<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 SEPTEMBER 30, 1996





                           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           (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)




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


                                    (415) 903-4000
                 (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)          {         } YES {    X    ) NO

THE NUMBER OF OUTSTANDING SHARES OF THE REGISTRANT'S COMMON STOCK, $.001 PAR
VALUE, WAS 6,936,647 AS OF SEPTEMBER 30, 1996.
<PAGE>
 
                          FUSION MEDICAL TECHNOLOGIES, INC.

                                        INDEX


PART I:  FINANCIAL INFORMATION                                            PAGE

Item 1.  Condensed financial statements - unaudited

         Condensed statements of operations - three months ended September 30,
         1996 and 1995 and nine months ended September 30, 1996 and 1995

         Condensed balance sheets - September 30, 1996 and December 31, 1995

         Condensed statements of cash flows - nine months ended September 30,
         1996 and  1995

         Notes to condensed consolidated financial statements

Item 2.  Management's discussion and analysis of financial condition and
         results of operations



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 5   Exhibits and Reports on Form 8-K

         Signatures

<PAGE>


PART I:  FINANCIAL STATEMENTS


<PAGE>

                          FUSION MEDICAL TECHNOLOGIES, INC.
                         (A COMPANY IN THE DEVELOPMENT STAGE)
                               CONDENSED BALANCE SHEETS
                                    (IN THOUSANDS)

                                                    September 30   December 31
                                                    ------------   -----------
                                                        1996          1995
                                                    ------------   -----------
                                                    (unaudited)
                                        ASSETS
Current assets:
  Cash, Cash Equivalents &
    Available-for-Sale Securities                  $    25,448    $     5,918
  Other Current Assets                                     196             68
                                                    ------------   -----------
     Total Current Assets                               25,644          5,986
  Long Term Assets                                       1,017            643
                                                    ------------   -----------
     Total Assets                                   $   26,661    $     6,629
                                                    ------------   -----------
                                                    ------------   -----------

                          LIABILITIES AND STOCKHOLDERS' EQUITY

  Current Liabilities                              $     1,088    $       672
  Long-term Obligations                                     89            189
                                                    ------------   -----------
     Total Liabilities                                   1,177            861
  Common stock and other stockholders' equity           36,530         10,406
  Deficit accumulated during the development stage     (11,046)        (4,638)
                                                    ------------   -----------
  Total Stockholders' Equity                            25,484          5,768
                                                    ------------   -----------
     Total Liabilities and Stockholders' Equity     $   26,661     $    6,629
                                                    ------------   -----------
                                                    ------------   -----------

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS



<PAGE>
                          FUSION MEDICAL TECHNOLOGIES, INC.
                         (A COMPANY IN THE DEVELOPMENT STAGE)
                          CONDENSED STATEMENTS OF OPERATIONS
                       (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

 
<TABLE>
<CAPTION>


                                                                                                            Cumulative Period
                                                   Three Months Ended           Nine Months Ended         from October 14, 1992
                                                      September 30,                September 30,           (date of inception)
                                                  1996             1995        1996             1995       to September 30, 1996
                                                      (unaudited)                   (unaudited)                 (unaudited)
<S>                                           <C>              <C>            <C>          <C>              <C>
Revenues                                      $          8              -     $       8                -    $                 8
                                              ---------------------------     --------------------------    -------------------
Costs & Expenses                                                                                           
  Cost of Goods                                          7              -             7                -                      7
  Research and Development                           1,241            741         3,519            1,719                  7,029
  Marketing, General and Administrative                843            266         2,025              624                  3,527
                                              ---------------------------     --------------------------    -------------------
     Total Costs and Expenses                        2,091          1,007         5,551            2,343                 10,563
                                              ---------------------------     --------------------------    -------------------
       Operating Loss                                2,083          1,007         5,543            2,343                 10,555
                                                                                                           
Interest Income, Net                                  (265)           (85)         (428)            (269)                  (802)
                                              ---------------------------     --------------------------    -------------------
Net loss                                      $     (1,818)    $     (922)    $  (5,115)     $    (2,074)     $          (9,753)
                                              ---------------------------     --------------------------    -------------------
                                              ---------------------------     --------------------------    -------------------
                                                                                                           
Net Loss Per Share                            $      (0.26)    $    (0.47)   $    (1.26)    $      (1.07)    $            (6.09)
                                              ---------------------------     --------------------------    -------------------
                                              ---------------------------     --------------------------    -------------------
                                                                                                           
Shares used in Computing Net Loss Per Share      6,936,647      1,942,637     4,058,047        1,942,637              1,601,061
                                              ---------------------------     --------------------------    -------------------
                                              ---------------------------     --------------------------    -------------------
                                                                                                           
Pro Forma Net Loss Per Share                  $      (0.26)    $    (0.18)    $  (0.87)      $    (0.41)     $           (3.15)
                                              ---------------------------     --------------------------    -------------------
                                              ---------------------------     --------------------------    -------------------

Shares Used in Computing Pro Forma
  Net Loss Per Share                             6,936,647      5,115,376     5,894,267       5,115,376              3,092,950
                                              ---------------------------     --------------------------    -------------------
                                              ---------------------------     --------------------------    -------------------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS


<PAGE>


                          FUSION MEDICAL TECHNOLOGIES, INC.
                         (A COMPANY IN THE DEVELOPMENT STAGE)
                          CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                                                   Cumulative Period
                                                                      Nine Months Ended          from October 14, 1992
                                                                        September 30,             (date of inception)
                                                                     1996           1995        to September 30, 1996
---------------------------------------------------------       ------------   ------------      ----------------------
                                                                 (unaudited)    (unaudited)             (unaudited)
<S>                                                             <C>            <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss                                                     $   (5,115)    $   (2,074)          $   (9,752)
    Adjustments to reconcile net loss to net cash
    used for operating activities:
    Depreciation and amortization                                       145             59                  270
    Amortization of deferred compensation                               283              -                  292
    Changes in assets and liabilities                                   426            317                  757
                                                                 ------------    -----------          -----------
Net cash used in operating activities                                (4,261)        (1,698)              (8,433)

CASH FLOWS FROM INVESTING ACTIVITIES:
    Expenditures for property and equipment                            (545)          (391)              (1,172)
    Purchases of available-for-sale securities                      (18,123)        (4,971)             (20,614)
    Sales of available-for-sale securities                           19,722              -               20,677
                                                               ------------    -----------          -----------
Net cash used in (provided by) investing activities                   1,054         (5,362)              (1,109)

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from issuance of preferred stock                             -          8,914               10,224
    Proceeds from issuance of common stock                           24,506              -               24,512
    Repayment of notes payable                                         (100)          (200)                (178)
    Proceeds from notes payable and bank line of credit                (133)           400                  432
                                                               ------------    -----------          -----------
Net cash provided by financing activities                            24,273          9,114               34,990

Net increase in cash and cash equivalents and available-
  for-sale securites                                                 21,066          2,054               25,448
Cash and cash equivalents and available-for-sale
  securities at beginning of period                                   4,382            222                    -
                                                               ------------    -----------          -----------
Cash and cash equivalents, and available-for-sale
  securities at the end of period                               $    25,448    $     2,276          $    25,448
                                                               ------------    -----------          -----------
                                                               ------------    -----------          -----------

Supplemental schedule of non-cash investing and financing
  activities:
     Conversion of preferred equity to common stock
                                                                          8                                   8
     Deferred compensation relating to the issuance of stock
      options                                                         1,361                               1,389


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

</TABLE>


<PAGE>


                          FUSION MEDICAL TECHNOLOGIES, INC.

                       NOTES TO CONDENSED FINANCIAL STATEMENTS
                                  September 30, 1996
                                     (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 sheet
as of September 30, 1996, and the statements of operations for the three and
nine month periods ended September 30, 1996 and 1995, and for the period from
October 14, 1992 (date of inception) to September 30, 1996,  the statement of
cash flows for the nine month periods ended September 30, 1996 and 1995, and the
cumulative statement of cash flows for the period from October 14, 1992 (date of
inception) to September 30, 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 and notes thereto included in the Company's registration on
form SB-2 (No. 333-3970-LA) which became effective June 7, 1996,  and the
related prospectus contained therein.

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 Bulletin No.
83, 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 (IPO) and 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.       PRO FORMA NET LOSS PER SHARE

The pro forma calculation of net loss per share has been computed as described
above but also gives retroactive effect from the date of issuance to the
conversion of the convertible preferred stock which automatically converted to
common shares upon closing of the Company's initial public offering.

4.       INITIAL PUBLIC OFFERING

On June 7, 1996, the Company's registration statement for its initial public
offering of 2,100,000 shares of common stock at $13.00 per share, was declared
effective by the Securities and Exchange Commission.  The Company received
proceeds of approximately $24,500,000 after deducting underwriting discounts,
commissions and offering costs.


<PAGE>

Upon completion of the IPO all outstanding shares of convertible preferred stock
were automatically converted into 3,172,739 shares of common stock.

5.       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.

6.       CONTINGENCIES

On May 30, 1996, a complaint was filed against the Company, two of its founders,
Dr. Philip N. Sawyer and Philip M. Sawyer, and Interface Biomedical Laboratories
Corporation in California Superior Court by an individual stockholder and former
marketing consultant of the Company.  The suit seeks general, special and
punitive damages in unspecified amounts as well as rescission of a stock
purchase agreement and a consulting agreement entered into by the Company and
the individual pursuant to which the individual purchased shares of Common Stock
of the Company.  Based upon the facts known to date, the Company and the
founders believe that the claims are without merit and intend to vigorously
contest this suit.  There can be no assurance, however, that the Company will
prevail in such litigation or that an adverse outcome would not result in a
material adverse effect on the Company's business, financial condition and
results of operations.

Footnote

Fusion, the Fusion Logo, Fusion Medical Technologies Inc., RapiSeal, and 
the RapiSeal logo are trademarks of the Company.

<PAGE>

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 and nine  months ended September  30, 1996, should be
read in conjunction with the Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the Company's Registration
Statement and Prospectus dated June 7, 1996 relating to the Company's initial
public offering.  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

Since its inception in October 1992, the Company  has been primarily engaged in
the research and development of its wound closure products.  The Company
recorded   revenues of $8,000 and $0 for the quarters ended September 30, 1996
and  1995, respectively.   As of  September  30, 1996, the Company had an
accumulated deficit of approximately $11,046,000.  Operating losses are expected
to continue at least through 1998 as the Company continues to expend
substantial resources to fund clinical trials in support of regulatory approvals
and clearances, research and development and expansion of sales and marketing
activities.

The Company commenced clinical trials of its first product, the RapiSeal 
Patch, in the United States in November 1995.  In April 1996, the Company 
filed a 510(k) pre-market notification with the FDA seeking clearance to 
market RapiSeal in the United States and received such clearance in June 
1996.  The Company expects to file an application for CE Mark approval in the 
fourth  quarter of 1996 for the sale of RapiSeal in Europe.  The Company 
expects to generate all of its revenue from RapiSeal for the next several 
years.  The Company has also been engaged in research and development of 
liquid products, and anticipates commencing initial human clinical trials 
with a liquid  product in 1997.  There can be no assurance that the Company's 
products will be cleared or approved for marketing by the appropriate United 
States or foreign regulatory authorities or that such products will achieve 
market acceptance.

In November 1995, the Company received a manufacturing license from the 
California Department of Health Services (CDHS) and began manufacturing 
RapiSeal for use in its clinical trial.  The Company manufactures RapiSeal 
internally in order to better manage product costs. The current lease on the 
facility expires in June 1998, and the Company has an option to extend the 
lease for an additional six months.  The Company is developing its own direct 
sales force in order to market RapiSeal in the United States and has hired 
three sales representatives to date.  The timing of  hiring additional 
salespersons will depend upon the rate of market acceptance of RapiSeal.

Future revenues, if any, and results of operations may fluctuate significantly
from quarter to quarter and will depend upon, among other factors, approval of
the RapiSeal for sale in Europe, other 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.


<PAGE>


RESULTS OF OPERATIONS

THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995


REVENUES

The Company recorded  $8,000 and $0 revenue  for the  the quarters ended
September  30, 1996 and 1995, respectively.  The Company's sales representatives
began full-scale sales activities in October 1996.


RESEARCH AND DEVELOPMENT

Research and development expenses increased 67% to $1,241,000 in the three
months ended September  30, 1996 from $741,000 in the three months ended
September 30, 1995.  For the nine  months ended September 30, 1996 research and
development expenses increased 105% to $3,519,000 from $1,719,000 in the same
period in 1995.  The increase in both the three month and nine month periods of
1996 were attributable to an increased number of employees and related use of
supplies, consultants and laboratory research as the Company substantially
increased its activities.  Expenses for the nine month period ended September
30, 1996 include the clinical trials which commenced in November 1995 and were
completed in June 1996.


MARKETING, GENERAL AND ADMINISTRATIVE

Marketing, general and administrative expenses increased 217% to $843,000 in the
three months ended September 30, 1996 from $266,000 for the three months ended
September 30, 1995.  For the nine months ended September 30, 1996 marketing,
general and administrative expenses increased 225% to $2,025,000 from $624,000
for the nine months ended September 30, 1995.  The increases in the quarter
ended September 30, 1996 and in the nine month period then ended, compared to
the year earlier period were primarily the result of increases in sales and
administrative personnel, expanded marketing activities and occupancy related
costs.

Net interest income increased 212% to $265,000 for the three months ended
September 30, 1996 from $85,000 for the three months ended September 30, 1995.
For the nine months ended September 30, 1996 net interest income increased 59%
to $428,000 from $269,000 for the nine months ended September 30, 1995.  The
increases were attributable to the Company's initial public offering in June
1996 which increased the Company's average cash balances.

As a result of the items discussed above, net loss was $1,818,000 for the three
months ended September 30, 1996 and $5,115,000 for the nine months ended
September 30, 1996.  These compare to a net loss of $922,000 for the three
months ended September 30, 1995, and $2,074,000 for the nine months then ended.


LIQUIDITY AND CAPITAL RESOURCES

At September 30, 1996 the Company's cash, cash equivalents and available-for-
sale securities were $25,448,000, compared to $5,918,000 at December 31, 1995.
On June 7, 1996 the Company completed its initial public offering 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.

During the nine months ended September 30, 1996 and 1995, Fusion's operations
consumed cash of $4,394,000 and $1,698,000 respectively.  The changes in cash
used in operations were due primarily to funding increased levels of research
and development of RapiSeal and Fusion's liquids, including a multi-site
clinical trial in the United States, as well as increased marketing activities
and associated personnel


<PAGE>

costs.  The Company expects the increased use of cash will continue through the
end  of 1996 as it further increases its operations to reflect the sales and
marketing of RapiSeal and the continued expansion of research and development
activities.

Although Fusion believes that the proceeds from its initial public offering,
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 1997,
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, the receipt
of and the time required to obtain regulatory clearances and approvals for other
products or other uses of RapiSeal, 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

The following factors represent some of the current challenges to the Company
which create risk and uncertainty.  Failure to adequately overcome any of the
following challenges, either alone or in combination, could have a material
adverse effect on the Company's results of operations, business, or financial
position.

NEAR-TERM DEPENDENCE UPON RAPISEAL.  In June 1996, the Company received
clearance from the FDA to market the RapiSeal Patch for lung surgery, including
lung cancer and lung volume reduction ("LVR") surgeries.  The Company
anticipates that, for the foreseeable future, it will be substantially dependent
on the successful commercialization of this product.  The Company would
experience a material adverse effect on its business, financial condition and
results of operations if the RapiSeal Patch is not successfully commercialized.

RISKS ASSOCIATED WITH LVR.  To date, a statistically significant body of
clinical data does not currently exist from which to draw final conclusions
concerning the efficacy and long-term outcomes associated with the LVR
procedure, a significant target market for the Company.  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 for, 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>

UNCERTAINTY OF MARKET ACCEPTANCE.  The Company's success will be dependent upon
the medical community's active sponsorship and ultimate acceptance of the
RapiSeal Patch and the Fusion Liquids.  The Company is unable to predict how
quickly, if at all, its products will be accepted by the medical community or,
if accepted, the number of products that will be used.  Use of the Company's
products may 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 it's 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 and the
Fusion liquids to achieve significant clinical adoption would have a material
adverse effect on the Company's business, financial condition and results of
operations.

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 owns one issued United
States patent and has ten pending United States patent applications related to
its patch technology and has three pending United States patent applications
relating to potential liquid products.  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 the 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 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 operation.

UNCERTAINTY RELATING TO THIRD-PARTY REIMBURSEMENT.  In the United States, health
care providers that purchase medical devices, such as the RapiSeal Patch and the
Fusion Liquids, generally rely


<PAGE>

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 being used.  The Company's success will be
dependent, in part, upon its ability to obtain satisfactory third-party
reimbursement from health care payors for surgical procedures that may use
RapiSeal and the Fusion Liquids.  HCFA has suspended payment for, and is
reviewing the appropriate reimbursement, if any, for LVR.  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 additional reimbursement for the Company's products.
Regardless of the type of reimbursement system, the Company believes that
surgeon advocacy of the RapiSeal Patch and the Fusion Liquids 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.

LIMITED MANUFACTURING EXPERIENCE; SCALE-UP RISK.  The Company received a
manufacturing license from the CDHS and commenced shipment of RapiSeal for use
in its clinical trial in November 1995.  However, the Company has no experience
manufacturing RapiSeal or 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 in manufacturing  scale-
up 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 production
requirements for United States and international clinical trials and commercial
sales.

DEPENDENCE ON SINGLE SOURCE SUPPLIERS.  The Company acquires several components
of its products from single source suppliers.  Generally, the Company believes
that there are alternative suppliers of identical materials available, and that
the Company could substitute suppliers without any regulatory consequences from
this substitution.  However, there can be no assurance that such substitute
suppliers will be available, 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 1996.
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


<PAGE>

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 al.  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.

LIMITED SALES, MARKETING AND DISTRIBUTION EXPERIENCE.  The Company has 
recorded only minimal sales 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, although the 
Company has not entered into any such agreements or arrangements to date.  
There can be no assurance that the Company will be able to build a large 
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 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 sales 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.

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 and 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 and
products to prevent surgical adhesions.  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.

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


<PAGE>

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.

PART II: OTHER INFORMATION

ITEM 1   LEGAL PROCEEDINGS
         See the Company's report on Form 10-Q for the quarter ended June 30,
         1996 for a discussion of litigation filed in May 1996.  See Footnote 6
         "Contingencies" to the Financial Statements in this report.

ITEM 2.  CHANGES IN SECURITIES
         None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
         None.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
         None.

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: November 13, 1996             By:  /s/ Philip Sawyer
                                        -------------------------------
                                            Philip Sawyer
                                            President, Chief Executive Officer

Date: November 13, 1996             By:  /s/ Richard Spalding
                                        -------------------------------
                                            Richard Spalding
                                            Chief Financial Officer