<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934. For the fiscal year ended December 31, 1999.
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: 000-28460


                        FUSION MEDICAL TECHNOLOGIES, INC.


             (Exact name of registrant as specified in its charter)

                     Delaware                         96662349
(State or other jurisdiction of incorporation    (I.R.S. Employer Identification
  or organization)                                  No.)


              1615 Plymouth Street, Mountain View, California 94043
               (Address of principal executive offices) (Zip code)

       Registrant's telephone number, including area code: (650) 903-4000

Securities registered pursuant to Section 12(b)
  of the Act:                                      None

Securities registered pursuant to Section 12(g)
  of the Act:                                      Common Stock, $.001 par value


     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 if disclosures 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. [X]

     The aggregate  market value of voting stock held by  non-affiliates  of the
Registrant,  based upon the closing sales price of the Common Stock on March 22,
2000 as reported on the Nasdaq National Market, was approximately  $93,327,208.
Shares of Common Stock held by each  executive  officer and director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded in
that such persons may be deemed to be affiliates. The determination of affiliate
status is not necessarily a conclusive determination for other purposes.

     As of March 22, 2000, the Registrant had 10,049,764  shares of Common Stock
outstanding.
____________________________

DOCUMENTS INCORPORATED BY REFERENCE

     The  information  called for in Part III is  incorporated by reference from
the Proxy  Statement  relating  to the  Annual  Meeting of  Stockholders  of the
Registrant to be held on June 15, 2000.
<PAGE>

                        Fusion Medical Technologies, INC.

                                      INDEX


                                                                           PAGE
                                                                          NUMBER
                                                                          ------
                                     PART I

 Item 1. Business...........................................................  3
 Item 2. Properties......................................................... 21
 Item 3. Legal Proceedings.................................................. 21
 Item 4. Submission of Matters to a Vote of Security Holders................ 21


                                     PART II

 Item 5. Market for Registrant's Common Equity and Related .................
         Stockholder Matters................................................ 22
 Item 6. Selected Financial Data............................................ 23
 Item 7. Management's Discussion and Analysis of Financial Condition
         and Results of Operations.......................................... 24
 Item 7A Quantitative and Qualitative Disclosures about Market Risk......... 28
 Item 8. Financial Statements and Supplementary Data........................ 28
 Item 9. Changes In and Disagreements with Accountants on Accounting
         and Financial Disclosure ...........................................28
                                    PART III

 Item 10 Directors and Executive Officers of the Registrants................ 29
 Item 11 Executive Compensation............................................. 29
 Item 12 Security Ownership of Certain Beneficial Owners
         and Management..................................................... 29
 Item 13 Certain Relationships and Related Transactions..................... 29



                                     PART IV

 Item 14 Exhibits, Financial Statement Schedules............................ 30
 Signatures ................................................................ 31


                                       2
<PAGE>

         PART I

ITEM 1.  BUSINESS

     THE  BUSINESS  SECTION AND OTHER PARTS OF THIS REPORT ON FORM 10-K  CONTAIN
FORWARD-LOOKING  STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.  THE COMPANY'S
ACTUAL  RESULTS  MAY DIFFER  SIGNIFICANTLY  FROM THE  RESULTS  DISCUSSED  IN THE
FORWARD-LOOKING STATEMENTS.  FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED,  THOSE DISCUSSED IN THE SECTION  ENTITLED  "BUSINESS - RISK
FACTORS" COMMENCING ON PAGE 15.

THE COMPANY

     We are  developing  and  commercializing  proprietary  products as surgical
hemostatic sealant products.  Hemostatic products are devices,  such as sutures,
and  topical  agents,  such  as  sponges,  used to stop  bleeding.  Our  current
commercial product, FLOSEAL(R) MATRIX HEMOSTATIC SEALANT  "FLOSEAL",  combines a
gel derived  from  collagen  with thrombin, a potent clotting  agent, to control
surgical bleeding.

     FloSeal  received  approval  for  marketing  in the  U.S.  from  the FDA on
December  8, 1999 and we began  selling  FloSeal  within 48 hours  into the U.S.
market, which we estimate to exceed $250 million.  FloSeal is indicated,  in the
U.S.  for  all  surgical  specialties  except  neurosurgical,   ophthalmic,  and
urological.  To address the broad hemostatic sealant market for FloSeal, we have
implemented a hybrid sales  strategy.  We are  initially  focused on three vital
markets:  cardiac,  vascular, and spinal surgical markets. To address the cardio
and vasuclar surgical specialty markets of cardiac and vascular surgeries in the
U.S.,  we have built a direct  sales  force.  To address  the spinal and cranial
surgical specialty markets, we entered into a world wide distribution  agreement
with Sulzer  Spine-Tech  in July 1999.  And, to address the cardiac and vascular
surgical   specialty   markets  in  Europe,  we  are  selling  through  regional
distributors.

     We believe the innovative  physical  structure of FLOSEAL  provides certain
performance advantages over existing surgical hemostatic products,  such as fast
and effective bleeding control even in challenging applications,  quick and easy
onsite  preparation,  excellent handling and total absorption by the body within
six to eight weeks.

     In December 1998, we completed a 309 patient clinical trial. The primary
endpoint of the clinical trial, which included cardiac, vascular and spinal
surgery patients, was to show FloSeal stopped bleeding within 10 minutes of
application at least as frequently as the Gelfoam plus thrombin control. The
trial showed FloSeal stopped patients' bleeding within 10 minutes in 96 % of all
patients treated with FloSeal, whereas Gelfoam plus thrombin stopped patients'
bleeding within 10 minutes in 77 % of all patients in the control group. The
trial also showed FloSeal stopped heavy cardiac bleeding within three minutes in
77% of patients, as compared to 0% for the control group where Gelfoam plus
thrombin was used. Lastly, FloSeal stopped patients' bleeding at least two times
more quickly than Gelfoam plus thrombin.

     We are also  developing  additional  configurations  of  FLOSEAL as well as
additional  products  designed to stop bleeding based upon our core  proprietary
technology.  A  configuration  of FloSeal for use by ear,  nose and throat (ENT)
surgeons is in the final stages of  development  and we expect to  commercialize
the product in the U.S. in late 2000.

                                       3
<PAGE>

BACKGROUND

     Surgical  wounds must be  effectively  closed and  bleeding  controlled  to
ensure the  success of surgical  procedures.  Failure to close  surgical  wounds
completely  can result in serious or  possibly  life-threatening  complications,
including blood loss, tissue damage, infection and excessive scarring. A variety
of  hemostats  have  been  developed  to help  surgeons  control  intraoperative
bleeding,  including  devices  such as sutures and  staples,  as well as topical
hemostatic  products,  such as sponges,  like Gelfoam(R),  and commercial fibrin
glues. Topical hemostatic products are a popular means of supplementing  sutures
and staples in applications where sutures and staples are not entirely effective
in controlling bleeding.

SUTURES AND STAPLES

     Historically,  sutures  have been the most common type of product  used for
closing  surgical  wounds.  Sutures  mechanically  bring  together the tissue on
either side of a wound to facilitate  healing.  In the 1960s,  surgical stapling
was introduced to reduce the  time-consuming and cumbersome aspects of suturing.
Surgical  stapling  involves  drawing together tissue through the application of
staples along the line of incision using a manually  operated  device.  Industry
sources  estimate  the  annual  worldwide  market  for  sutures  and  staples is
approximately $2.3 billion.

     Sutures and staples have a number of  limitations.  In particular,  they do
not have  inherent  sealing  capabilities  and thus  sometime  do not  eliminate
bleeding along suture lines,  especially  when  connecting  blood  vessels.  The
physical  structure  of sutures  and  staples  makes them often  ineffective  in
stopping  bleeding  associated with fragile tissue and organ wounds because such
sites  often lack the  structural  integrity  required  to hold such  devices in
place. Similarly, sutures and staples, because of their size limitations and the
mechanics of applying  them to the site of a wound,  are difficult or impossible
to use in  certain  types of  surgeries  where  access to the  surgical  site is
limited, such as minimally invasive procedures.

TOPICAL HEMOSTATS

     Topical hemostats provide the surgeon with additional means for controlling
bleeding in procedures in which sutures and staples are not entirely  effective.
Numerous materials have been used to achieve hemostasis in surgical  procedures,
including pads, like Avitene(R),  sponges,  like Gelfoam, used with and with out
thrombin,  and thrombin alone.  While existing  topical  hemostats are a popular
complement to sutures and staples, they have several limitations,  including the
following:

     o    LIMITED  EFFECTIVENESS  -  Topical  hemostats  do not work well on all
          types of bleeding.  It is often the time and pressure  that cause  the
          bleeding to stop.

     o    REBLEEDING MAY OCCUR AFTER  APPLICATION - Since topical  hemostats are
          usually in sponge or pad form,  when a blood clot is formed,  the clot
          becomes embedded in the topical hemostat. So, when the pad is removed,
          rebleeding often occurs.

     The limitations of current  products have been  particularly  pronounced in
procedures  involving suture lines in blood vessels,  such as in coronary artery
bypass  grafts,  and in patients  with  compromised  coagulation.  Despite these
limitations,  topical  hemostats  have  achieved  significant  sales to date. We
estimate  annual sales of topical  hemostats,  including  Gelfoam plus thrombin,
exceeded $120 million in 1999. The sales were almost  entirely within the United
States.

                                       4
<PAGE>

FIBRIN GLUES

     Fibrin glues and other types of surgical  sealants and adhesives  also have
limitations.

     o    LENGTHY AND COMPLEX  PREPARATION- Some fibrin glue products require as
          much as 40 minutes to prepare. Others require medical procedures, like
          drawing a  patient's  blood  hours  before  their  surgery  to extract
          components of their blood, utilizing specialized equipment, for use in
          the glue.

     o    DIFFICULT TO USE - Most fibrin glues are liquids.  Placing liquid on a
          very wet  (bloody)  surface  causes  the  liquid  glue to flow off the
          bleeding  site.  Surgeons  are  required  to dry the  site  (stop  the
          bleeding)  prior to  using  the glue  which  is  supposed  to stop the
          bleeding.

     We estimate the annual U.S.  sales of fibrin  glue,  approved by the FDA in
May 1998,  to have been $35  million in 1999.  In 1999,  international  sales of
fibrin glue, however,  were approximately $300 million, of which we believe that
over 60% were attributable to bleeding control.

THE BENEFITS OF FLOSEAL

     Our current  commercial  product,  FLOSEAL,  a proprietary gel derived from
collagen combined with thrombin,  is designed to complement  sutures and staples
and to overcome limitations of other existing products used to control bleeding,
including topical  hemostats,  fibrin glues and other types of surgical sealants
and adhesives. Our U.S. clinical trial demonstrated the effectiveness of FLOSEAL
in stopping  bleeding  in cardiac,  vascular  and spinal  surgeries.  We believe
FLOSEAL offers the following key performance advantages:

     o    STOPS BLEEDING RAPIDLY AND EFFECTIVELY. FLOSEAL'S proprietary physical
          structure  rapidly  induces  stable clot formation and seals the wound
          site,  even in  challenging  surgical  situations,  including very wet
          tissue and heavily  bleeding  sites.  For  example,  in cases of heavy
          bleeding  experienced by some cardiac  patients in our trial,  FLOSEAL
          stopped bleeding within three minutes in 77% of patients treated.

     o    STOPS VARIOUS TYPES OF BLEEDING.  A subanalysis  in our clinical trial
          demonstrated that FLOSEAL stopped all degrees of bleeding encountered,
          ranging from lighter "oozing" to heavier "flowing" and "spurting".  We
          believe   FLOSEAL  is  the  first  product  to   effectively   control
          substantially all of these types of bleeding. For example, a secondary
          endpoint  analysis  in our  clinical  trial  showed  in cases of heavy
          bleeding experienced by some cardiac patients FLOSEAL stopped bleeding
          within  three  minutes in 77% of patients  treated  with  FLOSEAL,  as
          compared  to 0% for those  treated  with  Gelfoam  plus  thrombin.  In
          addition,  we  believe  FLOSEAL  addresses  bleeding  associated  with
          fragile  tissues,  diffuse organ  bleeding and high pressure  arterial
          bleeding,   including   bleeding  in  patients   being   treated  with
          anti-coagulant drugs.  Data from the clinical trial are included below
          under the subsection entitled "Fusion's Products."

     o    EASY TO PREPARE. FLOSEAL can be prepared within two minutes and can be
          used for up to two hours after  preparation.  No special  equipment is
          required  during  preparation,  and all materials are contained in one
          simple package.

     o    EASY TO USE.  FLOSEAL  is easy to apply  using a  standard  disposable
          syringe and has a gel-like granular consistency which rapidly conforms
          to the  application  site.  The surgeon  can either  remove any excess
          material without  difficulty by gentle  irrigation of the treated area
          or leave it to be absorbed by the body. Since only minimal training is
          necessary,  we have seen both surgeons and nursing teams quickly learn
          how to use the product.

                                       5
<PAGE>

     o    BROAD  APPLICABILITY.  In the  U.S.,  FLOSEAL  is  indicated  in  most
          surgical  procedures  (other than in  neurosurgical,  ophthalmic,  and
          urological)  as an adjunct to  hemostasis  when control of bleeding by
          ligature or conventional procedures is ineffective or impractical.  In
          non-U.S. locations,  FLOSEAL is indicated in surgical procedures as an
          adjunct  to  hemostasis  when  control  of  bleeding  by  ligature  or
          conventional procedures is ineffective or impractical.

     o    BIOCOMPATIBLE AND SAFE. FLOSEAL is biocompatible and fully absorbed by
          the body within approximately six to eight weeks,  consistent with the
          body's  normal  healing  process.  Since  FLOSEAL  does not have to be
          removed after  application,  rebleeding  generally does not occur. The
          materials  used in  FLOSEAL,  collagen  and  thrombin,  are  naturally
          occurring materials that have a safe history of use in humans.

SALES AND MARKETING

     FloSeal  received  approval  for  marketing  in the  U.S.  from  the FDA on
December  8, 1999 and we began  selling  FloSeal  within 48 hours  into the U.S.
market,  which we estimate to be exceed $250 million.(see  TARGET MARKET).  This
market is  composed  of all  surgical  specialties  and  represents  the  market
targeted  by  FLOSEAL.  In the  U.S.  FLOSEAL  is  indicated  for  all  surgical
specialties  except  neurosurgical,   ophthalmic,  and  urological.  During  our
marketing  research,  we asked  surgeons  for the  percent of their  cases where
bleeding control was an issue. We found fifty percent of the initially  targeted
market  for  FloSeal  was  composed  of  three  surgical  specialties:  cardiac,
vascular,  and spinal.  Thus, we decided to focus our marketing efforts on these
three specialties.

     To address the three vital markets: cardiac,  vascular, and spinal, we have
implemented  a hybrid  sales  strategy.  To address  the  cardiac  and  vascular
surgical  specialties  in the  U.S.,  we have  built a direct  sales  force.  We
identified  the top  fifteen  geographic  areas  in the U.S.  with  the  highest
incidence of cardiac and vascular  procedures.  Beginning in the summer of 1999,
we began hiring sales  professionals  in these top  markets.  Today,  our direct
sales force services fourteen of these areas.

     To address the spinal and cranial surgical  specialty  markets,  we entered
into a world wide  distribution  agreement with Sulzer  Spine-Tech in July 1999.
Sulzer  Spine-Tech  is a subsidiary  of Sulzer  Medica  Ltd.,  a US$906  million
company headquartered in Switzerland.  Sulzer Spine-Tech has an established U.S.
sales force of approximately 120 persons with  relationships with most hospitals
conducting spinal and nuerosurgical  surgeries.  The distribution agreement with
Sulzer Spine-Tech grants the distribution rights to the product configuration of
FLOSEAL, called Proceed(TM) Hemostatic Sealant (Proceed),  for use in spinal and
cranial  surgeries  in all world wide  markets  except for Japan and a few other
small  markets  where we already had  distributor  relationships  in place.  The
agreement  extends through 2002 and contains  provisions for both annual renewal
and termination in the event of change in control.

     To address the cardiac and vascular  surgical  specialty markets in Europe,
we are selling through regional distributors.  FLOSEAL receive CE Mark clearance
to  allow  marketing  in  Europe  in  April  1999.  We have  relationships  with
distributors in Switzerland,  Germany, The Netherlands,  Sweden, Austria, Italy,
Spain,  the  United  Kingdom,   Belgium,  Denmark,  and  Finland.  The  regional
distributors maintain small inventories of FloSeal.

     We believe  this  hybrid  sales and  marketing  strategy  will enable us to
quickly  penetrate  the three vital  markets and rapidly  grow sales volume over
time.

                                       6
<PAGE>

TARGET MARKET

     Our  domestic  and  international  commercialization  efforts are  focusing
initially on those surgeons who perform cardiac, vascular and spinal procedures,
the  specialties  studied in the  clinical  trial.  These  first  three  markets
comprise  approximately 45% of the total initial market. There are approximately
500,000  cardiac  surgeries,  400,000  vascular  surgeries  and  400,000  spinal
surgeries  performed  annually in the United States. We believe FLOSEAL could be
used in approximately 15% of cardiac  surgeries,  50% of vascular  surgeries and
60% of spinal surgeries.  We believe the potential market for FLOSEAL outside of
the United States with respect to each of those surgical  specialties is roughly
equal to the corresponding market within the United States.  Finally, we believe
FLOSEAL  will be a  useful  hemostat  for  other  types  of  surgery,  including
non-spinal orthopedic,  trauma, gynecologic,  plastic and other general surgery.
Marketing FLOSEAL in the U.S. for use in neurosurgical,  urologic and ophthalmic
surgical specialities will require approvals by FDA, which cannot be guaranteed.

FUSION'S PRODUCTS

     The technology  underlying  FloSeal and our other products  currently under
development  consists of a mixture of a  proprietary  gel derived  collagen  and
thrombin,  a blood clotting agent.  When mixed,  the thrombin coats the gel, and
they act synergistically to stop bleeding. The granular nature of the gel allows
it to conform to irregular  wound  geometries.  We have  engineered the collagen
granules  to swell  upon  contact  with the blood.  By  swelling,  the  granules
restrict blood flow.  Blood  percolates  through the spaces between the granules
and  is  exposed  to  high  concentrations  of  thrombin,  thereby  accelerating
formation of a mechanically stable clot.

FLOSEAL

     FLOSEAL, our lead product, is designed to control bleeding in various types
of surgery and has received a Premarket  Approval  from FDA on December 8, 1999.
In April 1999, we received CE Mark  Certification  in Europe  allowing sales and
marketing activities to begin in most countries in Europe.

     CLINICAL  DEVELOPMENT.  In November  1998,  we  completed  enrollment  in a
ten-center,  randomized  clinical  trial of FLOSEAL  involving  309 patients who
underwent  cardiac,  vascular or spinal surgery.  One hundred fifty-six patients
were  treated with  FLOSEAL  while 153  patients  were treated with Gelfoam plus
thrombin.  At the time the study began,  Gelfoam  plus  thrombin was seen as the
standard of treatment The degree of  intraoperative  bleeding treated during the
trial ranged from lighter  "oozing" to heavier  "flowing" and  "spurting,"  with
nearly  one-third  (32%) of the patients  experiencing  bleeding in the heavier,
more difficult to control ranges.

     The primary  endpoint  of the trial was to show  FLOSEAL,  in the  combined
surgical procedures,  stopped bleeding within 10 minutes of application at least
as frequently as the Gelfoam plus thrombin  control.  FLOSEAL  stopped  bleeding
within 10 minutes  in 96% of the 156  patients  treated  with  FLOSEAL,  whereas
Gelfoam  plus  thrombin  stopped  bleeding  within ten minutes in 77% of the 153
patients  in the  control  group.  In  addition,  a subset  analysis of patients
treated  demonstrated  FLOSEAL  stopped  bleeding at least two times faster than
Gelfoam plus thrombin.  These results were consistent across all tested surgical
specialties  and  bleeding  classes,  from  simple  oozing  to  active  arterial
spurting.

     Ninety-three  patients underwent cardiac surgery,  the most difficult group
to  treat  due  to  the  use  of  cardiopulmonary  bypass  and  high  levels  of
anti-coagulant  drugs. FLOSEAL stopped bleeding within ten minutes in 94% of the
48 patients treated with FLOSEAL, whereas Gelfoam plus thrombin stopped bleeding
within ten minutes in 60% of the 45 patients in the control  group.  In cases of
heavy cardiac bleeding,  FLOSEAL stopped bleeding within three minutes in 77% of
patients, as compared to 0% for those treated with Gelfoam plus thrombin.

                                       7
<PAGE>

     In the trial,  89 patients  underwent  vascular  surgery.  FLOSEAL  stopped
bleeding  within ten minutes in 93% of the 43  patients  treated  with  FLOSEAL,
versus 76% for the 46 control group patients.  One hundred twenty-seven patients
underwent spinal surgery.  FLOSEAL stopped bleeding within ten minutes in 98% of
the 65  patients  treated  with  FLOSEAL,  versus 90% for the 62  control  group
patients.  Results for the  clinical  trial as a whole and each of the  cardiac,
vascular  and  spinal  arms of the trial have been  presented  as  abstracts  at
various medical  conferences.  The cardiac arm has been accepted for publication
in the Annals of Thoracic  Surgery.  We anticipate  additional  publications  in
peer-reviewed medical journals in the future.

     The  primary  endpoint  of the  trial was  achieved.  In  addition,  subset
analysis of secondary endpoints showed statistically  significant and clinically
meaningful  benefit of FLOSEAL relative to Gelfoam plus thrombin.  The following
chart summarizes certain data with respect to the trial results:

SUMMARY CLINICAL TRIAL RESULTS
<TABLE>
<CAPTION>


                                                    Hemostasis              Hemostasis
                                                within 10 minutes        within 3 minutes
                                              ---------------------     --------------------

                                                           GELFOAM                  GELFOAM
PATIENT CATEGORY                               FLOSEAL    +THROMBIN     FLOSEAL    +THROMBIN
----------------                               -------    ---------     -------    ---------

<S>                                               <C>       <C>            <C>        <C>
All patients                                      96%       77%            84%        47%

      All vascular                                93%       76%            79%        39%

      All spinal                                  98%       90%             *          *

      All cardiac patients                        94%       60%            69%        22%

         Cardiac: "Oozing"                        94%       66%            66%        29%

         Cardiac: "Flowing" or "Spurting"         92%       40%            77%        0%

*  Data not yet released and subject to publication in a peer reviewed medical journal.
</TABLE>

FLOSEAL FOR ENT

     We are  developing  a  configuration  of FLOSEAL  for use by ear,  nose and
throat  (ENT)  surgeons to control  bleeding.  This  configuration  is delivered
through a standard  disposable syringe with a sinus applicator tip, and consists
of the same FLOSEAL tested in the clinical trial  described  above. At the close
of sinus  surgeries,  conventional  packing  materials,  such as gauze strips or
plugs  are often  inserted  into the nose and left in place  for  several  days.
Removal of these  packing  materials  requires a return  visit to the  surgeon's
office, is generally painful and often results in re-bleeding. FLOSEAL, however,
is absorbed by the body and consequently  does not require  removal.  We believe
FLOSEAL will eliminate much of the  discomfort,  pain and cost  associated  with
nasal packing.

     In 1998, we completed a three-center evaluation of 18 patients in Canada in
which FLOSEAL controlled  intra-operative  bleeding during sinus surgery in 100%
of 29 application  sites. We intend to  commercialize  the ENT  configuration of
FLOSEAL in the second half of 2000.

                                       8
<PAGE>

     We expect our domestic and international commercialization efforts to focus
on ENT surgeons.  Industry sources estimate  approximately 875,000 ENT surgeries
are  performed  annually  in the United  States.  ENT  surgeries  include  sinus
surgery,  tonsillectomies and adenoidectomies.  We estimate approximately 50% of
these  ENT  procedures  could  benefit  from  the use of this  configuration  of
FLOSEAL.

FEMORAL ARTERY CLOSURE DEVICE

     We are also developing a device to close femoral artery punctures following
catheterization  procedures.  This device is an  additional  application  of our
FLOSEAL technology.  The femoral artery closure device is designed to be used by
interventionalists  to seal arterial  punctures of the femoral artery  following
vascular interventional procedures,  such as balloon angioplasty or angiography.
The  device  incorporates  a  proprietary  catheter-based  applicator  to easily
deliver to the site of the  arterial  puncture  the same  FLOSEAL  tested in the
clinical  trial  described  above.  Currently  available  suturing  devices  and
collagen plugs can be costly,  difficult to use and may require extensive doctor
training  prior to use. We are designing the femoral  artery  closure  device to
address these limitations.

     We have conducted preliminary pre-clinical studies examining the safety and
effectiveness  of the femoral  artery closure  device.  We plan to begin a pilot
clinical  trial  before  the  end  2000.  This  device  is in  early  stages  of
development.  To begin  clinical  trails and to market the device  requires  FDA
approval,  which cannot be guaranteed.  Industry sources estimate  approximately
3.3 million arterial  puncture  closure  procedures,  including  therapeutic and
diagnostic procedures, are performed annually in the United States in 1999.

FLOSEAL SPONGE

     The FLOSEAL sponge is a ready-to-use formulation of the FLOSEAL technology.
While the current  FLOSEAL product  requires the FLOSEAL gelatin  granules to be
mixed with the FLOSEAL  thrombin  component  prior to  application,  the FLOSEAL
sponge  would  be  packaged  in  a  pre-mixed,   dry  formulation.    A  gelatin
superstructure dissolves very quickly upon contact with a bleeding wound leaving
active FLOSEAL at the bleeding site. In laboratory tests, the FLOSEAL sponge has
been shown to stop bleeding as effectively as the current FLOSEAL product.

     The  FLOSEAL  sponge  will be used in  trauma,  ambulance  and  battlefield
applications where loss of blood often leads to patient death prior to receiving
necessary medical attention.  Discussion with FDA regarding specific  regulatory
requirements are planned to take place in the first half of 2000.

     The   statements   we   have   made   above   regarding   the   anticipated
commercialization  of products in our pipeline are forward  looking.  We are not
permitted to commercialize any of the above products unless and until we receive
necessary regulatory approvals.

RESEARCH AND DEVELOPMENT

     Our  research  and  development  activities  are focused on  enhancing  and
expanding  the  applications  of  the  FLOSEAL  technology  platform.   We  have
established  an active  dialogue with  surgeons to ascertain the most  desirable
additional applications and enhancements for the FLOSEAL technology.

MANUFACTURING

     Our  manufacturing  operations  are  located  in  our  13,200  square  foot
headquarters in Mountain View,  California.  We have maximized our manufacturing
capacity  within this facility.  We believe our current  manufacturing  capacity
will  be  sufficient  through  the  end of  2000.  In  January  2000,  we  began
improvements on

                                       9
<PAGE>

an  additional   72,500  square  foot  facility in  Fremont,   California.   The
Fremont  facility  will  become  our  corporate  headquarters.  We  believe  the
additional  capacity of the Fremont facility should be sufficient  through 2004.
In  conjunction  with  the new  facility,  we  anticipate  spending  a total  of
approximately $2.2 million for the purchase of production  equipment,  leasehold
improvements and office  furnishings and equipment.  We are exploring  proposals
for capital lease financing to support this expansion.

     Our  manufacturing  facilities  are  subject  to the FDA's  Quality  System
Regulation,  international quality standards and other regulatory  requirements.
Difficulties we encounter in manufacturing  scale-up or our failure to implement
and maintain  our  facilities  in  accordance  with  quality  standards or other
regulatory  requirements  could lead to a delay or  termination  of  production,
which would  materially  and adversely  affect our business.  We have received a
manufacturing  license  from  the  California  Department  of  Health  Services.
However,  we  have no  experience  manufacturing  our  products  in the  volumes
necessary to achieve significant commercial sales, and there can be no assurance
that such manufacturing can be achieved at a commercially reasonable cost. If we
encounter  any  manufacturing   difficulties   involving  capacity  constraints,
production  yields,  quality  control and  assurance,  supplies of components or
shortages of qualified  personnel our business could be materially and adversely
affected.  There  can be no  assurance  that we  will  be  able  to  manufacture
sufficient   quantities   of   products   to  meet   supply   requirements   for
commercialization and continued clinical trials in the United States and abroad.

     Fusion  acquires  raw  materials  and product  components  from  suppliers,
processes the raw materials  internally to the appropriate form and composition,
packages kits, arranges for sterilization by a third party and then packages the
products for shipment.  We acquire some raw materials  and  components,  such as
bovine hides and thrombin, all of which are essential components of FLOSEAL, and
sterilization  services from single suppliers.  Generally,  we believe there are
additional and alternative  suppliers of equivalent  materials  available and we
could  supplement and substitute  suppliers with minimal business and regulatory
consequences.  However,  there can be no assurance  that such  supplies  will be
available  or  such  substitutions   could  be  made  in  a  timely  manner,  on
commercially reasonable terms, if at all. In the event any of our current single
source  suppliers  become  unable  to meet our needs or we lose them as a supply
source for some other reason, our business could be disrupted and materially and
adversely affected.

COMPETITION

     The market for topical hemostats is highly  competitive.  A wide variety of
existing  products and products  under  development  may compete  directly  with
FLOSEAL and our other  products under  development.  Many existing and potential
competitors  have greater  name  recognition,  broader  product  lines,  greater
distribution  capabilities,  substantially  greater capital resources and larger
marketing  research and development  staffs and facilities.  Broad product lines
may give  competitors  the  ability to  negotiate  exclusive,  long-term  supply
contracts and, as a result, the ability to offer comprehensive pricing for their
products.  With a broader product line,  competitors may also have a significant
advantage in marketing competing products to group purchasing  organizations and
other managed care  organizations that increasingly seek to reduce costs through
centralized  purchasing.   There  can  be  no  assurance  we  will  be  able  to
successfully compete against competitors or potential competitors.  In addition,
we cannot be certain current  competitors or other companies will not succeed in
developing  technologies  and products  more  effective or that would render our
technology or products obsolete or unable to compete.

PATENTS AND PROPRIETARY RIGHTS

     Our  ability  to  compete  effectively  depends  in part on our  ability to
develop and  maintain the  proprietary  aspects of our  technology.  We have two
issued patents and four pending U.S. patent applications relating to FLOSEAL. We
also have ten issued U.S.  patents and three  pending U.S.  patent  applications
relating to other products under development and other technologies  invented by
our research department. We also have filed two

                                       10
<PAGE>

corresponding   patent  applications  with  the  European  Patent  and Trademark
Commission and may file additional patent applications outside the United States
at a later date. In addition,  we have  in-licensed  technology  that we believe
strengthens our patent portfolio.

     Our patent applications may not result in issued patents. We have conducted
searches to determine  whether our patent  applications  interfere with existing
patents.  Based upon these  searches,  we believe  our patent  applications  and
products do not interfere  with  existing  patents.  However,  we cannot be sure
relevant  patents  have not been  issued  that could block our ability to obtain
patents or commercialize our products.  Moreover, since U.S. patent applications
are not a matter of public record,  a patent  application  could currently be on
file that would stand in the way of us obtaining an issued  patent.  A number of
medical device and other companies,  universities and research institutions have
filed patent  applications or have issued patents  relating to compositions  and
methods for surgical  sealing,  which could  materially  impact our  operations.
Obtaining foreign patents may be more difficult than obtaining  domestic patents
because of differences in patent laws.  Protection  provided by foreign patents,
if obtained,  and any other  foreign  intellectual  property  protection  may be
weaker than that provided domestically.

     The  medical  device  industry is  characterized  by  extensive  litigation
regarding patents and other  intellectual  property rights.  Many medical device
companies  have  employed  intellectual  property  litigation as a way to gain a
competitive  advantage.  There is no  assurance  that we will not be sued in the
future challenging our patent rights or claiming infringement on patents held by
third  parties.   An  adverse   determination   in  litigation  or  interference
proceedings  to which we may  become a party  could  subject  us to  significant
liabilities to third parties,  require us to license  disputed rights from third
parties or require us to cease using the disputed  technology.  Although  patent
and intellectual  property disputes in the medical device area are often settled
through  licensing  or  similar   arrangements,   costs  associated  with  these
arrangements   may  be  substantial   and  could  include   ongoing   royalties.
Furthermore, we cannot be certain that the necessary licenses would be available
to us on satisfactory terms, if at all.

GOVERNMENT REGULATION

         UNITED STATES

     FLOSEAL, our proposed products and research and development  activities are
subject to regulation by the FDA and other regulatory  bodies.  FDA regulations,
govern, among other things, the following activities:

        o   Product development,
        o   Product testing,
        o   Product labeling,
        o   Product storage,
        o   Premarket clearance or approval,
        o   Advertising and promotion, and
        o   Product sales and distribution.

     Product  development  and  approval  can take a number  of years and can be
expensive and uncertain.

     In the  United  States,  medical  devices  are  classified  on the basis of
controls deemed necessary to reasonably  ensure the safety and  effectiveness of
the  device.  Class I devices are subject to general  controls.  These  controls
include  labeling,  premarket  notification  and  adherence to the FDA's Quality
System  Regulation.  Class II  devices  are  subject   to  general  and  special
controls.   Special   controls   include   performance   standards,   postmarket
surveillance,  patient  registries,  and FDA  guidelines.  Class III devices are
those which must  receive  premarket  approval by the FDA to ensure their safety
and effectiveness.

                                       11
<PAGE>

     Premarket  notification  clearance  must  be  obtained  for  class I and II
devices  and  class  III  devices  when  the FDA has not  called  for  premarket
approval.  A  premarket  approval  application  is  required  for most class III
devices. A premarket approval  application must be supported by valid scientific
evidence  to  demonstrate  the  safety  and  effectiveness  of the  device.  The
application typically includes:

        o   Results of bench and laboratory tests, animal studies, and clinical
              studies
        o   A complete description of the device and its components,
        o   A detailed description of the methods, facilities and controls used
              to manufacture the device, and
        o   Proposed labeling, advertising literature.

     The approval process can be expensive,  uncertain and lengthy.  A number of
devices for which FDA  approval  has been sought by other  companies  have never
been approved f or marketing.

     FDA REVIEW PROCESS. When the FDA receives a premarket approval application,
it will determine  whether the application is complete enough for review. If the
application is complete, the application is filed and the FDA begins an in-depth
review.  Currently,  FDA review time is approximately  12 months,  but timing is
uncertain  and the process  may take  significantly  longer.  The review time is
often  extended  by the FDA  asking for more  information  or  clarification  of
information  already  provided in the submission.  An advisory  committee may be
convened to review and evaluate the application and provide a recommendation  to
the FDA as to whether the device should be approved.  The FDA gives  substantial
weight to the  recommendation  but is not bound by it. Before the approval,  FDA
generally will conduct an inspection of the manufacturer's  facilities to ensure
compliance  with  applicable  Quality System  requirements.  The FDA conducted a
preapproval  inspection,  which we passed,  of our  facilities  in Mountain View
during the fourth quarter of 1999.

     The FDA may issue either an approval  letter or an  approvable  letter.  An
approvable  letter will contain a number of conditions that must be met in order
to secure  final  approval.  When and if those  conditions  are met, an approval
letter  will be  issued.  The FDA can also deny  approval  or issue a  "complete
action" letter that will detail the deficiencies.

     The FDA may determine that additional  clinical trials are necessary.  This
may delay approval for one or more years while  additional  clinical  trials are
conducted and  submitted.  Any  additional  information  must be submitted in an
amendment to the application.  Certain modifications to the device,  labeling or
manufacturing process may require premarket approval or approval of a supplement
to a  premarket  approval.  Premarket  approval  supplements  often  require the
submission of information only needed to support the proposed change.

     CLINICAL  STUDIES.  If clinical  trials involve a  "significant  risk," the
sponser  of the  trail  must  file an  Investigational  Device  Exemption  (IDE)
application  prior to  commencing  the study.  The FDA must approve the clinical
trial before the study may commence.  If the device presents a  "non-significant
risk" to the patient,  the clinical  trial may  commence  without FDA  approval.
Institutional  Review  Board (IRB)  approval  must be obtained  for all studies.
Submission  of an IDE  application  does  not give  assurance  that the FDA will
approve  the  application.  If the  application  is  approved,  there  can be no
assurance  that FDA will  determine  that data  derived  from the  studies  will
support  the  safety and  efficacy  of the  device.  An IDE  supplement  must be
approved  by the FDA before a sponsor  or  investigator  may make a  significant
change to the investigational plan.

     The FDA  determined  FLOSEAL  would be  regulated  as a class  III  medical
device.  A premarket  approval was obtained  from FDA for FLOSEAL on December 8,
1999. Thus, FLOSEAL can be marketed in the United States.  Additional IDEs, PMAs
or PMA supplements may be required for other  applications of FLOSEAL,  e.g. the
configuration  of FLOSEAL for ENT,  the femoral  artery  closure  device and the
FLOSEAL sponge. There can be no assurance a supplemental PMA application will be
accepted for our additional  products.  In the event we are unable to file a PMA
supplement  for  our  additional  products,  we  will be  required  to file  PMA
applications.


                                       12
<PAGE>

     MANUFACTURING.  Manufacture and  distribution of FLOSEAL will be subject to
continuing regulation by the FDA. We will also be subject to routine inspections
by the FDA to determine compliance with the following:

        o   Quality System requirements,
        o   Medical Device Reporting regulations, and
        o   FDA's restrictions on promoting products for unapproved or
              "off-label" uses.

     INTERNATIONAL

     To market  products in Europe and other foreign  countries,  we must obtain
similar  regulatory  approvals.  Regulations vary  significantly from country to
country.  The time required to obtain  approval to market products may be longer
or shorter  than that  required in the United  States.  Fusion  obtained CE mark
certification  to market FLOSEAL in member  countries of the European  Union. CE
mark certification is an international  symbol of adherence to quality assurance
standards  and   compliance   with  the  applicable   European   Medical  Device
Directives. In February 1997, we received ISO 9001 and EN 46001 qualification of
our  processes,  which is one of the  principal  steps  in the CE mark  approval
process.  There can be no assurance we will be successful  in completing  the CE
mark certification process or obtaining CE mark certification in a timely manner
for our additional FLOSEAL products.

EMPLOYEES

     As of December 31, 1999, we had 61 employees, thirteen of whom were engaged
in research and development,  six in regulatory  affairs and quality  assurance,
twenty-two in operations, two in marketing, eleven in sales and seven in finance
and   administration.   No  employees  are  covered  by  collective   bargaining
agreements, and we believe we maintain good relations with our employees.

EXECUTIVE OFFICERS OF THE COMPANY

     The  following  table sets forth  certain  information  with respect to our
executive officers as of December 31, 1999:
<TABLE>
<CAPTION>


Name                          Age         Position
--------------------------    ---     ------------------------------------------
<S>                            <C>    <C>
Philip M. Sawyer               35     President, Chief Executive Officer, and
                                        Director
Debera M. Brown                47     Vice President, Regulatory Affairs and
                                        Quality Assurance
Christopher S. Dauer           36     Vice President, Marketing, North America
Dan S. Ellis                   48     Vice President, Sales
Scott Huie                     41     Vice President, Operations
Cary J. Reich, Ph.D.           51     Vice President, Research
Joseph F. Rondinone, Ph.D.     52     Vice President, Development
Larry J. Strauss               47     Vice President, Finance and Chief
                                        Financial Officer
</TABLE>

     MR.  SAWYER,  a founder of the Company,  has served as President  and Chief
Executive  Officer and as a Director  since April 1993.  From 1991 to 1993,  Mr.
Sawyer  worked in  various  positions  in sales  and  marketing  at the  Stryker
Corporation.  From 1987 to 1989,  Mr. Sawyer  worked at Patricof & Co.  Ventures
Inc. From 1986 to

                                       13
<PAGE>

1987, Mr. Sawyer  worked in  the  health  care  corporate  finance group at E.F.
Hutton and Co. Mr. Sawyer holds a B.A. from Haverford College and an M.B.A. from
the Harvard Business School.

     MS. BROWN joined the Company in May 1995 as Vice President,  Regulatory and
Clinical Affairs,  which position she held until July 1997. Since July 1997, Ms.
Brown has been Vice President,  Regulatory Affairs and Quality  Assurance.  From
September  1990 to March  1995,  Ms.  Brown  was  Vice  President,  Medical  and
Regulatory  Affairs,  at  Celtrix  Pharmaceuticals,   Inc.,  a  manufacturer  of
biopharmaceutical products from recombinant proteins. At Celtrix, Mrs. Brown was
responsible  for  overseeing  the  actions of staff for the  Regulatory  Affairs
Department,  the Quality  Assurance  Department and clinical  trials.  Ms. Brown
holds a B.A.  in Human  Biology  from  Stanford  University  and  completed  the
Executive Program at Stanford University School of Business.

     MR. DAUER joined the Company in August 1996 as Director, U.S. Marketing and
has  been  instrumental  in  product  and  marketing   strategies  from  product
development to the  commercialization  of FloSeal.  In March 2000, Mr. Dauer was
promoted to Vice  President,  Marketing,  North  America  and will have  primary
responsibilities  for U.S.  marketing  strategy and coordination for PROCEED and
development of spinal and cranial markets. Prior to 1996, Mr. Dauer held various
positions  in  finance,   marketing   and   international   sales  with  Guidant
Corporation's  Vascular  Invention  division,  including  managing  the European
launch of the  Multi-Link(R)  stent.  Mr. Dauer holds a B.A.  degree,  magna cum
laude, in Economics and History from Brown University and earned an M.B.A.  from
Stanford University.

     MR. ELLIS rejoined the Company in June 1999 as Vice President,  Sales. From
January 1998 to June 1999, Mr. Ellis served as Vice President  Sales & Marketing
at Cardiac Pathways.  Prior to Cardiac Pathways, Mr. Ellis was Director of North
American  Sales with Fusion.  From 1987 to 1996, Mr. Ellis held senior sales and
marketing positions with Guidant Corporation and Advanced Cardiovascular Systems
Inc,   successfully   launching   multiple   products  and  building  sales  and
distribution  channels.  Mr. Ellis holds a B.S of Business  Administration  from
Oregon State University.

     MR. HUIE joined the Company in August 1997 as Vice  President,  Operations.
From May 1995 to August 1997, Mr. Huie was Director of Pharmaceutical
Engineering at Aradigm Corporation, a pharmaceutical and medical device company
specializing in non-invasive aerosol drug delivery. He directed process
development, scale up, clinical supplies and facilities. From February 1993 to
May 1995, Mr. Huie was Director of Engineering at Cygnus, Inc., ("Cygnus") a
manufacturer of transdermal drug delivery systems and developer of a non-
invasive glucose monitoring medical device. As Director of Engineering Mr. Huie
was responsible for all engineering functions in the company including process
engineering, clinical manufacturing, manufacturing engineering, maintenance and
validation. Mr. Huie holds a B.S. in Chemical Engineering from Rensselaer
Polytechnic Institute.

     DR.  REICH joined the Company in May 1995 as Vice  President,  Research and
Development. Dr. Reich's current position is Vice President, Research. >From
June 1987 to May 1995, Dr. Reich held various positions at Chiron Vision, a
manufacturer of devices and pharmaceuticals to correct, improve and restore
vision. His most recent position at Chiron Vision, which he held from April 1993
to May 1995, was Vice President, Research and Development. As Vice President,
Research and Development, Dr. Reich was responsible for global research and
development efforts in the field of ophthalmic medical devices. Dr. Reich holds
a B.S. in Chemistry from Harvey Mudd College and a Ph.D. in Physical Organic
Chemistry from Stanford University.

     DR.  RONDINONE  joined the Company in January  1996 as Director of Clinical
Affairs.   In  July  1997,  Dr.   Rondinone  was  promoted  to  Vice  President,
Development.  From July 1992 to January 1996, Dr.  Rondinone was Vice President,
Research and Development,  for LaserScope Surgical Systems, Inc., a manufacturer
and world-wide  distributor of surgical lasers and  instruments.  At LaserScope,
Dr. Rondinone was responsible for new product  development and management of the
research and development department.  Dr. Rondinone holds a B.S. in Biology from
Tufts  University,  an M.S.  from  University of California at Los Angeles and a
Ph.D. in physics

                                       14
<PAGE>

from the University of California at Los Angeles.

     MR. STRAUSS joined the company in June 1999 as Vice President,  Finance and
Chief  Financial  Officer.  From  February  1996 to May 1999,  Mr.  Strauss held
various  positions  at  CardioGenesis  Corporation,  currently a  subsidiary  of
Eclipse  Surgical  Technologies,  Inc, a manufacturer of proprietary  systems to
treat patients  suffering from angina.  At CardioGensis,  he served as Corporate
Controller and most recently as Vice  President,  Operations.  From 1991 through
1995, Mr. Strauss was Director of Finance and  Administration at Telik,  Inc., a
biotechnology drug discovery company. Mr. Strauss received a B.S. in Mathematics
graduating cum laude from Claremont  Men's College and earned an M.S.  degree in
Industrial  Engineering  and Operations  Research from University of California,
Berkeley.

RISK FACTORS

     THE FOLLOWING  FACTORS  REPRESENT SOME OF OUR CHALLENGES  WHICH CREATE RISK
AND  UNCERTAINTY.  IF ANY OF THE FOLLOWING RISKS ACTUALLY  OCCUR,  OUR BUSINESS,
FINANCIAL  CONDITION  OR RESULTS OF  OPERATIONS  COULD BE  MATERIALLY  ADVERSELY
AFFECTED. THIS FORM 10-K ALSO CONTAINS  FORWARD-LOOKING  STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES.

     WE DID NOT GENERATE ANY REVENUES IN 1998 AND ONLY MODEST  REVENUES IN 1999.
WE HAVE A HISTORY OF LOSSES AND WE EXPECT LOSSES TO CONTINUE IN THE FUTURE.

     We did not  generate any revenues in 1998 and  generated  only  $254,000 in
revenues in 1999.  We have a history of losses and we expect  losses to continue
in the future. We have not achieved, nor do we expect to achieve,  profitability
before  2001.  We incurred  net losses of $8.3  million,  $7.7  million and $9.9
million for the years ended December 31, 1999, 1998 and 1997,  respectively.  As
of December 31, 1999, we had an accumulated  deficit of $37.6  million.  We have
not had  significant  revenues in any period since our  inception.  We expect to
increase  our  operating  expenses  in the  near  future,  including  sales  and
marketing,  manufacturing and research and development  expenses, as we approach
U.S.  commercialization  of  FLOSEAL  and  continue  development  of  our  other
products.  As a result, we will need to generate significant revenues to achieve
and  maintain  profitability.  The  amount of  future  net  losses  and the time
required  to  achieve  profitability  are  highly  uncertain.  If we do  achieve
profitability  in any  period,  we cannot be  certain  that we will  sustain  or
increase such profitability on a quarterly or annual basis.


IF WE DO NOT SUCCESSFULLY COMMERCIALIZE FLOSEAL, OUR BUSINESS WILL SUFFER.

     We are dependent upon the success of our lead product, FLOSEAL. We received
the  necessary  regulatory  approval for the  commercial  sale of FLOSEAL in the
United States on December 8, 1999. We received the European CE mark on April 20,
1999 and have begun to export  FLOSEAL to Europe.  Our success after  regulatory
approval,  if any, will depend on the medical community's  acceptance of FLOSEAl
and our ability to successfully scale up commercial manufacturing and develop an
effective sales,  marketing and distribution  capability.  We cannot predict how
quickly,  if at all, the medical community will accept FLOSEAL,  or if accepted,
the extent of its use. A surgeon's  use of FLOSEAL  will  require the surgeon to
change from his or her usage of more familiar currently available products.  For
FLOSEAL to achieve market  acceptance,  it will have to be priced  competitively
and offer clinically  significant  advantages over other commercially  available
products.  Even if the market generally accepts FLOSEAL,  surgeons may choose to
use  it in  fewer  procedures  than  projected.  If  FLOSEAL  does  not  achieve
significant  market  adoption,  our business  will be  materially  and adversely
affected.

     SIGNIFICANT  INCREASES  IN OPERATING  EXPENSES IN THE FUTURE MAY  ADVERSELY
AFFECT OUR OPERATING RESULTS AND FINANCIAL CONDITION.

                                       15
<PAGE>

     We plan to  significantly  increase  our  operating  expenses to expand our
sales and marketing  operations and broaden our customer support capabilities as
we  continue  commercial  introduction  of FLOSEAL  and fund  greater  levels of
product development.  Our operating expenses, which include sales and marketing,
research and development and general and administrative  expenses,  are based on
our  expectations of future revenues and are relatively fixed in the short term.
If revenues fall below our  expectations,  we will not be able to quickly reduce
our spending in response,  which would materially adversely affect our operating
results and financial condition.

OUR LIMITED  OPERATING   HISTORY  AND LACK  OF EXPERIENCE  IN  MANUFACTURING AND
MARKETING  FLOSEAL  MAY  RESULT IN  SIGNIFICANT  FLUCTUATIONS  OF OUR  FINANCIAL
RESULTS.

     Our limited  operating  history,  dependence upon FLOSEAL to provide future
revenue and our lack of experience  in  manufacturing  and marketing  FLOSEAL in
commercial  quantities  may likely  cause our  operating  results  to  fluctuate
dramatically.  As a  result  of  these  fluctuations  and  uncertainties  in our
operating results,  we believe  quarter-to-quarter  or annual comparisons of our
operating  results  are not a good  indication  of our  future  performance.  In
addition at some point in the future,  these fluctuations may likely cause us to
perform below the  expectations of public market analysts and investors.  If our
results  were to fall below market  expectations,  the price of our common stock
would likely fall. Our limited operating results have varied widely in the past,
and we expect they will continue to vary significantly  from  quarter-to-quarter
as we attempt to commercially produce and establish our
products in the market.

WE MAY NEED TO RAISE ADDITIONAL MONEY BEFORE WE EXPECT TO ACHIEVE PROFITABILITY.
IF WE FAIL TO RAISE ANY SUCH NEEDED ADDITIONAL MONEY, OUR BUSINESS WILL SUFFER.

We received net proceeds of approximately  $15.8 Million in 1999 from the public
and private  offering of common stock. Our current cash and cash equivalents and
available  for  sale  securities  should  be  sufficient  to  fund  our  planned
operations  into  2001.  We may  need to raise  additional  funds in order to be
successful. Future financing strategies may include, but are not limited to:

        o   partnering relationships with larger medical device companies,

        o   bank facilities, or

        o   debt or additional equity offerings.

     If we are unable to raise additional funds when needed,  we may not be able
to market FLOSEAL as planned,  or continue  development  of our other  products,
which would materially and adversely affect our business.

ADDITIONAL  FUNDING  MAY NOT BE  AVAILABLE  TO US OR, IF  AVAILABLE,  MAY NOT BE
AVAILABLE ON COMMERCIALLY REASONABLE TERMS.

     If we need to raise additional  money to fund our operations,  we cannot be
certain  that  funding  from any source will be  available  to us on  acceptable
terms,  or at all.  The amount and the timing of raising  additional  funds will
depend primarily upon our ability to generate revenues from the sale of FLOSEAL.
Our inability to obtain any needed  additional  funding on reasonable terms will
materially and adversely affect our business.

WE  MAY  HAVE  TO  INCUR  SIGNIFICANT  COSTS  IN  MAINTAINING   COMPLIANCE  WITH
REGULATIONS GOVERNING OUR MANUFACTURING OPERATIONS.

     We are also  required to maintain  compliance  with the good  manufacturing
practice  requirements for medical devices  incorporated  into the FDA's Quality
System Regulation  ("QSR")  following  approval of FLOSEAL The QSR is similar to
good  manufacturing   practices  and  relate  to  product  testing  and  quality
assurance,  as well as the  maintenance  of records and  documentation.  The FDA
enforces the QSR through periodic post-approval  inspections.  We can provide no
assurance we will be able to maintain  compliance on an ongoing basis.  If we or

                                       16
<PAGE>

any third party  manufacturer  of our  products  does not conform to the QSR and
cannot be brought up to such a standard, we will be required to find alternative
manufacturers that do conform.  This may be a long and difficult process.  Those
manufacturers  must  be  approved  by  the  FDA  before  they  can  commercially
manufacture our products.  We may have to incur significant costs to comply with
such laws and  regulations  and our  failure  to comply  with them could lead to
penalties that could have a material and adverse affect on our business.

INTERNATIONAL  SALE  OF  OUR  PRODUCTS  WILL  ALSO   BE   SUBJECT  TO  EXTENSIVE
REGULATION.

     Marketing  of  FLOSEAL  in  jurisdictions  outside  of  the  U.S.  requires
compliance with additional  local  regulations.  We cannot  guarantee we will be
able to comply with such local  regulations  and thus cannot  guarantee  that we
will be allowed to sell FLOSEAL to any or all of these markets.

IF WE FAIL TO MAINTAIN REGULATORY APPROVALS AFTER FLOSEAL IS COMMERCIALIZED, OUR
BUSINESS WILL SUFFER.

     Following  regulatory  approval  of  FLOSEAL,  we continue to be subject to
extensive  regulatory  requirements.  These  regulations  are  wide-ranging  and
govern, among other things:

     o   product changes or modifications,

     o   product manufacturing,

     o   Quality System requirements,

     o   Medical Device Reporting regulations,

     o   FDA's restrictions on promoting products for unapproved, off-label
           uses, and

     o   product sales and distribution.

     If we fail to comply or maintain  compliance  with  medical  device laws or
regulations,  we may be fined and barred from selling our  products.  If the FDA
believes that we are not in compliance with the law, it can:

     o   detain or seize our products,

     o   issue a recall,

     o   enjoin future violations, and

     o   assess civil and criminal penalties against us.

     Our failure to comply with  regulatory  requirements  could have a material
adverse  effect on our  business.  Regulations  are also  subject to change.  We
cannot predict the effect, if any, that such changes might have on our business.

OUR ABILITY TO ACHIEVE  ANY  SIGNIFICANT  REVENUE  WILL DEPEND ON OUR ABILITY TO
ESTABLISH EFFECTIVE SALES, MARKETING AND DISTRIBUTION CAPABILITIES.

     If we fail to establish a sufficient  marketing and  distribution or direct
sales force to commercialize  FLOSEAL or any of our other products,  our ability
to enter new or existing markets will be impaired.  Our inability to effectively
enter these markets would  materially  and  adversely  affect our business.  The
alternatives for selling our products are:

     o   our own direct sales force,

     o   distribution agreements,

     o   collaborative arrangements with corporate strategic partners.


                                       17
<PAGE>

     Although we entered  into a multiyear  distribution  agreement  with Sulzer
Spine-Tech,  Inc.  in June  1999,  we cannot be certain we will be able to enter
into  additional  distribution  agreements or  collaborative  arrangements  on a
timely basis or at all, or that these relationships will be successful.  We have
only limited  experience in establishing and managing a direct sales force, from
selling the  RAPISEAL  patch,  a  discontinued  product  line,  and we cannot be
certain  we can  establish  and manage a direct  sales  force for  FLOSEAL.  Our
ability to achieve any significant  revenue will depend heavily upon our success
in establishing  effective sales and market capabilities,  through a combination
of distribution or collaboration arrangements and a direct sales force.

WE MAY BE UNABLE TO  EFFECTIVELY  COMMERCIALIZE  FLOSEAL  BECAUSE THE MARKET FOR
SURGICAL BLEEDING CONTROL PRODUCTS IS HIGHLY COMPETITIVE.

     The  market  for  products  that  control   surgical   bleeding  is  highly
competitive.  A wide variety of approved  products such as Gelfoam plus thrombin
and fibrin  glues,  exist today and will compete  directly  with  FLOSEAL.  Many
competitive products are produced by companies that have competitive  advantages
over us, such as:

     o   greater name recognition,

     o   broader product lines,

     o   greater distribution capabilities,

     o   substantially greater capital resources, and

     o   larger marketing, research and development staffs and facilities.

     Such  competitors   include   Pharmacia  &  Upjohn  AB,  Baxter  Healthcare
Corporation  and  Johnson & Johnson.  We cannot be certain  FLOSEAL or our other
products  will  be able to  successfully  compete  against  these  products  and
companies, or any other companies which may enter the marketplace.  In addition,
we cannot be  certain  that  current  competitors  or other  companies  will not
succeed in developing technologies and other products that are more effective or
that would render our technology or products obsolete or unable to compete.

WE HAVE TWO ISSUED PATENTS AND FOUR PENDING PATENT APPLICATIONS  RELATED TO  THE
FLOSEAL  TECHNOLOGY.  OUR  FAILURE  TO  OBTAIN  ADDITIONAL  ISSUED  PATENTS AND,
CONSEQUENTLY,   TO  PROTECT  OUR  PROPRIETARY   TECHNOLOGY,   COULD  IMPAIR  OUR
COMPETITIVE POSITION.

     We regard elements of FLOSEAL as proprietary and we attempt to protect them
through patent and trade secret laws and  restrictions,  as well as licenses and
contractual  confidentiality  provisions.  Any  steps  we  take to  protect  our
intellectual  property may be inadequate and expensive.  Despite our efforts, we
may be unable to prevent third parties from infringing upon or  misappropriating
our intellectual property. We have two issued U.S. patents and four pending U.S.
patent  applications  relating to FLOSEAL.  We also have ten issued U.S. patents
and three pending U.S.  patent  applications  relating to other  products  under
development and other technologies invented by our research department.  We also
have two corresponding  international patent applications filed under the Patent
Cooperation  Treaty and may file  additional  patent  applications  outside  the
United States at a later date.  Obtaining  foreign patents may be more difficult
than obtaining U.S.  patents  because of differences in patent laws.  Protection
provided by foreign  patents,  if obtained,  and any other foreign  intellectual
property  protection may be weaker than provided  domestically.  Any existing or
new patent applications, domestic or international, may not result in:

     o   the  priority  of our  patent applications over others' applications or
           issued patents,

     o   the issuance of any patents, or

     o   any competitive advantage.


                                       18
<PAGE>

     Furthermore,  our competitors may independently  develop similar technology
in the future that substantially limits the value of our intellectual property.

WE MAY  NOT BE  ABLE  TO  COMMERCIALIZE  FLOSEAL  OR OUR  OTHER  PRODUCTS  UNDER
DEVELOPMENT  IF THEY  INFRINGE  EXISTING  PATENTS OR  PATENTS  THAT HAVE NOT YET
ISSUED, WHICH WOULD MATERIALLY HARM OUR BUSINESS.

     We have  conducted  searches to determine  whether our patent  applications
interfere with existing patents.  Based upon these searches, we believe that our
patent  applications  and  products  do not  interfere  with  existing  patents.
However, we cannot be sure that relevant patents have not been issued that could
block our ability to obtain  patents or  commercialize  our products.  Moreover,
since  U.S.  patent  applications  are not a matter of public  record,  a patent
application  could currently be on file that would stand in our way of obtaining
an issued patent.  In addition,  a number of medical device and other companies,
universities and research  institutions  have filed patent  applications or have
issued patents  relating to compositions and methods for surgical  sealing.  The
issuance of any of these  potentially  competing  patents could  materially  and
adversely affect our business.

IF WE DO NOT OBTAIN FDA APPROVAL,  WE CANNOT  SELL ADDITIONAL CONFIGURATIONS  OF
FLOSEAL IN THE UNITED STATES, WHICH WOULD SIGNIFICANTLY HARM OUR BUSINESS.

     FLOSEAL  is  regulated  through  the Center for  Devices  and  Radiological
Health,  a  division  of the FDA,  and,  as such will be  subject  to  extensive
regulation in the United States. Before we can market additional  configurations
of FLOSEAL or any of our other products under  development in the United States,
we must show in clinical trials our products are safe and effective,  and obtain
approval from the FDA, which cannot be guaranteed.

     We may be required to obtain premarket approval from the FDA for additional
configurations  of FLOSEAL  before they may be marketed.  The FDA may also limit
the commercial claims and uses of any of our future products.

THE EUROPEAN FEAR OF "MAD COW DISEASE" COULD ADVERSELY IMPACT  ACCEPTANCE OF OUR
PRODUCTS IN EUROPE.

     There  is  uncertainty  as to the  European  acceptance  of  products  that
incorporate elements derived from cows. This uncertainty is due to concerns over
transmission  of disease  from cows to humans.  This disease in cows is commonly
referred to as "mad cow  disease."  Transmission  of this  disease to humans may
cause serious illness or death. FLOSEAL and our other products under development
contain thrombin and gelatin derived from bovine tissue only from traceable U.S.
herds.  There have been no cases of mad cow disease  associated with cattle from
traceable U.S.  herds.  Despite this fact,  concerns over  transmission  of this
disease to humans may prevent or  substantially  delay the acceptance of FLOSEAL
in Europe. A delay could materially and adversely affect our business.

WE CANNOT BE CERTAIN THAT WE WILL BE ABLE TO MANUFACTURE FLOSEAL IN HIGH VOLUMES
AT COMMERCIALLY REASONABLE COSTS.

     We have  produced  FLOSEAL  for use in  Europe  and  our  clinical  trials.
However,  we have limited experience  manufacturing  FLOSEAL or any of our other
products  under  development  in the amounts  necessary  to achieve  significant
commercial sales. We have expanded our manufacturing  capacity, but we cannot be
certain  we  will  be  capable  of  reliable,   high-volume   manufacturing   at
commercially reasonable costs. We could encounter problems related to:

     o   capacity constraints,

     o   production yields,

     o   quality control, and


                                       19
<PAGE>

     o   shortages of qualified personnel.

     Such problems could affect our ability to adequately scale-up production of
our  products  and  fulfill  customer  orders  on a timely  basis,  which  could
materially and adversely affect our business.

     Our manufacturing  facilities will be subject to QSR, international quality
standards and other regulatory  requirements,  including preapproval  inspection
for FLOSEAL and periodic post-approval inspections for all products. Our failure
to implement and maintain our  facilities in  accordance  with these  regulatory
requirements  and standards will result in a delay or termination of production.
Any delay or termination of production would materially and adversely affect our
business.

WE DO NOT HAVE LONG-TERM SUPPLY ARRANGEMENTS WITH OUR KEY SUPPLIERS.  THERE IS A
RISK WE COULD LOSE ONE  OR  MORE OF OUR KEY  SUPPLIERS, WHICH  WOULD DISRUPT OUR
BUSINESS.

     We currently  purchase  bovine hides and  thrombin,  essential  elements of
FLOSEAL,  as well as  sterilization  services for the end  product,  from single
suppliers.  We purchase  bovine  hides from Spear  Products  and  thrombin  from
GenTrac,  Inc. We do not have long-term  supply  arrangements  with any of these
suppliers.  In the event  any of our  current  single  source  suppliers  become
unavailable for any reason, we will be required to obtain regulatory approval of
alternative suppliers and our business would be disrupted. Any disruption caused
by a loss of one of these  suppliers could  materially and adversely  affect our
business.

FAILURE OF OUR END-USERS TO OBTAIN  ADEQUATE THIRD PARTY  REIMBURSEMENT  FOR THE
PROCEDURES  UTILIZING  FLOSEAL OR OUR OTHER PRODUCTS COULD ADVERSELY  AFFECT OUR
BUSINESS.

     In the United States,  health care providers that purchase medical devices,
such as FLOSEAL and our other  products  under  development,  generally  rely on
third party payors, such as federal Medicare,  state Medicaid and private health
insurance  plans, to reimburse some or all of the cost of the procedure in which
the medical device was used. We expect in a prospective  payment system, such as
the one utilized by the Health Care Financing  Administration  which manages the
federal Medicare  program,  and whose polices are followed by state Medicaid and
private third party payors,  our products' costs will be  incorporated  into the
overall cost of the procedures, and there will not be separate reimbursement for
our products. Our success depends, in part, upon health care providers obtaining
satisfactory  reimbursement from third party payors for surgical procedures that
may use  FLOSEAL  and our  other  products  under  development.  Failure  by our
products' users to obtain sufficient  reimbursement  from third party payors for
procedures in which our products are used or adverse changes in governmental and
private third party payors'  policies toward  reimbursement  for such procedures
could mean that they reduce or eliminate purchases of our products,  which would
materially and adversely affect our business.

     If we obtain the  necessary  foreign  regulatory  approvals,  international
market  acceptance  of our  products  would  be  dependent,  in  part,  upon the
availability  of  reimbursement  for our  products  or  procedures  that use our
products by the prevailing health care payment systems. Reimbursement and health
care payment systems in international  markets vary significantly by country and
include both  government-sponsored  health care and private insurance. We intend
to seek  international  reimbursement  approvals where applicable.  We cannot be
certain  any such  approvals  will be obtained  in a timely  manner,  if at all.
Failure to receive  international  reimbursement  approvals could materially and
adversely affect our business.

WE MAY  FACE  PRODUCT  LIABILITY  CLAIMS  RELATED  TO THE USE OR  MISUSE  OF OUR
PRODUCTS.

     We face an inherent  business risk of product liability claims in the event
the use or misuse of our products  results in personal  injury or death. We have
not experienced any such claims to date, but we cannot be certain, in particular
after  commercial  introduction  of our  products,  that we will not  experience
losses  due  to  product  liability  claims.  We  currently  maintain  liability
insurance with combined coverage limits of $3.0 million on a claims-made  basis.
We cannot be certain that the insurance  policies' coverage limits are adequate.
The

                                       20
<PAGE>

insurance is expensive,  difficult  to obtain  and  may not  be available in the
future on  acceptable  terms,  or at all. Any claims  against us,  regardless of
their merit, could materially and adversely affect our business.



YEAR 2000 COMPLIANCE

     To date, all internal  financial  systems,  network and  telecommunications
equipment have operated  without any known impact or disruption  related to Year
2000.  Prior to December 31, 1999, these systems were verified or upgraded to be
Year 2000 compliant or determined to have no material Year 2000 risk.

     To date,  we have not  encountered  any  disruption  of  service  or supply
provided to us by third parties which could be attributable to Year 2000.



OUR  ACTUAL  RESULTS  COULD  DIFFER  MATERIALLY  FROM THOSE  ANTICIPATED  IN OUR
FORWARD-LOOKING STATEMENTS.

     This Form 10-K contains  forward-looking  statements that involve risks and
uncertainties.   We  used  words  such  as  "believes,"   "intends,"  "expects,"
"anticipates,"   "plans,"  and  similar  expressions  identify   forward-looking
statements.  This Form 10-K also contains  third party  estimates  regarding the
size and growth of the  cardiovascular,  spinal and vascular surgery markets, as
well as the size of the suture and staples  market and topical  hemostat  market
and other  marketing  estimates.  You should not place  undue  reliance on these
forward-looking  statements.  Our actual  results could differ  materially  from
those  anticipated in the  forward-looking  statements for the reasons described
above and elsewhere in this Form 10-K.


ITEM 2.  PROPERTIES

     Our  headquarters  are located in a 13,200 square foot facility in Mountain
View, California. The lease for this facility extends through December 31, 2001.
In  mid-1999,  we signed a short term rental  agreement  for  approximately  700
square feet of  temporary  office  facilities  which is expected to be continued
through the first quarter 2000. In November  1999, we entered into a lease for a
new headquarters and manufacturing  facility of approximately 72,500 square feet
in Fremont, California. The lease for the Fremont facility began January 1, 2000
and extends through December 31, 2006.


ITEM 3.  LEGAL PROCEEDINGS

     We are currently not a party to any material legal proceedings.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Not applicable.


                                       21
<PAGE>

                                     Part II


ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.


     Our common stock is quoted on the Nasdaq  National  Market under the symbol
"FSON." The following table sets forth, for the periods indicated,  the high and
low  closing  sales  prices per share of our common  stock,  as  reported on the
Nasdaq National Market for the periods stipulated.
<TABLE>
<CAPTION>


                                           HIGH                 LOW
                                           ----                 ---
              1998
              <S>                          <C>                  <C>
              First Quarter              $ 5.063              $ 3.000
              Second Quarter               5.000                3.375
              Third Quarter                4.125                2.250
              Fourth Quarter               8.938                2.000

              1999
              First Quarter                7.750                5.125
              Second Quarter               7.938                5.125
              Third Quarter               13.500                7.547
              Fourth Quarter              14.500                9.500

              2000
              First Quarter (through
              March 22, 2000)             18.000               11.875
</TABLE>


     As of March 22, 2000,  the last  reported sale price of our common stock on
the Nasdaq National  Market was $17.125 per share and, on March 22, 2000,  there
were 110 stockholders of record.

     On November 17, 1999, the Company closed a private  placement  financing of
872,000  shares  of  common  stock at  $9.50  per  share.  Net  proceeds,  after
commissions  and fees along  with  other  costs  associated  with the  offering,
totaled $7,616,000.  The shares were registered under a Form S-3 on November 17,
1999.  Stephens Inc. acted as placement  agent.  All purchasers were "accredited
investors"  within the  meaning of Rule 501 of  Regulation  D, as  presently  in
effect.


                                       22
<PAGE>

   ITEM 6.  SELECTED FINANCIAL DATA

     The following  selected  financial data should be read in conjunction  with
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" and the Consolidated Financial Statements and Notes thereto included
elsewhere in this Form 10-K.  The  statements of  operations  data for the years
ended  December  31,  1999,  1998,  and 1997 and the  balance  sheet  data as of
December  31, 1999,  1998 and 1997 have been  derived from audited  consolidated
financial  statements  included  elsewhere in this Form 10-K.  The  consolidated
statement  of  operations  data for the years  ended  December  31, 1995 and the
balance  sheet data as of  December  31,  1996 and 1995 have been  derived  from
audited consolidated  financial statements that are not included in this report.
The  historical  results  are  not  necessarily  indicative  of the  results  of
operations to be expected in the future.
<TABLE>
<CAPTION>

                                                      ----------------------------------------------------------------
                                                                          YEAR ENDED DECEMBER 31
                                                      ----------------------------------------------------------------
                                                       1999          1998          1997         1996         1995
                                                       ----          ----          ----         ----         ----
STATEMENTS OF OPERATIONS DATA:                                   (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
  <S>                                               <C>           <C>             <C>          <C>          <C>
  Net Sales......................................  $    254      $    --        $    153      $    31      $    --
  Cost of sales and manufacturing start-up cost..       731           --             968          196           --
                                                   --------      --------       --------      -------      --------
     Gross Loss..................................      (477)          --            (815)        (165)          --
                                                   --------      --------       --------      -------      --------
  Operating Expenses:
     Research and development....................     5,095         6,145          5,647        4,693         2,650
     Sales and marketing.........................     1,441           614          2,421        1,582           142
     General and administrative..................     1,802         1,474          2,004        1,426           841
                                                   --------      --------       --------      -------      --------
       Total operating expenses..................     8,338         8,233         10,072        7,701         3,633
                                                   --------      --------       --------      -------      --------
     Loss from operations........................    (8,815)       (8,233)       (10,887)      (7,866)       (3,633)
  Interest income, net...........................       487           542            984          910           351
  Other income (expense), net....................         3             4            (49)           -             1
                                                   --------      --------       --------      -------      --------
  Net loss.......................................  $ (8,325)     $ (7,687)      $ (9,952)     $(6,956)     $ (3,281)
                                                   ========      ========       ========      =======      ========
  Basic and diluted net loss per share...........  $  (0.96)     $  (1.08)      $  (1.41)     $ (1.52)     $  (2.31)
                                                   ========      ========       ========      =======      ========
  Shares used in computing basic and diluted net
     loss per share..............................     8,707         7,145          7,070        4,563         1,423
                                                   ========      ========       ========      =======      ========


BALANCE SHEET DATA:
  Cash, cash equivalents and available for sale
     securities (including long term position)...  $ 14,066      $  7,164       $ 14,459      $ 23,485    $   5,918
  Working capital................................    11,550         6,242         11,850        21,072        5,314
  Total assets...................................    16,216         8,088         15,540        25,063        6,629
  Long term debt, including current portion......       204           321             43           189          322
  Accumulated deficit............................   (37,557)      (29,232)       (21,545)      (11,593)      (4,637)
  Total stockholders' equity.....................    14,786         6,827         14,224        23,742        5,768
</TABLE>



                                       23
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     THIS  SECTION  AND  OTHER  PARTS  OF THIS  REPORT  CONTAIN  FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND  UNCERTAINTIES.  OUR ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE  ANTICIPATED IN THE  FORWARD-LOOKING  STATEMENTS.  FACTORS
THAT MIGHT  CAUSE SUCH A  DIFFERENCE  INCLUDE,  BUT ARE NOT  LIMITED  TO,  THOSE
DISCUSSED IN THE SECTION ENTITLED  "BUSINESS - RISK FACTORS"  COMMENCING ON PAGE
15 AND ELSEWHERE IN THIS FORM 10-K.

Overview

     We  are  commercializing  and  developing  proprietary  collagen  gel-based
products for use in  controlling  bleeding in a variety of  surgeries.  Our lead
product,  FLOSEAL Matrix Hemostatic Sealant ("FLOSEAL") was approved on December
8, 1999 by FDA for  marketing  in the U.S.  FLOSEAL  combines a gel derived from
collagen with thrombin,  a potent clotting agent, to control surgical  bleeding.
We have  designed  FLOSEAL to  complement  sutures  and  staples and to overcome
limitations of existing  products used to control  bleeding,  including  topical
hemostats,  fibrin glues and other types of surgical  sealants and  adhesives.In
April 1999, we received the CE mark which will allow us to commercialize FloSeal
in the European Union.

     In November  1998, we completed  enrollment in a 309-patient  U.S.  pivotal
clinical trial for FLOSEAL in patients undergoing  cardiac,  vascular and spinal
surgery.  The pivotal  trial was  designed  primarily  to test  whether  FLOSEAL
stopped  bleeding  within ten minutes at least as frequently as the Gelfoam plus
thrombin  control.  Gelfoam  plus  thrombin is a product  widely used to control
surgical  bleeding.   We  anticipate  FLOSEAL  competing  against  Gelfoam  plus
thrombin.  The trial showed that FLOSEAL stopped  patients'  bleeding within ten
minutes in 96% of all  patients  treated  with  FLOSEAL,  whereas  Gelfoam  plus
thrombin stopped patients' bleeding within ten minutes in 77% of all patients in
the control group. The trial also showed that FLOSEAL stopped patients' bleeding
at least two times more quickly than Gelfoam plus thrombin.

     We have  reported  revenues  of  $254,000 in total sales of FLOSEAL for the
second,  third and fourth quarters of 1999.  Revenues are projected to increase.
We also anticipate,  however,  incurring  increased expenses relating to FLOSEAL
sales and marketing,  research and  development,  manufacturing  and general and
administrative  expenses.  We have not  achieved,  nor do we expect to  achieve,
profitability before 2001.

     We are also developing  additional bleeding control products based upon the
core technology  underlying  FLOSEAL.  These products include a configuration of
FLOSEAL  for use in ear,  nose and  throat  (ENT)  surgeries,  a femoral  artery
puncture sealing device for use following vascular interventional procedures and
the FLOSEAL  sponge,  a dry,  sponge-like  formulation  of FLOSEAL  requiring no
mixing, for use in trauma, ambulance and battlefield applications.  We expect to
begin commercial  shipments with our ENT  configuration of FLOSEAL by the end of
2000. We expect to begin  clinical  trials for the femoral artery closure device
before  the end of 2000.  Future  products  require  approvals  by FDA and other
regulators, which cannot be guaranteed.

     We have been  expanding our  manufacturing  capacity in order to be able to
meet the anticipated product supply requirements for commercial sale of FLOSEAL.
In November  1999,  we entered into a lease for a 72,500 square feet building in
Fremont,  California.  In  conjunction  with this new  facility,  we  anticipate
spending a total of approximately $2.2 million for the purchase of equipment for
production  and research &  development,  office  furnishings  and equipment and
leasehold improvements.

     As of December 31, 1999,  we had an  accumulated  deficit of  approximately
$37.6 million.


                                       24
<PAGE>

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1999 AND 1998 AND 1997


     REVENUES. We recorded revenues of $254,000, none and $153,000 for the years
ended  December 31, 1999,  1998 and 1997,  respectively.  We  commenced  selling
FLOSEAL in 1999 and stopped selling RapiSeal in 1997.

     GROSS LOSS.  We had a gross loss of  $477,000,  none and  $815,000  for the
years  ended  December 31,  1999,  1998 and  1997,  respectively.  In 1999,  the
increase  in the gross loss is the result of the  expenses  associated  with the
cost of FLOSEAL plus start-up  manufacturing costs. In 1998, the decrease in the
gross loss a result of discontinuing the sale of RAPISEAL products.

     RESEARCH  AND   DEVELOPMENT.   Research  and   development   expenses  were
$5,095,000,  $6,145,000  and  $5,647,000  for the years ended December 31, 1999,
1998  and  1997,  respectively.  The  decrease  in  1999 of  $1,050,000  was due
primarily to the  conclusion  of the  clinical  trail and  development  expenses
related to FLOSEAL.  The  increase  of $498,000 in 1998 was due to the  clinical
trail  and  increased  development  expenses  related  to  FLOSEAL.  We  believe
significant  investment in research and  development  is essential to our future
success and we expect research and development  expenses will increase in future
periods.

     SALES AND MARKETING. Sales and marketing expenses were $1,441,000, $614,000
and  $2,421,000  for  the  years  ended  December  31,  1999,   1998  and  1997,
respectively.  The  increase  of  $827,000  in 1999 is the  result  of sales and
marketing  efforts to establish  FLOSEAL in Europe and efforts to build a direct
sales force in the US in late 1999.  The decrease of $1,807,000 in 1998 resulted
from the cessation of our sales and marketing  efforts  related to RapiSeal.  We
anticipate that sales and marketing expenditures will increase in future periods
in connection with the commercial launch of FLOSEAL.

     GENERAL  AND  ADMINISTRATIVE.  General  and  administrative  expenses  were
$1,802,000,  $1,474,000  and  $2,004,000  for the years ended December 31, 1999,
1998 and 1997,  respectively.  The increase of $328,000 in 1999 is the result of
hiring an experienced  team to support the drive to attract new capital and make
preparations for the  commercialization  of FLOSEAL and support our growth.  The
decrease of $530,000 in 1998 resulted from reduction of staff and  consolidation
of facilities  following  discontinuation of the RapiSeal  business.  We believe
general and administrative expenses will increase in future periods.

     INTEREST INCOME AND EXPENSE, NET. Net interest and other income and expense
was $490,000,  $546,000 and $935,000 for the years ended December 31, 1999, 1998
and 1997,  respectively.  The decrease of $56,000 in 1999 is the result of shift
in mix of investments,  decreasing long term  investments in favor of short-term
investments  and decreases in interest  rates  partially  offset by increases in
cash, cash  equivalents  and  available-for-sale  securities  resulting from the
April 1999  follow-on  public  offering  and  November  1999  private  placement
financing.  The decrease of $389,000 in 1998 resulted from decreased  cash, cash
equivalents and available-for-sale securities.

     EXIT  CHARGES.  During the fourth  quarter of 1997,  we made a decision  to
discontinue  sales of our RapiSeal  patch. We incurred exit charges of $559,000,
which consisted of the following components:

                                       25
<PAGE>

<TABLE>
<CAPTION>



DESCRIPTION                                     AMOUNT      CLASSIFICATION ON STATEMENT OF OPERATIONS
-----------------------------------            --------     -----------------------------------------
<S>                                            <C>          <C>
Equipment.................................... $ 115,000     Cost of Sales
Personnel severance..........................   125,000     Sales and marketing, general
                                                            and administrative and research
                                                            and development
Inventory and purchase commitments...........   210,000     Cost of sales
Accounts receivable and potential returns....    25,000     Sales
Patents......................................    84,000     Research and development
                                               --------
Total........................................ $ 559,000
                                               ========

</TABLE>

     During  1998,  we  negotiated  a lower exit  charge  from one of our supply
agreements,  which resulted in a change to our reserve estimate by $50,000.  Our
anticipated  timing  until the  reserve  is  completely  depleted  is the fourth
quarter of 2000.

LIQUIDITY AND CAPITAL RESOURCES

     From inception to December 31, 1999, we incurred net losses resulting in an
accumulated  deficit of $37,557,000.  We have financed our operations  primarily
through  private sales of equity  securities and an initial  public  offering of
common stock in June 1996 together  aggregating net proceeds of $24,419,000.  In
April 1999 and November  1999,  we concluded a follow-on  public  offering and a
private placement financing, respectively, that together aggregated net proceeds
of $15,761,000.

     Cash, cash equivalents and  available-for-sale  securities  (including long
term position)  totaled  $14,066,000,  $7,164,000 and $14,459,000 as of December
31, 1999, 1998 and 1997,  respectively.  The increase of $6,902,000 from 1998 to
1999  was due to the  follow-on  offering  in April  and  private  placement  in
November 1999 offset by net losses. The decrease from 1997 to 1998 was primarily
due to net losses.

     Cash flows used in operating  activities  were  $8,290,000,  $7,468,000 and
$8,644,000 for the years ended December 31, 1999,  1998 and 1997,  respectively.
These cash outflows resulted  primarily from funding our net losses. In 1999, we
also made an  investment  in inventory of  $582,000,  increased  other assets by
$147,000 and accounts receivable by $145,000. In addition,  capital expenditures
for  property and  equipment  of  $735,000,  $245,000 and $415,000 for the years
ended December 31, 1999,  1998 and 1997,  respectively,  contributed to the cash
outflows.

     In  December  1997,  we signed an  agreement  for a bank loan  facility  to
finance  existing  equipment  up to a total  of  $1,000,000,  and new  equipment
purchases  for up to a total  facility  limit of  $2,500,000.  The  facility  is
secured by the  equipment  financed.  The loan  balance is subject to a floating
interest rate equal to the bank's prime rate plus 1.5%. As of December 31, 1999,
we had  drawn  down  $204,000  on the  existing  equipment  portion  of the loan
facility and had no draw down on the new equipment portion of the loan facility.
Available credit under this facility,  as amended,  expired in February 1998. In
connection with this loan facility, we issued a warrant to purchase 4,500 shares
of common stock at an exercise price of $4.00 per share. This warrant expires in
December 2002.

     Our future capital requirements will depend on numerous factors,  including
rate of acceptance of FloSeal in the market as evidenced by achieving  revenues,
our ability to scale up  manufacturing  activities,  and the nature,  timing and
success of other products  under  development.  We expect to commit  substantial
capital  resources to the  development  of  commercial-scale  manufacturing  for
FloSeal.  In November  1999,  we entered  into a lease for a 72,500  square foot
building in Fremont,  California. We expect to commit approximately $2.2 million
for manufacturing equipment, research and development equipment, office


                                       26
<PAGE>

furnishings  and  equipment  and  leasehold  improvements.   We  are  seeking to
secure  an  equipment  lease  line  to  finance  most  of the  expenditures  for
equipment.  The associated  working capital  requirements for  manufacturing and
commercial  launch of a new product  are also  expected  to be  substantial.  We
expect  to incur  substantial  expenditures  to  develop  our  direct  sales and
marketing  force.  The  timing  and  amount of  capital  requirements  cannot be
accurately predicted.


     When we need to raise additional money to fund our operations, we cannot be
certain  that  funding  from any source will be  available  to us on  acceptable
terms, or at all. In November 1999, we said a follow-on  offering may take place
around mid year   2000.  The amount and the timing of raising  additional  funds
will depend  primarily  upon our ability to generate  revenues  from the sale of
FLOSEAL.  Our inability to obtain  additional  funding on reasonable  terms will
materially and adversely affect our business.

     At  December 31,  1999,  we had  approximately  $24,419,000  in federal and
$27,213,000 in state net operating loss carry forwards which expire in the years
2001 through 2019, respectively. Utilization of federal income tax net operating
loss carry forwards is subject to certain  limitations  under Section 382 of the
Internal Revenue Code of 1986, as amended.  These annual  limitations may result
in  expirations  of net operating  losses and research and  development  credits
before they can be fully utilized.


RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the FASB issued Statement of Financial  Accounting  Standards
No. 133,  "Accounting for Derivative  Instruments and Hedging Activities," which
establishes  accounting and reporting  standards for derivative  instruments and
hedging  activities.  It requires that an entity  recognize all  derivatives  as
either assets or liabilities in the statement of financial  position and measure
those  instruments  at fair value.  In July 1999,  the FASB issued  Statement of
Financial  Accounting  Standards No. 137 "Accounting for Derivative  Instruments
and Hedging  Activities - Deferral of the Effective  Date of FASB  Statement No.
133" ("SFAS 137").  SFAS 137 deferred the  effective  date of SFAS 133 until the
first fiscal year beginning after June 15, 2000. To date, we have not engaged in
derivative  and hedging  activities.  We will adopt SFAS No. 133 as required for
our first quarterly filing of 2001.



                                       27
<PAGE>

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Our exposure to market risk for changes in interest  rates relates  primarily to
our investment portfolio and bank borrowings. We do not use derivative financial
instruments  in our  investment  portfolio,  and our  investment  portfolio only
includes highly liquid  instruments with an original maturity to us of generally
less than one year. We have primarily  entered into debt obligations for capital
expenditures.  We are  subject to  fluctuating  interest  rates that may impact,
adversely or otherwise, our results of operations or cash flows for our variable
rate  bank   borrowings,   available-for-sale   securities  and  cash  and  cash
equivalents.

     The table below presents  principal  amounts and related  weighted  average
interest  rates  by year of  maturity  for our  investment  portfolio  and  debt
obligations:
<TABLE>
<CAPTION>

                                                                                  FISCAL YEAR
                                                              ---------------------------------------------
                                                                 1999           2000         2001     TOTAL
                                                                                                      -----
Assets:
    <S>                                                         <C>            <C>              <C>   <C>
    Cash and cash equivalents                                 $  8,164             -            -    $ 8,164
    Average interest rate                                        5.88%             -            -      5.88%
    Available-for-sale securities including
      long term position                                      $  4,814       $    996           -    $ 5,810
    Average interest rate                                        6.28%          6.39%           -      6.28%

Liabilities:
    Bank borrowings (including current portion)               $    117       $     87      $    -    $   204
    Average interest rate                                       10.00%         10.00%           -     10.00%

</TABLE>

     The estimated fair value of our cash and cash equivalents  approximates the
principal  amounts  reflected  above  based  on the  short  maturities  of these
financial  instruments.  The  estimated  fair  value  of  our  debt  obligations
approximates  the principal  amounts  reflected  above based on rates  currently
available to us for debt with similar terms and remaining maturities.

     Although  payments  under the operating  lease for our facility are tied to
market  indices,  we are not exposed to material  interest rate risk  associated
with the operating lease.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     This  information  is  incorporated  herein by reference  to the  financial
statements listed in Item 14 of Part IV of this Report.


ITEM 9.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE.

     None


                                       28
<PAGE>

PART III

     Certain  information  required  by Part III is  omitted  from  this  Report
because the registrant will file a definitive  proxy  statement  within 120 days
after  the end of its  fiscal  year  pursuant  to  Regulation  14A  (the  "Proxy
Statement")  for its annual meeting of  stockholders to be held on June 15, 2000
and the information therein is incorporated herein by reference.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The information concerning the Company's directors required by this item is
incorporated  by  reference  to  the  Company's  Proxy  Statement.   Information
regarding  executive  officers is  included  in Part I hereof  under the caption
"Executive Officers of the Company" and is hereby incorporated by reference into
this Item 10.

ITEM 11.  EXECUTIVE COMPENSATION.

     The  information  required by this Item is incorporated by reference to the
Company's Proxy Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The  information  required by this Item is incorporated by reference to the
Company's Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The  information  required by this Item is incorporated by reference to the
Company's Proxy Statement.


                                       29
<PAGE>

PART IV
<TABLE>
<CAPTION>

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES

<S>      <C>      <C>                                                                                  <C>
(a)      1.       FINANCIAL STATEMENTS                                                                    PAGE(S)
                                                                                                          -------
                  Report of Independent Accountants.                                                        F-2
                  Consolidated Balance Sheets, December 31, 1999 and 1998.                                  F-3
                  Consolidated Statements of Operations and Comprehensive Loss,
                     Years Ended December 31, 1999, 1998 and 1997.                                          F-4
                  Consolidated Statements of Stockholders' Equity, Years Ended
                     December 31, 1999, 1998 and 1997.                                                      F-5
                  Consolidated Statements of Cash Flows, Years Ended December 31,
                     1999, 1998 and 1997.                                                                   F-6
                  Notes to Consolidated Financial Statements.                                           F-7 to F-18

        2.       2.       FINANCIAL STATEMENT SCHEDULE

                  All schedules are omitted because they are not applicable or the
                  required information is shown in the Consolidated Financial Statements or the
                  notes thereto.

         3.       EXHIBITS

                  The Exhibits listed on the accompanying index immediately
                  following the signature page are filed as part of this Report.

(b)      REPORTS ON FORM 8-K

                  Not applicable.


(c)      EXHIBITS

                  See Item 14 (a) 3. above.

</TABLE>

                                       30
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) the Securities Exchange Act
of 1934, the Registrant has duly caused this Report on Form 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized.


FUSION MEDICAL TECHNOLOGIES, INC.                           Date: March 29, 2000

By: /s/PHILIP M. SAWYER
    -------------------
       PHILIP M. SAWYER
   PRESIDENT AND CHIEF EXECUTIVE OFFICER


KNOW ALL PERSONS BY THESE  PRESENTS,  that each person whose  signature  appears
below constitutes and appoints Philip M. Sawyer his attorneys-in-fact,  and each
with the power of substitution,  for him in any and all capacities,  to sign any
amendments  to this  Report on Form 10-K,  and to file the same,  with  exhibits
thereto and other  documents in connection  therewith,  with the  Securities and
Exchange  Commission,  hereby  ratifying  and  confirming  all that each of said
attorneys-in-fact,  or his substitute or substitutes, may do or cause to be done
by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
on Form  10-K  has  been  signed  by the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated.


   SIGNATURE                              TITLE                        DATE
   ---------                              -----                        ----

 /s/ PHILIP M. SAWYER        President, Chief Executive Officer   March 29, 2000
 --------------------
  (PHILIP M. SAWYER)         and Director
                                (Principal Executive Officer)


 /s/ LARRY J. STRAUSS        Vice President, Finance and          March 29, 2000
 --------------------
  (LARRY J. STRAUSS)         Chief Financial Officer
                                (Principal Accounting Officer)


 /s/ GORDON W. RUSSELL       Chairman of the Board of Directors   March 29, 2000
 ---------------------
  (GORDON W. RUSSELL)


 /s/ OLAV B. BERGHEIM        Director                             March 29, 2000
 --------------------
  (OLAV B. BERGHEIM)


 /s/ VAUGHN D. BRYSON        Director                             March 29, 2000
 --------------------
  (VAUGHN D. BRYSON)


                                       31
<PAGE>

 /s/DOUGLAS E. KELLY, M.D.   Director                             March 29, 2000
--------------------------
  (DOUGLAS E. KELLY, M.D.)


 /s/ J. MICHAEL EGAN       Director                               March 29, 2000
--------------------
   (J. MICHAEL EGAN)


                                       32
<PAGE>

<TABLE>
<CAPTION>

INDEX TO EXHIBITS

EXHIBITS

<S>               <C>
3.1(1)            Certificate of Incorporation of Registrant.
3.4(1)            Amended and Restated By-laws of the Registrant.
10.1(1)           Restated Shareholder Rights Agreement dated as of January 17, 1995.
10.2(1)           1993 Stock Option Plan, as amended, and form of stock option agreement.
10.3(1)           1996 Employee Stock Purchase Plan.
10.4(1)           1996 Director Stock Option Plan, and form of stock option agreement.
10.5(1)           Form of Director and Officer Indemnification Agreements.
10.6(1)           Lease Agreement dated June 15, 1994 between the Registrant and James R. Benson.
10.7(2)           Loan and Security Agreements dated December 21, 1997 between the Registrant and Imperial Bank
10.8(2)           First Amendment dated December 21, 1997 to Warrant to Purchase Stock dated May 31, 1995
10.9(2)           Warrant to Purchase Stock dated December 21, 1997
10.10(3)          Purchase Agreement dated January 1, 1997 between Registrant and Spear
                  Products
10.11(4)*         Distribution Agreement dated July 1, 1999 between Registrant and Sulzer Spine-Tech Inc.
10.12(5)          Lease Agreement dated October 15, 1999 between Registrant and Tarlton/
                  Wohl Venture Nine LLC.
23.1              Consent of PricewaterhouseCoopers LLP, Independent Accountants.
27.1              Financial Data Schedule.

(1)  Previously filed as exhibits to the Company's Registration Statement on Form S-1 SEC file number 000-28460.

(2)  Previously filed as exhibits to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997.

(3)  Incorporated by reference from the Company's Form 10-Q for the quarter ended March 31, 1999.

(4)  Incorporated by reference from the Company's Form 10-Q for the quarter ended June 30, 1999.

(5)  Incorporated by reference from the Company's Form 10-Q for the quarter ended September 30, 1999.

(*)  Confidential treatment granted for portions of this Exhibit.

</TABLE>

Fusion(TM),   Fusion  Medical   Technologies,   Inc.(TM),   FloSeal  Matrix(TM),
FloSeal(R),  Proceed(TM)  RapiSeal Patch(TM) and SilverBullet(TM) are trademarks
of Fusion Medical Technologies,  Inc. Any use is strictly prohibited without the
prior written consent of Fusion Medical Technologies, Inc.

                                       33
<PAGE>

  FUSION MEDICAL TECHNOLOGIES, INC.



  INDEX TO FINANCIAL STATEMENTS

                                                                          PAGE
                                                                          ----


  Report of Independent Accountants........................................F-2



  Consolidated Balance Sheets as of December 31, 1999 and 1998.............F-3



  Consolidated Statements of Operations and Comprehensive Loss
     For the Years Ended December 31, 1999, 1998 and 1997..................F-4



  Consolidated Statements of Stockholders' Equity For the Years
     Ended December 31, 1999, 1998 and 1997................................F-5



  Consolidated Statements of Cash Flows For the Years Ended
     December 31, 1999, 1998 and 1997......................................F-6



  Notes to Consolidated Financial Statements...............................F-7

                                      F-1
<PAGE>

         REPORT OF INDEPENDENT ACCOUNTANTS





To the Board of Directors and Stockholders
Fusion Medical Technologies, Inc.:

     In our  opinion,  the  accompanying  consolidated  balance  sheets  and the
related  consolidated  statements  of  operations  and  comprehensive  loss,  of
stockholders' equity and of cash flows present fairly, in all material respects,
the financial position of Fusion Medical Technologies,  Inc. and subsidiary (the
"Company")  at December 31, 1999 and 1998,  and the results of their  operations
and their cash flows for each of the three  years in the period  ended  December
31, 1999, in conformity with  accounting  principles  generally  accepted in the
United  States.  These  financial  statements  are  the  responsibility  of  the
Company's  management;  our  responsibility  is to  express  an opinion on these
financial  statements  based on our  audits.  We  conducted  our audits of these
statements  in  accordance  with auditing  standards  generally  accepted in the
United  States,  which  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,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.




PricewaterhouseCoopers LLP

San Jose, California
February 4, 2000

                                      F-2
<PAGE>

<TABLE>
<CAPTION>

                                             FUSION MEDICAL TECHNOLOGIES, INC.
                                                CONSOLIDATED BALANCE SHEETS
                                           (in thousands, except per share data)

                                                                                                 December 31,
                                                                                        ------------------------------
                                                                                               1999        1998
                                                                                        -----------        -----------
<S>                                                                                     <C>                <C>

ASSETS
Current assets:
     Cash and cash equivalents                                                          $   8,164         $    4,151
     Available-for-sale-securities                                                          3,818              3,013
     Accounts receivable                                                                      147                 --
     Inventory                                                                                582                 --
     Prepaids and other current assets                                                        182                135
                                                                                        ---------         ----------
         Total current assets                                                              12,893              7,299

Restricted cash deposits                                                                    1,088                 --
Available-for-sale securities                                                                 996                 --
Property and equipment, net                                                                 1,038                735
Other assets                                                                                  201                 54
                                                                                        ---------         ----------
             Total assets                                                               $  16,216         $    8,088
                                                                                        =========         ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable                                                                   $     719         $      157
     Accrued expenses                                                                         507                783
     Current portion of bank borrowings                                                       117                117
                                                                                        ---------         ----------
         Total current liabilities                                                          1,343              1,057
     Bank borrowings, net of current portion                                                   87                204
                                                                                        ---------         ----------
             Total liabilities                                                              1,430              1,261
                                                                                        ---------         ----------
Commitments (Note 6)

Stockholders' equity:
Preferred stock, par value $0.001: Authorized:  5,000 shares; issued and                       --                 --
     outstanding: none
Common stock, par value $0.001:  Authorized: 50,000 shares; issued and
     outstanding: 10,009 shares in 1999 and 7,211 shares in 1998                               10                  7
Additional paid-in capital                                                                 52,564             36,137
Deferred compensation                                                                        (202)               (87)
Accumulated other comprehensive income (loss)                                                 (29)                 2
Accumulated deficit                                                                       (37,557)           (29,232)
         Total stockholders' equity                                                        14,786              6,827
                                                                                        ---------         ----------
             Total liabilities and stockholders' equity                                 $  16,216         $    8,088
                                                                                        =========         ==========

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

</TABLE>

                                      F-3
<PAGE>

<TABLE>
<CAPTION>

                                          FUSION MEDICAL TECHNOLOGIES, INC.

                             CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                                        (in thousands, except per share data)

                                                                             Year Ended December 31,
                                                          ------------------------------------------------------
                                                          1999                       1998                 1997
                                                          --------                  --------            --------
<S>                                                       <C>                       <C>                 <C>

Net sales                                                $    254                                        $    153
Cost of sales and start-up manufacturing costs                731                                             968
                                                         --------                   -------              --------
         Gross loss                                          (477)                                           (815)
                                                         --------                   -------              --------
Operating Expenses:
     Research and development                               5,095                     6,145                 5,647
     Sales and marketing                                    1,441                       614                 2,421
     General and administrative                             1,802                     1,474                 2,004
                                                         --------                   -------              --------
         Total operating expenses                           8,338                     8,233                10,072
                                                         --------                   -------              --------
              Loss from operations                         (8,815)                   (8,233)              (10,887)

Other income (expense):
     Interest income                                          513                       581                 1,008
     Interest expense                                         (26)                      (39)                  (24)
     Other income (expense), net                                3                         4                   (49)
                                                         --------                   -------              --------
              Net loss                                     (8,325)                   (7,687)              (9,952)

Other comprehensive income (loss):
     Change in unrealized gain or loss on available
     for sale securities                                      (31)                       --                   13
                                                         --------                   -------              --------
              Comprehensive loss                          $(8,356)                  $(7,687)             $ (9,939)
                                                         ========                   =======              ========

Basic and diluted net loss per share                      $ (0.96)                  $ (1.08)             $  (1.41)
                                                         ========                   =======              ========
Shares used in computing basic and diluted net
     loss per share                                         8,707                     7,145                 7,070
                                                         ========                   =======              ========

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

</TABLE>

                                                                  F-4
<PAGE>

<TABLE>
<CAPTION>

FUSION MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the three years ended December 31, 1999
(in thousands)

                                                                         Notes                     Accumulated
                                                            Additional  Receivable                 Other
                                            Common Stock    Paid-In     >From         Deferred      Comprehensive  Deficit
                                          Shares    Amount  Capital     Shareholder  Compensation  Income (Loss)  Accumulated  Total

                                          ------------------------------------------------------------------------------------------

<S>                                       <C>       <C>     <C>         <C>          <C>           <C>            <C>          <C>

Balances, January 1, 1997                  6,999       $  7    $36,579        $(48)      $(1,191)          $(11)  $(11,593) $23,743
Issuance of common stock:
  Upon exercise of stock options              84                    60                                                           60

  Under employee stock purchase plan          35                   124                                                          124
Interest on notes receivable                                                    (6)                                              (6)

Change in unrealized  loss on available
  for sale securities                                                                                        13                  13
Adjustment  for  cancellation  of stock                           (667)                      667
Amortization of deferred compensation                                                        242                                242
Net loss                                                                                                            (9,952)  (9,952)

                                           -----       ---      ------         ----       ------            ----   -------   ------
Balances, December 31, 1997                7,118         7      36,096         (54)         (282)             2    (21,545)  14,224
Issuance of common stock:
  Upon exercise of stock options              65                    29                                                           29
  Under employee stock purchase plan          28                    73                                                           73
Payment of notes receivable                                                     54                                               54
Adjustment  for  cancellation  of stock                            (61)                       61
Amortization of deferred compensation                                                        134                                134
Net loss                                                                                                           ( 7,687) ( 7,687)
                                           -----       ---      ------         ----       ------            ----   -------   ------
Balances, December 31, 1998                7,211         7      36,137           -           (87)             2    (29,232)   6,827
Issuance of common stock:
  Follow-on  public  offering,  net  of
    issuance costs of $1,080               1,800         2       8,143                                                        8,145
  Private  placement,  net of  issuance
    costs of $668                            872         1       7,615                                                        7,616
  Upon exercise of stock options             109                   212                                                          212
  Under employee stock purchase plan          17                   103                                                          103
Change  in   unrealized   gain/loss  on
  sale securities                                                                                           (31)                (31)

Unearned compensation on NSO                                       354                      (354)
Amortization of deferred compensation                                                        239                                239
Net loss                                                                                                            (8,325)  (8,325)
                                         -------       ---     -------         ----       ------            ----   -------   ------
Balances, December 31, 1999               10,009       $10     $52,564         $ -         $(202)          $(29)  $(37,557) $14,786
                                         =======       ===     =======         ====       ======           ====   ========  =======

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

</TABLE>

                                                                  F-5
<PAGE>

<TABLE>
<CAPTION>

                                          FUSION MEDICAL TECHNOLOGIES, INC.
                                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                   (in thousands)

                                                                                    YEAR ENDED DECEMBER 31,
                                                                             1999          1998           1997
                                                                         ------------  ------------   ------------
<S>                                                                      <C>           <C>           <C>

Cash flows used for operating activities:
      Net loss                                                           $    (8,325)  $   (7,687)   $     (9,952)
      Adjustments to reconcile  net loss to net cash used in operating
      activities:
        Depreciation and amortization                                            432          319             464
        Loss on disposition of property and equipment                             --           --             264
        Accretion of available-for-sale securities                                (8)          16              17
        Amortization of deferred compensation                                    239          134             242
        Interest on notes receivable from stockholder                             --           --              (6)
        Provision for doubtful accounts                                           --           --              10
      Changes in assets and liabilities:
        Accounts receivable                                                     (147)          21              (8)
        Inventories                                                             (582)          --              83
        Prepaids and other current assets                                       ( 47)          72             100
        Other assets                                                            (147)         (10)             --
        Accounts payable                                                         562         (441)           (281)
        Accrued expenses                                                        (276)         108             423
                                                                               ------       ------         ------
                    Net cash used in operating activities                     (8,299)      (7,468)         (8,644)
                                                                               ------       ------         ------
Cash flows from investing activities:
     Acquisition of property and equipment                                       (735)        (245)          (415)
     Purchases of available-for-sale-securities                                (7,513)      (1,996)       (10,515)
     Restructured Cash                                                         (1,088)          --             --
     Sales of available-for-sale securities                                     5,689        5,953         16,231
                                                                               ------       ------         ------
     Net cash provided by (used in) investing activities                       (3,647)       3,712          5,301
                                                                               ------       ------         ------

Cash flows from financing activities:

     Proceeds from issuance of common stock, net of issuance costs             16,076          102            184
     Proceeds from bank borrowings                                                 --          278             ---
     Repayment of notes payable                                                  (117)          --           (146)
     Payment received on note receivable from stockholder                          --           54             ---
                                                                               ------       ------         ------
                    Net cash provided by financing activities                  15,959          434             38
                                                                               ------       ------         ------
Net increase (decrease) in cash and cash equivalents                            4,013       (3,322)       (3,305)
Cash and cash equivalents, beginning of year                                    4,151        7,473        10,778
                                                                               ------       ------         ------
Cash and cash equivalents, end of year                                        $ 8,164      $ 4,151       $ 7,473
                                                                              =======      =======       =======

Supplemental disclosure of cash flow information:
     Cash paid for interest                                                   $    26      $    80       $    64
                                                                              =======      =======       =======
     Cash paid for taxes                                                      $    --      $     1       $     1
                                                                              =======      =======       =======
Supplemental disclosure of noncash investing and financing activities:
    Adjustment for cancellation of stock options                              $    --      $    61       $   667
                                                                              =======      =======       =======
    Issuance of stock options to outside consultants                          $   354      $    --       $    --
                                                                              =======      =======       =======

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

</TABLE>

                                       F-6





FUSION MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  FORMATION AND BUSINESS OF THE COMPANY

     Fusion Medical  Technologies,  Inc. (the "Company") was incorporated in the
State of  Delaware  in 1992.  The  Company is  developing,  and  commercializing
proprietary collagen and thrombin gel-based products used to control bleeding in
a  variety  of  surgeries.   Since  its  inception,   the  Company  has  devoted
substantially  all of its efforts to developing  products,  raising  capital and
recruiting personnel. The Company operates in one business segment.

     The  Company  sold  2,100,000  shares of common  stock at $13.00  per share
through  an  initial  public   offering  in  June  1996.  Net  proceeds   (after
underwriter's  commissions  and fees along with other costs  associated with the
offering) totaled $24,419,000.  Upon completion of the offering, all outstanding
shares of preferred  stock (a total of 7,659,000  shares)  were  converted  into
shares of common stock.

     In April 1999, the Company sold 1,800,000  shares of common stock at $5.125
per share in a follow-on public offering.  Net proceeds,  after  commissions and
fees along with other costs associated with the offering, totaled $8,145,000. In
November 1999, the Company  closed a private  placement  financing with selected
accredited  investors of 872,000 shares of common stock at $9.50 per share.  Net
proceeds,  after commissions and fees along with other costs associated with the
offering, totaled $7,616,000.

     These  financial  statements  contemplate the realization of assets and the
satisfaction  of liabilities in the normal course of business.  In the course of
its  development,  the Company has sustained  operating  losses and expects such
losses to continue through at least 2001.  Management believes that its existing
cash balances and other potential  financing  alternatives will be sufficient to
meet the Company's  capital and operating  requirements  for the next 12 months.
There can be no assurance that the Company will not require  additional  funding
and should this prove necessary,  the Company may sell additional  shares of its
common stock or preferred  stock  through  private  placement or further  public
offerings.  There can be no assurance  that the Company  would be able to obtain
additional  debt or equity  financing,  if and when  needed,  on terms  that the
Company finds  acceptable.  Any additional  equity or debt financing may involve
substantial  dilution to the Company's  stockholders,  restrictive  covenants or
high interest costs. The failure to raise needed funds on sufficiently favorable
terms could have a material adverse effect on the Company's business,  operating
results and financial condition.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     BASIS OF CONSOLIDATION

     The consolidated  Financial  Statements include the accounts of the Company
and its  wholly-owned  subsidiary.  All  significant  intercompany  accounts and
transactions have been eliminated.


     USE OF ESTIMATES

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the reported  amounts of expenses  during the reporting  period.
Actual results could differ from those estimates.

                                      F-7
<PAGE>

                        FUSION MEDICAL TECHNOLOGIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



     LONG-LIVED ASSETS

     The Company reviews long-lived assets and certain  identifiable  intangible
assets to be held and used, or disposed of, for  impairment  whenever  events or
changes in  circumstances  indicate that the carrying amount of an asset may not
be recoverable.  The Company assesses the impairment of long-lived assets, based
upon the estimated future cash flows from these assets.

     CASH AND CASH EQUIVALENTS AND AVAILABLE-FOR-SALE SECURITIES

     The Company  considers  all highly  liquid  investments  purchased  with an
original maturity of three months or less to be cash equivalents.  Cash and cash
equivalents include money market funds and various deposit accounts.

     The Company has classified its  investments as  "available-for-sale."  Such
investments  are  recorded at fair value and  unrealized  gains and  losses,  if
material,  are  recorded  as a  separate  component  of equity  until  realized.
Interest  income is recorded using an effective  interest rate,  with associated
premium or discount  amortized to "interest income." The cost of securities sold
is  based  upon  the  specific  identification  method.  All  available-for-sale
securities with original maturities greater than 365 days are classified as long
term.

     INVENTORIES

     Inventories are stated at the lower of cost or market, with cost determined
on a first-in, first-out basis.

     DEPRECIATION AND AMORTIZATIOn

     Property  and  equipment  are  recorded  at cost and are  depreciated  on a
straight-line  basis  over  their  estimated  lives  of  three  to  five  years.
Maintenance  and  repairs  are  charged to  operations  as  incurred.  Leasehold
improvements are amortized over their estimated useful lives, or the lease term,
if shorter.

     REVENUE RECOGNITION

     The Company  recognizes  revenue upon  shipment of product to the customer,
upon  fulfillment  of  acceptance   terms,  if  any,  and  when  no  significant
contractual obligations remain outstanding.

     RESEARCH AND DEVELOPMENT EXPENDITURES

     Research and development expenditures are expensed as incurred.

     ADVERTISING EXPENSES

     The  Company  recognizes   advertising   expenses  as  they  are  incurred.
Advertising  expenses for the years ended December 31, 1999,  1998 and 1997 were
$12,000, none and $1,000 respectively.

     INCOME TAXES

     Income taxes are  accounted for under the  liability  method.  Deferred tax
assets  and  liabilities   are  recognized  for  the  future  tax   consequences
attributable to differences  between the financial statement carrying amounts of
existing  assets and liabilities  and their  respective tax basis.  Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled.  Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized.

                                       F-8
<PAGE>

                        FUSION MEDICAL TECHNOLOGIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

     CONCENTRATION OF CREDIT RISK

     The Company's cash, cash equivalents and available-for-sale  securities are
maintained at three financial  institutions.  Deposits in these institutions may
exceed the amount of insurance  provided on such deposits.  At December 31, 1999
two customers  accounted for 89% of the total accounts  receivable.  At December
31, 1999 two customers accounted for 60% of the total sales revenue.

     RISKS AND UNCERTAINTIEs

     The  Company's   products   require   approvals  from  the  Food  and  Drug
Administration  ("FDA")  and  international  regulatory  agencies  prior  to the
commencement  of  commercialized  sales.  There  can be no  assurance  that  the
Company's  products  will  receive the  required  approvals.  If the Company was
denied  such  approvals,  or  such  approvals  were  delayed,  it  would  have a
materially adverse impact on the Company.

     The  Company  is  dependant  upon the  success  of its lead  product  under
development.  The Company's  future success depends upon its ability to develop,
introduce and market new  products,  its ability to obtain  components  from key
suppliers, and to obtain
sufficient manufacturing capacity.

     FAIR VALUE OF FINANCIAL INSTRUMENTS

     Carrying  amounts  of  certain  of  the  Company's  financial   instruments
including cash and cash  equivalents,  accounts  receivable,  accounts  payable,
accrued expenses and other liabilities approximate fair value due to their short
maturities.  Based upon borrowing rates  currently  available to the Company for
loans with similar terms,  the carrying  value of the Company's bank  borrowings
approximate fair value. Estimated fair values for available-for-sale securities,
which are separately disclosed elsewhere,  are based on quoted market prices for
the same or similar instruments.

     COMPUTATION OF BASIC AND DILUTED NET LOSS PER SHARE

     Basic  and  diluted  net loss per  share are  computed  using the  weighted
average number of shares of common stock  outstanding.  Common equivalent shares
from stock  options and warrants  have been  excluded  from the  computation  of
diluted net loss per share, as their effect is anti-dilutive.

                                      F-9
<PAGE>

                        FUSION MEDICAL TECHNOLOGIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

     Stock options to purchase 1,795,000, 1,113,000 and 992,000 shares of common
stock at prices  ranging  from  $0.16 to $14.00 per share  were  outstanding  at
December 31,  1999,  1998 and 1997,  respectively,  but were not included in the
computation  of  diluted  net loss per share  because  they were  anti-dilutive.
Warrants  to  purchase  12,785,  12,785  and 8,285  shares  of  common  stock at
$4.00.per share were outstanding at 1999, 1998 and 1997, respectively,  but were
not included in the  computation of diluted net loss per share because they were
anti-dilutive.  The aforementioned  stock options and warrants could potentially
dilute earnings per share in the future.


     RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the FASB issued Statement of Financial  Accounting  Standards
(SFAS) No. 133, "Accounting for Derivative  Instruments and Hedging Activities",
which establishes  accounting and reporting standards for derivative instruments
and hedging activities.  It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial  position and measure
those  instruments  at fair value.  In July 1999,  the FASB issued  Statement of
Financial  Accounting  Standards  (SFAS) No.  137,  "Accounting  for  Derivative
Instruments  and Hedging  Activities - Deferral of the  Effective  Date of FASB
Statement No. 133"("SFAS 137"). SFAS 137 deferred the effective date of SFAS 133
until the first fiscal year beginning after June 15, 2000. The Company, to date,
has not engaged in  derivative  and hedging  activities.  The Company will adopt
SFAS No. 133 as required for its first quarterly filing of calendar year 2001.


3.  AVAILABLE-FOR-SALE SECURITIES



     The following  summarizes the Company's available-for-sale securities
(including long term position) (in thousands):
<TABLE>
<CAPTION>

                                       UNREALIZED
                            COST       GAIN/(LOSS)    FAIR VALUE     MATURITY DATES
                           -------     ----------     ----------     --------------


<S>                          <C>           <C>           <C>         <C>
DECEMBER 31, 1999
   Corporate Bonds         $ 4,745       $ (29)        $ 4,814       4/00 - 03/01

DECEMBER 31, 1998
   Corporate Bonds         $ 3,011         $  2        $ 3,013       1/99 - 6/99

</TABLE>


     During 1999,  1998 and 1997,  there were no realized gains or losses on the
disposal of available-for-sale securities.

                                  F-10
<PAGE>

                        FUSION MEDICAL TECHNOLOGIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


4.   BALANCE SHEET DETAILS
<TABLE>
<CAPTION>

                                                            DECEMBER 31,
                                                  ------------------------------
                                                           (IN THOUSANDS)
                                                     1999                1998
                                                  -----------        -----------
<S>                                                   <C>                   <C>
Inventory:
Raw materials                                     $   237            $      -
Work in progress                                      150                   -
Finished goods                                        195                   -
                                                  --------           ---------
                                                  $   582            $      -
                                                  ========           =========
</TABLE>

<TABLE>
<CAPTION>

                                                            DECEMBER 31,
                                                  ------------------------------
                                                           (IN THOUSANDS)
                                                     1999                1998
                                                  -----------        -----------
<S>                                                <C>                 <C>
Property and equipment:
Computer equipment                                $   366            $    295
Office furniture and equipment                        146                 147
Machinery and equipment                             1,210               1,086
Leasehold improvements                                758                 217
                                                  --------           ---------
       Total                                        2,480               1,745
Less accumulated depreciation and amortization     (1,442)             (1,010)
                                                  --------           ---------
       Net                                        $ 1,038            $    735
                                                  ========           =========

</TABLE>


<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                  ------------------------------
                                                           (IN THOUSANDS)
                                                     1999                1998
                                                  -----------        -----------
<S>                                                   <C>                  <C>
Accrued expenses:
Accrued compensation                              $   269            $     157
Restructuring (Note 12)                                43                   43
Clinical trial                                          5                  383
Other                                                 190                  200
                                                  --------           ---------
                                                  $   507            $     783
                                                  ========           =========

</TABLE>

                                      F-11
<PAGE>

                       FUSION MEDICAL TECHNOLOGIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


5.  BANK BORROWINGS

     In  December  1997,  the  Company  signed a loan  agreement  with a bank to
finance  existing  equipment and future  equipment  purchases up to  $2,500,000.
Subject to certain terms and conditions,  the facility  finances a percentage of
the invoice  cost of existing  equipment  and all of the invoice  cost of future
equipment  purchases.  The equipment purchased serves as collateral.  Borrowings
under the  facility,  as amended,  expired in February  1998. As of December 31,
1999, the Company had a balance of $204,000 outstanding.  The loan is payable in
monthly  installments  bearing interest at the rate of prime plus 1.5% per annum
(10.0% at December  31,  1999).  This  borrowing  agreement  contains  covenants
restricting the payment of dividends.

         Future payments under this loan agreement are as follows:
<TABLE>
<CAPTION>

     YEAR                             AMOUNT
     ----                            --------
     <S>                                  <C>
     Current                         $    117

     2001                                  87
                                     --------
                                     $    204
                                     ========
</TABLE>


6.  COMMITMENTS

     The Company leases office, laboratory and manufacturing space under various
operating  leases,  the latest expiring in December 2006.  Except for the 7 year
lease  commencing  January  1,  2000  for the  Company's  new  headquarters  and
manufacturing facility in Fremont,  California, the leases generally require the
Company to pay property taxes, insurance and ordinary maintenance and repairs in
addition to the lease payment.

     The  Company  issued a letter  of  credit to the  landlord  of the  Fremont
building in the amount of $1,087,500.  The letter of credit is collateralized by
a  cash  deposit  held  in an  interest  bearing  account  and is  reflected  as
restricted cash on the accompanying balance sheet. In exchange for the letter of
credit,  the landlord is providing  improvements to the site equal to or greater
than  $1,087,500.  Repayment to the landlord for these  improvements  are deemed
rental payments and are payable during the initial term of the lease. The letter
of credit extends through the initial lease term and will decrease pro-rata upon
each annual renewal.

                                      F-12
<PAGE>

                       FUSION MEDICAL TECHNOLOGIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


     Rent  expense for the years ended  December 31,  1999,  1998 and 1997,  was
approximately $436,000, $304,000 and $363,000, respectively.

     Minimum future lease  payments  under the lease  agreements at December 31,
1999 are as follows (in thousands):
<TABLE>
<CAPTION>

                    YEAR                     AMOUNT
                    ----                   --------
                    <S>                      <C>
                    2000                  $  1,366
                    2001                     1,826
                    2002                     1,518
                    2003                     1,570
                    2004                     1,623
                    Thereafter               3,376
                                           -------
                                          $ 11,279
                                           =======

</TABLE>



                                      F-13
<PAGE>

                       FUSION MEDICAL TECHNOLOGIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


7.  STOCKHOLDERS' EQUITY

     PREFERRED STOCK

     Under the  Company's  Restated  Articles of  Incorporation,  the  Company's
preferred stock is issuable in series. As of December 31, 1999, 5,000,000 shares
of  preferred  stock  were  authorized  and no  preferred  stock  was  issued or
outstanding.  The  previously  outstanding  preferred  stock was converted  into
common stock in connection  with the Company's  initial public  offering in June
1996.

      WARRANTS

     During  September  1994, in connection with the issuance of a note payable,
the  Company  issued a warrant to purchase  20,000  shares of Series B preferred
stock at an exercise price of $1.66.  Upon the closing of the Company's  initial
public offering and conversion of the Company's previously outstanding preferred
stock into common  stock,  the warrant  became  exercisable  for 8,285 shares of
common stock at an exercise price of $4.80 per share.  In 1997, this warrant was
modified to $4.00 per share and the  expiration  date was  extended to September
2000.

     In December 1997, in connection with bank borrowings,  the Company issued a
warrant to purchase 4,500 common shares at an exercise price of $4.00 per share.
This warrant  expires in five years.  The value of these warrants was calculated
using  the  Black  Scholes  Model.   The  calculated  value  was  deemed  to  be
insignificant.

     STOCK OPTION PLAN

     In November 1993, the Company  established  the 1993 Stock Option Plan (the
Plan),  which provides for both incentive stock options (ISOs) and non-qualified
stock options (NSOs) to be granted to employees and consultants.  All NSOs allow
for the  purchase of common stock at prices not less than 85% of the fair market
value as determined  by the Board of Directors at the date of grant.  ISOs allow
for the purchase of common stock at prices not less than 100% of the fair market
value as  determined  by the Board of Directors at the date of grant.  If at the
time the Company  grants an option the optionee  owns more than 10% of the total
combined  voting  power of all the classes of stock of the  Company,  the option
price shall be at least 110% of the fair value and the term of the options shall
be five years from the date of grant. All other options must be exercised within
ten years from the date of grant.  Options  vest as  determined  by the Board of
Directors, generally over four years.

     In the event that options are exercised prior to vesting,  upon termination
of service,  the Company has the right to repurchase  the issued common stock at
the original issuance price.  Shares are released from the Company's  repurchase
option over periods  consistent with the original options' vesting period. As of
December  31, 1999,  23,583  shares are subject to  repurchase.  The Company has
reserved  2,640,000  shares of common  stock for  issuances  to  employees,  and
officers under the Plan.

                                      F-14
<PAGE>

                        FUSION MEDICAL TECHNOLOGIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


7.   STOCKHOLDERS' EQUITY (CONTINUED)


     Activity  under the Plan is as  follows (in  thousands,  except per share
data):
<TABLE>
<CAPTION>

                                       SHARES                       WEIGHTED
                                      AVAILABLE     NUMBER OF        AVERAGE
                                      FOR GRANT      SHARES      EXERCISE PRICE      TOTAL
                                    -----------     ---------    --------------      -----

<S>                                        <C>         <C>             <C>          <C>
Balances, December 31, 1996                 400          618          $1.13         $   701
    Additional Shares authorized
    Options granted                        (557)         557           4.33           2,410
    Options cancelled                        99          (99)          2.17            (215)
    Options exercised                                    (84)          0.71             (60)
                                    -------------------------------------------------------------
Balances, December 31, 1997                 242          992           2.86           2,836
    Additional Shares authorized
      under the Plan                        400           --             --              --
    Options granted                        (354)         354           4.73           1,676
    Options cancelled                       240         (240)          4.31          (1,034)
    Options exercised                        --          (65)          0.45             (29)
                                    --------------------------------------------------------------
Balances, December 31, 1998                 528        1,041           3.31           3,449
     Additional Shares authorized
       under the Plan                       750           --
     Options granted                       (926)         926           8.08           7,481
     Options cancelled                       65          (65)          4.41            (286)
     Options exercised                       --         (109)          1.94            (212)
                                    --------------------------------------------------------------
Balances, December 31, 1999                 417        1,793          $5.82         $10,432
                                            ===        =====          =====         =======
</TABLE>


     For the years ended December 31, 1999, 1998 and 1997, the weighted  average
fair  value  of  options   granted  was  $4.36,   $1.67  and  $2.42  per  share,
respectively.

     In February 1997, the Company offered employees the right to cancel certain
outstanding  stock  options and receive  new options  with an exercise  price of
$4.38 per share,  the closing  price of the common stock on the date  individual
employees agreed to cancel their original outstanding stock options.  Options to
purchase a total of 49,000 shares at original exercise prices ranging from $6.00
to $11.50 per share were cancelled and new options were issued in February 1997.
The option term and vesting  under the new options are identical to the terms of
the cancelled options.

     During 1999,  the Company  granted  30,000  non-qualified  stock options to
consultants  at  excercise  prices  ranging  from  $3.25 to $8.97.  The  Company
determined the fair market value of these options using the Black Scholes option
pricing model with the  following  assumptions:  expected  life of ten years,  a
weighted average  risk-free  interest rate of 5.0%,  expected dividend yield of
zero and volatility of 90%. The deferred  compensation relating to these options
was $354,000.


                                      F-15
<PAGE>

                        FUSION MEDICAL TECHNOLOGIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


7.  STOCKHOLDERS' EQUITY (CONTINUED)


     DIRECTOR OPTION PLAN

     In May 1996,  the Company  approved the  Director  Option Plan and reserved
120,000  shares of common  stock for  issuance.  Options to purchase  19,200 and
20,800 shares were granted in 1998 and 1999  respectively  for a total of 59,200
shares.  Shares  are  granted  under  the plan at 100% of the fair  value of the
Company's common stock on the date of the grant. The options vest at the rate of
25% after the first year of service and the  remaining  amount  equally  over 36
months until fully vested after four years.  These options expire ten years from
the date of grant and are only exercisable upon vesting.

     EMPLOYEE STOCK PURCHASE PLAN

     In May 1996,  the Company  approved the Employee  Stock  Purchase  Plan and
reserved 280,000 shares of common stock for issuance. In 1999, a total of 17,288
shares of common  stock were  purchased  under the plan at prices  ranging  from
$5.42 to $6.43 per share.  In 1998, 28,000 shares of common stock were purchased
under the plan at $3.31 per  share.  Shares  are  purchased  through  employee's
payroll  deductions  at purchase  prices  equal to 85% of the lesser of the fair
value of the  Company's  common stock at either the  beginning or the end of the
six-month purchase period.

     STOCK-BASED COMPENSATION

     The Company has adopted the  disclosure  only  provisions  of  Statement of
Financial Accounting Standard No. 123 (SFAS No. 123) "Accounting for Stock-Based
Compensation."  Had compensation cost for the Plan, the Director Option Plan and
the Employee Stock Purchase Plan been determined  based on the fair value at the
grant date for awards in 1997,  1998 and 1999  consistent with the provisions of
SFAS No. 123,  the  Company's  net loss and basic and diluted net loss per share
for the years ended  December 31, 1997,  1998 and 1999 would have been increased
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>


                                                               1999           1998            1997
                                                          ----------      ---------       ---------
  <S>                                                         <C>            <C>            <C>
  Net loss - as reported                                  $   (8,325)     $  (7,687)      $  (9,952)
                                                          ==========      =========       =========
  Net loss - pro forma                                    $   (9,176)     $  (8,051)      $ (10,313)
                                                          ==========      =========       =========
  Basic and diluted net loss per share-as reported        $    (0.96)     $   (1.08)      $   (1.41)
                                                          ==========      =========       =========
  Basic and diluted net loss per share-pro forma          $    (1.05)     $   (1.13)      $   (1.45)
                                                          ==========      =========       =========
</TABLE>



                                      F-16
<PAGE>

                        FUSION MEDICAL TECHNOLOGIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)






7.  STOCKHOLDERS' EQUITY (CONTINUED)

     The fair value of each option grant is estimated on the date of grant using
the Black-Scholes model with the following weighted average assumptions:

<TABLE>
<CAPTION>

                                  1999               1998              1997
                                  ----               ----              ----
<S>                            <C>               <C>                <C>
Risk-free interest rate        4.67%-6.80%       5.39%-5.77%        5.79%-6.6%
Expected life                    4 years           4 years           4 years
Expected dividends                  -                 -                 -
Expected volatility                 80%              83%                82%

</TABLE>


     The options  outstanding  and currently  exercisable  by exercise  price at
December 31, 1999 are as follows:


<TABLE>
<CAPTION>


                                                                      OPTIONS CURRENTLY
                    OPTIONS OUTSTANDING                                   EXERCISABLE
----------------------------------------------------------------    ----------------------------
                                         WEIGHTED
                                         AVERAGE        WEIGHTED                    WEIGHTED
                                        REMAINING       AVERAGE                     AVERAGE
                            NUMBER      CONTRACTUAL     EXERCISE    NUMBER          EXERCISE
EXERCISE PRICE        OUTSTANDING       LIFE (YRS)      PRICE       EXERCISABLE     PRICE
--------------        -------------     ------------    --------    -----------     ------------

 <S>                     <C>                 <C>           <C>         <C>                  <C>
 $0.16 -   0.41            197,822           5.18        $ 0.36        197,494            $ 0.36
 $1.00 -   2.41             24,351           6.09          2.41         23,701              2.41
 $3.62 -   4.38            425,352           7.32          4.25        309,168              4.26
 $4.50 -   7.13            692,800           8.68          5.42        221,263              5.21
 $7.56 -  14.00            511,650           9.47          9.97         47,350              8.89
                         ---------                                     -------
                         1,851,975           8.18          5.83        798,976              3.78
                         =========                                     =======


</TABLE>

     As of December 31, 1998 and 1997,  options to purchase  525,000 and 230,000
shares of common stock were  exercisable at weighted  average exercise prices of
$2.55 and $0.99, respectively.




                                      F-17

<PAGE>

                        FUSION MEDICAL TECHNOLOGIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7.   STOCKHOLDERS' EQUITY (CONTINUED)

     For the options  granted in the 12 month period  before the initial  public
offering,  the difference between the stock option exercise price and the deemed
fair  market  value of the  Company's  common  stock at the date of issue of the
stock options, totaling $1,578,000 has been recorded as deferred compensation as
a component of  stockholders'  equity.  Of this amount  $850,000 of compensation
expense has been recognized as an expense through December 31, 1999 and $728,000
of the  amount  was  adjusted  for  cancellation  of stock  options,  due to the
termination of employment of certain employees.

8.   EMPLOYEE BENEFIT PLAN

     During 1995,  the Company  established a Retirement  Savings and Investment
Plan (the 401(k) Plan) under which employees may defer a portion of their salary
up to the maximum  allowed  under IRS rules.  The Company has the  discretion to
make  contributions  to the 401(k) Plan.  To date,  the Company has not made any
contributions to the 401(k) Plan.

9.   RELATED PARTIES

     The Company has a consulting  contract  with a retired  surgeon and medical
device designer.  The contract pays a maximum of $1,500 per month for consulting
services  and  reimburses  him for related  expenses.  The retired  surgeon is a
shareholder  of an  affiliate  of the  Company  and is related  to an  executive
officer.

10.  INCOME TAXES

     The tax effects of the significant  temporary  differences,  which comprise
net  deferred  tax  assets  at  December 31,  1999 and 1998 are as  follows  (in
thousands):

<TABLE>
<CAPTION>
                                                                   1999                1998
                                                                 --------          ---------
<S>                                                             <C>             <C>
Capitalized start-up and research and development costs         $   4,198          $  3,032
Research and development credit                                     1,023               811
Depreciation                                                          138               159
Net operating loss carryforwards                                    9,869             7,472
Other accrued expenses                                                 99               240
                                                                 --------          --------
Net deferred tax asset                                             15,327            11,714
Less valuation allowance                                          (15,327)          (11,714)
                                                                 --------          --------
Net deferred income taxes                                        $      -          $      -
                                                                 ========          ========
</TABLE>

                                      F-18
<PAGE>

                        FUSION MEDICAL TECHNOLOGIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (concluded)



10.  INCOME TAXES (CONTINUED)

     The Company has  established  a  valuation  allowance  to the extent of its
deferred  tax assets  since it is more likely than not that a benefit can not be
realized in the future due to the Company's recurring operating losses.

     The  Company  had federal and state net  operating  loss  carryforwards  of
approximately $24,419,000 and $27,313,000,  respectively,  at December 31, 1999,
available to offset future regular and alternative  minimum taxable income.  The
Company's net operating loss  carryforwards  expire in 2001 through 2019, if not
utilized.  The Company has federal and state  research  and  development  credit
carryforwards of $694,000 and $329,000, respectively, expiring in the years 2007
through 2019, respectively, if not utilized.

     For  federal  and  state  tax  purposes,  a portion  of the  Company's  net
operating  loss  carryforwards  are  subject  to certain  limitations  on annual
utilization in case of changes in ownership, as defined by federal and state tax
law.

11.  RAPISEAL BUSINESS EXIT

     During  the  fourth  quarter  of  1997,  the  Company  made a  decision  to
discontinue sales of its RapiSeal patch. These restructuring  actions were taken
to align the  Company's  costs in light of the  discontinuation  of the RapiSeal
business.  At year-end  1997,  the Company  incurred  RapiSeal  exit  charges of
$559,000 for personnel  severance,  patent charges,  and inventory and dedicated
equipment  write-offs  associated with exit of its RapiSeal business. A majority
of  terminated  employees  were  located  in  California  and  worked  in sales,
marketing,  research and development and  administrative  support  functions.  A
total of nine employees were terminated.  Of such charges ($325,000) was charged
to cost of sales,  ($209,000)  to operating  expenses and  ($25,000) as a charge
against sales. In 1998 there was a change in reserve  estimates of $50,000,  due
to the favorable  settlement  of a contract with a third party.  The majority of
the remaining cash outlays of $43,000 are expected to occur in fiscal 2000.

     The following table summarizes the amounts that were charged and where they
are reflected in the accompanying statement of operations:

<TABLE>
<CAPTION>


      Description                                       Amount        Classification on Statement of Operations
------------------------------------------------       ---------      -----------------------------------------
<S>                                                    <C>             <C>
Equipment........................................      $ 115,000       Cost of Sales
Personnel severance..............................        125,000       Sales and  marketing,  general and
                                                                         administrative  and research and
                                                                         development
Inventory and purchase commitments...............        210,000       Cost of sales
Accounts receivable and potential returns........         25,000       Sales
Patents..........................................         84,000       Research and development
                                                       ---------
Total............................................      $ 559,000
                                                       =========
</TABLE>

                                      F-19
<PAGE>

The following  table  summarizes the Company's  restructuring  reserve  balances
through December 31, 1999: (in thousands)

<TABLE>
<CAPTION>

                                               SALES     COST OF GOODS    EXPENSES     TOTAL
                                               -----     -------------    --------     -----
<S>                                              <C>         <C>             <C>          <C>
Restructuring reserve....................      $  25     $    325         $   209      $   559
Non-cash charges.........................        (10)        (225)                        (233)
                                               -----     --------         -------      -------
Restructuring reserve balances
  at December 31, 1997...................         15          100             211          326
Change in reserve estimate...............         --          (50)             --          (50)
Cash charges.............................        (15)         (50)           (168)        (233)
                                               -----     --------         -------      -------
Restructuring reserve balances at
  At December 31, 1998 and 1999                $  --    $     --          $    43      $    43
                                               =====     ========         =======      =======


</TABLE>



                                      F-20