<PAGE>
 
                                   FORM 10-Q
                                        
                       SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                   QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                                        

       For the Quarter ended June 30, 1998 Commission file number 0-28492
                             -------------                               

                            INNOVASIVE DEVICES, INC.
             (Exact name of registrant as specified in its charter)


                 Massachusetts                          04-3132641
        (State or other jurisdiction of              (I.R.S. Employer
        incorporation or organization)              Identification No.)

                   734 Forest Street,  Marlborough  MA  01752
                    (Address of principal executive offices)

        Registrant's telephone number, including area code  508/460-8229
                                                            ------------

                                      N/A
   Former name, former address and former fiscal year, if changed since last
                                    report.

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 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.

                            (1)  YES  X      NO
                                     ---        ---
                            (1)  YES         NO  X
                                     ---        ---

The number of shares outstanding of the registrant's common stock as of August
12, 1998 was  9,180,386.
<PAGE>
 
                            INNOVASIVE DEVICES, INC.

                                     INDEX
<TABLE> 
<CAPTION> 
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Part I:    Financial Information

  Item 1.  Condensed Consolidated Financial Statements

           Condensed Consolidated Balance Sheet at June 30, 1998    
             (unaudited) and December 31, 1997                                3
 
           Condensed Consolidated Statement of Operations (unaudited) for
             the Three and Six Months Ended June 30, 1998 and 1997            4
 
           Condensed Consolidated Statement of Cash Flows (unaudited) for
             the Six Months Ended June 30, 1998 and 1997                      5
 
           Notes to Unaudited Condensed Consolidated Financial Statements     6
 
  Item 2.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations                                7
 
PART II.   Other Information                                                 11

Signatures                                                                   13

</TABLE> 

                                       2
<PAGE>
 
                        Part I - Financial Information
 
                         Item 1.  Financial Statements
 
                           INNOVASIVE DEVICES, INC.
                     Condensed Consolidated Balance Sheet
                                (in thousands)
<TABLE> 
<CAPTION> 
                                                              June 30,     December 31,
                                                               1998           1997
                                                            -----------    ------------
                                                            (unaudited)
<S>                                                         <C>           <C>
ASSETS
 
Current assets:
     Cash and cash equivalents                              $  5,289       $  2,916
     Marketable securities                                     3,733         10,604
     Accounts receivable, net of allowance for                             
        doubtful accounts of $139 and $121 at June 30,                     
        1998 and December 31, 1997, respectively               1,889          1,625
     Inventories                                               3,957          2,947
     Prepaid expenses                                             31            116
                                                            --------       --------
         Total current assets                                 14,899         18,208
                                                                           
     Fixed assets, net                                         2,047          1,960
     Other assets, net                                         1,184          1,352
                                                            --------       --------
                                                            $ 18,130       $ 21,520
                                                            ========       ========
                                                                           
LIABILITIES AND STOCKHOLDERS' EQUITY                                       
                                                                           
Current liabilities:                                                       
     Accounts payable                                       $    675       $    809
     Accounts payable to related party                           188            392
     Other current liabilities                                 1,148          1,122
                                                            --------       --------
         Total current liabilities                             2,011          2,323
                                                            --------       --------
Stockholders' equity:                                                      
     Common stock                                                  1              1
     Additional paid-in capital                               54,798         54,702
     Accumulated deficit                                     (38,600)       (35,156)
     Deferred compensation                                       (80)          (350)
                                                            --------       --------
                                                              16,119         19,197
                                                            --------       --------
                                                            $ 18,130       $ 21,520
                                                            ========       ========
</TABLE>


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

                                       3
<PAGE>
 
                           INNOVASIVE DEVICES, INC.
                Condensed Consolidated Statement of Operations
               (In thousands, except per share data; unaudited)
 
<TABLE> 
<CAPTION> 
                                                 Three months ended           Six months ended
                                                     June 30,                     June 30,
                                             -------------------------      -----------------------
                                               1998            1997           1998           1997
                                             --------        --------       --------       --------
<S>                                         <C>            <C>             <C>            <C>
Net sales                                    $   2,955      $    1,751      $   5,513      $   3,414
                                                                                           
Cost of sales                                      829             510          1,544          1,020
                                             ---------      ----------      ---------      ---------
     Gross profit                                2,126           1,241          3,969          2,394
                                                                                           
Selling, general and administrative                                                        
     expenses                                    2,749           1,856          5,471          3,351
Research and development                         1,165             927          2,261          1,757
Purchased in-process research and                                                          
     development                                     -          13,370              -         13,370
                                             ---------      ----------      ---------      ---------
     Loss from operations                       (1,788)        (14,912)        (3,763)       (16,084)
                                                                                           
Interest income, net                               124             286            319            585
                                             ---------      ----------      ---------      ---------
     Net loss                                ($  1,664)     ($  14,626)     ($  3,444)     ($ 15,499)
                                             =========      ==========      =========      =========
Basic and diluted net loss per share         ($   0.18)     ($    2.00)     ($   0.38)     ($   2.12)
                                             =========      ==========      =========      =========
     Shares used in computing basic          
        and diluted net loss per share           9,175           7,328          9,171          7,294
                                             =========      ==========      =========      =========
</TABLE>

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

                                       4
<PAGE>
 
                           INNOVASIVE DEVICES, INC.
                Condensed Consolidated Statement of Cash Flows
                           (In thousands; unaudited)
 
<TABLE> 
<CAPTION> 
                                                             Six months ended
                                                                 June 30,
                                                           --------------------
                                                             1998        1997
                                                           --------    --------
<S>                                                       <C>         <C>
Cash flows from operating activities
     Net loss                                              $(3,444)    $(15,499)
     Adjustments to reconcile net loss to net cash                     
        provided by (used for) operating activities:                   
        Depreciation and amortization                          462          170
        Amortization of deferred compensation                  323           21
        Purchased in-process research and development            -       13,370
        Changes in assets and liabilities:                             
               Accounts receivable, net                       (264)        (381)
               Inventories                                  (1,010)        (692)
               Prepaid expenses                                 85          (83)
               Other assets                                    110            -
               Accounts payable                               (134)           6
               Accounts payable to related party              (204)         173
               Other current liabilities                        26          (62)
                                                           -------     --------
Net cash used for operating activities                      (4,050)      (2,977)
                                                           -------     --------
Cash flows from investing activities                                   
     Purchases of fixed assets                                (490)        (404)
     Purchases of marketable securities                     (5,424)      (8,125)
     Redemption of marketable securities                    12,295        3,197
     Acquisition of business, net of cash acquired               -         (372)
                                                           -------     --------
Net cash provided by (used for) investing activities         6,381       (5,704)
                                                           -------     --------
Cash flows from financing activities                                   
     Proceeds from issuance of common stock,                           
          net of issuance costs                                 42           26
                                                           -------     --------
Net increase (decrease) in cash and cash equivalents         2,373       (8,655)
                                                                       
Cash and cash equivalents at beginning of period             2,916       12,825
                                                           -------     --------
Cash and cash equivalents at end of period                 $ 5,289     $  4,170
                                                           =======     ========
</TABLE>



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

                                       5
<PAGE>
 
                            INNOVASIVE DEVICES, INC.
         Notes to Unaudited Condensed Consolidated Financial Statements

                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

                                        
1.  BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of
Innovasive Devices, Inc. (the "Company") include, in the opinion of management,
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation of the Company's financial position as of June
30, 1998 and the results of operations for the three and six month periods ended
June 30, 1998 and 1997.  Results of operations for interim periods are not
necessarily indicative of those to be achieved for the full year.

Pursuant to accounting requirements of the Securities and Exchange Commission
(the "SEC") applicable to quarterly reports on Form 10-Q, the accompanying
unaudited condensed consolidated financial statements and these notes do not
include all disclosures required by generally accepted accounting principles for
complete financial statements.  Accordingly, these statements should be read in
conjunction with the financial statements and accompanying notes contained in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997
filed with the SEC on March 31, 1998.

2.  INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
                                June 30,        December 31,
                                  1998              1997
                              ------------      ------------
                              (unaudited)
<S>                             <C>               <C>
                                 
Raw materials                    $1,367            $1,360
Work-in-process                     525               329
Finished goods                    2,065             1,258
                                 ------            ------
Totals                           $3,957            $2,947
                                 ======            ======
</TABLE>


3.  NET LOSS PER SHARE (UNAUDITED)

Basic earnings per share is computed by dividing the income available to common
stockholders by the weighted average number of common shares outstanding  for
the period.  For purposes of calculating diluted earnings per share, the
denominator includes both the weighted average number of common shares
outstanding and potential dilutive common shares outstanding for the period.
For each of the periods presented, basic and diluted earnings per share are the
same due to the antidilutive effect of potential common shares outstanding.

                                        
                                        

                                       6
<PAGE>
 
                            INNOVASIVE DEVICES, INC.
                                        
   Item 2.   Management's Discussion and Analysis of Financial Condition and
                             Results of Operations
                                        
OVERVIEW

Innovasive Devices, Inc. (the "Company") is primarily engaged in the
development, manufacture and marketing of proprietary devices and
instrumentation which facilitate the reattachment of soft tissue structures,
such as ligaments and tendons, to bones and other tissues. The Company has a
limited operating history and has expended significant resources to fund
research and development, the establishment of its manufacturing capabilities
and the expansion of its marketing and sales organization.  The Company plans to
continue investing aggressively in these areas. Although the Company's sales
have been principally derived from the sale of its family of shoulder related
products, the Company now markets four product platforms:  suture fasteners,
suture systems, cartilage repair products and anterior cruciate ligament ("ACL")
reconstruction products.  The Company broadened its product portfolio with the
June 27, 1997 acquisition of MedicineLodge, Inc. ("MLI"), a company which
designs develops and manufactures orthopaedic medical devices - particularly
implants and related instrumentation used in minimally invasive arthroscopic
procedures to repair injuries to the knee.

The following information should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included in this
Quarterly Report and with the Financial Statements and Management's Discussion
and Analysis of Financial Condition and Results of Operations contained in the
Company's Annual Report on Form 10-K filed with the SEC on March 31, 1998.

Any statements in this report expressing the beliefs and expectations of
management regarding the Company's future results and performance are forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995.  Such forward-looking statements are based on current
expectations that involve a number of risks and uncertainties.  The Company
wishes to caution readers not to place undue reliance on any such forward-
looking statements, which speak only as of the date made.  Such forward looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected.  These risks include the receipt of regulatory
approvals, progress of product development programs, clinical efficacy of and
market demand for the products.  Certain of such risks and uncertainties are
described in Exhibit 99 of the Company's Annual Report on Form 10-K filed with 
the Securities and Exchange Commission on March 31, 1998.

                                       7
<PAGE>
 
RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1997

Net sales for the second quarter of 1997 of $2,955,000 increased $1,204,000 from
$1,751,000 for the same period in the prior year.  The increase resulted
primarily from a higher level of sales of ROC suture anchors, suture systems and
ACL reconstruction products which were not available in the second quarter of
1997.  Contributing to the increase in ROC suture anchor sales was the BioROC,
a bioabsorbable suture anchor introduced in the first quarter of 1998.
Contributing to the increase in ACL reconstruction products was the Linx HT, a
device introduced in the third quarter of 1997 which utilizes the fixation of
hamstring tendon grafts in ACL repair procedures.  In the second quarter of 1998
the Company commenced shipments of a new suture system product, the Y-Knot, a
device used in place of traditional knot configurations when securing soft
tissue to bone.  Domestic net sales increased during the second quarter of
1998 over the second quarter of 1997 as a result of an increase in sales of the
Company's ROC suture anchors, suture systems and ACL reconstruction products.
In addition, the Company has increased its domestic direct sales force, clinical
support and agent distribution network over the same quarter in the prior year.
International net sales increased during the second quarter of 1998 from the
second quarter of 1997 primarily as a result of an increase in ROC suture
anchors and ACL reconstruction systems.

Gross profit increased to $2,126,000 in the second quarter of 1998 from
$1,241,000 in the second quarter of 1997.  As a percentage of sales, gross
profit increased to 72.0% in the second quarter of 1998 from 70.9% in the second
quarter of 1997.  The increase in gross profit was due primarily to an improved
product sales mix in the period and higher sales volumes which resulted in
improved manufacturing efficiencies.

Selling, general and administrative expenses increased to $2,749,000 in the
second quarter of 1998 from $1,856,000 in the second quarter of 1997. The
increase resulted primarily from higher selling commissions resulting from
higher sales volume, increased advertising costs relating to new product
introductions, increased salary and travel costs related to the expansion of the
domestic direct sales force and incremental administrative costs related to the
operations of MLI, acquired in the second quarter of 1997.

Research and development expenses increased to $1,165,000 in the second quarter
of 1998 from $927,000 in the second quarter of 1997. The increase was primarily
attributable to incremental research and development costs associated with the
operations of MLI, acquired in the second quarter of 1997, and compensation
related to the grant of stock options.

As a result of the Company's transaction with MLI in the second quarter of 1997,
the Company incurred a non recurring charge to operations of $13,370,000
representing the portion of the purchase price allocated to in-process research
and development.

Interest income decreased to $124,000 in the second quarter of 1998 from
$286,000 in the second quarter of 1997 primarily as a result of investment
returns earned on lower average cash balances maintained during the first
quarter of 1998 compared to the prior year.

As a result of the foregoing, the net loss decreased to $1,664,000 in the second
of 1998 from a loss of $14,626,000 in the second of 1997.

                                       8
<PAGE>
 
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996

Net sales for the first six months of 1998 of $5,513,000 increased $2,099,000
from $3,414,000 for the same period in the prior year.  The increase resulted
primarily from a higher level sales of ROC suture anchors, suture systems and
ACL reconstruction products which were not available in the first half of 1997.
Contributing to the increase in ROC suture anchor sales was the BioROC, a
bioabsorbable suture anchor introduced in the first quarter of 1998.  Suture
system sales also increased over the first half of 1997 partially as a result of
sales of the CuffLink which was introduced in the second quarter of 1997.  The
CuffLink is used to augment tunnels made in the bone for rotator cuff repair
procedures.  Contributing to the increase in ACL reconstruction products was the
Linx HT, a device introduced in the third quarter of 1997 which utilizes the
fixation of hamstring tendon grafts in ACL repair procedures.  Domestic net
sales increased during  the first half of 1998 over the first half of 1997 as a
result of an increase in sales of the Company's ROC suture anchors, suture
systems and ACL reconstruction products.  In addition, the Company has increased
its domestic direct sales force, clinical support and agent distribution network
over the same period in the prior year.  International net sales also increased
during the first half of 1998 over the first half of 1997 primarily as a result
of an increase in ROC suture anchors and ACL reconstruction systems.  In the
first quarter of 1998, the Company announced the appointment of Protek GmbH, a
division of Sulzer Orthopaedics, and Stryker Canada, Inc. as distributors for
the Company's products in Germany and Canada, respectively

Gross profit increased to $3,969,000 for the first six months of 1998 from
$2,394,000 for the first six months of 1997.  As a percentage of sales, gross
profit increased to 72.0% for the first six months of 1998 from 70.1% for the
first six months of 1997.  The increase in gross profit was due primarily to an
improved product sales mix in the period and higher sales volumes which resulted
in improved manufacturing efficiencies.

Selling, general and administrative expenses increased to $5,471,000 for the
first six months of 1998 from $3,351,000 for the first six months of 1997.  The
increase resulted primarily from the expansion of the domestic direct sales
force and clinical support resulting in increased salary and travel costs,
higher selling commissions resulting from the increased sales volume, increased
advertising costs relating to new product introductions and incremental
administrative costs related to the operations of MLI, acquired in the second
quarter of 1997.

Research and development expenses increased to $2,261,000 in the first half of
1998 from $1,757,000 in the first half of 1997. The increase was primarily
attributable to incremental research and development costs associated with the
operations of MLI, acquired in the second quarter of 1997, and compensation
related to the grant of stock options.

As a result of the Company's transaction with MLI in the second quarter of 1997,
the Company incurred a non recurring charge to operations of $13,370,000
representing the portion of the purchase price allocated to in-process research
and development.

Interest income decreased to $319,000 in the first half of 1998 from $585,000 in
the first half of 1997 primarily as a result of investment returns earned on
lower average cash balances maintained during the first half of 1998 compared to
the prior year.

As a result of the foregoing, the net loss decreased to $3,444,000 in the first
half of 1998 from  a loss of $15,499,000 in the first half of 1997.

                                       9
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES
 
As of June 30, 1998, working capital amounted to $12.9 million as compared to
$15.9 million at December 31, 1997.

Cash used in the Company's operations amounted to $4.1 million for the first
half of 1998 compared to $3.0 in the first half of 1997.  The net loss incurred
of $3.4 million and an increase in inventories of $1.0 were partially offset by
depreciation and the amortization of deferred compensation charges.

Cash provided by investing activities totaled $6.4 million for the first half of
1998 resulting from  net redemptions of marketable securities totaling $6.9
million partially offset by capital equipment expenditures totaling $490,000.
The Company invests its excess cash in marketable securities with maturities of
less than two years.

Cash provided by financing activities totaled $42,000 for the first half of 1998
resulting primarily from the exercise of common stock options.

The Company expects that its balance of cash, cash equivalents and marketable
securities will be adequate to fund the near term cash requirements for
operations, working capital and fixed assets. The Company's future liquidity and
capital requirements will depend upon the establishment of effective sales
channels in the United States and abroad, the extent to which the Company's
products gain market acceptance, the progress of research and development
programs, regulatory requirements and the expansion of its manufacturing
capabilities to satisfy increasing volume requirements. Therefore, the Company
cannot provide assurances that it will not require additional financing in the
future. If additional financing is necessary, the Company would seek to raise
these funds through bank facilities or debt or equity offerings. There can be no
assurance that such financing would be successfully completed or that such
financing would be available on terms acceptable to the Company.

                                       10
<PAGE>
 
                            INNOVASIVE DEVICES, INC.
                                        
                          PART II -- OTHER INFORMATION
                                        

ITEM 1.  LEGAL PROCEEDINGS
         -----------------

         None

ITEM 2.  CHANGES IN SECURITIES
         ----------------------

         None

Item 3.  Defaults Upon Senior Securities
         -------------------------------

         None

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


The Company's Annual and Special Meeting of Stockholders was held on June 8,
1998 in Boston, Massachusetts.  All matters submitted to a vote of the Company's
stockholders were described in the Company's Proxy Statement dated May 8, 1998.
At the meeting, the shareholders:

(1)  elected the following directors for terms expiring in 2001:

<TABLE>
<CAPTION>
                                  Term       Total Vote For      Total Vote Withheld
                                Expires       Each Director       From Each Director
                               ---------     ---------------     -------------------
<S>                           <C>             <C>                    <C>
Joseph A. Ciffolillo             2001           6,350,104                 5,600
David J. Foster                  2001           6,350,104                 5,600
</TABLE>

(2)  approved the Company's 1996 Omnibus Stock Plan as amended by the Board of
     Directors;

         For                                            3,587,536
         Against                                          327,695
         Abstain                                          616,255
         Broker Non-Votes                               1,824,218


(3)  ratified the Board of Directors' selection of PricewaterhouseCoopers LLP as
     the Company's independent auditors for the fiscal year ending 
     December 31, 1998.

         For                                            6,352,504
         Against                                            1,500
         Abstain                                            1,700

                                       11
<PAGE>
 
ITEM 5.  OTHER INFORMATION
         -----------------

         None

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
         ---------------------------------

         None

                                       12
<PAGE>
 
SIGNATURES

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

INNOVASIVE DEVICES, INC,

Date:  August 14, 1998           By: /s/ Richard D. Randall
                                    ---------------------------------------
                                    Richard D. Randall
                                    President, Chief Executive Officer
                                    and Director
                                    (Principal Executive Officer)

Date:  August 14, 1998           By: /s/ James V. Barrile
                                    --------------------------------------
                                    James V. Barrile
                                    Executive Vice President of Finance,
                                    Chief Financial Officer and Treasurer
                                    (Principal Financial Officer)

                                       13