liability claims. Claims-made insurance policies generally cover only those asserted claims and incidents that are reported to the insurance carrier while the policy is in effect. Thus, a claims-made policy does not generally represent a transfer of risk for claims and incidents that have been incurred but not reported to the insurance carrier during the policy period.

The Company estimated that its liability for unreported tissue processing and product liability Any punitive damage components of claims was $3.9 million as of September 30, 2009. The $3.9 million balance is included as a component of accrued expenses of $1.9 million and other long-term liabilities of $2.0 million on the September 30, 2009 Summary Consolidated Balance Sheet. Further analysis indicated that the liability could be estimated to be as high as $8.5 million, after including a reasonable margin for statistical fluctuations calculated based on actuarial simulation techniques. The Company estimated that as of September 30, 2009, $1.4 million of the accrual for unreported liability claims would be recoverable under the Company’s insurance policies. The $1.4 million insurance recoverable is included as a component of receivables of $700,000 and other long-term assets of $700,000 on the September 30, 2009 Summary Consolidated Balance Sheet. These amounts represent management’s estimate of the probable losses and anticipated recoveries for unreported liability claims related to services performed and products sold prior to September 30, 2009. Actual results may differ from this estimate.are uninsured.

The Company believes that the assumptions it uses to determine its unreported loss liability provide a reasonable basis for its calculation. However, the accuracy of the estimates is limited by the general uncertainty that exists for any estimate of future activity due to uncertainties surrounding the assumptions used and due to Company specific conditions and the scarcity of industry data directly relevant to the Company’s business activities. Due to these factors, actual results may differ significantly from the assumptions used and amounts accrued.

AsThe Company accrues its estimate of December 31, 2008 the Company accrued $4.4 million for unreported tissue processing and product liability claims and recorded a receivable of $1.5 million for unreported liability claims estimated to be recoverable under the Company’s insurance policies. This $4.4 million accrual was included as a componentcomponents of accrued expenses and other current liabilities of $2.2 million and other long-term liabilities of $2.2 million onand records the December 31, 2008 Summary Consolidated Balance Sheet. The $1.5 millionrelated recoverable insurance recoverable was includedamounts as a component of receivables of $700,000 and other long-term assetsassets. The amounts recorded represent management’s estimate of $800,000 on the probable losses and anticipated recoveries for unreported claims related to services performed and products sold prior to the balance sheet date.

At March 31, 2010 and December 31, 2008 Summary Consolidated Balance Sheet.

11. New Accounting Pronouncements

The Company was required to adopt new accounting guidance related to business combinations on January 1, 2009. The new guidance establishes principles2009 the short-term and requirements for how an acquirer in a business combination recognizes and measures in its financial statementslong-term portions of the identifiable assets acquired, the liabilities assumed,unreported loss liability and any controlling interest; recognizes and measuresrelated recoverable insurance amounts are as follows (in thousands):