<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q




(Mark One)

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

           For the quarter ended DECEMBER 31, 1998,

                                       OR

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

           For the transition period from _____________ to  _______________

                        Commission file number: 000-24103

                           COHESION TECHNOLOGIES, INC.
             (Exact Name of Registrant as Specified in Its Charter)

          DELAWARE                                         94-3274368
(State or Other Jurisdiction of                         (I.R.S. Employer 
Incorporation or Organization)                          Identification No.)


                      2500 FABER PLACE, PALO ALTO, CA 94303
          (Address of Principal Executive Offices, including Zip Code)

       Registrant's telephone number, including area code: (650) 354-4300

        Securities registered pursuant to Section 12(b) of the Act: NONE

           Securities registered pursuant to Section 12(g) of the Act:
                          COMMON STOCK, $.001 PAR VALUE
                         PREFERRED SHARE PURCHASE RIGHTS


Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 month (or 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

As of January 31, 1999, Registrant had 8,398,660 shares of Common Stock
outstanding, exclusive of 480,100 shares held by the Registrant as treasury
stock.



<PAGE>   2


                                     PART I

                           COHESION TECHNOLOGIES, INC.

                                      INDEX


<TABLE>
<CAPTION>
PART I.  Financial Information                                       Page No.
<S>                                                                  <C>

Condensed Consolidated Balance Sheets -
December 31, 1998  and June 30, 1998                                      3

Condensed Consolidated Statements of Operations -
Three and Six months ended December 31, 1998 and 1997                     4

Condensed Consolidated Statements of Cash Flows -
Six months ended December 31, 1998 and 1997                               5

Notes to Condensed Consolidated Financial Statements                   6-10

Management's Discussion and Analysis of Financial
Condition and Results of Operations                                   11-19




PART II.             Other Information


Other Information                                                        20

Signatures                                                               21

</TABLE>



                                       2
<PAGE>   3


                           COHESION TECHNOLOGIES, INC.

                      CONDENSED CONSOLIDATED BALANCE SHEETS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
                                   (UNAUDITED)



<TABLE>
<CAPTION>
                                                                               DECEMBER 31,         JUNE 30,
                                                                                  1998               1998*
                                                                               -----------          --------
<S>                                                                            <C>                  <C>     
ASSETS
Current assets:
  Cash and cash equivalents ..........................................          $    953            $    591
  Short-term investments .............................................                --               1,016
  Accounts receivable, net ...........................................               611                 473
  Inventories, net ...................................................               617                  81
  Other current assets, net ..........................................             2,170               1,254
                                                                                --------            --------
         Total current assets ........................................             4,351               3,415

Property and equipment, net ..........................................             4,130               2,072
Intangible assets, net ...............................................               956               1,184
Investment in Boston Scientific Corporation ..........................            44,662              73,979
Receivable from equity collar investment .............................             7,620                  --
Other investments and assets, net ....................................            12,849              15,003
                                                                                --------            --------

                                                                                $ 74,568            $ 95,653
                                                                                ========            ========


LIABILITIES AND STOCKHOLDERS' AND PARENT COMPANY EQUITY

Current liabilities:
  Loan payable .......................................................          $  1,000            $     --
  Accounts payable ...................................................             1,124                 792
  Other accrued liabilities ..........................................             2,795               2,390
  Income taxes payable ...............................................               300                 300
  Accrued compensation ...............................................             2,216                 953
  Payable to Collagen Aesthetics, Inc. ...............................               727                 880
                                                                                --------            --------
         Total current liabilities ...................................             8,162               5,315

Deferred income taxes ................................................            22,623              31,923

Commitments and contingencies

Stockholders' and parent company equity:
  Preferred stock, $.001 par value, authorized: 5,000,000 shares,
    issued and outstanding: no shares at December 31 and
    June 30, 1998 ....................................................                --                  --
  Common stock, $.001 par value, authorized: 15,000,000 shares,
    issued and outstanding: 8,345,316 shares at December 31, 1998 and
    8,861,040 shares at June 30, 1998 ................................                 9                   9
  Additional paid-in capital .........................................            14,874               9,612
  Parent company equity ..............................................                --               4,961
  Retained earnings (Since August 19, 1998) ..........................               429                  --
  Unrealized gain on available-for-sale investments ..................            30,273              43,833
  Treasury stock, at cost, 502,272 shares at December 31, 1998
      (None at June 30, 1998) ........................................            (1,802)                 --
                                                                                --------            --------
         Total stockholders' and parent company equity ...............            43,783              58,415
                                                                                --------            --------
                                                                                $ 74,568            $ 95,653
                                                                                ========            ========
</TABLE>

The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.

*  Amounts derived from audited financial statements at the date indicated.




                                       3
<PAGE>   4

                           COHESION TECHNOLOGIES, INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)



<TABLE>
<CAPTION>
                                                             THREE MONTHS ENDED                    SIX MONTHS ENDED
                                                                DECEMBER 31,                          DECEMBER 31,
                                                         ---------------------------           ---------------------------
                                                           1998               1997               1998               1997
                                                         --------           --------           --------           --------
<S>                                                      <C>                <C>                <C>                <C>     
Revenue -- product sales ......................          $    828           $    526           $  1,223           $  1,234

               Costs and expenses:
  Cost of sales ...............................               412                279                595                692
  Research and development ....................             3,470              3,892              7,459              7,402
  Selling, general and administrative .........             1,531              1,247              3,219              2,591
  Compensation expense related to
       cancelled stock options ................               635                 --              2,447                 --
  Purchased in-process research and 
       development ............................                --             10,530                 --             10,530
                                                         --------           --------           --------           --------
          Total costs and expenses ............             6,048             15,948             13,720             21,215
                                                         --------           --------           --------           --------

Loss from operations ..........................            (5,220)           (15,422)           (12,497)           (19,981)

Other income (expense):
  Gain on investments, principally
      Boston Scientific Corporation ...........             4,353              2,844             13,971              8,775
  Equity in losses of other affiliates ........                --                 --                 --                 (9)
  Interest income (expense) ...................                10                 (1)                67                236
                                                         --------           --------           --------           --------

Income (loss) before provision for 
  income taxes ................................              (857)           (12,579)             1,541            (10,979)
Provision (benefit) for income taxes ..........              (391)                --                616                 --
                                                         --------           --------           --------           --------

Net income (loss) .............................          $   (466)          $(12,579)          $    925           $(10,979)
                                                         ========           ========           ========           ========


Basic and diluted net income (loss) per share            $   (.16)               n/a           $    .11                n/a
                                                         ========           ========           ========           ========

Shares used in calculating basic and diluted
per share information
                                                            8,580                n/a              8,709                n/a
                                                         ========           ========           ========           ========

</TABLE>


The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.



                                       4
<PAGE>   5


                           COHESION TECHNOLOGIES, INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                                 (IN THOUSANDS)
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                                             SIX MONTHS ENDED
                                                                               DECEMBER 31,
                                                                        ---------------------------
                                                                          1998               1997
                                                                        --------           --------
<S>                                                                     <C>                <C>      
Cash flows from operating activities:
  Net income (loss) ..........................................          $    925           $(10,979)

  Adjustments to reconcile net income (loss)
     to net cash used in operating activities:
     Depreciation and amortization ...........................               553                341
     Gains on investments ....................................           (13,971)            (8,775)
     Purchase in-process research and development ............                --             10,530
     Equity in losses of affiliates ..........................                --                  9
     Deferred income taxes ...................................                --                561

     Decrease (increase) in assets:
       Accounts receivable ...................................              (139)              (214)
       Inventories ...........................................              (536)                26
       Other .................................................              (747)            (3,002)
     Increase (decrease) in liabilities:
       Accounts payable, accrued liabilities and other .......             1,535              1,051
       Income taxes payable ..................................                --             (2,428)
                                                                        --------           --------
  Total adjustments ..........................................           (13,305)            (1,901)
                                                                        --------           --------
     Net cash used in operating activities ...................           (12,380)           (12,880)
                                                                        --------           --------

Cash flows from investing activities:
  Proceeds from sales of Boston Scientific
     Corporation stock .......................................            13,221              9,362
  Proceeds from sales of other affiliate stock ...............               533                704
  Proceeds from sales and maturities of short-term investments             1,016              4,571
  Proceeds from equity collar investment .....................             1,081                 --
  Expenditures for property and equipment ....................            (2,403)              (366)
  Purchases of short-term investments ........................                --             (3,567)
  Equity investments and loans to affiliates .................                --               (500)
  Acquisition of shares of Cohesion Corporation, net of
      cash balances ..........................................                --            (10,530)
                                                                        --------           --------
     Net cash provided by (used in) investing activities .....            13,448               (326)
                                                                        --------           --------

Cash flows from financing activities:
   Proceeds from short-term borrowings, net ..................             1,000                 --
   Proceeds from employee stock purchase plan ................                96                 --
   Treasury stock purchase ...................................            (1,802)                --
                                                                        --------           --------
     Net cash used in financing activities ...................              (706)                --
                                                                        --------           --------

Net increase (decrease) in cash and cash equivalents .........               362            (13,206)
Cash and cash equivalents at beginning of period .............               591             13,706
                                                                        --------           --------

Cash and cash equivalents at end of period ...................          $    953           $    500
                                                                        ========           ========
</TABLE>


The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.


                                       5
<PAGE>   6


                           COHESION TECHNOLOGIES, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   Basis of Presentation

     Cohesion Technologies, Inc. ("Cohesion" or the "Company") was organized as
a Delaware corporation and a wholly owned subsidiary of Collagen Aesthetics,
Inc. formerly known as Collagen Corporation ("Collagen") in June 1997. In
October 1997, Collagen announced that it would proceed to separate its Aesthetic
Technologies Group and its Collagen Technologies Group ("CTG") into two
independent, publicly traded companies. In connection with the separation of the
two groups, Collagen distributed as a dividend to its stockholders, one share of
the Company's Common Stock for each share of Collagen common stock outstanding
on August 18, 1998 (the "Distribution"). The Distribution was designed to
separate two distinct businesses with significant differences in their markets,
products, research needs, investment needs, employee retention and compensation
plans and plans for growth. Collagen's Board believed the separation into two
independent companies would enhance the ability of each to focus on strategic
initiatives and new business opportunities, improve cost structures and
operating efficiencies and create incentives that are more attractive and
appropriate for the recruitment and retention of key employees. As a
consequence, Collagen believed that investors would be able to evaluate better
the merits of the two groups of businesses and their future prospects.

     In March 1998, the Board of Directors of Collagen approved certain
agreements between the Company and Collagen (collectively, the "Intercompany
Agreements") which (i) provided for the transfer, effective January 1, 1998, of
certain assets and liabilities relating to the businesses previously conducted
by Collagen's CTG to Cohesion, and (ii) established contractual arrangements
between Collagen and the Company. CTG's business activities focused on the
design, development, manufacture and commercialization of innovative resorbable
biomaterials, adhesive technologies, and delivery systems in the fields of
tissue repair and regeneration.

     The condensed consolidated financial statements reflect the results of
operations, financial condition and cash flows of Cohesion as a component of
Collagen up through August 18, 1998 and as a separate stand-alone company
thereafter. The financial statements of Cohesion include the operating results
of Cohesion Corporation, a developer of proprietary products for hemostasis and
tissue adhesion, biosealants and adhesion barriers for surgical applications,
since the acquisition of Cohesion Corporation by Collagen in fiscal 1996.
Results prior to the distribution may not be indicative of the actual results of
operations and financial position of Cohesion under separate ownership. The
various assets, liabilities, revenues and expenses associated with CTG have been
allocated to the historical financial statements of Cohesion in a manner
consistent with the Intercompany Agreements. Management believes that the
consolidated statements of operations include a reasonable allocation of costs
incurred by Collagen which benefit Cohesion. These allocations of corporate
expenses include, in aggregate, approximately 30% to 35% of the general and
administrative expenses of Collagen for the periods presented, with the
exception of certain former Chief Executive Officer ("CEO") expenses in fiscal
1998. The CEO expenses have been allocated to Cohesion based on the CEO's level
of involvement in Cohesion during fiscal 1998. Costs and expenses associated
with cost of sales and research and development were generally allocated to
Cohesion on a specific identification basis.

     In connection with the asset transfer discussed above, $10.9 million of
cash, cash equivalents and short-term investments remained with Collagen and the
remaining cash, cash equivalents and short-term investments were transferred to
the Company at December 31, 1997. Each debt security was 



                                       6
<PAGE>   7

allocated between the companies pro rata to the total allocation of such
investments. Substantially all investments in affiliates, including Boston
Scientific Corporation of Natick, Massachusetts ("Boston Scientific") and
Innovasive Devices, Inc. of Marlborough, Massachusetts ("Innovasive Devices")
were allocated to Cohesion. Trade receivables, notes receivable, loans to
officers and employees, fixed assets and employee related liabilities were
allocated based on specific identification. All equity accounts, with the
exception of the additional paid-in-capital related to Target Therapeutics,
Inc., remained with Collagen. For any assets or liabilities where it was not
practical to use the specific identification method, Cohesion was allocated 30%
of these assets and liabilities. The 30% allocation was based on a review of the
characteristics and activity of these assets and liabilities and business
objectives. The intercompany receivable/payable balances resulting from
Cohesion's participation in Collagen's central cash management system, after
consideration of the December 31, 1997 contribution of cash, cash equivalents
and short-term investments, is a component of Collagen's contributed capital on
Cohesion's balance sheet. The officer separation agreement with Collagen's
former CEO and the costs associated with the agreement have been allocated to
Cohesion.

     Under the terms of the services and supply agreements between Cohesion and
Collagen, Collagen will supply certain products to Cohesion for a fee. The cost
of sales amounts included in the financial statements are based on historical
costs for the periods presented through January 1, 1998. The Intercompany
Agreements provide for cost to be determined on a defined formula. If such
prospective arrangements had been in place during the periods presented, cost of
sales would have decreased by $48,000 in the six months ended December 31, 1997.

     Under the terms of the recombinant technology and development license
agreement between Cohesion and Collagen, Cohesion and Collagen will collaborate
to develop recombinant human collagen and will share the costs of the project
until certain milestones are met. The research and development ("R&D") expenses
included in the financial statements are based on historical costs for the
periods presented through January 1, 1998. The Intercompany Agreements provide
for costs to be equally shared. If such prospective arrangements had been in
place during the periods presented, R&D expenses, net of reimbursements from
Collagen, would have decreased by $1.0 million in the six months ended December
31, 1997.

     The condensed consolidated financial statements include the accounts of
Cohesion and its wholly-owned and majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. Cohesion operates
in one industry segment focusing on the development and sale of medical devices.
Investments in unconsolidated subsidiaries, and other equity investments in
which Cohesion has a 20% to 50% interest or otherwise has the ability to
exercise significant influence, are accounted for under the equity method.

    Unrestricted available-for-sale equity securities in which Cohesion has a
less than 20% interest, which includes holdings in Boston Scientific and the
unrestricted portion of the Company's holdings in Innovasive Devices are carried
at fair value with the unrealized gains and losses, net of tax, reported as a
separate component of stockholders' equity. Restricted equity securities in
which Cohesion has less than a 20% interest are carried at cost or estimated
realizable value, if less, and are included in "other investments" in the
accompanying balance sheets. (See Note 2.) The cost of securities sold is based
on the specific identification method. The fair value of public equity
securities held is based upon quoted closing market prices. The fair value of
private equity securities held approximates the carrying value based on quoted
market prices for similar securities.

     The condensed consolidated balance sheet as of December 31, 1998, the
condensed consolidated statements of operations for the three and six months
ended December 31, 1998 and 1997, and the condensed consolidated statements of
cash flows for the six months ended December 31, 1998 and 1997, have been
prepared by the Company and are unaudited. In the opinion of management, all
necessary adjustments (which include only normal recurring adjustments) have
been made to present fairly the financial position, results of operations, and
cash flows at December 31, 1998 and for all periods presented. Interim results
are not necessarily indicative of results for a full fiscal year. The
consolidated balance sheet as of June 30, 1998 has been derived from the audited
consolidated 



                                       7
<PAGE>   8

financial statements at that date.

     The financial statements for the prior fiscal period have been reclassified
to conform with the current year presentation. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
These condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes included in the
Company's Annual Report on Form 10-K for the year ended June 30, 1998.


New Accounting Standards

     As of July 1, 1998, the Company adopted Financial Accounting Standard No.
130 ("SFAS 130"), "Reporting Comprehensive Income". SFAS 130 establishes new
rules for the reporting and display of comprehensive income and its components;
however, the adoption of this statement had no impact on the Company's net
income or stockholders' equity. SFAS 130 requires unrealized gains or losses on
the Company's available-for-sale securities which prior to adoption were
reported separately in stockholders' equity to be included in other
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of SFAS 130.

     The components of comprehensive income (loss), net of related tax,
for the three and six-months ended December 31, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                               Three Months Ended                      Six Months Ended
                                                                   December 31,                          December 31,
                                                           ---------------------------           ---------------------------
                                                               1998               1997               1998               1997
                                                           --------           --------           --------           --------
<S>                                                        <C>                <C>                <C>                <C>      
Net income (loss)                                          $   (466)          $(12,579)          $    925           $(10,979)
Change in unrealized gains (losses) on securities
                                                             (3,799)            (5,640)           (13,560)           (10,279)
                                                           --------           --------           --------           --------

Comprehensive income (loss)                                $ (4,265)          $(18,219)          $(12,635)          $(21,258)
                                                           ========           ========           ========           ========
</TABLE>


2. EQUITY INVESTMENTS

     Boston Scientific Corporation

     During the three and six months ended December 31, 1998, Cohesion sold
75,000 and 200,000 shares (pre-split), respectively, of Boston Scientific common
stock for a pre-tax gain of approximately $3.3 million and $12.4 million,
respectively. Boston Scientific's common stock split 2:1 as of November 30,
1998. Boston Scientific is a leading manufacturer of catheter-based devices that
can be inserted through small body openings and are used in heart surgery and
other operations. Boston Scientific common stock is quoted on the New York Stock
Exchange under the symbol BSX. On December 31, 1998, the closing price of Boston
Scientific common stock was $26.81 per share. At December 31, 1998, the Company
held 1.7 million shares (post-split) of Boston Scientific, representing less
than 1% ownership interest.

     Cohesion's shares of Boston Scientific common stock are classified as
available-for-sale and have been recorded at the estimated fair value. The
unrealized gains (estimated fair value less cost) on these available-for-sale
securities have been reported as a separate component of stockholders' equity,
net of tax. The following is a summary of the aggregate estimated fair value,
gross unrealized gains and amortized cost of the Company's investment in Boston
Scientific common stock:



                                       8
<PAGE>   9


2. EQUITY INVESTMENTS (CONTINUED)

     Boston Scientific Corporation


<TABLE>
<CAPTION>
                               DECEMBER 31,      JUNE 30,
                                 1998             1998
                                -------          -------
                                     (IN THOUSANDS)
<S>                            <C>               <C>    
Amortized Cost ............     $ 3,602          $ 4,468
Gross Unrealized Gains.....      41,060           69,511
                                -------          -------
Estimated Fair Value ......     $44,662          $73,979
                                =======          =======
</TABLE>


     To hedge against fluctuations in the market value of a portion of the
Boston Scientific common stock, Cohesion entered into costless collar
instruments that expire quarterly from August 1998 through May 2001 and will
require settlement in cash. At December 31, 1998, 1.5 million shares were hedged
under these collars. The call options are collateralized by shares of Boston
Scientific common stock held by Cohesion. The receivable from the equity collar
investment at December 31, 1998 was $7.6 million. During the three months ended
December 31, 1998, the Company received $1.1 million from the expiration of a
collar.


     Innovasive Devices, Inc.

     Prior to October 1996, Cohesion's 843,936 shares of common stock of
Innovasive Devices were valued at cost or $4.1 million due to restrictions which
prevented the sale of any of such shares. At December 31, 1998, these
restrictions were no longer applicable on 804,100 shares of Innovasive Devices
common stock held by Cohesion. Cohesion carries the portion of its investment in
Innovasive Devices which can be sold within one year, as an available-for-sale
investment at market value, or $2.7 million at December 31, 1998, reflecting an
unrealized loss of $1.2 million ($2.7 million estimated fair value less $3.9
million cost), which has been included in a separate component of stockholders'
equity, net of tax. The remaining 39,836 restricted shares of common stock
continued to be valued at cost of $192,000. The investment in Innovasive Devices
is included in "other investments" in the accompanying balance sheets.

     During the quarter ended December 31, 1998, Cohesion did not sell any of
its shares of common stock of Innovasive Devices. Innovasive Devices common
stock is quoted on The Nasdaq Stock Market under the symbol IDEA. The closing
price of Innovasive Devices' common stock at December 31, 1998, was $3.375 per
share. At December 31, 1998, Cohesion held approximately a 9% ownership position
in Innovasive Devices.


     Pharming, B.V.

     Prior to July 1998, Cohesion's investment in Pharming B.V. ("Pharming") was
valued at cost or $7.0 million. In July 1998, Pharming became a publicly traded
company, at which time the Company's shares were converted into 838,512 shares
of Pharming common stock. The Pharming common stock held by the Company will be
restricted from sale until December 31, 1998. Cohesion carries the portion of
its investment in Pharming which can be sold within one year, as an
available-for-sale investment at market value, or $2.0 million at December 31,
1998, reflecting an unrealized gain of $321,000 ($2.0 million estimated fair
value less $1.7 million cost), which has been included in a separate component
of stockholders' equity, net of tax. The remaining 631,478 restricted shares of
common stock continued to be valued at cost of $5.3 million. The investment in
Pharming is included in "other investments" in the accompanying balance sheets.



                                       9
<PAGE>   10

     Pharming common stock is quoted on The EASDAQ Stock Market under the symbol
PHAR. The closing price of Pharming common stock at December 31, 1998, was $9.91
per share. At December 31, 1998, Cohesion held approximately a 6% ownership
position in Pharming.


3. SHORT-TERM DEBT

     At December 31, 1998, the Company had outstanding $1.0 million of
borrowings for working capital purposes. The interest rate on the demand loan is
based on LIBOR + 1-1/8% and the debt is collateralized by the Boston Scientific
common stock.


4. STOCKHOLDERS' AND PARENT COMPANY EQUITY

   Parent Company Equity

      Cohesion's equity account with its parent company, Collagen, was closed
out to Additional Paid-in Capital as of the Distribution date. Retained earnings
has been established thereafter, and includes net income for the Company since
August 19, 1998.


   Cohesion Corporation Stock Options

     In September 1998, the Company's Board of Directors approved a program to
cancel options to purchase shares of the common stock of Cohesion Corporation, a
majority-owned subsidiary of the Company. In connection with such program, the
Company offered to pay each holder of these canceled options a per share amount
equal to the excess of $16.70 over the exercise price of the canceled option.
The Company will make this option payment ratably over the original vesting
period of the canceled option so long as the former holder thereof remains an
employee or consultant of the Company or Cohesion Corporation. The Company
recorded $635,000 and $2.4 million of compensation expense related to these
canceled options during the three and six months ended December 31, 1998 and
expects to records an additional $3.3 million over fiscal years 1999 through
2001.


5. INCOME TAXES

     The effective tax rate for the six months ended December 31, 1998 was 40%.
There was no tax provision for the prior year based on fiscal year 1998
projections at that time.


6.  EARNINGS PER SHARE

     Historical per share data for the quarter ended December 31, 1997 has not
been presented as no common shares were outstanding until June 25, 1998.

     For the three and six months ended December 31, 1997, basic and diluted pro
forma net loss per share was $1.41 and $1.24, respectively, based on 8,895,000
and 8,857,000 shares, respectively, assuming the distribution of shares of the
Company's Common Stock to Collagen's stockholders had occurred on July 1, 1997
based on the number of Collagen common shares and common equivalent shares
outstanding for that period, assuming a one-for-one exchange ratio in the
Distribution.



                                       10
<PAGE>   11



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



      The following information should be read in conjunction with the Condensed
Consolidated Financial Statements and the notes thereto. This quarterly report
on Form 10-Q, and in particular the Management's Discussion and Analysis of
Financial Condition and Results of Operations, contains forward-looking
statements regarding future events or the future performance of the Company that
involve certain risks and uncertainties including those discussed in "Factors
That May Affect Future Results of Operations" below and as more fully described
in "Risk Factors" in the Company's Form 10-K for the year ended June 30, 1998.
In this report, the words "anticipates", "believes", "expects", "future" and
similar expressions identify forward-looking statements. Actual events or the
actual future results of the Company may differ materially from any
forward-looking statements due to such risks and uncertainties. The Company
assumes no obligation to update these forward-looking statements to reflect
actual results or changes in factors or assumptions affecting such
forward-looking statements, which reflect management's analysis only as of the
date hereof. The Company undertakes no obligation to publicly release the
results of any revision to these forward-looking statements, which may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events. For a more detailed discussion of these and
other business risks, see "-- Factors That May Affect Future Results of
Operations."

      The financial information of the Company set forth in this Form 10-Q is
theoretical in nature and not necessarily indicative of the future results of
operations or financial position of the Company or the results of operations and
financial position which would have resulted had the Company been a stand-alone
company during the periods presented.


OVERVIEW

     Cohesion Technologies, Inc. ("Cohesion" or the "Company") was organized as
a Delaware corporation and wholly owned subsidiary of Collagen Aesthetics, Inc.,
formerly known as Collagen Corporation ("Collagen"), in June 1997. In October
1997, Collagen announced that it would proceed to separate its Aesthetic
Technologies Group and its Collagen Technologies Group ("CTG") into two
independent, publicly-traded companies. Effective January 1, 1998, Collagen
contributed its research and development programs for hemostatic devices,
biosealants, orthopedics products and programs, adhesion barriers and
recombinant human collagen and thrombin and other related businesses of CTG (the
"Transferred Businesses") to the Company. Collagen also contributed various
equity investments to the Company, including all of its holdings in Boston
Scientific Corporation ("Boston Scientific") and Innovasive Devices, Inc.
("Innovasive Devices"), which together had an aggregate market value of $47.6
million at December 31, 1998. In connection with the separation of the two
groups, Collagen distributed as a dividend to its stockholders on August 18,
1998, one share of the Company's Common Stock for each share of Collagen common
stock outstanding (the "Distribution"). The Company and Collagen have entered
into various agreements (the "Intercompany Agreements") to provide for an
orderly transition of matters and to govern certain ongoing matters between the
two entities and provide a mechanism for transitioning license, supply,
distribution, research and development, tax, service and other agreements in
connection with the Distribution. A description of the assets and liabilities
contributed by Collagen to the Company is contained in Note 1 of Notes to
Condensed Consolidated Financial Statements.

     The Company's historical financial position and results of operations
reflect the historical operations of the Transferred Businesses contributed by
Collagen to the Company. Prior to being contributed to the Company by Collagen,
the Transferred Businesses were part of the Collagen Technologies Group. In
particular, this Management's Discussion and Analysis of Financial Condition and
Results of Operations reflects the historical results of that operating group
for all periods presented through January 1, 1998, as if the contribution of the
Transferred Businesses by Collagen 



                                       11
<PAGE>   12

to the Company had occurred on July 1, 1997. (See Note 1 of Notes to Condensed
Consolidated Financial Statements.)

     The Company is focused on developing and commercializing proprietary
surgical products, including bioresorbable hemostatic devices and biosealants
for tissue repair and regeneration. CoStasis surgical hemostat, the Company's
lead hemostatic product, is designed for use initially in cardiothoracic
indications. The Company completed a multi-site, randomized, pivotal clinical
trial in Europe and received European Community Certification ("CE Mark") for
CoStasis in September 1998. The Company expects to launch CoStasis in Europe in
early calendar 1999. The Company has received an Investigational Device
Exemption ("IDE") from the United States Food and Drug Administration ("FDA")
for CoStasis and has commenced U.S. pivotal trials targeting cardiac, hepatic,
orthopedic and general surgery indications. CoSeal(TM) surgical sealant, the
Company's lead biosealant product designed for sealing organs and other tissues
resulting from surgical wounds and incisions, is expected to commence
feasibility clinical trials during fiscal 1999. The Company believes its
surgical products will provide several distinct advantages over currently
available technologies, including ease of preparation and use, novel delivery
systems, improved safety profiles and clinical effectiveness. The Company also
sells Collagraft implant, an orthopedic product, and has research and
development programs in other orthopedic areas and in recombinant human collagen
and thrombin. The Company's products and programs are based on a platform of
proprietary technologies centered around collagen and hydrophilic polymers that
quickly polymerize in-vivo and bind to tissue.


RESULTS OF OPERATIONS

Three and Six Months Ended December 31, 1998 and 1997

     Product sales of $828,000 during the three months ended December 31, 1998,
increased by approximately $302,000 or 57%, compared to product sales of
$526,000 for the same prior-year period. Product sales of $1.2 million during
the six months ended December 31, 1998 were comparable to the same prior-year
period. Sales of Collagraft of $689,000 during the three months ended December
31, 1998, increased by approximately $279,000 or 68%, compared to sales of
$410,000 for the same prior-year period. The increase is due to the timing of
shipments to Zimmer. Sales of Collagraft of $966,000 during the six months ended
December 31, 1998, increased by approximately $14,000 or 1%, compared to sales
of $952,000 for the same prior-year period. The Company expects sales of
Collagraft in fiscal 1999 to be at levels slightly higher than those of fiscal
1998 due to anticipated product launches by Zimmer in Japan and by the Company
in certain European countries.

     A number of uncertainties exist surrounding the marketing and distribution
of Collagraft bone graft products. The Company's primary means of distribution
for these products is through Zimmer, a third- party firm. The Company's
business and financial results could be adversely affected in the event that
Zimmer is unable to market the product effectively, anticipate customer demand
accurately, or effectively manage industry-wide pricing and cost containment
pressures in health care.

     Cost of sales as a percentage of sales was 50% and 49% for the three and
six months ended December 31, 1998, respectively, compared to 53% and 56% for
the same prior-year period. Cost of sales as a percentage of sales for fiscal
1999 is expected to be comparable to fiscal 1998 as cost of sales will reflect
the cost of goods for CoStasis as well as a full year's impact of the supply
agreement with Collagen, which provides for cost to be determined on a defined
formula.

     Research and development ("R&D") expenses were $3.5 million and $3.9
million for the three months ended December 31, 1998 and 1997, respectively. R&D
expenses for the six months ended December 31, 1998 was comparable to the same
prior-year period. The 11% decrease in R&D spending for the three months ended
December 31, 1998 compared to the three months ended December 31, 1997, was
primarily due to lower spending in the recombinant human collagen program which
was partially offset by increased spending in the tissue adhesive and biosealant
programs. 



                                       12
<PAGE>   13

R&D expense for fiscal 1999 is reflected net of reimbursement from Collagen for
the recombinant human collagen program in accordance with the Intercompany
Agreements. The Company expects R&D spending in fiscal 1999 to be at levels
comparable to fiscal 1998.

     Selling, general and administrative ("SG&A") expenses of $1.5 million
during the three months ended December 31, 1998, increased by approximately
$300,000 or 23%, compared to SG&A expenses of $1.2 million for the same
prior-year period. SG&A expenses of $3.2 million during the six months ended
December 31, 1998, increased by approximately $600,000 or 24%, compared to SG&A
expenses of $2.6 million for the same prior-year period. The SG&A expense
increase over the prior-year is due primarily to increased marketing costs
associated with the anticipated launch of CoStasis in Europe. SG&A costs for the
periods presented include expenses related to Collagen's former CEO, Mr.
Palefsky. The Company made cash payments of $575,000 to Mr. Palefsky in fiscal
1998, and will make cash payments to Mr. Palefsky during fiscal 1999 totaling
$233,000. The Company also agreed to forgive all indebtedness, aggregating $1.6
million, owed by Mr. Palefsky to Collagen (and assumed by the Company effective
January 1, 1998) subject to certain conditions. (See Note 1 of Notes to
Condensed Consolidated Financial Statements) Such indebtedness was fully
reserved during fiscal 1997. SG&A expenses are expected to remain relatively
constant in fiscal 1999 due to reductions in costs associated with the
Distribution, and expenses associated with Mr. Palefsky, offset by anticipated
increased expenses associated with operating as a public company. Future levels
of SG&A spending will depend on various factors, including the level of product
sales.

     During the three and six months ended December 31, 1998, the Company
recorded $635,000 and $2.4 million, respectively, of compensation expense in
connection with the cancellation of the remaining stock options of Cohesion
Corporation. In September 1998, the Company's Board of Directors approved a
program to cancel options to purchase shares of the common stock of Cohesion
Corporation (the "Canceled Options"). In connection with such program, the
Company offered to pay each holder of Canceled Options a per share amount equal
to the excess of $16.70 over the exercise price of the Canceled Option (the
"Option Payment"). The Company will make this Option Payment ratably over the
original vesting period of the Canceled Option so long as the former holder
thereof remains an employee or consultant of the Company or Cohesion
Corporation. The Company expects to record an additional $3.3 million of
compensation expense with respect to the cash-out of options, which will be
recognized during fiscal years 1999 through 2001.

     Gains on sales of investments were $4.4 million and $14 million for the
three and six months ended December 31, 1998, respectively, compared to $2.8
million and $8.8 million for the same prior-year periods. During the three and
six months ended December 31, 1998, the Company sold 75,000 and 200,000 shares
(pre-split), respectively, of Boston Scientific common stock which provided cash
proceeds of $3.6 million and $13.2 million, respectively. Also included in the
gain on sales of investments for the three and six months ended December 31,
1998, was proceeds of $1.1 million from the expiration of an equity collar
investments (See Note 2 of Notes to Condensed Consolidated Financial
Statements). The timing and number of additional shares of Boston Scientific
common stock sold will depend on market conditions and the anticipated cash
needs of the Company.

     For the three and six months ended December 31, 1998, net interest income
was $10,000 and $67,000, respectively, which included $4,000 for the three and
six months ended December 31, 1998, for interest expense from short-term
borrowings (See Note 3 of Notes to Condensed Consolidated Financial Statements)
compared to $1,000 of net interest expense and $236,000 of net interest income
for the same prior-year period. The decrease in net interest income for the six
months ended December 31, 1998, was due to lower average cash, cash equivalent,
and short-term investment balances in the current fiscal year.

     The Company recorded a provision for income taxes of 40% for the six months
ended December 31, 1998. There was no provision for income taxes recorded for
the prior year based on projections at that time for the fiscal year 1998.



                                       13
<PAGE>   14


LIQUIDITY AND CAPITAL RESOURCES

     On January 1, 1998, Collagen contributed to the Company cash, cash
equivalents and short-term investments of $1.8 million, certain equity
investments, including Boston Scientific common stock and common stock of
Innovasive Devices, as well as the agreement with Zimmer regarding the
distribution of Collagraft products. The Company expects to rely upon proceeds
from the sale of these investments, as well as revenues from the sale of
Collagraft, for future working capital, capital expenditures and other corporate
purposes.

     At December 31, 1998, cash, cash equivalents and short-term investments
were $953,000. Net cash used in operating activities was $12.4 million for the
six months ended December 31, 1998. For the six months ended December 31, 1998,
cash provided by investing activities was $13.4 million and was primarily
related to proceeds of $13.2 million from the sale of 200,000 shares (pre-split)
of Boston Scientific common stock and proceeds of $2.6 million from the sales of
short-term and other investments, including $533,000 of other affiliated stock,
partially offset by capital expenditures. Cash proceeds of $1.1 million were
received primarily from borrowings, offset by $1.8 million used to purchase
shares of the Company's common stock. The Company anticipates capital
expenditures to be approximately $6.0 million in fiscal 1999.

     In September 1998, the Company's Board of Directors approved a stock
repurchase program to repurchase up to 1.0 million shares of the Company's
Common Stock at a price of up to $4.25 per share. As of December 31, 1998, the
Company had repurchased an aggregate of 471,100 shares of Common Stock under
this program.

     The Company's principal sources of working capital include sales of Boston
Scientific common stock and its cash, cash equivalents and short-term
investments. The Company anticipates that sales of Boston Scientific common
stock will be made from time to time, with the objective of generating cash for,
among other things, further investments in both current and new affiliated
companies. The Company may defer sales of Boston Scientific common stock for tax
planning purposes, although decisions concerning prospective Boston Scientific
common stock sales will also be affected by the then-current market price of
Boston Scientific common stock. As another source of financing, the Company may
in the near term establish a credit facility, although there can be no assurance
that a line of credit will be available to the Company on acceptable terms, if
at all. As of December 31, 1998, the Company had outstanding short-term
borrowings of $1.0 million which was collateralized by the Boston Scientific
common stock (See Note 3 of Notes to Condensed Consolidated Financial
Statements).

     The Company's capital requirements will depend on numerous factors,
including the progress of the Company's clinical research and product
development programs, the extent to which the Company enters into collaborative
relationships with third parties and the scope of the Company's obligations in
any of such relationships, the receipt of, and the time required to obtain,
regulatory clearances and approvals, the resources required to protect the
Company's intellectual property and other factors. The timing and amount of such
capital requirements cannot be accurately predicted.

     The Company believes that its current sources of liquidity should be
adequate to fund its anticipated capital requirements through at least the next
two fiscal years. However, during this period and thereafter, the Company may
require additional financing. The Company does not anticipate significant
capital expenditures in the near term other than what is noted above; however,
it may make investments in businesses and technologies that are necessary to
support its objectives. There can be no assurance that additional financing will
be available to the Company on acceptable terms, if at all. Furthermore, any
additional equity financing may be dilutive to stockholders and debt financing,
if available, may involve restrictive covenants.

    Subsequent to December 31, 1998, Cohesion formed a new company, NeuColl,
Inc. ("NeuColl"), a wholly owned subsidiary, in order to commercialize products
in the orthopedics field, which include 



                                       14
<PAGE>   15

Collagraft and NeuVisc(TM), a collagen-based intra-articular implant. In
connection with the formation, Cohesion granted NeuColl an exclusive license to
certain patents relating to collagen and polymer technology for orthopedic
applications. Cohesion will initially provide funding to NeuColl, however, the
Company expects that NeuColl will eventually seek third-party funding.



YEAR 2000

      The Year 2000 issue refers to problems that computer programs may have in
determining the correct century; for example, time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could cause a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar business activity. The Company
has developed a plan to address potential exposures related to the Year 2000
issue and is taking reasonable steps to ensure that its systems, software and
equipment involving date-related information will continue to function properly
after December 31, 1999. The Company's plan encompasses compliance with
regulatory guidelines on the Year 2000 issue.

      The Company has started its assessment of information technology business
systems, product, operating equipment, and third party interfaces, including
suppliers. To date, the Company has not identified any significant problems. The
Company plans to use Collagen's computer systems until June 30, 1999 under one
of the Intercompany Agreements. Some of Collagen's older computer programs were
written using two digits rather than four to define the applicable year.
Collagen has completed an assessment and has notified the Company that it will
modify or replace portions of its software so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter. The
Company will incur no costs related to ensuring that Collagen's computer systems
are year 2000 compliant. Accordingly, the Company estimates that its costs
associated with the year 2000 issue will be immaterial. Subsequent to June 30,
1999, the Company expects to utilize its own recently purchased computer system,
which the Company believes is Year 2000 compliant. The Company plans to
implement this new business system during fiscal 1999.

      With respect to third party interfaces, the Company has and will continue
to confirm the Year 2000 readiness of those third parties through January 1,
2000. However, the Company cannot reasonably estimate the potential impact on
its financial condition and operations if critical third parties do not become
Year 2000 ready on a timely basis.



FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

    For a more complete discussion of risks and uncertainties involving the
Company's business, please see the risk factors described under the heading
"Risk Factors" set forth in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1998.


Uncertainties Related to Clinical Trials and Lack of Extensive Clinical Data

      Although the Company received a CE Mark in Europe for its lead product
candidate, CoStasis, and is currently in clinical trials in the United States,
clinical data obtained to date has been insufficient to demonstrate the safety
and efficacy of any of the Company's product candidates under applicable FDA
regulatory guidelines. Significant additional clinical data will be required
prior to submission of a premarket approval ("PMA") application for any of such
prospective products in the United States. Such obstacles could delay progress
in the development and commercialization of the Company's current product
candidates. Adverse events related to the use of the Company's product
candidates may occur during clinical 



                                       15
<PAGE>   16

trials, and any such events may require suspension or termination of clinical
trials, and the filing of reports with the FDA and other applicable U.S. and
international regulatory authorities. Such events could negatively impact the
Company's ability to achieve successful development and commercialization of its
products.


Uncertainties Related to Development and Commercialization

      The development and commercialization of new products, such as the
Company's surgical sealant CoSeal, are highly uncertain, as is the timing
associated with these activities. Among other things, potential products that
may appear to the Company to be promising may not reach the market for a number
of reasons, including the possibilities that the potential products will be
found to be ineffective or to cause harmful side effects during preclinical
testing or clinical trials, will fail to receive necessary regulatory approvals,
will be difficult to manufacture on a commercial scale, will be uneconomical,
will fail to achieve market acceptance or will be precluded from
commercialization by the proprietary rights of third parties. If any of the
Company's development programs are not successfully completed in a timely
fashion, required regulatory approvals are not obtained in a timely fashion, or
products for which approvals are obtained are not commercially successful, the
Company's business, financial condition and results of operations will be
materially and adversely affected.


Uncertainties of Market Acceptance

     There can be no assurance that the Company's products will gain commercial
acceptance among physicians, patients and health care payors, even if necessary
international and U.S. marketing approvals are obtained. The Company believes
that recommendations and endorsements by physicians will be essential for market
acceptance of its surgical products, and there can be no assurance that any such
recommendations or endorsements will be obtained. Acceptance among physicians
may also depend upon the Company's ability to train surgeons and other potential
users of the Company's products in the application of sprayable surgical
products, which they typically have not used, and the willingness of such users
to learn these new techniques. Additional factors in achieving market acceptance
may include the Company's ability to address competition from U.S. and
international medical device, pharmaceutical and biopharmaceutical companies, to
develop a marketing and sales force, to form strategic partnerships and to
manufacture price- and cost-effective products. Failure of the Company's
products to achieve significant market acceptance will have a material adverse
effect on the Company's business, financial condition and results of operations.


Intense Competition

     The Company competes with many domestic and foreign medical device,
pharmaceutical and biopharmaceutical companies and organizations across each of
its product categories and areas in which it is conducting research and
development activities. In the hemostatic and biosealant areas, the Company
believes that it will face strong competition in the United States from existing
methodologies for controlling bleeding and sealing wounds resulting from
surgery, such as hemostatic powders and sponges, collagen-based hemostats and
traditional sutures and staples marketed by companies. In the United States,
there are several fibrin sealants under development, including a fibrin sealant
product which was recently approved by the FDA. In addition to conventional
fibrin sealants, there are a number of other products in late-stage development
using either collagen or polymer technologies, as well as another class of
sealants called cyanoacrylates. In the orthopedics area, the Company's
Collagraft bone graft products face competition from synthetic bone graft
substitutes.

     Many of these companies and organizations have or may have substantially
greater financial, technological, research and development, regulatory and
clinical, marketing and sales and personnel resources than the Company. They may
also have greater experience in developing products, conducting clinical trials,
obtaining regulatory approvals, and manufacturing and marketing such products.
They may also develop alternative technologies and products that are more
effective, easier 



                                       16
<PAGE>   17

to use or more economical than those which have been or are being developed by
the Company or that render the Company's technology and products obsolete and
non-competitive. There can be no assurance that the Company's current
competitors or other parties will not succeed in developing alternative
technologies and products that are more effective, easier to use or more
economical than those which have been or are being developed by the Company or
that would render the Company's technology and products obsolete and
uncompetitive. Competitors may also obtain approval or clearance by the FDA or
foreign regulatory approval organizations, achieve product commercialization or
obtain patent protection earlier than the Company. Also, to the extent the
Company commences manufacturing activities, it will also face competition with
respect to manufacturing efficiency and marketing capabilities, areas in which
it currently has limited experience.


Uncertainty of Future Profitability

     The Company's operating losses have resulted primarily from expenses
incurred in connection with the Company's research and development activities,
including preclinical and clinical trials, development of manufacturing
processes and general and administrative expenses, and the Company expects that
such expenses will continue to increase for the foreseeable future. The
Company's ability to achieve and sustain operating profitability is highly
dependent upon obtaining in a timely and efficient fashion regulatory approval
for its products in development and successfully commercializing such products,
particularly the CoStasis atraumatic hemostatic device and the CoSeal surgical
sealant. The Company must also develop sales and marketing capabilities for its
product candidates, both in Europe, the United States and other markets. There
can be no assurance that the Company will obtain required regulatory approvals
in a timely fashion, if at all, or successfully develop, manufacture,
commercialize and market products or that the Company will ever record
significant product revenues or achieve operating profitability. Operating
profitability, if achieved, may not be sustained.


Dependence on Boston Scientific Stock to Fund Operations

     The Company has implemented a "protect" strategy based on purchases of put
options and sales of call options in combination, common known as an "equity
collar," covering 1.5 million shares of its Boston Scientific stock holdings as
of December 31, 1998. While the strategy is designed to minimize downside risk
of loss should the stock price decline below approximately $31.00 (post-split)
and allow for limited upside participation should the stock price rise above
approximately $49.00 (post-split), there can be no assurance that the Company
will be able to sell the remaining unhedged shares of Boston Scientific stock at
attractive prices if, when and as needed. Failure to achieve such sales could
jeopardize the Company's ability to fund its operations and require it to engage
in additional financing alternatives, some of which might be dilutive. The
market price of Boston Scientific common stock is highly volatile and, as a
medical device manufacturer, the Company believes that Boston Scientific is
subject to a number of the same factors affecting its operations as the Company,
as well as additional factors not applicable to the Company. Any significant
downward fluctuation in the market price for Boston Scientific common stock
could adversely impact the Company's earnings due to lower amounts realized on
any sales by the Company of such stock.


No Assurance of Regulatory Approvals

     The Company's existing and proposed products, research and development and
planned commercialization activities are subject to regulation by numerous
governmental authorities, principally the FDA and corresponding state and
foreign regulatory agencies. Product development and approval within this
regulatory framework takes a number of years and involves the expenditure of
substantial resources. Any failure by the Company to comply with applicable
regulatory requirements could result in the detention or seizure of products,
issuance of an enjoinment of future product 



                                       17
<PAGE>   18

activities and the assessment of civil and criminal penalties against the
Company, its officers and its employees. Failure to comply with the regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations.

     In order for the Company to market its products in Europe and other foreign
countries, the Company and/or its partners, if any, must obtain required
regulatory approvals and comply with extensive regulations governing safety,
quality and manufacturing processes. These regulations vary significantly from
country to country. The time required to obtain approval to market the Company's
products outside the United States may be longer or shorter than that required
in the United States. In order to market the products being developed by the
Company in the member countries of the European Union, the Company will be
required to obtain CE Mark certification.

     The Company anticipates that its products currently in development will be
regulated as Class III medical devices and will require a PMA prior to being
marketed in the United States. There can be no assurance that the FDA will agree
that the clinical study results for CoStatis or CoSeal, once submitted, will
have adequately demonstrated the safety and effectiveness of such products.


Limited Manufacturing Capacity

     Cohesion expects to manufacture and package the final CoStasis and CoSeal
products and that it will use outside contractors for other functions, such as
non-proprietary, high-volume processes. There can be no assurance that the
Company will be able to manufacture commercial quantities of its planned
products in a timely manner, or at all, and at commercially reasonable costs on
a timely basis. There can also be no assurance that the Company or its suppliers
or contract manufacturers will not experience materials shortages in the future.
Any of these factors could have an material adverse effect on the Company's
ability to develop and commercialize its products, which in turn would have a
material adverse effect on the Company's business, financial condition and
results of operations.

     The Company is required to register as a medical device manufacturer with
the FDA and to list its products with the FDA. In addition, prior to
international commercialization, the Company will be required to attain and
maintain compliance with ISO 9001 standards. Failure to either attain or
maintain compliance with the applicable regulatory requirements of various
regulatory agencies would have a material adverse effect on the Company's
business, financial condition and results of operations. The Company has not yet
undergone an FDA quality system regulation ("QSR") inspection and does not
anticipate that it will undergo such an inspection until after submission of its
initial PMA application for its CoStasis product.


Lack of Marketing and Sales Capabilities

     The Company currently has no experience in marketing or selling its
products under development and does not have a significant marketing and sales
staff. In order to achieve commercial success for any product approved by the
FDA, the Company must either develop a marketing and sales force or enter into
arrangements with third parties to market and sell its products. If the Company
develops its own marketing and sales capabilities, it will compete with other
companies that currently have experienced and well-funded marketing and sales
operations. To the extent that the Company enters into co-promotion or other
marketing and sales arrangements with other companies, any revenues to be
received by the Company will be dependent on the efforts of others, and there
can be no assurance that such efforts will be successful.


                                       18
<PAGE>   19



TEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      The Company is exposed to market risk, including changes to interest rates
and equity investment prices. The Company places its debt investments in
instruments that meet high credit quality standards, as specified in the
Company's investment policy guidelines. The Company does not expect any material
loss with respect to its debt investment portfolio. As part of its strategic
alliance efforts, the Company invests in equity instruments of biotechnology or
biomedical device companies that are subject to fluctuations in market value
from changes in stock prices and thus has material equity investments at
December 31, 1998 with related market risks. The Company believes that these are
viable investments that will eventually develop into marketable investments.




                                       19
<PAGE>   20

                           PART II. OTHER INFORMATION

                           COHESION TECHNOLOGIES, INC.



Item 1.  Legal Proceedings

         None



Item 2.  Changes in Securities and Use of Proceeds

         None



Item 3.  Defaults Upon Senior Securities

         None



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

         None



Item 5.  Other Information

         None



Item 6.  Exhibits and Reports on Form 8-K

         A.  Exhibits


         Exhibit 27   Financial Data Schedule



         B.  Reports on Form 8-K

                  None



                                       20
<PAGE>   21


                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.



                                         COHESION TECHNOLOGIES, INC.



Dated: February 16, 1999                 /s/   Sharon Kokubun
                                         ---------------------------------------
                                         Sharon Kokubun
                                         Vice President, Financial Operations
                                         (Principal Accounting Officer)



                                       21
<PAGE>   22


                           COHESION TECHNOLOGIES, INC.

       FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED DECEMBER 31, 1998


                                INDEX TO EXHIBITS


<TABLE>
<CAPTION>
                                                                    Sequentially
Exhibit                                                              Numbered
Number                           Exhibit                               Page
------                           -------                            -----------
<S>               <C>                                               <C>

  27              Financial Data Schedule (EDGAR version only)
  27.1            Financial Data Schedule (EDGAR version only)
  27.2            Financial Data Schedule (EDGAR version only)
</TABLE>



                                       22