<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, 1998.

                                      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         (I.R.S. Employer Identification No.)
 incorporation or organization) 

           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 24, 1999 as reported on the Nasdaq National Market, was approximately 
$13,222,000.  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 24, 1999, the Registrant had 7,217,886 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 May 20, 1999.


<PAGE>   1

<TABLE>
<CAPTION>

                     Fusion Medical Technologies, Inc.

                                   INDEX


                                                                       Page 
                                                                      Number
                                                                      ------
                                    PART 
<S>       <C>                                                          <C>
Item 1.    Business..................................................    3
Item 2.    Properties................................................   12
Item 3.    Legal Proceedings.........................................   13
Item 4.    Submission of Matters to a Vote of Security Holders.......   13


                                   PART II

Item 5.    Market for Registrant's Common Equity and Related 
           Stockholder Matters.......................................   15
Item 6.    Selected Financial Data...................................   16
Item 7.    Management's Discussion and Analysis of Financial 
           Condition and Results of Operations.......................   17
Item 7A.   Quantitative and Qualitative Disclosures about Market Risk   20
Item 8.    Financial Statements and Supplementary Data...............   21
Item 9.    Changes In and Disagreements with Accountants on
           Accounting and Financial Disclosure.......................   21


                                   PART III

Item 10.   Directors and Executive Officers of the Registrants.......   22
Item 11.   Executive Compensation....................................   22
Item 12.   Security Ownership of Certain Beneficial Owners 
           and Management............................................   22
Item 13.   Certain Relationships and Related Transactions............   22



                                   PART IV

Item 14.   Exhibits, Financial Statement Schedules...................   23

</TABLE>
                                       2
<PAGE>   2


                                   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 "Management's Discussion and Analysis of Financial Condition and 
Results of Operations - Factors Affecting Future Operating Results and 
Market Price of Common Stock" commencing on page 17.

The Company

     We are developing and commercializing proprietary surgical hemostatic
products.  Hemostatic products are devices, such as sutures, and topical 
agents, such as sponges, used to stop bleeding.  Our lead product, FloSeal 
Matrix Hemostatic Sealant, combines a gel derived from collagen with thrombin,
a potent clotting agent, to control surgical bleeding.  We believe that 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 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 primary endpoint of the pivotal trial was to show that 
FloSeal stopped bleeding within 10 minutes of application at least as 
frequently as the Gelfoam plus thrombin control.  The trial showed that 
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 that FloSeal stopped patients' bleeding at least two 
times more quickly than Gelfoam plus thrombin.  We completed submission of 
our full pre-market approval application for FloSeal in February 1999.  
Assuming timely acceptance of the application and approval by the FDA, which 
cannot be assured, we expect to commercialize the product in the United 
States in early 2000.  We have filed for European regulatory clearance and 
expect to receive required certification by mid-1999 and to commercialize 
FloSeal in Europe shortly thereafter.
 
     We are also developing additional products designed to stop bleeding 
based upon our core proprietary technology.  Such products include SinuSeal, 
for use by ear, nose and throat surgeons, and vascular access site closure 
device, which we call VASC, for use in the closure of femoral artery 
punctures following vascular interventional procedures.  We expect to file a 
premarket approval application supplement for SinuSeal shortly after 
obtaining FloSeal approval.  We expect to begin clinical trials for VASC in 
late 1999.

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, 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.  

                                       3
<PAGE>   3


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 that 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 
physcial 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 sponges, like Gelfoam, thrombin, fibrin 
glues and other types of surgical sealants and adhesives.  While existing 
topical hemostats are a popular complement to sutures and staples, they too 
have several limitations, including the following:

     *  Limited Effectiveness. Topical hemostats do not always conform to a 
bleeding site and can take a long time or fail to stop bleeding.  For 
example, fibrin glues do not adhere strongly to wet tissue and have little 
impact on actively bleeding lesions.  Gelfoam plus thrombin can take several 
minutes to stop even moderate bleeding.

     *  Lengthy and Complex Preparation.  Preparation of some topical 
hemostats can take a long time, require complicated steps or necessitate 
special equipment.  For example, fibrin glues may take up to 40 minutes to 
prepare, and thus must often be mixed prior to surgery, whether or not they 
are actually used in the procedure.  Certain fibrin glues and adhesives also 
require special equipment for preparation, such as heaters or centrifuges.

     *  Difficult to Use. Many topical hemostats products can be awkward to 
use or difficult to place precisely.  Sponges, such as Gelfoam, often 
require sustained manual pressure to be effective.  In addition, topical 
hemostats can impede a surgeon's vision of and access to the surgical site.  
Both these factors can significantly delay the completion of the surgical 
procedure, especially where continued visualization is important, such as in 
spinal and sinus surgeries, and in certain minimally invasive surgeries.

     *  Rebleeding May Occur After Application.  Topical hemostats are often 
removed prior to closing the wound.  Similar to when a gauze bandage is 
pulled away from a scab, rebleeding can occur upon removal because these 
materials become incorporated into the clot itself. 

     The limitations of current products have been particularly pronounced 
in procedures involving suture lines in blood vessels, such as coronary 
artery bypass grafts, and in patients with compromised coagulation. Despite 
these limitations, topical hemostats have achieved significant sales to 
date.  

                                       4
<PAGE>   4


     We estimate that annual sales of topical hemostats, including Gelfoam 
plus thrombin, exceeded $100 million in 1997.  The sales were almost 
entirely within the United States and did not include the sale of fibrin 
glue because the FDA did not approve fibrin glue until May 1998.  In 1997, 
international sales of fibrin glue, however, were approximately $270 
million, of which we believe that over 60% were attributable to bleeding 
control.

The Benefits of FloSeal 

     Our lead 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. pivotal clinical trial demonstrated the 
effectiveness of FloSeal in stopping bleeding  in cardiac, vascular and 
spinal surgeries.  We believe that FloSeal offers the following key 
performance advantages:

     *  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 pivotal trial, FloSeal stopped bleeding 
within three minutes in 77% of patients treated.

     *  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 that FloSeal will be the first product to effectively control 
substantially all of these types of bleeding.  For example, a secondary 
endpoint analysis in our pivotal clinical trial showed that 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 
that FloSeal will address 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 is included below under the subsection entitled "Fusion's Products."

     *  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. 

     *  Easy to Use.  FloSeal is easy to apply using a standard disposable 
syringe and has a gel-like 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 believe 
that surgeons will quickly learn how to use the product.

     *  Broad Applicability.  Under our current premarket approval 
application, we are pursuing regulatory approval of FloSeal for a broad 
range of surgical specialties.  Our U.S. pivotal clinical trial demonstrated 
the effectiveness of FloSeal in patients undergoing cardiac, vascular and 
spinal surgeries.  In addition, FloSeal has been used outside the United 
States in several other surgical specialties, including nasal and sinus, 
gynecologic and general surgery. 

     *  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 is unlikely to occur.  The materials used in 

                                       5
<PAGE>   5


        FloSeal, collagen and thrombin, are naturally occurring materials 
        that have a safe history of use in humans.


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 been tested for safety and effectiveness in a 
pivotal U.S. clinical trial involving patients undergoing cardiac, vascular 
and spinal surgery.  In February 1999, we completed submission of our full 
premarket approval application for FloSeal.

     Clinical Development.  In November 1998, we completed enrollment in a 
ten-center, randomized pivotal 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.  The degree of intraoperative bleeding 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 pivotal trial was to show that 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 Gelofoam plus thrombin stopped bleeding within 
ten minutes in 77% of the 153 patients in the control group.  In addition, 
FloSeal a subset analysis demonstrated that 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.  

     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.  Detailed results for the vascular and spinal 
arms of the pivotal trial have not yet been published, but we anticipate 
publication in a peer-reviewed medical journal in the future. 

     The following chart summarizes certain data with respect to the trial 
results: 



                                       6
<PAGE>   6

                      Summary Clinical Trial Results
<TABLE>
<CAPTION>
                                         Hemostasis       Hemostasis within
        Patient Category              within 10 minutes       3 minutes
        ----------------            -------------------  ------------------
                                               Gelfoam             Gelfoam
                                     FloSeal  +Thrombin  FloSeal  +Thrombin
                                     -------  --------- --------- ---------
<S>                                   <C>       <C>        <C>       <C>
All patients (1)                       96%       77%        84%       47%

  All vascular(3)                      93%       76%         *         *

  All spinal(4)                        98%       90%         *         *

  All cardiac patients(5)              94%       60%        69%       22%

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

    Cardiac: "Flowing" or "Spurting"   92%       40%        77%       0%
</TABLE>

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

     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.  
We completed submission of our full premarket approval application for 
FloSeal in February 1999.  Assuming timely acceptance of the application and 
approval by the FDA, which cannot be assured, we expect to commercialize the 
product in the United States in early 2000.  We will seek the labeling 
indication, "for 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." 

     We have filed for European regulatory approval and expect to receive 
such approval by mid-1999.  We intend to commercialize FloSeal in EU member 
countries shortly thereafter with a labeling indication, "for surgical 
procedures as an adjunct to homeostasis when control of bleeding by ligature 
or conventional procedures is ineffective or impractical."

     Target  Market. We  expect our domestic and international 
commercialization efforts to focus initially on those surgeons who perform 
cardiac, vascular and spinal procedures, the specialties studied in the 
clinical trial.  There are approximately 500,000 cardiac surgeries, 380,000 
vascular surgeries and 400,000 spinal surgeries performed annually in the 
United States.  We believe that FloSeal could be used in approximately 15% 
of cardiac surgeries, 50% of vascular surgeries and 50% of spinal surgeries.  
We believe that 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.  We also believe that 
FloSeal will be a useful hemostat for other types of surgery, including 
orthopedic, trauma, gynecologic, plastic and other general surgery.


SinuSeal

     We are developing SinuSeal, an additional application for FloSeal for 
use by ear, nose and throat surgeons to control bleeding.  SinuSeal is 
delivered through a standard disposable syringe with a sinus applicator tip, 
and consists of the same FloSeal gel tested in the clinical trial described 
above.  At the close 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.  SinuSeal, however, is absorbed by the body and consequently does 
not require removal.  We believe that SinuSeal will eliminate much of the 
discomfort, pain and cost associated with nasal 

                                       7
<PAGE>   7


packing.

     In 1998, we completed a three-center evaluation of 18 patients in 
Canada in which SinuSeal controlled intra-operative bleeding during sinus 
surgery in 100% of 29 application sites. We intend to file a premarket 
approval application supplement for SinuSeal after receiving FDA approval 
for FloSeal.  We may be required to perform a clinical trial prior to 
submitting such a supplement for SinuSeal.

     We expect our domestic and international commercialization efforts to 
focus on ear, nose and throat surgeons. Industry sources estimate that 
approximately 400,000 sinus surgeries are performed annually in the United 
States.  In addition, we have performed technical and clinical studies which 
suggest that SinuSeal can be used to control bleeding associated with 
tonsillectomies and adenoidectomies.  Industry sources estimate there are 
approximately 530,000 of these procedures performed annually in the United 
States.  We estimate that approximately one-third of these nose and throat 
procedures could benefit from the use of SinuSeal.


VASC

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

     We have conducted preliminary pre-clinical studies examining the safety 
and effectiveness of VASC.  We plan to begin a pilot clinical trial in late 
1999 and a pivotal clinical trial in 2000.  Industry sources estimate that 
approximately 3.3 million arterial puncture closure procedures will be 
performed in the United States in 1999. 

     The statements we have made above regarding the anticipated 
commercialization of our products 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.  
Current products at the research stage include a sponge form of FloSeal for 
field dressing and other emergency applications and an absorbable spinal 
anti-adhesion agent.


Sales and Marketing

     We are engaged in preliminary discussions with prospective distribution 
partners to provide sales, marketing and distribution functions in both the 
United States and international markets once regulatory approvals are 
received.  We initially intend to focus our domestic and international sales 
and marketing efforts on developing surgeon acceptance of FloSeal for 
application in procedures including cardiac, vascular and spinal surgeries.  
We are in discussions with multinational surgical companies with 
capabilities in various surgical specialties.  We are also in discussions 
with independent distributors, particularly in international markets in 
order to capitalize on their strong capabilities in local markets.  Fusion 
intends to select distribution partners based on demonstrated sales and 

                                       8
<PAGE>   8


marketing expertise, focused positioning of FloSeal within a portfolio of 
other surgical products and favorable economic terms.

Manufacturing

     Our manufacturing operations are located in our 13,200 square foot 
headquarters in Mountain View, California.  We are currently expanding our 
manufacturing capacity within this facility, and we believe that such 
additional capacity will be sufficient through 2000.  We expect to complete 
the expansion of our expansion of our manufacturing facility by the end of 
the second quarter of 1999.  In conjunction with this expansion, we 
anticipate spending a total of approximately $250,000 for the purchase of 
production equipment and $275,000 for the facilities' upgrade. 

     Our manufacturing facilities are subject to Quality System Regulations, 
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 entail 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, thrombin and sterilization services, all 
of which are essential components of FloSeal, from single suppliers.  
Generally, we believes that there are additional and alternative suppliers 
of equivalent materials available and that 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 
that such substitutions could be made in a timely manner, on commercially 
reasonable terms, if at all.  In the event that 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 that we will be able to successfully compete against 
competitors or potential competitors.  In addition, we cannot be certain 
that current competitors or other companies will not succeed in developing 
technologies and products that are more effective or that would render our 
technology or products obsolete or unable to compete.

Patents and Proprietary Rights 

                                       9
<PAGE>   9


     Our ability to compete effectively depends in part on our ability to 
develop and maintain the proprietary aspects of its technology.  We have 
five pending U.S. patent applications relating to FloSeal and other products 
under development, but no issued patents.  We also have filed two 
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 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 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

     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:

     *  Product development, 
     *  Product testing,
     *  Product labeling,
     *  Product storage,
     *  Premarket clearance or approval,
     *  Advertising and promotion, and
     *  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 

                                       10
<PAGE>   10


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 regulations.  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.

     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:

     *  Results of bench and laboratory tests, animal studies, and clinical 
          studies  
     *  A complete description of the device and its components, 
     *  A detailed description of the methods, facilities and controls used 
          to manufacture the device, and
     *  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 for 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. We have not yet 
undergone an FDA Quality System inspection.

     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 must file an Investigational Device Exemption 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 approval must be obtained for all studies.  Submission of an 
Investigational Device Exemption 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 
Investigational Device Exemption supplement must be approved by the FDA 
before a sponsor or investigator may make a significant change to the 
investigational plan.

     The FDA has determined that FloSeal will be regulated as a class III 
medical device.  Premarket approval 

                                       11
<PAGE>   11


must be obtained before FloSeal can be marketed in the United States. Fusion 
has received approval of an Investigational Device Exemption to study 
FloSeal in cardiac, vascular and spinal surgery in the United States. 
Enrollment for the FloSeal pivotal U.S. clinical trial was completed in 
November 1998.  The final analysis of the study is currently ongoing.  There 
can be no assurance that the study will adequately support approval for 
FloSeal.  Additional Investigonial Device Exemptions will be required for 
other applications of FloSeal. There can be no assurance that a supplemental 
premarket approval application will be accepted for SinuSeal.   In the event 
we are unable to file a premarket approval supplement for SinuSeal, we will 
be required to file a premarket approval application.


     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:

     *  Quality System requirements,
     *  Medical Device Reporting regulations, and
     *  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 
must obtain 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 Devices 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 that we 
will be successful in completing the remainder of the CE mark certification 
process or obtaining CE mark certification in a timely manner.


Employees

     As of March 1, 1999, we had 31 employees, 13 of whom were engaged in 
research and development, two in regulatory affairs and quality assurance, 
ten in operations, two in marketing and four in finance and administration.  
No employees are covered by collective bargaining agreements, and we believe 
we maintain good relations with our employees.


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.  We believe that these existing facilities will be 
sufficient for our manufacturing and office requirements through 2000.  We 
believe that suitable additional or alternative space will be available in 
the future on commercially reasonable terms as needed.

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.                                       


                                       12
<PAGE>   12



                     Executive Officers of the Company

     The following table sets forth certain information with respect to our 
executive officers and directors as of December 31, 1998:
<TABLE>
<CAPTION>
         Name               Age                     Position                
         ----               ---                     --------

<S>                        <C>   <C>
Philip M. Sawyer            34    President, Chief Executive Officer, acting 
                                  Chief Financial Officer and Director
Debera M. Brown             46    Vice President, Regulatory Affairs and 
                                  Quality Assurance
Cary J. Reich, Ph.D.        50    Vice President, Research 
Scott Huie                  40    Vice President, Operations
Joseph F. Rondinone, Ph.D.  51    Vice President, Development

</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 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.

     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.

     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. 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 from the 
University of California at Los Angeles.

                                       14
<PAGE>   14


                                   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 since our initial public offering in June 6, 1996

<TABLE>
<CAPTION>
                                                            High       Low
                                                            ----       ---
    <S>                                                   <C>       <C>
     1996
     Second Quarter from June 6, 1996                      $13.250   $7.063
     Third Quarter                                          10.000    5.875
     Fourth Quarter                                          9.375    4.125

     1997     
     First Quarter                                           4.875    3.313
     Second Quarter                                          4.500    2.750
     Third Quarter                                           5.625    3.625
     Fourth Quarter                                          6.000    2.813

     1998
     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 through March 8, 1999)              7.063    5.563
</TABLE>


     As of March 8, 1999, the last reported sale price of our common stock 
on the Nasdaq National Market was $6.00 per share and, on January 25, 1999, 
there were 89 stockholders of record.

                                       15
<PAGE>   15



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 Prospectus.  The statements of operations 
data for the years ended December 31, 1998, 1997, and 1996 and the balance 
sheet data as of December 31, 1998 and 1997 have been derived from audited 
consolidated financial statements included elsewhere in this report. The 
consolidated statement of operations data for the years ended December 31, 
1995 and 1994 and the balance sheet data as of December 31, 1996, 1995 and 
1994 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,
                              ----------------------------------------------
<S>                          <C>      <C>      <C>      <C>      <C>

Statements of
  Operations Data:              1998     1997     1996      1995     1994
                              -------- -------- --------- -------- ---------
                               (in thousands, except per share amounts)
  Net Sales                            $    153  $     31                   
  Cost of sales and 
   manufacturing start-up cost              968       196 
                                       -------- --------- 
     Gross Loss                            (815)     (165)
                                       -------- ---------
  Operating Expenses:
    Research and development   $ 6,145 $  5,647  $  4,693  $ 2,650  $   756
    Sales and marketing            614    2,421     1,582      142       67
    General and administrative   1,474    2,004     1,426      841      349
                               ------- -------- ---------  ------- --------
      Total operating expenses   8,233   10,072     7,701    3,633    1,172
      Loss from operations      (8,233) (10,887)   (7,866)  (3,633)  (1,172)
    Interest income, net           542      984       910      351       17
    Other income <expense>, net      4      (49)                 1        2
                                ------ -------- ---------  ------- --------
    Net loss                   $(7,687)$ (9,952)$  (6,956) $(3,281)$ (1,153)
  Basic and diluted net loss
    per share                  $ (1.08)$  (1.41) $  (1.52) $ (2.31)$  (0.81)
  Shares used in computing
    basic and diluted net
    loss per share               7,145    7,070     4,563    1,423    1,431  
                               ======= ========  ========  ======= ========
  Balance Sheet Data:

  Cash, cash equivalents and
   available for sale
    securities                 $ 7,164 $ 14,459  $ 23,485  $ 5,918  $   222
  Working capital                6,242   11,850    21,072    5,314      (80)
  Total assets                   8,088   15,540    25,063    6,629      436
  Long term debt, including
    current portion                321       43       189      322      200
  Accumulated Deficit          (29,232) (21,545)  (11,593)  (4,637)  (1,357)
  Total stockholders' equity   $ 6,827 $ 14,224  $ 23,742  $ 5,768  $   126

</TABLE>

                                      15

<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 "Risk Factors" commencing on page 
and elsewhere in this prospectus.

Overview

     Since inception in October 1992, we have been primarily engaged in the 
research and development of surgical sealants and topical hemostats.  As of 
December 31, 1998, we had an accumulated deficit of approximately 
$29,232,000.  Operating losses are expected to continue at least through 
2001. 

     We commenced selling our first product, the RapiSeal patch, in late 
1996.  After careful consideration, we reallocated our capital resources to 
the development of FloSeal and in late 1997 discontinued sales of the 
RapiSeal patch and disbanded our test sales force.  We recorded a one time 
expense of $559,000 associated with our exit from the RapiSeal business.  Of 
such expense, $325,000 was charged to cost of sales, $209,000 to operating 
expenses and $25,000 as a charge against sales.  

     In 1998, we conducted a ten center, 309-patient pivotal clinical trial 
to demonstrate the safety and effectiveness of FloSeal.  We have filed for 
European regulatory clearance and have completed submission of our premarket 
approval application for FloSeal with the FDA.  In addition, we have been 
expanding our manufacturing capacity in order to be able to meet the 
anticipated product supply requirements for commercial sale of FloSeal.  We 
expect to complete the expansion of our manufacturing facility by the end of 
the second quarter of 1999.  In conjunction with this expansion, we 
anticipate spending a total of approximately $250,000 for the purchase of 
production equipment and $275,000 for the facilities' upgrade.

     Future revenues, if any, and the results of operations may fluctuate 
significantly from quarter to quarter and will depend upon, our ability to 
obtain regulatory clearances for FloSeal and to successfully commercialize 
the product.


Results of Operations


Years Ended December 31, 1998, 1997 and 1996

     Revenues.  We recorded revenues of none, $153,000 and $31,000 for the 
years ended December 31, 1998, 1997 and 1996, respectively.  We commenced 
selling the RapiSeal patch in 1996 and stopped selling RapiSeal in 1997.  We 
cannot begin selling FloSeal until we receive necessary regulatory 
approvals.

     Gross Loss.  We had a gross loss of none, $815,000, and $165,000 for 
the years ended December 31, 1998, 1997 and 1996, respectively.  In 1997, 
the increase in gross loss of $650,000 resulted from increased manufacturing 
start-up expenses and the inclusion of $325,000 of expenses related to our 
exit from the RapiSeal business, including the write-down of dedicated 
equipment and inventories and the estimated expenses to settle supply 
contracts. 

                                      16

<PAGE>



Item 7     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS (CONTINUED)


     Research and Development.  Research and development expenses were 
$6,145,000, $5,647,000, and $4,693,000 for the years ended December 31, 
1998, 1997 and 1996, respectively.   The increase of $498,000 in 1998 was 
due to the increased clinical and development expenses related to FloSeal.   
The increase of $954,000 in 1997 was attributable to outside development 
services, increased staff and related expenses, increased patent and 
regulatory expenses.  We believe significant investment in research and 
development is essential to our future success and we expect that research 
and development expenses will increase in future periods.

     Sales and Marketing.  Sales and marketing expenses were $614,000, 
$2,421,000, and $1,582,000 for the years ended December 31, 1998, 1997 and 
1996, respectively. The decrease of $1,807,000 in 1998 resulted from the 
cessation of our sales and marketing efforts related to RapiSeal.  The 
increase of $839,000 in 1997 resulted from nearly a full year of sales 
expense for RapiSeal and costs associated with our exit from the RapiSeal 
business late in that year. We anticipate that sales and marketing 
expenditures will increase in future periods in connection with the 
introduction of FloSeal.

     General and Administrative.  General and administrative expenses were 
$1,474,000, $2,004,000, and $1,426,000 for the years ended December 31, 
1998, 1997 and 1996, respectively. The decrease of $530,000 in 1998 resulted 
from reduction of staff and consolidation of facilities following 
discontinuation of the RapiSeal business.  The increase of $578,000 in 1997 
resulted from costs associated with the commercialization of RapiSeal.  

     Interest and other income and expense, net.  Net interest and other 
income and expense was $546,000, $935,000, and $910,000 for the years ended 
December 31, 1998, 1997 and 1996, respectively. The decrease of $389,000 in 
1998 resulted from decreased cash, cash equivalents and available-for-sale 
securities.  The net increase of $25,000 in 1997 resulted from increased 
cash, cash equivalents and available-for-sale securities following our 
initial public offering in June 1996. 

     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:

<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. 
 
                                      17
<PAGE>

Item 7     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS (CONTINUED)


Liquidity and Capital Resources

     From inception to December 31, 1998, we incurred net losses resulting 
in an accumulated deficit of $29,232,000.  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. 

     Cash, cash equivalents and available-for-sale securities totaled 
$7,164,000, $14,459,000, and $23,485,000 as of December 31, 1998, 1997 and 
1996, respectively.  The decreases from 1996 to 1998 were primarily due to 
net losses.

     Cash flows used in operating activities were $7,468,000, $8,644,000, 
and $6,083,000 for the years ended December 31, 1998, 1997 and 1996, 
respectively.  These cash outflows resulted primarily from funding our net 
losses.  In addition, capital expenditures for property and equipment of  
$245,000, $415,000, and  $769,000 for the years ended December 31, 1998, 
1997 and 1996, 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 future 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%.  The unused portion of the total 
loan facility commitments are subject to a 0.5% quarterly commitment fee.  
As of December 31, 1998, we had drawn down $321,000 on the existing 
equipment loan facility and had no draw down on the new equipment loan 
facility.  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 the timing of regulatory actions on FloSeal, our ability to enter 
into strategic marketing arrangements and to scale up manufacturing 
activities, the extent and timing of any future FloSeal sales 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.  The associated working capital 
requirements for manufacturing and commercial launch of a new product are 
also expected to be substantial.  If we are unable to secure corporate 
partners to distribute our products, we will incur substantial expenditures 
to develop a suitable direct sales and marketing force.  The timing and 
amount of capital requirements cannot be accurately predicted. 

      We are in the process of a follow-on offering on a best efforts basis.  
We expect to receive net proceeds of approximately $9.2 million from the 
offering.  In addition to our current cash and cash equivalents, at a 
minimum we need to raise approximately $3.5 million from this offering in 
order to run our planned operations through the next 12 months, which is 
prior to the time that we expect to achieve profitability.  As a result we 
must raise additional funds after this offering in order to be successful.  
Alternative financing strategies may include, but are not limited to:

            * Partnering relationships with larger medical device companies,
            * Bank facilities, or
            * Debt or additional equity offerings.

      In addition, if we do not raise the full amount contemplated in this 
offering, we will need to raise additional funds sooner than anticipated.  
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.

     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.  The amount and the timing of raising 
additional funds will depend primarily upon our ability to obtain needed 
regulatory clearances and generate revenues from the sale of FloSeal.  Our 
inability any additional funding on reasonable terms will materially and 
adversely affect our business.

                                      18
<PAGE>

Item 7     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS (CONTINUED)

     At December 31, 1998, we had approximately $19,586,000 in federal and 
$19,903,000 in state net operating loss carry forwards which expire in the 
years 2001 through 2018, 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.  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 2000.

Year 2000 Compliance.

     Beginning on January 1, 2000, computer systems and software will 
produce erroneous results or fail unless they have been modified or upgraded 
to process date information correctly.  Our primary exposure with respect to 
this problem involves third party software we have purchased or licensed for 
our financial systems, network and telecommunications equipment.  Our 
financial systems software is Year 2000 compliant.  We have obtained the 
software needed to make our network Year 2000 compliant.  We have analyzed 
the Year 2000 risk with regard to our telecommunications equipment and have 
concluded that there is no material Year 2000 risk.

     To date, we have not encountered any material Year 2000 problems with 
software and information systems provided to us by third parties.  We have 
contacted our suppliers of bovine hides and thrombin, the two essential 
supplies we require for FloSeal, and have confirmed that there is no Year 
2000 associated risk of a delay in supply from these sources.  We could be 
materially adversely affected if third parties, upon whom we depend in order 
to run our day-to-day business, experience Year 2000 problems.  For example, 
if our supplier of electricity has not made appropriate Year 2000 
corrections, we could experience a power outage and, consequently a stoppage 
of our manufacturing operation.  Other than problems that would be 
experienced by businesses generally, we do not anticipate any Year 2000 
problems unique to our company.


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

                                      19
<PAGE>

Item 7     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS (CONTINUED)

 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             
                                      -------------------------------------
                                        1998     1999     2000      Total
                                      --------  -------- --------  --------
<S>                                   <C>         <C>       <C>    <C>
Assets
   Cash and cash equivalents           $4,151       -         -     $4,151
   Average interest rate                 4.90%      -         -       4.90%
   Available-for-sale securities       $3,013       -         -     $3,013
   Average interest rate                 7.72%      -         -       7.72%

Liabilities
   Bank borrowings (including
     current portion)                  $  117     $ 117    $  87    $  321
   Average interest rate                 9.25%     9.25%    9.25%     9.25%

</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 hereby 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

                                      20
<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 May 20, 
1999 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.

                                       21
<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
             Balance Sheets, December 31, 1998 and 1997.            F-3
             Statements of Operations and Comprehensive Loss,
               Years Ended December 31, 1998, 1997 and 1996.        F-4 
             Statements of Stockholders' Equity, Period from
               January 1, 1996 to December 31, 1998                 F-5
             Statements of Cash Flows, Years Ended December 31,
               1998, 1997 and 1996                                  F-6 
             Notes to Financial Statements                      F-7 to F-18

</TABLE>


      2.     Financial Statement Schedule2. 


             All schedules are omitted because they are not applicable or 
             the required information is shown in the 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.

                                      22
<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 31, 1999

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 31, 1999
-------------------------
Philip M. Sawyer,          acting Chief Financial Officer 
                           and Director 
                           (Principal Executive Officer)


/s/ GORDON W. RUSSELL      Chairman of the Board of           March 31, 1999
-------------------------  Directors 
Gordon W. Russell


/s/ OLAV B. BERGHEIM       Director                           March 31, 1999
-------------------------
Olav B. Bergheim


/s/ VAUGHN D. BRYSON       Director                           March 31, 1999
-------------------------
Vaughn D. Bryson


/s/ DOUGLAS E. KELLY, M.D. Director                           March 31, 1999
-------------------------
Douglas E. Kelly, M.D.


/s/ LAWRENCE G. MOHR, JR.  Director                           March 31, 1999
Lawrence G. Mohr, Jr.



                                      23
<PAGE>



                                Index to Exhibits

<TABLE>
<CAPTION>

                                    Exhibit
<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
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     

</TABLE>

Fusion(tm), Fusion Medical Technologies, Inc. (tm), FloSeal Matrix(tm), 
FloSeal(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.

                                      24
<PAGE>

<TABLE>
<CAPTION>
                       FUSION MEDICAL TECHNOLOGIES, INC.

                         INDEX TO FINANCIAL STATEMENTS
         

                                                                    Page
                                                                    ----
<S>                                                                <C>
Report of Independent Accountants................................... F-2

Consolidated Balance Sheets......................................... F-3

Consolidated Statements of Operations and Comprehensive Loss........ F-4

Consolidated Statements of Stockholders' Equity..................... F-5

Consolidated Statements of Cash Flows............................... F-6

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

</TABLE>

                                      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, 
consolidated stockholders' equity and of consolidated cash flows present 
fairly, in all material respects, the financial position of Fusion Medical 
Technologies, Inc. and subsidiary at December 31, 1998 and 1997, and the 
results of their operations and their cash flows for each of the three years 
in the period ended December 31, 1998, in conformity with generally accepted 
accounting principles.  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 generally accepted auditing standards, 
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

January 28, 1999



                                      F-2
<PAGE>

<TABLE>
<CAPTION>
                       FUSION MEDICAL TECHNOLOGIES, INC.

                         CONSOLIDATED BALANCE SHEETS
                  (in thousands, except per share data) 

                                                       DECEMBER 31,      
                                                 ------------------------
                                                     1998         1997   
                                                 ----------    ----------
<S>                                             <C>           <C>
                              ASSETS
Current assets:
   Cash and cash equivalents                     $   4,151      $   7,473 
   Available-for-sale-securities                     3,013          5,465 
   Accounts receivable, net of allowance
     for doubtful accounts of $10,000 in 1997            -             21 
   Prepaids and other current assets                   135            207 
                                                 ---------      --------- 
      Total current assets                           7,299         13,166 
Noncurrent available-for-sale securities                 -          1,521
Property and equipment, net                            735            809
Other assets                                            54             44
                                                 ---------      ---------

         Total assets                            $   8,088      $  15,540
                                                 =========      =========


                    LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities: 

   Accounts payable                              $     157      $     598
   Accrued expenses                                    783            675
   Current portion of bank borrowings                  117             43
                                                 ---------      ---------
      Total current liabilities                      1,057          1,316
   Bank borrowings, net of current portion             204              -
                                                 ---------      ---------
      Total liabilities                              1,261          1,316

Commitments (Note 7)

Stockholders' equity:
Convertible 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:
 7,211 shares in 1998 and 7,118 shares in 1997           7              7
Additional paid-in capital                          36,137         36,096
Notes receivable from stockholder                        -            (54)
Deferred compensation                                  (87)          (282)
Accumulated other comprehensive income                   2              2 
Accumulated deficit                                (29,232)       (21,545)
                                                 ---------      ---------
          Total stockholders' equity                 6,827         14,224
                                                 ---------      ---------
Total liabilities and stockholders' equity       $   8,088      $  15,540
                                                 =========      =========

</TABLE> 

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

                                      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,
                                      --------------------------------------
                                          1998          1997         1996      
                                      ------------  -----------  -----------
<S>                                   <C>           <C>          <C>
Net sales                                             $    153    $      31
Cost of sales and start-up
 manufacturing costs                                       968          196
                                                     ---------    ---------
    Gross loss                                            (815)        (165)
                                                     ---------    ---------
Operating Expenses: 
  Research and development             $   6,145         5,647        4,693
  Sales and marketing                        614         2,421        1,582
  General and administrative               1,474         2,004        1,426
                                       ---------     ---------    ---------
          Total operating expenses         8,233        10,072        7,701
                                       ---------     ---------    ---------
               Loss from operations       (8,233)      (10,887)      (7,866)
                                       ---------     ---------    ---------
     Interest income                         581         1,008          926
     Interest expense                        (39)          (24)         (16)
     Other income (expense), net               4           (49)           - 
                                       ---------     ---------    ---------
               Net loss                   (7,687)       (9,952)      (6,956)

Other comprehensive income (loss): 
   Change in unrealized gain or loss
   on available for sale securities            -            13          (11)
                                       ---------     ---------    ---------
               Comprehensive loss      $  (7,687)    $  (9,939)   $  (6,967)
                                       =========     =========    =========

Basic and diluted net loss per share   $   (1.08)    $   (1.41)   $   (1.52)
                                       =========     =========    =========
Shares used in computing basic and
  diluted net loss per share               7,145         7,070        4,563 
                                       =========     =========    =========

</TABLE>

The accompanying notes are an integral part of these consolidated financial 
statements.
                                      F-4
<PAGE>

<TABLE>
<CAPTION>

                                                        FUSION MEDICAL TECHNOLOGIES, INC.
                                                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                                For the three years ended December 31, 1998
                                                                (in thousands)

                                                                                                  Accumulated
                                                                                   Notes             Other 
                   Series A Convertible Series B Convertible           Additional Receivable        Compre-
                   Preferred Stock       Preferred Stock   Common Stock             From   Deferred hensive 
                   ------------------- ------------------- ------------ Paid-In     Share-  Compen- Income   Deficit 
                   Shares     Amount    Shares    Amount   Shares Amount Capital   holder   sation  (Loss)  Accumulated   Total  
                   ------     ------    ------    ------   ------ ------ -------   -------- -------- ------ ----------- -------- 
<S>               <C>       <C>         <C>      <C>      <C>    <C>   <C>        <C>      <C>      <C>      <C>        <C>     
Balances, January
  1, 1996          2,269     $    2      5,390    $    5   1,520 $   2  $ 10,416             $ (19)           $(4,637)   $  5,769
Issuance of common
 stock:
Upon exercise of
 Stock Options                                               123              33                                               33
 In exchange for
   Notes receivable                                           40              48   $   (48)   
 From initial public
   offering net of
   issuance costs of
   $2,881                                                  2,100     2    24,417                                           24,419
  
 Upon exercise of
   Warrants                                                   26              41                                               41
  Under employee 
  stock purchase
  plan                                                        17              70                                               70
Conversion of
 preferred stock
 in connection                         
 with initial
 public offering  (2,269)        (2)    (5,390)       (5)  3,173     3         4 
 Unrealized losses
 on available-for-sale
 securities                                                                                           $  (11)                 (11)
Deferred compensation
 related to issuance
 of common stock
 and grants of 
 stock options                                                             1,550            (1,550) 
Amortization of
 deferred compensation                                                                         378                            378
Net loss                                                                                                       (6,956)     (6,956)
                   -------   ------     ------   -------  ------ -----  --------   ------- -------    ------  -------     -------
Balances, December
 31, 1996                                                  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 options                                                              (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 options                                                               (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
                   ======    ======     ======   =======  ====== =====  ========   ======= =======    ======  ========    =======
 


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

                                                                       F-5

</TABLE>

<PAGE>


<TABLE>
<CAPTION>
                         FUSION MEDICAL TECHNOLOGIES, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (in thousands)


                                                 YEAR ENDED DECEMBER 31, 
                                           -------------------------------
                                              1998       1997     1996   
                                           ---------  ---------  ---------
<S>                                       <C>        <C>        <C>
Cash flows used for operating activities:
 Net loss                                  $  (7,687) $  (9,952) $  (6,956)
 Adjustments to reconcile
   net loss to net cash used in
   operating activities:
   Depreciation and amortization                 319        464        259
   Loss on disposition of property 
     and equipment                                 -        264          -
   Accretion of available-for-sale
     Securities                                   16         17          -
   Amortization of deferred compensation         134        242        378
   Interest on notes receivable from
     Stockholder                                   -         (6)         -
   Provision for doubtful accounts                 -         10          - 
   Changes in assets and liabilities:
     Accounts receivable                           21        (8)       (23)
     Inventories                                             83        (83)
     Prepaids and other current assets             72       100       (239)
     Other assets                                 (10)                 (11)
     Accounts payable                            (441)     (281)       403 
     Accrued expenses                             108       423        189
                                            ---------  --------  ---------
       Net cash used in operating activities   (7,468)   (8,644)    (6,083)
                                            ---------  --------  ---------

Cash flows from investing activities:
  Acquisition of property and equipment          (245)     (415)      (769)
  Purchases of available-for-sale-securities   (1,996)  (10,515)   (11,182)
  Sales of available-for-sale securities        5,953    16,231          -
                                            ---------  --------  --------- 
      Net cash provided by (used) in
        investing activities                    3,712     5,301    (11,951)
                                            ---------  --------  ---------
Cash flows from financing activities:
  Proceeds from issuance of common stock,
    net of issuance costs                         102       184     24,563
  Proceeds from bank borrowings                   278         -          -
  Repayment of notes payable                               (146)      (133)
  Payment received on note receivable from
    stockholder                                    54         -          -
                                            ---------  --------  ---------
      Net cash provided by financing
        activities                                434        38     24,430 
                                            ---------  --------  ---------
Net increase (decrease) in cash and cash
   Equivalents                                 (3,322)   (3,305)     6,396
Cash and cash equivalents, beginning of year    7,473    10,778      4,382
                                            ---------  --------  ---------
Cash and cash equivalents, end of year      $   4,151  $  7,473  $  10,778
                                            =========  ========  =========

Supplemental disclosure of cash flow
  information:
    Cash paid for interest                  $      80  $     64  $      16
                                            =========  ========  =========
    Cash paid for taxes                     $       1  $      1  $       1
                                            =========  ========  =========

Supplemental disclosure of noncash
  investing and financing activities:

Issuance of common stock in exchange for
  notes receivable                                  -         -  $      48
                                            =========  ========  =========  
Adjustment for cancellation of
  stock options                             $      61  $    667          
                                            =========  ======== 

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


</TABLE>




                                      F-6
<PAGE>



                        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 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 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. 

     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.

     Stock Split

     In May 1996, the Company effected a 1-for-2.414 reverse split of the 
Company's common stock and a corresponding change in the preferred stock 
conversion rates.  All common shares and per share amounts in these 
financial statements have been adjusted retroactively to give effect to the 
split.

     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>


2. Summary of Significant Accounting Policies, 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 "investment income."  The cost 
of securities sold is based upon the specific identification method.  All 
available-for-sale securities with maturity dates greater than 365 days are 
classified as non-current. 

     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.

     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>



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 two financial institutions.  Deposits in these 
institutions may exceed the amount of insurance provided on such deposits.

     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

     The Company adopted SFAS No. 128 "Earnings Per Share" and the 
Securities and Exchange Commission Staff Accounting Bulletin No. 98 ("SAB 
No. 98") effective December 31, 1997; accordingly, all prior periods have 
been restated.  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 are excluded from the computation of 
diluted net loss per share, as their effect is anti-dilutive.  No additional 
shares are considered to be outstanding for either computation under the 
provisions of SAB No. 98.

     Stock options to purchase 1,113,000, 992,000, and 618,000 shares of 
common stock at prices ranging from $.16 to $11.50 per share were 
outstanding at December 31, 1998, 1997, and 1996, respectively, but were not 
included in the computation of diluted net loss per share because they were 
anti-dilutive.  Warrants to purchase 13,000, 8,000, and 8,000 shares of 
common stock at $4.00, $4.00, and $4.80 per share were outstanding at 1998, 
1997, and 1996, 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.

                                      F-9

<PAGE>



2. Summary of Significant Accounting Policies, continued

     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.  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 2000.

3. Available-for-Sale Securities

     The following summarizes the Company's available-for-sale securities:

<TABLE>
<CAPTION>

                                   Unrealized
                           Cost       Gain      Fair Value   Maturity Dates
                        ---------  ----------  ------------  --------------
<S>                    <C>        <C>          <C>           <C>
December 31, 1998
-----------------
  Corporate Bonds       $   3,011  $        2    $    3,013     1/99 - 6/99

December 31, 1997
-----------------
  Corporate Bonds       $   6,984  $        2    $    6,986   


</TABLE>

During 1998, 1997 and 1996, there were no realized gains or losses on the 
disposal of available-for-sale securities.


4.     Property and Equipment

     Property and equipment comprise: (in thousands)


                                      F-10
<PAGE>

<TABLE>
<CAPTION>

                                                      December 31,
                                               ----------------------------
                                                   1998           1997    
                                               ------------    ------------
    <S>                                        <C>              <C>
     Computer equipment                         $     295        $     256  
     Office furniture and equipment                   147               60 
     Machinery and equipment                        1,086              971 
     Leasehold improvements                           217              213 
                                                ---------        ---------
     Total                                          1,745            1,500 
     
     Less accumulated depreciation and
       Amortization                                (1,010)            (691)
                                                ---------        ---------
           Net                                  $     735        $     809 
                                                =========        =========
</TABLE>

5. Accrued expenses

Accrued expenses comprise: (in thousands)

<TABLE>
<CAPTION>
                                                      December 31,
                                               ----------------------------
                                                   1998           1997    
                                               ------------    ------------
<S>                                           <C>              <C>

     Accrued compensation                       $     157        $     175 
     Restructuring (Note 12)                           43              326 
     Clinical trial                                   383                -
     Accrued general and administrative               200              174
                                                ---------        ---------
                                                $     783        $     675 
                                                =========        =========

</TABLE>

                                      F-11
<PAGE>

6.     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.  
As of December 31, 1998, the Company had a balance of $321,000 outstanding. 
The loan is payable in monthly installments bearing interest at the rate of 
prime plus 1.5% per annum (9.25% at December 31, 1998).

     Future payments under this loan agreement are as follows:
<TABLE>
<CAPTION>
         Year                                                    Amount
         ----                                                    ------ 
        <S>                                                     <C>
         Current................................................  $ 117
         2000 ..................................................    117
         2001 ..................................................     87
                                                                  -----
                                                                  $ 321
                                                                  =====

</TABLE>

7.     Commitments

     The Company leases office, laboratory and manufacturing space under an 
operating lease expiring in December 2001.  The lease requires the Company 
to pay property taxes, insurance and ordinary maintenance and repairs.  The 
lease contains an option to extend the lease terms for one year.  Rent 
expense for the years ended December 31, 1998, 1997, and 1996, was 
approximately $304,000, $363,000 and $244,000, respectively.

     Minimum future lease payments under the lease agreements at December 
31, 1998 are as follows: (in thousands)

<TABLE>
<CAPTION>

         Year                                                   Amount
         ----                                                  -------- 
        <S>                                                    <C>
         1999                                                   $   317
2000 341
         2001                                                       356
                                                                ------- 
                                                                $ 1,014  
                                                                =======
</TABLE>

                                      F-12
<PAGE>



8. 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, 1998, 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 close 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 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, 1998, 14,000 shares are subject 
to repurchase.  The Company has reserved 1,890,000 shares of common stock 
for issuances to employees, and officers under the Plan.


                                      F-13
<PAGE>


8.     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, January 1, 1996            292        412       $0.36     $   148 
  Additional Shares authorized
    Under the Plan                   437          -          -            -
    Options granted                 (438)       438        2.16         946
    Options canceled                 109       (109)       3.30        (360)
    Options exercised                  -       (123)       0.27         (33)
                                --------   --------                 -------
Balances, December 31, 1996          400        618        1.13         701  
   Additional Shares authorized
     Under the Plan                  300          -          -            -
     Options granted                (557)       557        4.33       2,410  
     Options canceled                 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 canceled                240       (240)       4.31      (1,034)
     Options exercised               (65)         -        0.45         (29)
                                --------   --------                 -------
Balances, December 31, 1998          528      1,041      $ 3.31     $ 3,449 
                                ========   ========                 =======

</TABLE>

     For the years ended December 31, 1998, 1997, and 1996, the weighted 
average fair value of options granted was $1.67, $2.42, and $0.87 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 canceled options. 


                                       F-14
<PAGE>

8.     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 
shares were granted in 1997 and 1998 for a total of 38,400 shares.  No 
options to purchase shares of the Company's common stock were granted during 
fiscal 1996.  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 1998, 28,000 shares 
of common stock were purchased under the plan at $3.31 per share.  In 1997 
and 1996, 35,000 and 17,000 shares of common stock were purchased under the 
plan at $3.54 and $4.02 per share, respectively.  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 1996, 1997 and 1998 
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, 1996, 
1997 and 1998 would have been increased to the pro forma amounts indicated 
below:

<TABLE>
<CAPTION>
                                         1998          1997        1996     
                                      ----------   -----------  -----------
<S>                                  <C>          <C>          <C>
Net loss - as reported                $   (7,687)  $   (9,952)  $   (6,956)
                                      ==========   ==========   ==========
Net loss - pro forma                  $   (8,051)  $  (10,313)  $   (6,990)
                                      ==========   ==========   ==========
Basic and diluted net loss
 per share-as reported                $    (1.08)  $    (1.41)  $    (1.52)
Basic and diluted net loss per        ==========   ==========   ==========
 share-pro forma                      $    (1.13)  $    (1.45)  $    (1.53)
                                      ==========   ==========   ==========

</TABLE>

      The above pro forma disclosures are not necessarily representative of 
the effects on reported net income or loss for future years.


                                      F-15
<PAGE>


8.     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>

                                         1998          1997        1996     
                                      ----------   -----------  -----------
    <S>                              <C>          <C>          <C>
     Risk-free interest rate          5.39%-5.77%  5.79%-6.6%     5.49%-6.5%
     Expected life                      4 years      4 years       4 years 
     Expected dividends                        -            -            -
     Expected volatility                 82.86%       82.15%     0.0%-79.52%

</TABLE>

     The options outstanding and currently exercisable by exercise price at 
December 31, 1998 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          232,000        6.27     $  0.37     217,000  $  0.36 
$1.00 -  2.41           75,000        7.12     $  1.65      43,000  $  1.74 
$3.62 -  4.38          436,000        8.26     $  4.30     187,000  $  4.32
$4.50 -  7.25          298,000        8.33     $  4.78      78,000  $  4.82
                     ---------                           --------- 
                     1,041,000                 $  3.31     525,000  $  2.55
                     =========                           ========= 
</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-16

<PAGE>



8.     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 imputed 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 $763,000 of compensation expense has been recognized as an expense 
through December 31, 1998 and $728,000 of the amount was adjusted for 
cancellation of stock options, due to the termination of employment  of 
certain employees. The remaining $87,000 will be recognized as an expense as 
the shares and options vest over fiscal 1999.

9.     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.

10.     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 related 
to an executive officer.  The Company held a note receivable, for $54,000, 
from an executive of the Company to purchase stock options. In 1998 the 
executive terminated his relationship with the Company and satisfied the 
note. 

11.     Income Taxes

     The tax effects of the significant temporary differences, which 
comprise deferred tax assets (liabilities) at December 31, are as follows: 
(in thousands) 
<TABLE>
<CAPTION>

                                                      1998        1997     
                                                   ----------   ----------
<S>                                              <C>           <C>
Capitalized start-up and research and
 development costs                                 $    3,032   $      978 
Research and development credit                           811          641 
Depreciation                                              159           78
Net operating loss carryforwards                        7,472        7,063
Other accrued expenses                                    240          190
                                                   ----------   ----------
Net deferred tax asset                                 11,714        8,950
Less valuation allowance                              (11,714)      (8,950)
                                                   ----------   ----------
Net deferred income taxes                          $        -   $        -
                                                   ==========   ==========  
</TABLE>

                                      F-17

<PAGE>



11.     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 $19,586,000, and 19,903,000, respectively, at December 31, 
1998, available to offset future regular and alternative minimum taxable 
income.  The Company's net operating loss carryforwards expire in 2001 
through 2018, if not utilized. The Company has federal and state research 
and development credit carryforwards of $553,000 and $390,000, respectively, 
expiring in the years 2009 through 2018, 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.  

12.     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 is 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>
                                                  Classification on 
         Description                  Amount   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-18

<PAGE>



     The following table summarizes the Company's restructuring reserve 
balances through December 31, 1998: (in thousands)

<TABLE>
<CAPTION>

                            Sales     Cost of Goods     Expenses     Total  
                          ---------  ----------------  -----------  -------
<C>                       <C>         <C>             <C>         <C>
Restructuring reserve     $      25     $    325        $    209    $   559 
Non-cash charges                (10)        (225)              2       (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 December 31,
 1998                     $       -     $      -        $     43    $    43 
                          =========     ========        ========    =======

</TABLE>

                                       F-19

<PAGE>