<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, 1998

       OR

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

                    Commission File Number:  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)


                           1615 Plymouth Street
                         Mountain View, CA  94043
                 (Address of principal executive offices)


                              (650) 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. Yes  [ X ] No [    ]


Indicate by check mark whether the registrant has filed all documents and 
reports required by Section 12, 13, or 15(d) of the Securities Exchange Act 
of 1934 subsequent to the distribution of the securities under a plan 
confirmed by the Court.  Yes [ X ] No [   ]

The number of outstanding shares of the registrant's Common Stock was 
7,173,616 as of October 31, 1998.




This Report on Form 10-Q includes 18 of pages with the Index to Exhibits 
located on page 16.

<PAGE>   1



                     FUSION MEDICAL TECHNOLOGIES, INC.

                                  INDEX TO
                            REPORT ON FORM 10-Q
                    FOR QUARTER ENDED SEPTEMBER 30, 1998

<TABLE>
<CAPTION>

                                                                       Page
                                                                       ----
<S>                                                                    <C>
                      PART I.   FINANCIAL INFORMATION

Item 1.   Financial Statements:

          Condensed Balance Sheets - September 30, 1998 (unaudited)
           and December 31, 1997.....................................    3

          Condensed Statements of Operations - Three Months and
           Nine Months ended September 30, 1998 (unaudited)
           and 1997 (unaudited)......................................    4

          Statements of Cash Flows - Nine Months ended September
           30, 1998 (unaudited) and 1997 (unaudited).................    5

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


Item 2.   Management's Discussion and Analysis of Financial
           Condition and Results of Operations.......................    8



                      PART II.   OTHER INFORMATION


Item 2.   Changes in Securities......................................    16

Item 6.   Exhibits and Reports on Form 8-K...........................    16


          Signature..................................................    17

</TABLE>
                                       2

<PAGE>   2



                      FUSION MEDICAL TECHNOLOGIES, INC.

                          CONDENSED BALANCE SHEETS
                               (in thousands)
<TABLE>
<CAPTION>

                                                September 30,  December 31,
                                                    1998           1997 (1)
                                                -------------  ------------
                                                 (unaudited)

ASSETS

<S>                                              <C>            <C>
Current assets:

  Cash and cash equivalents                       $   5,870      $   7,473
  Available-for-sale-securities                       3,030          5,465 
  Other assets                                          169            228 
                                                  ---------      ---------

    Total current assets                              9,069         13,166 

Long term assets                                         54          1,565
Property and equipment, net                             737            809 
                                                  ---------      ---------

    Total assets                                  $   9,860      $  15,540 
                                                  =========      =========


LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities                               $   1,290      $   1,316 
Long-term obligations                                   234              -
                                                  ---------      ---------

    Total liabilities                                 1,524          1,316
                                                  ---------      ---------

Common stock and other equity                        36,001         35,769 
Accumulated deficit                                 (27,665)       (21,545)
                                                  ---------      ---------

    Total stockholders' equity                        8,336         14,224 
                                                  ---------      ---------

Total liabilities and stockholders' equity        $   9,860      $  15,540 
                                                  =========      =========
</TABLE>


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

(1)   Data extracted from audited financial statements dated December 31, 
      1997 of Fusion Medical Technologies, Inc.

                                       3

<PAGE>   3



                      FUSION MEDICAL TECHNOLOGIES, INC.

                     CONDENSED STATEMENTS OF OPERATIONS
                  (in thousands except per share amounts)
                                (unaudited)
<TABLE>
<CAPTION>

                                    Three Months Ended  Nine Months Ended
                                      September  30,      September  30, 
                                    ------------------  ------------------
                                      1998      1997      1998      1997   
                                    --------  --------  --------  -------- 

<S>                                <C>       <C>       <C>       <C>
Net Sales                                     $     66            $    144 
                                              --------            --------

Costs and expenses:

  Cost of goods                                    194                 576 
  Research and development          $  1,654     1,441  $  4,875     4,024 
  Marketing, general and 
    administrative                       474     1,109     1,671     3,395 
                                    --------  --------  --------  --------

      Total costs and expenses         2,128     2,744     6,546     7,995 
                                    --------  --------  --------  --------
      Operating loss                  (2,128)   (2,678)   (6,546)   (7,851)

Interest income                          156       282       485       912
Interest expense                       (   6)       (3)    (  59)      (34)
                                    --------  --------  --------  --------

      Net loss                      $ (1,978) $ (2,399) $ (6,120) $ (6,973)
                                    ========  ========  ========  ========

Net loss per share - basic and 
  diluted                           $  (0.28) $  (0.34) $  (0.86) $  (0.99)
                                    ========  ========  ========  ========

Shares used in computing net loss
  per share - basic and diluted        7,172     7,066     7,157     7,052 
                                    ========  ========  ========  ========
</TABLE>

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

                                       4

<PAGE>   4



                     FUSION MEDICAL TECHNOLOGIES, INC.

                         STATEMENTS OF CASH FLOWS
                              (in thousands)
                               (unaudited)
<TABLE>
<CAPTION>
                                                         Nine Months Ended
                                                           September 30,  
                                                        ------------------
                                                          1998      1997  
                                                        --------  --------
<S>                                                    <C>       <C>
Cash flows used for operating activities:
 Net loss                                               $ (6,120) $ (6,973)
 Adjustments to reconcile net loss to net cash used
  in operating activities:
  Depreciation and amortization                              219       339
  Accretion of available-for-sale securities                  29       128
  Amortization of deferred compensation                      125       285
  Change in assets and liabilities:
   Accounts receivable                                        21       (58)
   Inventories                                                 -       (17)
   Prepaids and other current assets                         (17)      196
   Other assets                                               46         -
   Accounts payable                                          (21)     (348)
   Accrued expenses                                          (79)      242
                                                        --------  --------
  Net cash used in operating activities                   (5,797)   (6,206)
                                                        --------  --------

Cash flows from investing activities:
 Acquisition of property and equipment                      (147)     (415)
 Purchases of available-for-sale securities               (2,025)   (5,055)
 Sales of available-for-sale securities                    5,952    11,783 
                                                        --------  --------
  Net cash provided by investing activities                3,780     6,313 
                                                        --------  --------

Cash flows from financing activities:
 Proceeds from issuance of note payable                      408         -
 Proceeds from issuance of shareholder note receivable        54         -
 Accrued interest from shareholder notes receivable                     (4)
 Repayment of notes payable                                 (101)     (111)
 Proceeds from issuance of common stock                       53       111
                                                        --------  --------
  Net cash provided by (used in) financing activities        414        (4)
                                                        --------  --------

Net increase (decrease) in cash and cash equivalents      (1,603)      103
Cash and cash equivalents, beginning of period             7,473    10,778
                                                        --------  --------

Cash and cash equivalents, end of period                $  5,870  $ 10,881
                                                        ========  ========

Supplemental disclosure of cash flow information:
   Cash paid for interest                               $     80  $      -
                                                        ========  ========
</TABLE>

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

                                       5
<PAGE>   5


                       FUSION MEDICAL TECHNOLOGIES, INC.

                    NOTES TO CONDENSED FINANCIAL STATEMENTS
                               September 30, 1998
                                  (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, 1998, and the 
statements of operations for the three and nine months ended September 30, 
1998 and 1997, and the statements of cash flows for the nine month periods 
ended September 30, 1998 and 1997 are unaudited but include all adjustments 
(consisting of normal recurring adjustments) which the Company considers 
necessary for a fair presentation of the financial position at such dates 
and the operating results and cash flows for those periods.  Although the 
Company believes that the disclosures in these financial statements are 
adequate to make the information presented not misleading, certain 
information normally included in financial statements and related footnotes 
prepared in accordance with generally accepted accounting principles have 
been condensed or omitted pursuant to the rules and regulations of the 
Securities and Exchange Commission.  The accompanying financial statements 
should be read in conjunction with the financial statements as contained in 
the Company's Annual Report on Form 10-K for the year ended December 31, 
1997.

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


2.    Net loss per share

The Company adopted SFAS No. 128 "Earnings Per Share" and the Securities 
and Exchange Commission Staff Accounting Bulletin No. 98 ("SAB No. 98") 
effective December 31, 1997; accordingly, all prior periods have been 
restated.  Basic and diluted loss per common share are computed using the 
weighted average number of shares of common stock outstanding.  Common 
equivalent shares from stock options are excluded from the computation of 
diluted net loss per common share as their effect is antidilutive.  No 
additional shares are considered to be outstanding for either computation 
under the provisions of SAB No. 98.  Stock options to purchase 1,252,469 
and 997,872 shares of common stock at prices ranging from $0.16 to $11.50 
per share were outstanding at September 30, 1998 and 1997, respectively, 
but were not included in the computation of diluted income per 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.

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.

                                       6

<PAGE>   6

                       FUSION MEDICAL TECHNOLOGIES, INC.

                    NOTES TO CONDENSED FINANCIAL STATEMENTS
                               September 30, 1998
                                  (Unaudited)


4.  Debt

In December 1997, the Company signed an agreement with Imperial Bank for a 
loan facility to finance existing equipment and future equipment purchases 
up to a total of $2,500,000.  Subject to certain terms and conditions, the 
facility finances a percentage of the invoice cost of existing equipment 
and all of the invoice cost of future equipment purchases. The equipment 
purchased serves as collateral.  As of September 30, 1998, the Company has 
an outstanding balance of  $350,000.  The current interest rate on the note 
is 10%.  The note is scheduled to be retired in October, 2001.


5.  Comprehensive Income

Effective March 31, 1998, the Company adopted Statement of Financial 
Accounting Standards ("SFAS) No. 130, "Reporting Comprehensive Income", 
which establishes standards for the reporting and display of comprehensive 
income and its components in a full set of general-purpose financial 
statements.  Comprehensive income is defined as the change in equity of a 
business enterprise during a period from transactions and other events and 
circumstances from non-owner sources.  As the components of comprehensive 
income are not material, the Company has not reflected the additional 
reporting and display provisions of SFAS 130 in the accompanying financial 
statements. 


6.  Effect Of Changes In Accounting Principles 

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, 
"Disclosures about Segments of an Enterprise and Related Information," 
which establishes annual and interim reporting standards for an 
enterprise's business segments and related disclosures about its products, 
services, geographic areas and major customers. Adoption of this statement 
will not impact the Company's consolidated financial position, results of 
operations or cash flows. The Company will adopt this statement in its 
financial statements for the year ending December 31, 1998.

                                       7
<PAGE>   7


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 "Additional Factors That Might Affect Future Results" 
commencing on page 10 and those set forth under Item 1 in the Company's 
Annual Report filed on 10K.  Certain sections in this report have been 
identified as containing forward-looking statements (designated by an *).  
The reader is cautioned that other sections not so identified may also 
contain forward-looking statements.

OVERVIEW

Since its inception in October 1992, Fusion has been committed to 
developing and commercializing innovative biomaterials for treating 
surgical wounds. As of September 30, 1998, the Company had an accumulated 
deficit of approximately $27,665,000 million.  Operating losses are 
expected to continue at least through 2000 as the Company continues to fund 
early research, product development, clinical trials, regulatory 
submissions, and related administrative and support services. 

The Company started clinical trials in the United States under an IDE in 
1998 at ten medical centers in the areas of cardiac, vascular, and spinal 
surgery.  At the end of September 1998, over 80% of the 300 patients in the 
study, have been enrolled.

In addition, the Company has been engaged in research to expand the 
potential applications of FloSeal.  The Company has demonstrated in pre-
clinical models that FloSeal is effective for sealing vascular access 
sites, especially in the femoral artery.  The Company is now in the process 
of developing a specialized applicator for use with FloSeal in this 
indication.  A patent has been filed, and prototypes are currently being 
tested in pre-clinical models.

Future revenues, if any, and the results of operations may fluctuate 
significantly from quarter to quarter and will depend upon, among other 
factors, the speed with which the Company's product or products proceed 
through clinical trials and the preparation of related regulatory 
submissions, the speed with which regulatory agencies review and 
potentially clear the Company's products, the rate at which the Company or 
its corporate partners for distribution establish product distribution 
networks and mobilize the available sales forces, the rate at which the 
Company's products gain market acceptance, the timing and impact of the 
introduction of competitive products for surgical sealant functions, the 
regulation and setting of relevant reimbursement levels and other factors 
relating to the commercialization of medical products.


RESULTS OF OPERATIONS


Three and Nine Months Ended September 30, 1998 and 1997

NET SALES

Due to the Company's exit of the RapiSeal Patch business in December 1997, 
the Company had no revenues in the three and nine months ended September 
30, 1998 as compared to $66,000 and $144,000 in revenues for the three and 
nine months ended September 30, 1997, respectively. 

                                       8
<PAGE>   8

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


RESEARCH AND DEVELOPMENT

Research and development expenses increased 15% to $1,654,000 in the three 
months ended September 30, 1998 compared to $1,441,000 in the three months 
ended September 30, 1997.  For the nine months ended September 30, 1998, 
research and development expenses increased 21% to $4,875,000 as compared 
to expenses of $4,024,000 for the nine months ended September 30, 1997.  
The increase for the third quarter and the nine months ended September 30, 
1998 is attributable to expenses related to clinical and preclinical 
activities necessary to support ongoing product development activities for 
FloSeal.  In 1998, research and development expenses are expected to be 
higher than those of 1997 as the Company supports its clinical trials and 
prepares FloSeal for market introduction *.

MARKETING, GENERAL AND ADMINISTRATIVE

Marketing, general and administrative expenses decreased 57% to $474,000 in 
the three months ended September 30, 1998, compared to $1,109,000 for the 
three months ended September 30, 1997. For the nine months ended September 
30, 1998 marketing, general and administrative expenses decreased 51% to 
$1,671,000 as compared to $3,395,000 for the nine months ended September 
30, 1997.  The decrease for the third quarter, compared to the year earlier 
period, and the nine months ended September 30, 1998 compared to the nine 
months ended September 30, 1997, was primarily the result of decreases in 
sales and administrative personnel. 

INTEREST INCOME

Interest income decreased 45% to $156,000 for the three months ended 
September 30, 1998 compared to $282,000 for the three months ended 
September 30, 1997 and by 47% to $485,000 in the first nine months of 1998 
from $912,000 in the first nine months of 1997.  The decrease was 
attributable primarily to the declining balance of the Company's investment 
portfolio.

INTEREST EXPENSE

Interest expense increased 200% to $6,000 for the three months ended 
September 30, 1998 compared to $3,000 for the three months ended September 
30, 1997 and by 74% to $59,000 for the first nine months of 1998 from 
$34,000 for the first nine months of 1997.  The increase was attributable 
to the financing of the Company's Directors and Officers insurance and the 
expense on the loan facility agreement that the Company agreed to in 
December of 1997.

NET LOSS

As a net result of the items discussed above, net loss was $1,978,000 for 
the three months ended September 30, 1998.  This is an improvement of 18% 
or $421,000 over the net loss of $2,399,000 for the three months ended 
September 30,1997. The net loss for the nine months ended September 30, 
1998 was $6,120,000.  This is an improvement of 12% or $853,000 over the 
net loss of $6,973,000 for the nine months ended September 30, 1997.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 1998, the Company's cash, cash equivalents and available-
for-sale securities were $8,900,000 compared to $14,460,000 at December 31, 
1997. 

For the nine months ended September 30, 1998 and 1997 the Company's 
operations consumed cash of $5,797,000 and $6,206,000, respectively.  The 
decrease in cash consumed by operations was due primarily to a decrease in 
personnel costs, and a reduction in overall administrative spending. 

                                       9
<PAGE>   9

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


Although Fusion believes that current cash balances, augmented by 
investment income, and the balance of its loan facility (the balance 
available for use is $2,150,000) will be sufficient to meet the Company's 
operating and capital requirements at least until 2000, the Company may 
decide to seek additional financing within this time frame *.  After 
lengthy discussions with the U.S. Food and Drug Administration (FDA), the 
Company has determined that FloSeal will follow the Pre-Market Approval 
(PMA) regulatory pathway *.  A PMA is a lengthy and expensive process.  
Thus, the PMA determination will significantly increase the cash required 
before commercialization of FloSeal, in comparison to a 510(k) *.  Fusion's 
future liquidity and capital requirements will depend on numerous factors, 
including the cost and time to conduct clinical trials, the receipt of and 
the time required to obtain regulatory clearances and approvals for 
FloSeal, the resources the Company devotes to developing, manufacturing and 
marketing its products and other factors.  There can be no assurance that 
additional financing, if required, will be available on satisfactory terms 
or at all.  Any additional equity financing may be dilutive to 
stockholders, and debt financing, if available, may include restrictive 
covenants.

ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS

Technology and Development Risk.  To be successful, the Company's products 
under development including FloSeal, must act effectively in humans in 
comparison to current standard of care control products.  The physiological 
processes, which must be favorably altered, are very complex.  The effects 
that these products seek to provide are very difficult to achieve and are 
dependent upon many independent and interacting variables, which are not 
fully understood.  The products must be effective in treating the 
substantial variations involved from patient to patient, as well as with 
regard to the differing techniques and procedures employed by surgeons.  
The technologies related to these potential products are evolving and are 
not fully developed.  As a result, the predictability and success rate of 
the technological design process with respect to these products is highly 
uncertain.  As a consequence of the above factors and many additional 
factors, the time and expense required to design and develop a product is 
highly uncertain and cannot be predicted reliably.  With respect to any 
particular product under development, the desired physiological effects or 
product specifications may not be fully achieved, if at all.  Even if the 
products are successfully developed, there can be no assurance that 
clinically relevant effects will be achieved, that successful regulatory 
clearances will be secured, or that the products will become economically 
viable.  If the Company is not successful in developing its planned 
products, its business prospects, financial condition and results of 
operations would be materially and adversely affected.

Competition and Uncertainty as to Technological Change.  The surgical 
sealant market is highly competitive, and the Company expects competition 
in its targeted markets to intensify.  The Company expects to encounter 
direct competition from companies (or medical institutions) offering a wide 
variety of competing products including but not limited to topical 
hemostats, fibrin glues, home-brew cryoprecipitates, synthetic adhesives, 
synthetic hydrogels, pericardial strips, synthetic strips, synthetic fibrin 
glues and femoral artery closure systems/devices.  In addition, several 
large companies targeting the surgical sealant market may be developing 
products (unknown to the market at present) that would compete with the 
Company's products.  The Company is also aware of several potential 
competitors that are working on biological tissue sealants.  Many of the 
competitors or potential competitors have greater name recognition, broader 
product lines, greater distribution capabilities, substantially greater 
capital resources and larger marketing, research and development staffs and 
facilities than the Company.  Broad product lines may give the Company's 
competitors or potential competitors the ability to negotiate exclusive, 
long-term medical device supply contracts and, consequently, the ability to 
offer comprehensive pricing for their products, including those that may 
compete with the Company's products.  By offering a broader product line, 
these potential competitors may also have a significant advantage in 
marketing competing products to group purchasing organizations and other 
managed care organizations that increasingly seek to reduce costs through 
centralization of purchasing functions.  There can be no assurance that the 
Company will be able to effectively compete against such competitors or 
potential competitors.  In addition, there can be no assurance that the 
Company's current competitors or other companies will not succeed in 

                                       10
<PAGE>   10

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

developing technologies and products that are more effective than the 
Company's or that would render the Company's technology or products 
obsolete or unable to compete.

Dependence on Patents and Proprietary Technology.  The Company's ability to 
compete effectively will depend in part on its ability to develop and 
maintain the proprietary aspects of its technology.  The Company has 
pursued its own patents covering its technologies in various forms.  In 
addition, the Company has licensed technology to further broaden its patent 
portfolio.  The Company owns three and has licensed three issued United 
States patents, and has 20 pending United States patent applications 
relating to its patch, gel and liquid formulations.  There can be no 
assurance that the pending surgical sealant patent applications will issue, 
or that the issued patents 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 surgical 
sealants.  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 prospects, financial condition and results of operation.

Risks Related to FloSeal Matrix.  Following the end of the third quarter 
1997, the Company decided to shift essentially all discretionary resources 
then committed to the support of the RapiSeal patch to its hemostatic 
sealant, FloSeal.  Subsequently, the Company decided to exit the RapiSeal 
business and to disband its small test sales force. FloSeal, which the 
Company believes to have substantially greater market potential than 
RapiSeal, thus was reinforced as the Company's lead product in terms of 
potential strategic impact on the Company's operations. FloSeal began human 
clinical trials in the United States in March of 1998.  The Company is in 
the process of scaling up production for these trials and planning for 
commercial production.  There can be no assurance that production scale-up 
can be successfully completed, that the product(s) will be successful in 
human trials, that the product(s) will gain regulatory clearance, or that 
the product(s) will be accepted in the marketplace.  There can be no 
assurance that strategic corporate partnerships can be concluded to aid in 
the development or the distribution of the product or that such alliances 
can be concluded on favorable terms.  There can be no assurance that future 
revenues, if any, will provide a reasonable return, if any, on the cost of 
development.  Unless FloSeal is successfully introduced and marketed on a 
timely basis, the Company's business prospects, financial condition and 
results of operations will be materially and adversely affected.

                                       11
<PAGE>   11


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

Regulatory Uncertainty.  The regulatory processes for the approval of 
medical devices, such as the Company's products, are highly uncertain.  The 
time and expense required to obtain clearances are difficult to forecast 
and can vary widely.  In certain cases, a clearance may not be ever gained.  
In particular, the regulatory process in the United States is arduous and 
demanding.  A major factor in the time and expense required for a device 
clearance to market is the type of submission required, 510(K) or PMA. 
FloSeal will follow the PMA pathway.  A PMA pathway, in general, is 
significantly longer and more expensive than a 510(K) pathway.  Likewise, 
the FDA sets the requirements for the size and structure of clinical trials 
after input from the Company.  There can be no assurance that the clinical 
requirements of the FDA for submissions will be favorable for the Company 
or within its expense and time estimates or result in an economically 
viable program.  The clinical or other requirements can change during the 
process resulting in new requirements or standards which can materially 
increase the time and expense of the regulatory process.  The FDA may 
require additional clinical trials or tests and new requirements after the 
initial submissions.  The time required for review and clearance at the FDA 
can vary widely depending on the quality of the submission, the perceived 
importance of the product, and many other factors.  Many of the factors 
affecting the time and expense for the regulatory process are outside the 
control of the Company.  Longer and more expensive clinical trials and 
regulatory processes can have a material adverse effect on the business 
prospects, financial condition and results of operations of the Company.  
The regulatory process outside the United States can also vary widely in 
the time and expense of clearance and may result in no clearance at all.  
In summary, there can be no assurance that marketing clearances will ever 
be granted for any of the Company's products in the development process or 
that the time and expense of the regulatory process can be reliably 
predicted or will result in an economically viable investment.

Uncertainty of Market Acceptance.  The Company's success will depend upon 
the medical community's active sponsorship and ultimate acceptance of 
FloSeal.  The Company is unable to predict how quickly, if at all, the 
medical community will accept its products or, if accepted, the number of 
products that will be used.  Use of the Company's products 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 the Company's products 
offer clinically significant advantages. Moreover, 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.  Even if generally accepted, surgeons may choose to use 
the Company's products in a smaller minority of procedures than projected 
thus leading to lower sales.  Failure of FloSeal to achieve significant 
clinical adoption would have a material adverse effect on the Company's 
business prospects, financial condition and results of operations.

Uncertainty Relating to Third Party Reimbursement.  In the United States, 
health care providers that purchase medical devices, such as FloSeal, 
generally rely on third-party payors, principally federal Medicare, state 
Medicaid and private health insurance plans to reimburse all or part of the 
cost of the procedure in which the medical device is 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 FloSeal.  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 there will not be separate 
reimbursement for the Company's products *.  Regardless of the type of 
reimbursement system, the Company believes that surgeon advocacy of FloSeal 
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 
prospects, financial condition and results of operations.

                                       12
<PAGE>   12


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

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 Sales, Marketing and Distribution Experience.  To date, the Company 
has not generated any revenues from sales of FloSeal.  The company has a 
small marketing organization that provides market analysis, marketing 
strategy, and expertise in product development and positioning.  The 
Company intends to sell its products primarily through agreements with 
distributors or by means of collaborative arrangements with corporate 
strategic partners *.  As of September 30, 1998, the Company had not 
entered into any such agreements or arrangements with respect to FloSeal or 
other future products.  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.  Should 
the Company decide to use a direct sales strategy for general or for 
specialty applications, there can be no assurance that the Company will be 
able to build a direct sales force or marketing organization, that 
establishing a direct sales force or marketing organization will be cost 
effective, or that the Company's sales and marketing efforts will be 
successful.  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 prospects, 
financial condition and results of operations.

Product Liability Risk, Limited Insurance Coverage.  The medical device 
industry has historically been litigious, and the Company faces an inherent 
business risk of financial exposure to product liability claims in the 
event that the use of its products results in personal injury.  Although 
the Company has not experienced any claims to date, there can be no 
assurance that the Company will not experience losses due to product 
liability claims in the future.  The Company currently maintains liability 
insurance with combined 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 as 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.

Uncertainty as to Bovine (Animal) Sourced Products in Europe.  There is 
substantial uncertainty as to the acceptance of bovine sourced products in 
Europe due to concerns over potential contamination with Transmissible 
Spongiform Encephalopathies (TSE), which is the same or closely related to 
the disease which strikes cows known as Bovine Spongiform Encephalopathies 
(BSE) or commonly as "Mad Cow Disease".  The first generation of FloSeal is 
made from bovine-sourced thrombin and bovine-sourced gelatin.  However 
unscientific in the Company's judgement the fear of TSE might be, if TSE 
concerns prevent or substantially delay the marketing of FloSeal in Europe, 
there would be a material and adverse effect on the Company's business 
prospects, financial condition and results of operations.  There can be no 
assurance that alternative sources of human thrombin or alternative (non-
bovine) sources of the gel component can be obtained with the timing, cost, 
capacity, and other factors necessary to support a timely introduction of a 
second generation product into Europe.

Limited Manufacturing Experience, Scale-up Risk.  The Company has received 
a manufacturing license from the California Department of Health Services 
(CDHS) and commenced shipment of FloSeal to Canada and Europe for 

                                       13
<PAGE>   13

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

use in its application evaluation cases in December 1997.  However, the 
Company has no experience manufacturing FloSeal 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 viable 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 
Quality System Regulations (QSR), 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 QSR, 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 
prospects, financial condition and results of operations.  There can be no 
assurance that the Company will be able to manufacture and supply 
sufficient quantities of products to meet product requirements for United 
States and international clinical trials and commercial sales.

Dependence on Single Source Suppliers.  The Company acquires several 
components of its products from single source suppliers.  Generally, the 
Company believes that there are alternative suppliers of equivalent 
materials available, and that the company could substitute suppliers with 
minimal regulatory consequences from this substitution *.  However, there 
can be no assurance that such substitute suppliers will be available, that 
such substitutions could be made in a timely manner or on commercially 
reasonable terms.  In the case of hides for processing into gelatin, there 
are only a few suppliers that could meet the Company's requirements.  The 
company currently relies exclusively on one supplier of such hides and 
expects to continue to do so through at least the end of 1999 *.  The 
Company and this supplier have entered into a long-term supply agreement.  
However, if this supplier were unable to meet the Company's demands there 
can be no assurance that the Company would be able to secure alternative 
sources of hides of sufficient quality and quantity to produce sufficient 
product to meet its customers' needs.  A transition to alternate 
arrangements could involve additional costs and delays in production.  
There can be no assurance that such transition would be successful in 
entering into alternate arrangements on commercially reasonable terms if at 
all.  Sterilization of the Company's product is performed by 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.  The Company relies upon a single vendor for its bovine 
thrombin, which is a critical element in the mechanism of action of 
FloSeal.  This supplier is currently the only FDA approved manufacturer of 
bovine thrombin in the United States.  While the Company believes that this 
vendor is reliable and has adequate capacity to serve the Company's 
requirements, there can be no assurance that this vendor will supply 
adequate thrombin or that alternative vendors will enter the market and 
prove to be reliable suppliers.  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 
prospects, financial condition and results of operations.

Computer Systems Readiness for Year 2000.  The Year 2000 computer issue 
refers to a condition where a two digit field rather than a four digit 
field is used to distinguish a calendar year.  Unless corrected some 
computers and software applications could be unable to function on January 
1, 2000 (and thereafter until corrected), as they will be unable to 
distinguish the correct date.  Such an uncorrected condition could 
significantly interfere with the conduct of the Company's business, could 
result in disruption of its operations, and could subject it to potentially 
significant legal liabilities.

The Company is in the process of assessing its exposure to the Year 2000 
problem.  The Company is upgrading its current third party software for 
Year 2000 compliance.  While the Company believes it has made progress in 
resolving known Year 2000 issues, sufficient testing has not been completed 
to fully validate the readiness of the Company's

                                       14
<PAGE>   14

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

systems.  Additional testing and upgrades are planned during fiscal 1999 to 
reasonably ensure Year 2000 compliance *.

The Company is also assessing the possible effect on its operations of the 
Year 2000 readiness of critical suppliers of products and services.  The 
Company's reliance on its key suppliers, and therefore on the proper 
functioning of their information systems and software, is increasing, and 
there can be no assurance that another company's failure to address Year 
2000 issues could not have an adverse effect on the Company.  To date, The 
Company has not contacted its suppliers to determine their Year 2000 
readiness.

The Company expects to complete an estimate of Year 2000 project costs 
during the first half of fiscal 1999 *.  The Company believes that it is 
unlikely to experience a material adverse impact on its financial condition 
or results of operations due to Year 2000 compliance issues.  However, 
since the assessment process is ongoing, year 2000 complications are not 
fully known, and potential liability issues are not clear, the full 
potential impact of the Year 2000 on the Company is not known at this time.  
The Company will be developing a contingent plan for Year 2000 issues as it 
determines its Year 2000 exposure *.




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.

                                       15
<PAGE>   15


                          PART II-OTHER INFORMATION
<TABLE>
<CAPTION>

Item 2.     Changes in Securities and Use of Proceeds.

            The net proceeds to the Company after deducting expenses 
            associated with the Company's initial public offering in June 
            of 1996 was $24,418,512.  From June 7, 1996 to September 30, 
            1998 the Company used such net offering proceeds, in direct or 
            indirect payments to others, as follows:

            <S>                                         <C>

            Purchase and installation of machinery 
            and equipment                                $    676,964
            Working capital                                15,024,428
            Repayment of debt                                 336,168
            Investments in short term,
            interest-bearing obligations                    8,380,952
                                                         ------------
            Total                                        $ 24,418,512
                                                         ============
</TABLE>


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

(a)  Exhibits.
     ---------
<TABLE>
<CAPTION>

            Exhibit 
            Number                 Description                        
            ------      --------------------------------------
            <S>        <C>

             27.1       Financial Data Schedule.

</TABLE>

(b) Reports on Form 8-K.
    --------------------

   The Registrant did not file any reports on Form 8-K with the Securities
   and Exchange Commission during the quarter ended September 30, 1998.   


                                       16

<PAGE>   16



                                  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:     November 13, 1998              By: /s/ PHILIP M. SAWYER
                                            ------------------------------
                                                  Philip M. Sawyer

                                       President, Chief Executive Officer, 
                                           Principal Financial Officer

                                       17
<PAGE>   17