<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 March 31, 2000

                                       OR
[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934
       For the transition period from ____________ to ____________


                        Commission File Number:  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)


                           34175 Ardenwood Boulevard
                               Fremont, CA  94555
                    (Address of principal executive offices)


                                 (510) 818-4600
              (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. Yes  [ X ] No [ ]


The number of outstanding shares of the registrant's Common Stock was 10,082,322
as of May 10, 2000.


This Report on Form 10-Q includes 20 of pages with the Index to Exhibits located
on page 19.
<PAGE>

                       FUSION MEDICAL TECHNOLOGIES, INC.

                                    INDEX TO
                              REPORT ON FORM 10-Q
                        FOR QUARTER ENDED MARCH 31, 2000


<TABLE>
<CAPTION>
                                                                                              Page
                                                                                           -----------

PART I.  FINANCIAL INFORMATION

Item 1.       Financial Statements:

<S>           <C>                                                                          <C>
              Condensed Consolidated Balance Sheets - March 31, 2000 (unaudited) and
              December 31, 1999.........................................................             3


              Condensed Consolidated Statements of Operations - Three Months Ended
              March 31, 2000 (unaudited) and 1999 (unaudited)...........................             4


              Statements of Condensed Consolidated Cash Flows - Three Months Ended
              March 31, 2000 (unaudited) and 1999 (unaudited)...........................             5


              Notes to Condensed Consolidated Financial Statements......................             6


Item 2.       Management's Discussion and Analysis of Financial Condition and Results
              of Operations.............................................................             9


Item 3.       Quantitative and Qualitative Disclosures About Market Risk................            18


PART II.  OTHER INFORMATION

Item 1.       Legal Proceedings.........................................................            19

Item 6.       Exhibits and Reports on Form 8-K..........................................            19

              Signatures................................................................            20

</TABLE>


                                       2
<PAGE>
PART I - FINANCIAL INFORMATION

I. FINANCIAL STATEMENTS


                       FUSION MEDICAL TECHNOLOGIES, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                (In thousands)

<TABLE>
<CAPTION>
                                                                                   March 31        December 31
                                                                                     2000             1999
                                                                                ------------      --------------
                                                                                 (Unaudited)
<S>                                                                             <C>               <C>
                                               ASSETS

Current assets:
       Cash and cash equivalents                                                 $  2,957            $  8,164
       Available-for-sale securities                                                5,203               3,818
       Accounts receivable                                                            349                 147
       Inventory                                                                      909                 582
       Prepaids and other current assets                                              132                 182
                                                                                 --------            --------
            Total current assets                                                    9,550              12,893


 Property and equipment, net                                                        1,363               1,038
 Available-for-sale securities, long term                                           1,189                 996
 Restricted cash deposit                                                            1,088               1,088
 Other long-term assets                                                               209                 201
                                                                                 --------            --------
            Total assets                                                         $ 13,399            $ 16,216
                                                                                 ========            ========

                             LIABILITIES AND STOCKHOLDERS' EQUITY

 Current liabilities                                                             $  1,503            $  1,343
 Long-term obligations                                                                 58                  87
                                                                                 --------            --------
              Total liabilities                                                     1,561               1,430
                                                                                 --------            --------
 Common stock and other equity                                                     52,531              52,343
 Accumulated deficit                                                              (40,693)            (37,557)
                                                                                 --------            --------
              Total stockholders' equity                                           11,838              14,786
                                                                                 --------            --------

              Total liabilities and stockholders' equity                         $ 13,399            $ 16,216
                                                                                 ========            ========
</TABLE>

  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.
<PAGE>
                        FUSION MEDICAL TECHNOLOGIES, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                   Three Months Ended
                                                                                     March 31
                                                                         ------------------------------------
                                                                             2000                 1999
                                                                         --------------        --------------
<S>                                                                      <C>                   <C>
Net revenues                                                               $        682          $         -
                                                                           ------------          -----------
Costs and expenses:
      Cost of sales and start-up manufacturing costs                              1,056                    -
      Research and development                                                    1,021                1,127
      Marketing and selling                                                         963                  280
      General and administrative                                                    942                  254
                                                                           ------------          -----------
           Total costs and expenses                                               3,982                1,661
                                                                           ------------          -----------
            Operating loss                                                       (3,300)              (1,661)

      Interest income                                                               170                   79
      Interest expense                                                               (5)                  (7)
      Other income (expense), net                                                    (1)                   7
                                                                           ------------          -----------
                Net loss                                                     $   (3,136)           $  (1,582)
                                                                           ============          ===========
Basic and diluted net loss per share                                         $    (0.31)           $   (0.22)
Shares used in computing basic and diluted net                             ============          ===========
      loss per share                                                             10,026                7,225
                                                                           ============          ===========
</TABLE>

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

<PAGE>
                        FUSION MEDICAL TECHNOLOGIES, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                      Three Months Ended
                                                                                            March 31
                                                                              -----------------------------------
                                                                                    2000                 1999
                                                                              ------------         --------------
<S>                                                                            <C>               <C>
Cash flows used for operating activities:
     Net loss                                                                  $    (3,136)       $      (1,582)
     Adjustments to reconcile net loss to net cash used in
          operating activities:
          Depreciation and amortization                                                113                   86
          Accretion of available-for-sale securities                                     -                    6
          Amortization of deferred compensation                                         87                   26
          Changes in assets and liabilities:
              Accounts receivable                                                     (202)                  (2)
              Inventories                                                             (327)                 (76)
              Prepaids and other current assets                                         50                 (312)
              Other assets                                                              (8)                  11
              Accounts payable                                                         195                   76
              Accrued expenses                                                         (34)                 (54)
                                                                               -----------        -------------
                Net cash used in operating activities                               (3,262)              (1,821)
                                                                               -----------        -------------
Cash flows from investing activities:
     Acquisition of property and equipment                                            (437)                (210)
     Purchases of available-for-sale securities                                     (4,576)                   -
     Sales and maturities of available-for-sale securities                           2,997                1,500
                                                                               -----------        -------------
                  Net cash (used in) provided by investing activities               (2,016)               1,290
                                                                               -----------        -------------

Cash flows from financing activities:
     Proceeds from issuance of common stock, net of issuance costs                     (27)                   -
     Proceeds from exercise of common stock options                                    127                   69
     Repayment of notes payable                                                        (29)                 (29)
                                                                               -----------        -------------
                  Net cash provided by financing activities                             71                   40
                                                                               -----------        -------------
Net decrease in cash and cash equivalents                                           (5,207)                (491)
Cash and cash equivalents, beginning of period                                       8,164                4,151
                                                                               -----------        -------------
Cash and cash equivalents, end of period                                       $     2,957        $      3,660
                                                                               ===========        =============

Supplemental disclosure of cash flow information:
     Cash paid for interest                                                    $         5        $          7
                                                                               ===========        ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>

                       FUSION MEDICAL TECHNOLOGIES, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2000
                                  (Unaudited)


1.  Basis of presentation

The accompanying condensed consolidated 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
condensed consolidated balance sheet as of March 31, 2000, and the condensed
consolidated statements of operations for the three month periods ended March
31, 2000 and 1999, and the condensed consolidated statements of cash flows for
the three month periods ended March 31, 2000 and 1999 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 consolidated operating results and cash flows for those periods.
Although the Company believes that the disclosures in these condensed
consolidated 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 condensed
consolidated 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, 1999.

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

Basic and diluted loss per common share are computed using the weighted average
number of shares of common stock outstanding.  Common equivalent shares from
stock options and warrants are excluded from the computation of diluted net loss
per common share as their effect is anti-dilutive.  Stock options to purchase
2,334,765 and 1,106,013 shares of common stock at prices ranging from $0.16 to
$17.63 per share were outstanding at March 31, 2000 and 1999, respectively, but
were not included in the computation of diluted income per share because they
were anti-dilutive.  At March 31, 2000 and 1999 there were warrants outstanding
to purchase 12,785 shares of common stock at an exercise price of $4.00.  These
warrants have been excluded from the computation of diluted loss per common
share because they were antidilutive.


3.  Cash, 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.


                                       6
<PAGE>

                       FUSION MEDICAL TECHNOLOGIES, INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 March 31, 2000
                                  (Unaudited)


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 are recorded as a separate component of equity until realized.
Interest income is recorded using an effective interest rate, with associated
premium or discount amortized to interest income.  The cost of securities sold
is based upon the specific identification method.


4.  Inventory

Inventory is recorded at the lower of cost or market using the FIFO method.
Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                         March 31   December 31
                           2000          1999
                          -----         -----
<S>                    <C>        <C>
  Finished goods          $ 138         $ 195
  Work in process           280           150
  Raw materials             491           237
                          -----         -----
                          $ 909         $ 582
                          =====         =====

</TABLE>
5.  Debt

In December 1997, we signed an agreement for a bank loan facility to finance
equipment up to a total of $3,500,000. Available credit under this facility, as
amended, expired in February 1998.  The facility is secured by the equipment
financed. The loan balance is subject to a floating interest rate equal to the
bank's prime rate plus 1.5% per annum (10.25% at March 31, 2000).  As of March
31, 2000, we had drawn down $175,000 on the loan facility. In connection with
this loan facility, we issued a warrant to purchase 4,500 shares of common stock
at an exercise price of $4.00 per share. This warrant expires in December 2002.
These facilities are subject to specific positive and negative covenants that
include restrictions on the declaration or payment of any dividend or any other
distribution on any of its capital stock. The Company was in compliance with
those covenants at March 31, 2000.


6.  Segment Reporting

The Company operates in one reportable segment; surgical sealants and topical
hemostat products.



7.  Recent Accounting Pronouncements

In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for derivative instruments and
hedging activities.  It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those


                                       7
<PAGE>

                       FUSION MEDICAL TECHNOLOGIES, INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 March 31, 2000
                                  (Unaudited)



instruments at fair value.  In July 1999, the FASB issued Statement of Financial
Accounting Standards No. 137 "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133" ("SFAS
137").  SFAS 137 deferred the effective date of SFAS 133 until the first fiscal
year beginning after June 15, 2000.  The Company, to date, has not engaged in
derivative and hedging activities.  The Company will adopt SFAS No. 133 as
required for its first quarterly filing of calendar year 2001.


8.   Subsequent Event

On April 17, the Company accepted a commitment from Transamerica Business Credit
Corporation - Technology Finance Division to finance up to a total of $3,000,000
toward production equipment, research & development equipment, computer
equipment and office furnishings.  A maximum of $900,000 of this total can be
used to finance tenant improvements.  Each loan term commences upon delivery of
the equipment having an aggregate cost of $75,000 or more and will continue for
48 months.  The interest rate is variable and based on 4-year U.S. Treasury
Securities plus 700 basis points.  The interest rate becomes fixed at the
commencement of each loan for the complete term.  A balloon payment of 10% of
the original principal amount of each loan is due at the end of each loan term.
Draw down capability under this facility will expire on December 31, 2000.


                                       8
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS


This Report on Form 10-Q contains, in addition to historical information,
forward-looking statements that 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
"Business - Additional Factors Tha Might Affect Future Results" commencing on
page 15 and those set forth under Item 1 in the Company's Annual Report filed on
Form 10-K for the Year Ended December 31, 1999.


OVERVIEW

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

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

         We have reported $682,000 in revenue for the first quarter of 2000 and
no revenue for the first quarter of 1999.  Revenues are projected to increase.
We also anticipate, however, incurring increased expenses relating to FloSeal
sales and marketing, research and development, manufacturing and general and
administrative expenses.  We have not achieved, nor do we expect to achieve,
profitability before 2001.

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

     We have been expanding our manufacturing capacity in order to be able to
meet the anticipated product supply requirements for commercial sale of FloSeal.
In November 1999, we entered into a lease


                                       9
<PAGE>

ITEM 2.   MANAGEMENT'S DICUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS (CONTINUED)


for a 72,500 square foot building in Fremont, California. In conjunction with
this new facility, we anticipate spending a total of approximately $2.2 million
for the purchase of equipment for production, research and development and
office furnishings and equipment.

     As of March 31, 2000, we had an accumulated deficit of $40.7 million.
Operating losses are expected to continue at least through 2001.


RESULTS OF OPERATIONS

Three Months Ended March 31, 2000 and 1999
------------------------------------------


NET REVENUES

          We recorded revenues of $682,000 and none for the three months ended
March 31, 2000 and 1999 respectively.  We commenced selling FloSeal in the U.S.
in December 1999.  Due to the Company's exit of the RapiSeal Patch business and
focus on the development of, FloSeal, the Company had no revenues in the same
three months ended March 31, 1999.

COST OF SALES AND START-UP MANUFACTURING COSTS

          We recorded cost of sales and start up manufacturing costs of
$1,056,000 and none for the three months ended March 31, 2000 and 1999
respectively.  The increase was due to the start-up of production related to the
commercial sales of FloSeal.  In the three months ended March 31, 1999, all
manufacturing related costs were recorded as research and development expenses.
We anticipate that cost of sales and start-up manufacturing costs will increase
in future periods in connection with the continued commercial launch of FloSeal.

RESEARCH AND DEVELOPMENT

          Research and development expenses decreased 9% to $1,021,000 in the
three months ended March 31, 2000 compared to $1,127,000 in the three months
ended March 31, 1999.  The decrease for the first quarter of 2000 is
attributable to reduced development expenses related to clinical and preclinical
activities for development of FloSeal and start-up manufacturing expenses being
recorded as product cost. For the full fiscal year 2000, the Company believes
research and development expenses are likely to exceed those of 1999 as the
Company devotes more resources to the support of new products based on the
FloSeal technology.

MARKETING AND SELLING

          Marketing and selling expenses increased 244% to $963,000 in the three
months ended March 31, 2000, compared to $280,000 for the three months ended
March 31, 1999. The increase for the first quarter of calendar year 2000,
compared to the year earlier period, was primarily the result of increases in
expenses associated with sales and marketing efforts to establish a direct sales
force and marketing efforts to launch FloSeal in the U.S. and Europe.  We
anticipate that sales and marketing expenditures will increase in future periods
in connection with the continued commercial launch of FloSeal.


GENERAL AND ADMINISTRATIVE

                                      10
<PAGE>

ITEM 2.   MANAGEMENT'S DICUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS (CONTINUED)


      General and administrative expenses increased 271% for the three months
ended March 31, 2000 to $942,000 for the three months ended March 31, 2000,
compared to $254,000 for the three months ended March 31, 1999.  The increase
was primarily attributable to addition of our new Fremont headquarters that
incurred rent expense for the three months ended March 31, 2000 and an increase
in expenses in preparation for and following the approval of FloSeal.   The
Fremont facility remained unoccupied during construction improvements.
Occupancy by management, sales and marketing, administrative and limited
research personnel began on April 3, 2000.  Additional personnel, including some
manufacturing activities, are anticipated to move to Fremont in the third
quarter 2000. We anticipate that general and administrative expenditures will
increase in future periods.

INTEREST INCOME

          Interest income increased 115% to $170,000 for the three months ended
March 31, 2000 compared to $79,000 for the three months ended March 31, 1999.
The increase was attributable primarily to the increase balance of the Company's
cash, cash equivalents and available-for-sale securities resulting from an April
1999 follow-on public offering and a November 1999 private placement financing.

NET LOSS

          As a net result of the items discussed above, net loss was $3,136,000
for the three months ended March 31, 2000 as compared to the net loss of
$1,582,000 for the three months ended March 31, 1999.


LIQUIDITY AND CAPITAL RESOURCES

          At March 31, 2000, the Company's cash, cash equivalents and available-
for-sale securities, including long-term portion, were $9,349,000 compared to
$12,978,000 at December 31, 1999.

          For the three months ended March 31, 2000 and 1999 the Company's
operations consumed cash of $3,262,000 and $1,821,000, respectively.  The
increase in cash consumed by operations was due primarily to the increase in the
net loss of operations as well as an increase in accounts receivable and
inventories.  The Company expects the use of cash in operating activities to
continue to increase through calendar year 2000 and into 2001 as it continues to
devote resources to the commercialization of FloSeal and develops other products
based on the FloSeal technology.

          In December 1997, we signed an agreement for a bank loan facility to
finance equipment up to a total of $3,500,000. Available credit under this
facility, as amended, expired in February 1998.  The facility is secured by the
equipment financed. The loan balance is subject to a floating interest rate
equal to the bank's prime rate plus 1.5% per annum (10.25% at March 31, 2000).
As of March 31, 2000, we had drawn down $175,000 on the loan facility. In
connection with this loan facility, we issued a warrant to purchase 4,500 shares
of common stock at an exercise price of $4.00 per share. This warrant expires in
December 2002. These facilities are subject to specific positive and negative
covenants that include restrictions on the declaration or payment of any
dividend or any other distribution on any of its capital stock. The Company was
in compliance with those covenants at March 31, 2000.

          In April 2000, we accepted a commitment from Transamerica Business
Credit Corporation - Technology Finance Division to finance up to a total of
$3,000,000 toward production equipment,


                                      11
<PAGE>

ITEM 2.   MANAGEMENT'S DICUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS (CONTINUED)


research & development equipment, computer equipment and office furnishings. A
maximum of $900,000 of this total can be used to finance tenant improvements.
Each loan term commences upon delivery of the equipment having an aggregate cost
of $75,000 or more and will continue for 48 months. The interest rate is
variable and based on 4-year U.S. Treasury Securities plus 700 basis points. The
interest rate becomes fixed at the commencement of each loan for the complete
term. A balloon payment of 10% of the original principal amount of each loan is
due at the end of each loan term. Draw down capability under this facility will
expire on December 31, 2000.

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


Recent Accounting Pronouncements

          In March 2000, the Financial Accounting Standards Board ("FASB")
issued FIN44 "Accounting for Certain Transactions Involving Stock Compensation -
an interpretation of APB25" which is effective July 1, 2000.  The Company does
not expect FIN44 will have a material impact on its financial statements.



ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS

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

WE DID NOT GENERATE ANY REVENUES IN 1998 AND ONLY MODEST REVENUES IN 1999
AND IN THE FIRST QUARTER OF 2000. WE HAVE A HISTORY OF LOSSES AND WE
EXPECT LOSSES TO CONTINUE IN THE FUTURE.

We did not generate any revenues in 1998, $254,000 in revenues in 1999 and
$682,000 in the first quarter of 2000.  We have a history of losses and we
expect losses to continue in the future. We have not achieved, nor do we expect
to achieve, profitability before 2001.  We incurred net losses of $8.3 million,
$7.7 million and $10.0 million for the years ended December 31, 1999, 1998 and
1997, respectively.  As of March 31, 2000, we had an accumulated deficit of
$40.7 million.  We have not had significant revenues in any period since our
inception.  We expect to increase our operating expenses in the near future,
including sales and marketing, manufacturing and research and development
expenses, as we continue U.S. commercialization of FloSeal and continue
development of our other products.  As a result, we will need to generate
significant revenues to achieve and maintain profitability.  The amount of
future net losses and the time required to achieve profitability are highly
uncertain.  If we do achieve profitability in any period, we cannot be certain
that we will sustain or increase such profitability on a quarterly or annual
basis.

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

We are dependent upon the success of our lead product, FloSeal. We received the
necessary regulatory approval for the commercial sale of FloSeal in the United
States on December 8, 1999. We received the European CE mark on April 20, 1999
and have begun to export FloSeal to Europe.  Our success after regulatory
approval, if any, will depend on the medical community's acceptance of FloSeal
and our ability to successfully scale up commercial manufacturing and develop an
effective sales, marketing and distribution capability.  We cannot predict how
quickly,


                                      12
<PAGE>

ITEM 2.   MANAGEMENT'S DICUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS (CONTINUED)


if at all, the medical community will accept FloSeal, or if accepted, the extent
of its use. A surgeon's use of FloSeal will require the surgeon to change from
his or her usage of more familiar currently available products. For FloSeal to
achieve market acceptance, it will have to be priced competitively and offer
clinically significant advantages over other commercially available products.
Even if the market generally accepts FloSeal, surgeons may choose to use it in
fewer procedures than projected. If FloSeal does not achieve significant market
adoption, our business will be materially and adversely affected.

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

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

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

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

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

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

 .   partnering relationships with larger medical device companies,

 .   bank facilities, or

 .   debt or additional equity offerings.

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

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

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


                                      13
<PAGE>

ITEM 2.   MANAGEMENT'S DICUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS (CONTINUED)


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

We are also required to maintain compliance with the good manufacturing practice
requirements for medical devices incorporated into the FDA's Quality System
Regulation  ("QSR") following approval of FloSeal The QSR is similar to good
manufacturing practices and relate to product testing and quality assurance,  as
well as the  maintenance  of records and  documentation.  The FDA enforces the
QSR through periodic post-approval  inspections.  We can provide no assurance we
will be able to maintain  compliance on an ongoing basis.  If we or any third
party manufacturer of our products does not conform to the QSR and cannot be
brought up to such a standard, we will be required to find alternative
manufacturers that do conform. This may be a long and difficult process. Those
manufacturers must be approved by the FDA before they can commercially
manufacture our products. We may have to incur significant costs to comply with
such laws and regulations and our failure to comply with them could lead to
penalties that could have a material and adverse affect on our business.

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

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

IF WE FAIL TO MAINTAIN REGULATORY APPROVAL OF FLOSEAL, OUR BUSINESS WILL SUFFER.

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

     .   product changes or modifications,

     .   product manufacturing,

     .   Quality System requirements,

     .   Medical Device Reporting regulations,

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

     .   product sales and distribution.

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

     .   detain or seize our products,

     .   issue a recall,

     .   enjoin future violations, and

     .   assess civil and criminal penalties against us.

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


                                      14
<PAGE>

ITEM 2.   MANAGEMENT'S DICUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS (CONTINUED)


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

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

     .   our own direct sales force,

     .   distribution agreements,

     .   collaborative arrangements with corporate strategic partners.

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

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

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

     .   greater name recognition,

     .   broader product lines,

     .   greater distribution capabilities,

     .   substantially greater capital resources, and

     .   larger marketing, research and development staffs and facilities.

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

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

We regard elements of FloSeal as proprietary and we attempt to protect them
through patent and trade secret laws and restrictions, as well as licenses and
contractual confidentiality provisions.  Any steps we take to protect our
intellectual property may be inadequate and expensive.  Despite our efforts, we
may be unable to prevent third parties from infringing upon or misappropriating
our intellectual property. We have two issued U.S. patents and four pending U.S.
patent applications relating to FloSeal.  We also have ten issued U.S. patents
and three pending U.S. patent applications relating to other products under
development and other technologies invented by our research department.  We also
have two corresponding international patent applications filed under the Patent
Cooperation


                                      15
<PAGE>

ITEM 2.   MANAGEMENT'S DICUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS (CONTINUED)

Treaty and may file additional patent applications outside the
United States at a later date.  Obtaining foreign patents may be more difficult
than obtaining U.S. patents because of differences in patent laws.  Protection
provided by foreign patents, if obtained, and any other foreign intellectual
property protection may be weaker than provided domestically.  Any existing or
new patent applications, domestic or international, may not result in:

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

     .   the issuance of any patents, or

     .   any competitive advantage.

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

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

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

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

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

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

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

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

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

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


                                      16
<PAGE>

ITEM 2.   MANAGEMENT'S DICUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS (CONTINUED)


     .   capacity constraints,

     .   production yields,

     .   quality control, and

     .   shortages of qualified personnel.

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

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

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

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

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

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

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

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


                                      17
<PAGE>

ITEM 2.   MANAGEMENT'S DICUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS (CONTINUED)

We face an inherent business risk of product liability claims in the event the
use or misuse of our products results in personal injury or death. We have not
experienced any such claims to date, but we cannot be certain, in particular
after commercial introduction of our products, that we will not experience
losses due to product liability claims.  We currently maintain liability
insurance with combined coverage limits of $3.0 million on a claims-made basis.
We cannot be certain that the insurance policies' coverage limits are adequate.
The insurance is expensive, difficult to obtain and may not be available in the
future on acceptable terms, or at all. Any claims against us, regardless of
their merit, could materially and adversely affect our business.

EARTHQUAKE DANGER.

The Company's corporate headquarters, including its manufacturing, research and
development, sales and marketing and administrative activities are located near
major earthquake fault lines.  The Company could be materially adversely
affected in the event of a major earthquake.

YEAR 2000 COMPLIANCE.

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

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

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

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

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     No significant change has occurred since the filing by the Registrant on
Form 10-K for the year ended December 31, 1999. Reference is made to Part II,
Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our
Annual Report on Form 10-K for the year ended December 31, 1999.  The average
interest rate for our available-for-sale securities, as of March 31, 2000 was
6.05% compared to 6.28% reported in the Form 10-K for the year ended December
31, 1999.  The average interest rate for our cash and cash equivalents as of
March 31, 2000 was 6.06% compared to 5.88% reported in the Form 10-K for the
year ended December 31, 1999.  No other material changes have occurred since the
filing by the Registrant on Form 10-K for the year ended December 31, 1999.

Fusion Medical Technologies Inc. and RapiSeal are registered trademarks of
Fusion Medical Technologies, Inc. FloSeal Matrix and FloSeal are trademarks of
Fusion Medical Technologies, Inc.

                                       18
<PAGE>

PART II-OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

          None.



ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K


    (a)  Exhibits.
         ---------

               Exhibit
               -------
               Number                           Description
               --------         ---------------------------------------------
                 27.1           Financial Data Schedule.


    (b) Reports on Form 8-K. The Company did not file any Reports on Form 8-K
        -------------------
        during the quarter ended March 31, 2000.




                                      19
<PAGE>

                                   SIGNATURES


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:  May 15, 2000              By: /s/  LARRY J. STRAUSS
                                     ---------------------------
                                                 Larry J. Strauss

                                          Vice President, Finance and
                                            Chief Financial Officer
                                         (Chief Accounting Officer and Duly
                                          Authorized Officer of the Registrant)



                                      20