<PAGE>

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549


                                   FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
    EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997



                         COMMISSION FILE NUMBER: 0-28460

                       FUSION MEDICAL TECHNOLOGIES, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



          DELAWARE                                 94-3177221
          --------                                 ----------
(STATE OR OTHER JURISDICTION OF        (I.R.S. EMPLOYER IDENTIFICATION NO.)
 INCORPORATION OR ORGANIZATION)



                         1804 N. SHORELINE BOULEVARD
                           MOUNTAIN VIEW, CA  94043
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)



       (415) 903-4000 UNTIL SEPTEMBER 1, 1997 (650) 903-4000 THEREAFTER
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)


INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS 
REQUIRED 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.


                         (ITEM 1) ( X )  YES (  ) NO
                         (ITEM 2) ( X )  YES (  ) NO


-----------------------------------------------------------------------------
THE NUMBER OF OUTSTANDING SHARES OF THE REGISTRANT'S COMMON STOCK, $.001 PAR 
VALUE, WAS 7,063,000 AS OF JUNE 30, 1997.
-----------------------------------------------------------------------------




FloSeal Matrix-TM-, FloSeal-TM-RapiSeal-TM-, SilverBullet-TM-, Fusion 
Medical Technologies-TM- and Fusion-TM and the stylized Fusion logo are 
trademarks of the Company.

<PAGE>

               FUSION MEDICAL TECHNOLOGIES, INC.

                            INDEX



PART I: FINANCIAL INFORMATION


Item 1. Condensed financial statements - unaudited

        Condensed balance sheets - June 30, 1997 and December 31, 1996

        Condensed statements of operations - three months and six months 
        ended June 30, 1997 and 1996

        Condensed statements of cash flows - six months ended June 30, 1997
        and 1996

        Notes to condensed financial statements


Item 2. Management's discussion and analysis of financial condition and 
        results of operations for the three months and six months ended June 
        1997 and 1996



PART II: OTHER INFORMATION

Item 1. Legal Proceedings

Item 2. Changes in Securities

Item 3. Defaults Upon Senior Securities

Item 4. Submission of Matters to a Vote of Security Holders

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

        Signatures

<PAGE>

<PAGE>


                        FUSION MEDICAL TECHNOLOGIES, INC.
                       (a company in the development stage)

                            CONDENSED BALANCE SHEETS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                       June 30,         December 31,
                                                         1997              1996
                                                     -------------      ------------
                                                      (unaudited)
<S>                                                  <C>                <C>
                    ASSETS

Current assets:
  Cash and cash equivalents                           $  12,077          $  10,778
  Available-for-sale securities                           5,107             11,145
  Other assets                                              251                414
                                                     -------------      ------------
    Total current assets                                 17,435             22,337



  Available-for-sale securities                           1,562              1,562
  Property and equipment, net                             1,230              1,121
  Other assets                                               44                 44
                                                     -------------      ------------
    Total assets                                      $  20,271          $  25,063
                                                     -------------      ------------
                                                     -------------      ------------
                   LIABILITIES

Current liabilities                                   $     941          $   1,265
Long-term obligations                                         -                 56
                                                     -------------      ------------
    Total liabilities                                       941              1,321
                                                     -------------      ------------

                STOCKHOLDERS' EQUITY

Common stock and other stockholders' equity              35,497             35,335
Deficit accumulated during the development stage        (16,167)           (11,593)
                                                     -------------      ------------
     Total stockholders' equity                          19,330             23,742
                                                     -------------      ------------
       Total liabilities and stockholders' equity     $  20,271          $  25,063
                                                     -------------      ------------
                                                     -------------      ------------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL 
STATEMENTS.

<PAGE>

                        FUSION MEDICAL TECHNOLOGIES, INC.
                       (a company in the development stage)

                       CONDENSED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)
                                   (UNAUDITED) 


<TABLE>
<CAPTION>

                                            Three Months Ended June 30,      Six Months Ended June 30,
                                            ---------------------------      -------------------------
                                               1997            1996              1997          1996
                                            -----------    ------------      -------------  -----------
<S>                                         <C>            <C>               <C>            <C>
Net sales                                   $       28              -       $         78           -

Cost of sales and start-up manufacturing
  costs                                            224              -                382           -
                                            -----------                      ------------
     Gross profit (loss)                          (196)             -               (304)          -
                                            -----------    ------------      -------------  -----------
Operating expenses:

  Research and development                       1,342     $     1,215             2,583    $   2,278

  Marketing, general and administrative          1,242             628             2,286        1,182
                                            -----------    ------------      ------------   ----------
     Total operating expenses                    2,584           1,843             4,869        3,460
                                            -----------    ------------      ------------   ----------
       Loss from operations                     (2,780)         (1,843)           (5,173)      (3,460)


Interest income                                    303             105               630          163

Other expense                                       (7)             -                (31)          -
                                            -----------    ------------      ------------   ----------

        Net loss                            $   (2,484)    $    (1,738)      $    (4,574)   $  (3,297)
                                            -----------    ------------      ------------   ----------
                                            -----------    ------------      ------------   ----------

Net loss per share                          $    (0.35)    $     (0.53)      $     (0.65)   $   (0.61)
                                            -----------    ------------      ------------   ----------
                                            -----------    ------------      ------------   ----------

Shares used in computing net loss per
  share                                          7,063           3,295             7,044        5,373
                                            -----------    ------------      ------------   ----------
                                            -----------    ------------      ------------   ----------


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL STATEMENTS.
</TABLE>

<PAGE>



                        FUSION MEDICAL TECHNOLOGIES, INC.
                       (a company in the development stage)

                            STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                   (UNAUDITED)
<TABLE>
<CAPTION>

                                                           Six Months Ended June 30,
                                                           -------------------------
                                                               1997          1996
                                                           -----------    ----------
<S>                                                        <C>            <C>
Cash flows from operating activities:
  Net loss                                                 $   (4,574)     $ (3,297)
  Adjustments to reconcile net loss to net cash
   used in operating activities:
     Depreciation and amortization                                216           100
     Amortization of deferred compensation                        189           189
     Accretion of Available-for-sale securities                   (78)
     Changes in assets and liabilities:
       Accounts receivable                                        (14)
       Inventories                                                 25
       Prepaids and other current assets                          151
       Accounts payable                                          (474)
       Accrued expenses                                           173           781
                                                           -----------    ----------
          Net cash used in operating activities                (4,385)       (2,227)
                                                           -----------    ----------
Cash flows from investing activities:
  Acquisition of property and equipment                          (326)         (286)
  Purchases of short-term investments                          (2,557)       (2,481)
  Sales of short-term investments                               8,595         1,536
                                                           -----------    ----------
          Net cash provided by investing activities             5,712        (1,231)
                                                           -----------    ----------

Cash flows from financing activities:
  Proceeds from issuance of common stock                           51        24,504
  Proceeds from notes payable                                      (1)
  Repayment of notes payable                                      (78)          (66)
                                                           -----------    ----------
          Net cash provided (used) by financing activities        (28)       24,438
                                                           -----------    ----------

Net increase in cash and cash equivalents                       1,299        20,980

Cash and cash equivalents, beginning of period                 10,778         4,382
                                                           -----------    ----------
Cash and cash equivalents, end of period                   $   12,077     $  25,362
                                                           -----------    ----------
                                                           -----------    ----------


THE ACCOMPANYING NOTES ARE AN ITEGRAL PART OF THESE CONDENSED FINANCIAL 
STATEMENTS.

</TABLE>

<PAGE>

FUSION MEDICAL TECHNOLOGIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1997
(Unaudited)

1. BASIS OF PRESENTATION

The accompanying condensed financial statements of Fusion Medical 
Technologies, Inc. (the "Company" or "Fusion") have been prepared in 
accordance with generally accepted accounting principles for interim 
financial information and with the instructions for Form 10-Q and Article 10 
of Regulation S-X. The balance sheets as of June 30, 1997, and the statements 
of operations for the three month periods ended June 30, 1997 and 1996 and six 
months ended June 30, 1997 and 1996, and the statement of cash flows for the 
six month periods ended June 30, 1997 and 1996 are unaudited but include all 
adjustments (consisting of normal recurring adjustments) which the Company 
considers necessary for a fair presentation of the financial position at such 
dates and the operating results and cash flows for those periods. Although 
the Company believes that the disclosures in these financial statements are 
adequate to make the information presented not misleading, certain 
information normally included in financial statements and related footnotes 
prepared in accordance with generally accepted accounting principles have been 
condensed or omitted pursuant to the rules and regulations of the Securities 
and Exchange Commission. The accompanying financial statements should be read 
in conjunction with the financial statements as contained in the Company's 
Annual Report on Form 10-K for the year ended December 31, 1996 and its 
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.

Results for any interim period are not necessarily indicative of results for 
any other interim period or for the entire year.

2. NET LOSS PER SHARE

Net loss per share is computed using the weighted average number of shares of 
common stock outstanding during the periods presented. Common equivalent 
shares are excluded from the computation as their effect is antidilutive, 
except that, pursuant to the Securities and Exchange Commission Staff 
Accounting Bulletins, common and common equivalent shares (stock options, 
warrants and preferred stock) issued during the 12 month period prior to the 
Company's initial public offering have been included in the calculation as if 
they were outstanding for all periods through June 7, 1996 (using the 
treasury stock method for stock options and warrants and the if-converted 
method for preferred stock).

3. CASH AND CASH EQUIVALENTS AND AVAILABLE-FOR-SALE SECURITIES

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

The Company classifies both short term and long term investments as 
available-for-sale. Such investments are recorded at fair market value and 
unrealized gains and losses, if material, are recorded as a separate 
component of equity until realized. Interest income is recorded using an 
effective interest rate, with associated premium or discount amortized to 
interest income. The cost of securities sold is based upon the specified 
identification method.

4. INVENTORY

As of December 31, 1996, the Company began capitalizing its inventories of 
raw materials, work-in-process materials and finished goods related to the 
RapiSeal. Inventory is recorded at the lesser of cost or market using the 
LIFO method. For purposes of presentation, those materials and related 
production items consumed by the Research and Development process have been 
expensed and are thus excluded from the Balance Sheet.

5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

<PAGE>

In February 1997, the Financial Accounting Standards Board (FASB) issued 
Statement No. 128 ("SFAS 128"), "Earnings per Share", which specifies the 
computation, presentation and disclosure requirements for income per share of 
common stock. SFAS 128 will become effective for the Company's year ending 
December 31, 1997. The Company believes that the adoption of SFAS 128 will 
have no material impact on the Company's financial statements and results of 
operations.

In June 1997, FASB issued Statement No. 130 ("SFAS 130"), "Reporting 
Comprehensive Income", which establishes standards for the reporting and 
display of comprehensive income and its components in a full set of general 
purpose financial statements. Comprehensive income is defined as the change 
in equity of a business enterprise during a period from transactions and 
other events and circumstances from non-owner sources. The Company believes 
that the adoption of SFAS 130 will have no material impact on the Company's 
financial statements and results of operations for the foreseeable future.
The Company has not determined if SFAS 13 would be applicable in the current
year, if at all, or if at any time in the forseeable future.

In June 1997, FASB issued Statement No. 131 ("SFAS 131"), "Disclosure about 
Segments of an Enterprise and Related Information", which requires 
publicly-held companies to report financial and other information about key 
revenue producing statements of the entity provided such information is 
available and is utilized by the chief operation decision maker. Specific 
information to be reported for individual segments includes profit or loss, 
certain revenue and expense items and total assets. SFAS No. 131 may be 
effective for the Company in 1998 and the impact of adoption, if any, has not 
been determined.

ITEM 2.

                       MANAGEMENT'S DISCUSSION AND ANALYSIS
                 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the Financial Condition and Results of Operations 
of the Company for the three months ended June 30, 1997, should be read in 
conjunction with the Company's Annual Report on Form 10-K for the fiscal year 
ended December 31, 1996 under the heading "Management's Discussion and 
Analysis of Financial Condition and Results of Operations -- Factors Affecting 
Operating Results and Market Price of Common Stock". The following discussion 
contains forward-looking statements which involve risks and uncertainties. 
The Company's actual results could differ materially from those anticipated 
by these forward-looking statements as a result of certain factors, including 
those set forth in "Additional Factors That Might Affect Future Results" 
below.

OVERVIEW

Fusion Medical Technologies, Inc. ("Fusion" or the "Company") was 
incorporated in Delaware in 1993. The Company is developing proprietary wound 
closure products which the Company believes may have broad application in a 
variety of surgical procedures, including lung resections for cancer and 
emphysema, procedures requiring anastomoses, and minimally invasive 
surgeries. The Company's RapiSeal bioresorbable patch and FloSeal-TM- and 
FloSeal Matrix-TM- products are designed to effectively treat surgical wounds 
in a wide variety of organs and blood vessels by rapidly forming flexible 
seals across the targeted tissue. The Company believes that its wound closure 
products have the potential to reduce post-operative complications associated 
with air and fluid leaks and bleeding and consequently reduce hospital costs. 

In June 1996, the Company received 510(k) pre-market clearance from the 
United States Food and Drug Administration ("FDA") to market its RapiSeal 
patch in connection with lung surgery. In February 1997, the Company also 
received 510(k) pre-market clearance to sell its RapiSeal patch for the 
treatment of bleeding which occurs in solid organ surgeries, such as liver, 
spleen and kidney surgeries. This product is designed to

<PAGE>

effectively treat surgical wounds by creating barriers for blood, fluid and 
air across the targeted tissue. The Company believes that in lung surgeries, 
its RapiSeal patch may reduce post-operative complications associated with 
air and fluid leaks, thus reducing hospital costs.

In May 1997, the Company received 510(k) pre-market clearance from the FDA to 
market in the United States the Company's SilverBullet-TM- electrode. 
The SilverBullet allows surgeons to utilize standard electrosurgical 
equipment readily available in the operating room as an energy source for the 
application of Fusion's RapiSeal patch. The Company commenced selling the 
SilverBullet electrode in June 1997.

To expand its product offerings, the Company is developing collagen-based 
flowable-gel products (FloSeal-TM- and FloSeal Matrix-TM-) to enable surgeons 
to quickly and easily stop bleeding occurring in connection with a wide 
variety of surgeries, such as those performed by cardiac, vascular and 
general surgeons. Pre-clinical tests indicate these products may be effective 
in controlling active bleeding. The first version of the flowable-gel product 
will be targeted for open surgery, and work has begun on a device appropriate 
for use in minimally invasive surgery. The Company expects to begin clinical 
evaluation of this product in open surgical procedures in the fourth quarter 
1997.

Future revenues, if any, and results of operations may fluctuate 
significantly from quarter to quarter and will depend upon, among other 
factors; actions relating to regulatory and reimbursement matters, the 
extent to which the Company's product or products gain market acceptance, the 
rate at which the Company establishes its distribution network, the timing 
and size of any distributor purchases, the progress of clinical trials, and 
the introduction of competitive products for wound sealing.

RESULTS OF OPERATIONS

Three months and six months ended June 30, 1997 and 1996

REVENUES

The Company recorded revenues from product sales of $28,000 for the quarter 
ended June 30, 1997 and $78,000 in the first six months of 1997. No revenues 
were recorded for the quarter ended June 30, 1996 because the Company had not 
obtained clearance to market its first product until October 1996. Gross 
margins remained negative as a result of start-up manufacturing costs, 
primarily due to low unit sales volume.

RESEARCH AND DEVELOPMENT

Research and development expenses increased 10% to $1,342,000 in the three 
months ended June 30, 1997 compared  to $1,215,000 in the three months ended 
June 30, 1996, and by 13% to $2,583,000 in the first six months of 1997 
compared to $2,287,000 in the first six months of 1996. The increase for the 
second quarter of 1997 was attributable to increased numbers of employees and 
related use of supplies, consultants and laboratory research as the Company 
substantially increased its activities. Expenses for the second quarter ended 
June 30, 1997 included costs associated with the Company's FloSeal/FloSeal 
Matrix products.

MARKETING, GENERAL AND ADMINISTRATIVE

Marketing, general and administrative expenses increased 98% to $1,242,000 in 
the three months ended June 30, 1997, compared to $628,000 for the three 
months ended June 30, 1996, and by 93% to $2,286,000 in the first six months 
of 1997 from $1,182,000 in the first six months of 1996. The increase in the 
second quarter ended June 30, 1997, compared to the year earlier period, were 
primarily the result of increases in sales and administrative personnel, 
expanded marketing activities and occupancy related costs.

<PAGE>

INTEREST INCOME

Net interest income increased 189% to $303,000 for the three months ended 
June 30, 1997 compared to $105,000 for the three months ended June 30, 1996, 
and by 287% to $630,000 in the first six months of 1997 from $163,000 in the 
first six months of 1996. The increases were attributable to the Company's 
initial public offering in June 1996, which increased its average cash 
balance.

NET LOSS

As a result of the items discussed above, net loss was $2,484,000 for the 
three months ended June 30, 1997 and $4,574,000 for the six months ended June 
30, 1997. This compares to a net loss of $1,738,000 for the three months 
ended June 30, 1996 and $3,297,000 for the six months ended June 30, 1996.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 1997, the Company's cash, cash equivalents and available-for-sale 
securities (classified as both long term and short term) were $18,746,000 
compared to $27,843,000 at June 30, 1996. On June 7, 1996, the Company 
completed its initial public offering (IPO) of 2,100,000 shares of common 
stock at a price of $13.00 per share. The net proceeds to the Company from 
the IPO were approximately $24,500,000.

For the six months ended June 30, 1997 and 1996, Fusion's operations consumed 
cash of $4,385,000 and $2,227,000, respectively. The increase in cash 
consumed by operations was due primarily to increased marketing activities 
and associated personnel costs, start-up manufacturing activities, and 
funding increased levels of research and development of RapiSeal and the 
FloSeal and FloSeal Matrix. The Company expects the increased use of cash 
will continue through the end of 1997 as it increases its operations to 
reflect the sales and marketing of RapiSeal and the continued expansion of 
research and development for the FloSeal and FloSeal Matrix and other Fusion 
products.

Although Fusion believes that the proceeds from its IPO, augmented by cash 
generated by sales of the RapiSeal product, will be sufficient to meet the 
Company's operating and capital requirements at least through 1998, there can 
be no assurance that the Company will not require additional financing within 
this time frame. Fusion's future liquidity and capital requirements will 
depend on numerous factors, including market acceptance of RapiSeal and 
SilverBullet, the receipt of and the time required to obtain regulatory 
clearances and approvals for other uses of RapiSeal and the FloSeal Matrix, 
the resources the Company devotes to developing, manufacturing and marketing 
its products and other factors. There can be no assurance that additional 
financing, if required, will be available on satisfactory terms or at all. 
Any additional equity financing may be dilutive to stockholders, and debt 
financing, if available, may include restrictive covenants.


ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS

TECHNOLOGY AND DEVELOPMENT RISK. To be successful the Company's products 
under development must act favorably in humans. The physiological processes 
and effects that these products seek to provide are very difficult to achieve 
and are dependent upon may independent and interacting variables which are 
not fully understood. The products must be effective in treating the 
substantial variations involved from patient to patient, as well as with 
regard to the differing techniques and procedures employed by surgeons. The 
technologies related to these potential products are evolving and are not 
fully developed. As a result, the predictability and success of the technology 
design process with respect to these products is highly uncertain. As a 
consequence of the above factors and many additional factors, the time and 
expense required to design and develop a product is highly uncertain and 
cannot be predicted reliably. With respect to any particular product under 
development, desired physiological effects or product specifications may not 
be fully achieved, if at all. Even if the products are successfully developed 
to achieve desired biological effects, there can be no assurance

<PAGE>

that successful clinical effects will be achieved, that successful regulatory 
clearances will be secured or that the products will become economically 
viable. If the Company were not successful in developing its planned products, 
its business, financial condition and results of operations would be materially 
adversely affected.

COMPETITION; UNCERTAINTY OF TECHNOLOGICAL CHANGE. The wound closure market is 
highly competitive, and the Company expects competition in its targeted 
markets to intensify. The Company expects to encounter direct competition from 
companies offering pericardial strips, synthetic strips, and synthetic fibrin 
glues. In addition, several large companies targeting the wound closure market 
may be developing products that would compete with the Company's products. 
The Company is also aware of several potential competitors that are working 
on biological tissue sealants. Many of the competitors or 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 than the Company. 
Broad product lines may give the Company's competitors or potential 
competitors the ability to negotiate exclusive, long-term medical device 
supply contracts and, consequently, the ability to offer comprehensive 
pricing for their products, including those that may compete with the 
Company's products. By offering a broader product line, these potential 
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 centralization 
of purchasing functions. There can be no assurance that the Company will be 
able to effectively compete against such competitors or potential 
competitors. In addition, there can be no assurance that the Company's 
current competitors or other companies will not succeed in developing 
technologies and products that are more effective than the Company's or that 
would render the Company's technology or products obsolete or uncompetitive.

DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY. The Company's ability to 
compete effectively will depend in part on its ability to develop and maintain 
the proprietary aspects of its technology. The Company has pursued its own 
patents covering its technologies in various forms. In addition, the Company 
has licensed technology to further broaden its patent portfolio. The Company 
owns one and has licensed two issued United States patents, and has 18 
pending United States patent applications related to its patch technology and 
liquid formulations. The Company has also licensed one United States patent 
related to the manufacture of its patch technology. There can be no 
assurance that the pending patent applications will issue, or that the issued 
patent or any patents that may issue in the future will provide any 
competitive advantages for the Company's products or that they will not be 
successfully challenged, invalidated or circumvented in the future. 
Moreover, litigation or interference proceedings associated with enforcing 
or defending patents or trade secrets is expensive and can divert the 
efforts of technical and management personnel. The Company has filed certain 
corresponding patent applications in certain foreign countries and may file 
additional patent applications outside the United States. The Company believes 
that obtaining foreign patents may be more difficult than obtaining domestic 
patents because of differences in patent laws and believes the protection 
provided by foreign patents, if obtained, and any other foreign intellectual 
property protection may be weaker than that provided domestically. In 
addition, there can be no assurance that competitors will not seek to apply 
for and obtain patents that will prevent, limit or interfere with the 
Company's ability to make, use and sell its products. 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 wound closure. In addition, the medical device industry has been 
characterized by extensive litigation regarding patents and other 
intellectual property rights, and many companies in the medical device 
industry have employed intellectual property litigation to gain competitive 
advantage. There can be no assurance that suits will not be brought against 
the Company in the future challenging its patent rights or claiming 
infringement on patents held by third parties.

An adverse determination in litigation or interference proceedings to which 
the Company may become a party could subject the Company to significant 
liabilities to third parties, require disputed rights to be licensed from 
third parties or require the Company to cease using such technology. Although 
patent and intellectual property disputes in the medical device area have 
often been settled through licensing or similar arrangements, costs

<PAGE>

associated with such arrangements may be substantial and could include 
ongoing royalties. Furthermore, there can be no assurance that necessary 
licenses would be available to the Company on satisfactory terms, if at all. 
Adverse determinations in a judicial or administrative proceeding or failure 
to obtain necessary licenses on satisfactory terms, if at all, could prevent 
the Company from manufacturing and selling its products, which would have a 
material adverse effect on the Company's business, financial condition and 
results of operations.

REGULATORY UNCERTAINTY. The regulatory processes for the approval of medical 
devices, such as the Company's products, are highly uncertain. The time and 
expense required to obtain approvals can vary widely. In certain cases, an 
approval may not be ever gained. In particular, the regulatory process in the 
United States is arduous and demanding. A major factor in the time and 
expense required for a device approval to market is the type of submission 
required, 510(k) or PMA. While the Company generally seeks the faster 510(k) 
regulatory pathway for its products whenever it believes this pathway is 
appropriate, the decision as to the pathway is essentially within the sole 
discretion of the FDA and there can be no assurance that a 510(k) pathway 
will be obtained. A PMA process is significantly longer and more expensive. 
Likewise, the FDA sets the requirements for the size and structure of 
clinical trials after input from the Company. There can be assurance that the 
clinical requirements of the FDA for submissions will be favorable to the 
Company or within its expense and time estimates or result in an economically 
viable program. The clinical or other requirements can change during the 
process resulting in new requirements or standards which materially increase 
the time and expense of the regulatory process. The FDA can require 
additional clinical trials or tests and requirements after the initial 
submissions. The time required for review and approval at the FDA can vary 
widely depending on the quality of the submittal and many other factors. Many 
of the factors affecting the time and expense required within the regulatory 
process are outside the control of the Company. Longer and more expensive 
clinical trials can have a material adverse effect on the financial results 
and operations of the Company. The regulatory processes outside the United 
States also vary widely in the time and expense required for approval and may 
result in no approval at all. In summary, there can be no assurance that 
approvals will ever be granted for any of the Company's products currently in 
the development process or that the time and expense of the regulatory 
process can be reliably estimated or will result in an economically viable 
investment.

UNCERTAINTY OF MARKET ACCEPTANCE. The Company's success will depend upon the 
medical community's active sponsorship and ultimate acceptance of the 
RapiSeal patch, FloSeal Matrix and other products. The Company is unable to 
predict how quickly, if at all, the medical community will accept its 
products or, if accepted, the number of products that will be used. Use of 
the Company's products will require changes in surgical practices, and there 
can be no assurance that surgeons will be willing to make such changes. To 
achieve market acceptance of its products, the Company must also demonstrate 
that its products offer clinically significant advantages. The Company 
conducted its multi-center clinical trial of RapiSeal in support of its 510K 
application in only 26 patients, which may not provide sufficient data to 
demonstrate clinically significant advantages, if any, to surgeons. Moreover, 
this limited experience with patients may initially make it difficult for the 
Company to ascertain those factors most relevant to the surgeon's decision 
whether to use the Company's products. Air leaks associated with lung 
resections require the insertion of chest tubes in the patient. While the 
Company believes that the RapiSeal patch may reduce hospital costs by 
shortening the duration of patient dependence on chest tubes, RapiSeal will 
not eliminate the need for chest tubes. In addition, air leaks may occur in 
the patient after the lung resection procedure, and RapiSeal cannot address 
such leaks. Failure of the RapiSeal patch, the FloSeal Matrix or other Fusion 
products to achieve significant clinical adoption would have a material 
adverse effect on the Company's business, financial condition and results of 
operations.

UNCERTAINTY RELATING TO THIRD-PARTY REIMBURSEMENT. In the United States, 
health care providers that purchase medical devices, such as the RapiSeal 
patch, the FloSeal Matrix or other Fusion products, generally rely on 
third-party payors, principally federal Medicare, state Medicaid and private 
health insurance plans to reimburse all or part of the cost of the 
procedure in which the medical device is used. The Company's success will be 
dependent, in part, upon its ability to obtain satisfactory third-party 
reimbursement
<PAGE>

from health care payors for surgical procedures that may use RapiSeal, the 
FloSeal Matrix or other Fusion products.  HCFA has suspended payment for, and 
is reviewing the appropriate reimbursement, if any, for the Lung Volume 
Reduction ("LVR") procedure.  See "Risks Associated with LVR."  The Company 
anticipates that in a prospective payment system, such as the Diagnostic 
Related Group System utilized by Medicare, and in many managed care systems 
used by private health care payors, the cost of the Company's products will 
be incorporated into the overall cost of the procedures and that there will 
not be separate reimbursement for the Company's products.  Regardless of the 
type of reimbursement system, the Company believes that surgeon advocacy of 
the RapiSeal patch, the FloSeal Matrix or other Fusion products will be 
required to obtain reimbursement.  There can be no assurance that any 
reimbursement will be sufficient to assure profitability.  Failure by 
physicians, hospitals and other users of the Company's products to obtain 
sufficient reimbursement from health care payors for procedures in which the 
Company's products are used or adverse changes in governmental and private 
third-party payors' policies toward reimbursement for such procedures would 
have a material adverse effect on the Company's business, financial condition 
and results of operations.

If the Company obtains the necessary foreign regulatory approvals, market 
acceptance of the Company's products in international markets would be 
dependent, in part, upon the availability of reimbursement within prevailing 
health care payment systems for the Company's products or the procedures in 
which the products are used. Reimbursement and health care payment systems in 
international markets vary significantly by country, and include both 
government-sponsored health care and private insurance.  The Company intends 
to seek international reimbursement approvals.  There can be no assurance 
that any such approvals will be obtained in a timely manner, if at all, and 
failure to receive international reimbursement approvals could have a 
material adverse effect on market acceptance of the Company's products in 
the international markets in which such approvals are sought.

RISKS ASSOCIATED WITH LVR.  The Company believes that the success of the 
RapiSeal is dependent to a large degree on its successful use in conjunction 
with a lung volume reduction procedure known as LVR.  LVR is a procedure 
wherein the surgeon removes the most diseased lung tissue, using a stapler 
which simultaneously cuts the targeted tissue and staples the remaining 
tissues to close the surgical wound.  A statistically significant body of 
clinical data does not exist from which to draw final conclusions concerning 
the effectiveness and long-term outcomes associated with the LVR procedure.  
Independent studies of patients who have undergone the LVR procedure reported 
that patients experienced reduced shortness of breath, improved exercise 
tolerance and improved quality of life.  However, the number of patients who 
have undergone the LVR procedure in the United States and for whom a 
clinically acceptable post-operative evaluation period has elapsed is 
relatively small.  As a result, there can be no assurance concerning the 
safety, effectiveness and long-term outcomes associated with the LVR 
procedure.  The Health Care Financing Administration ("HCFA") has suspended 
payment, and is reviewing the appropriate reimbursement, if any, for LVR.  In 
connection with such review, HCFA has announced its intention to collaborate 
with the National Institutes of Health ("NIH") on a large-scale, 
multi-center trial to be conducted by the NIH to evaluate the long-term 
benefits of the LVR procedure for patients with late-stage emphysema.  There 
can be no assurance as to when this trial will be completed or whether the 
results of the trial will demonstrate the safety or long-term efficacy of 
LVR.  It is not known when HCFA will make a final determination as to 
reimbursement for LVR, and it may be several years before a determination is 
made.  There can be no assurance that reimbursement for LVR will be 
reinstated or, if reinstated that HCFA will not impose limitations on 
reimbursement.  The Company believes a significant portion of the candidates 
for the LVR procedure could be affected by HCFA's determination with respect 
to reimbursement.  Failure to reinstate reimbursement or the imposition of 
limitations on reimbursement would have a material adverse effect on the 
Company's business prospects.  If reimbursement is not available for LVR 
procedures, if the LVR procedure is not widely adopted or if RapiSeal cannot 
be used successfully in LVR procedures, it would have a material adverse 
effect on the Company's business, financial condition and results of 
operations.

<PAGE>


LIMITED SALES, MARKETING AND DISTRIBUTION EXPERIENCE.  The Company has had 
limited sales to date and only has a small sales and marketing organization. 
The Company intends to sell the RapiSeal patch for use in lung surgeries in 
the United States through a direct sales force. In other markets, the Company 
intends to sell its products primarily through agreement with distributors or 
by means of collaborative arrangements, and the Company has entered into a 
limited number of agreements or arrangements to date. There can be no 
assurance that the Company will be able to build a direct sales force or 
marketing organization, that establishing a direct sales force or marketing 
organization will be cost effective, or that the Company's sales and 
marketing efforts will be successful. There can be no assurance that the 
Company will be able to enter into agreements with additional distributors or 
collaborative arrangements on a timely basis or at all, or that such 
distributors or collaborators will devote adequate resources to selling the 
Company's products. In addition, to the extent that the Company enters into 
distribution agreements or collaborative arrangements for the sale of its 
products, the Company will be dependent upon the efforts of third parties, 
and there can be no assurance that such efforts will be successful. Failure 
to build an effective selling and marketing organization or to establish 
effective distribution or collaborative arrangements would have a material 
adverse effect on the Company's business, financial condition and results of 
operations.

PRODUCT LIABILITY RISK; LIMITED INSURANCE COVERAGE.  The medical device 
industry has historically been litigious, and the Company faces an inherent 
business risk of financial exposure to product liability claims in the event 
that the use of its products results in personal injury. Although the Company 
has not experienced any claims to date, there can be no assurance that the 
Company will not experience losses due to product liability claims in the 
future. The Company currently maintains liability insurance with coverage 
limits of $3.0 million on a claims-made basis. There can be no assurance 
that the coverage limits of the Company's insurance policies will be 
adequate. Such insurance is expensive, difficult to obtain and may not be 
available in the future on acceptable terms, or at all. Any claims against 
the Company regardless of their merit or eventual outcome, could have a 
material adverse impact upon the Company's business, financial condition and 
results of operations.

LIMITED MANUFACTURING EXPERIENCE; SCALE-UP RISK.  The Company received a 
manufacturing license from the California Department of Health Services 
(CDHS) and commenced shipment of RapiSeal for use in its clinical trial in 
November 1995. The Company commenced selling its second product, the 
SilverBullet, in June 1997. In the quarter ended June 30, 1997, the Company 
generated product revenues of approximately $28,000. However, the Company has 
limited experience manufacturing RapiSeal and the SilverBullet, and no 
experience manufacturing any other products, in the volumes necessary to 
achieve significant commercial sales, and there can be no assurance that 
reliable, high-volume manufacturing can be achieved at a commercially 
reasonable cost. The Company may encounter difficulties in scaling up 
production, including problems involving production yield, quality control 
and assurance, and shortages of qualified personnel. The Company's 
manufacturing facilities will be subject to GMP regulations, international 
quality standards and other regulatory requirements. Difficulties encountered 
by the Company with the scale-up of manufacturing or failure by the Company 
to implement and maintain its facilities in accordance with GMP regulations, 
international quality standards or other regulatory requirements would entail 
a delay or termination of production, which could have a material adverse 
effect on the Company's business, financial condition and results of 
operations. Any manufacturing difficulties involving production yields, 
quality control and assurances, supplies of components or shortages of 
qualified personnel encountered by the Company could also have a material 
adverse effect on its business, financial condition and results of 
operations. There can be no assurance that the Company will be able to 
manufacture and supply sufficient quantities of products to meet product 
requirements for United States and international clinical trials and 
commercial sales.

DEPENDENCE ON SINGLE SOURCE SUPPLIERS.  The Company purchases several 
components of its products from single source suppliers. Generally, the 
Company believes that there are alternative suppliers of equivalent materials 
available, and that the Company could substitute suppliers with minimal 
regulatory consequences from this substitution. However, there can be no 
assurance that such substitute suppliers will be
<PAGE>

available, or that such substitutions could be made in a timely manner or on 
commercially reasonable terms. In the case of collagen, there are only a few 
suppliers that could meet the Company's requirements. The Company currently 
relies exclusively on one supplier of collagen, Kensey Nash Corporation, and 
expects to continue to do so through at least the end of 1997. Fusion and 
this supplier have entered into a long-term supply agreement. However, if 
this supplier were unable to meet the Company's demands, there can be no 
assurance that the Company would be able to secure alternative sources of 
collagen to produce sufficient product to meet its customers' needs. A 
transition to alternate arrangements could involve additional costs and 
delays in production. There can be no assurance that such transition would be 
successful in entering into alternate arrangements on commercially reasonable 
terms, if at all. Sterilization of the Company's product is out-sourced to a 
single vendor. While the Company believes alternative sterilization vendors 
are readily available, there can be no assurance that such vendors would be 
available or that such a transition could be made in a timely, cost-effective 
manner. In the event the Company is not able to acquire sufficient supplies 
from its current sources or to locate alternate sources on commercially 
reasonable terms, the Company may not be able to manufacture its products on 
a timely and cost-competitive basis, or at all, which would have a material 
adverse effect on the Company's business, financial condition and results of 
operations.

PART II:  OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS
          None.

ITEM 2.   CHANGES IN SECURITIES
          None.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES
          None.

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

          The Company Annual Meeting of Shareholders was held on May 22, 
          1997. The results of the voting were as follows:

          Proposal 1:  Election of the Board of Directors of the Company.

               Nominee                      Votes For         Votes Withheld
               -------                      ---------         --------------
          Philip M. Sawyer                  6,251,562             14,377
          Gordon W. Russell                 6,251,562             14,377
          Olav B. Bergheim                  6,263,989              1,950
          Vaughn D. Bryson                  6,263,989              1,950
          Douglas E. Kelly                  6,263,989              1,950
          Lawrence J. Mohr                  6,263,989              1,950
          Richard S. Schneider, Ph.D.       6,263,989              1,950

          Proposal 2:  Ratify and Approve an Amendment to the Company's 1993 
                       Stock Option Plan

                              Votes For:           5,383,082
<PAGE>

                              Votes Against:         525,287
                              Votes Abstaining:      260,743
                              Non-Vote:               96,827

          Proposal 3:  Ratify the appointment of Coopers & Lybrand L.L.P. as 
                       independent auditors.

                              Votes For:           6,263,139
                              Votes Against:           1,600
                              Votes Abstaining:        1,200
                              Non-Vote:                    0

ITEM 5.   OTHER INFORMATION
          None.

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K
          Exhibit 11.1  Computation of net loss per share.
          Exhibit 27.1  Financial Data Schedule.

<PAGE>

Pursuant to the requirements of the Securities Exchange Act of 1934, the 
registrant has duly caused this report to be signed on its behalf by the 
undersigned thereunto.

                        FUSION MEDICAL TECHNOLOGIES, INC.



Date:  August 14, 1997                  By: 
                                            ----------------------------------
                                            Philip M. Sawyer
                                            President, Chief Executive Officer



                                        By: 
                                            ----------------------------------
                                            Raymond W. Anderson
                                            Vice President, Finance and 
                                            Chief Financial Officer