<PAGE>   1
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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

X    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934

For the quarterly period ended September 30, 2000 or

[ ]  Transition report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934

For the transition period from              to

                         Commission file number 0-19707

                                 INNERDYNE, INC.

             (Exact name of Registrant as specified in its charter)

<TABLE>
<S>                                             <C>
                  DELAWARE                          87-0431168
               (State or other                   (I.R.S. Employer
               jurisdiction of                  Identification No.)
                incorporation
               or organization)
</TABLE>

                    1244 REAMWOOD AVENUE, SUNNYVALE, CA 94089
          (Address, including zip code, of principal executive offices)

       Registrant's telephone number, including area code: (408) 745-6010

     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. Yes X No [ ]

     The number of shares of Registrant's Common Stock issued and outstanding as
of November 3, 2000 was 23,135,396.

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<PAGE>   2

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements
<S>                                                                                                <C>
         Condensed Balance Sheets.............................................................      2

         Condensed Statements of Operations...................................................      3

         Condensed Statements of Cash Flows...................................................      4

         Notes to Condensed Financial Statements..............................................      5

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of
         Operations...........................................................................      7

Item 3.  Quantitative and Qualitative Disclosures About Market Risk...........................     26

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings....................................................................     27

Item 2.  Changes in Securities and Use of Proceeds............................................     27

Item 3.  Defaults upon Senior Securities......................................................     27

Item 4.  Submission of Matters to a Vote of Security Holders..................................     27

Item 5.  Other Information....................................................................     27

Item 6.  Exhibits and Reports on Form 8-K.....................................................     27

         Signature Page.......................................................................     28

         Exhibit Index........................................................................     29
</TABLE>



<PAGE>   3

                          PART I FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

                                 INNERDYNE, INC.
                            CONDENSED BALANCE SHEETS
ASSETS

<TABLE>
<CAPTION>
                                                        SEPTEMBER 30,      DECEMBER 31,
                                                           2000               1999
                                                        (UNAUDITED)        (*SEE NOTE)
                                                        ------------       ------------
<S>                                                     <C>                <C>
Current assets:
   Cash and cash equivalents .....................      $  9,469,418       $  6,862,313
   Accounts receivable, net ......................         4,147,972          3,524,228
   Interest and other receivables ................            23,765            170,110
   Inventories ...................................         1,581,144          1,602,143
   Prepaid expenses and other ....................         1,400,438            197,874
                                                        ------------       ------------

     Total current assets ........................        16,622,737         12,356,668
Equipment and leasehold improvements, net ........           606,064            721,846
Deposits .........................................            66,737             67,167
                                                        ------------       ------------

     Total assets ................................      $ 17,295,538       $ 13,145,681
                                                        ============       ============
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Line of credit ................................      $          0       $    639,989
   Current installments of long-term debt ........                 0            284,816
   Accounts payable ..............................           136,492            234,911
   Accrued liabilities ...........................         1,629,847          1,189,836
                                                        ------------       ------------
        Total current liabilities ................         1,766,339          2,349,552
Long-term debt, excluding current installments ...                 0            232,797
Stockholders' equity:
   Common stock ..................................           230,896            221,536
   Additional paid-in-capital ....................        62,007,675         60,618,436
   Accumulated deficit ...........................       (46,709,372)       (50,276,640)
                                                        ------------       ------------
        Net stockholders' equity .................        15,529,199         10,563,332
                                                        ------------       ------------
Total liabilities and stockholders equity ........      $ 17,295,538       $ 13,145,681
                                                        ============       ============
</TABLE>
*Condensed from audited financial statements.

See accompanying notes to condensed financial statements.


                                       2
<PAGE>   4
                                 INNERDYNE, INC.
                       CONDENSED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
<TABLE>
<CAPTION>

                                                            THREE MONTHS ENDED                  NINE MONTHS ENDED
                                                      SEPTEMBER 30,      SEPTEMBER 30,     SEPTEMBER 30,    SEPTEMBER 30,
                                                          2000               1999              2000              1999
                                                      ------------       ------------       -----------      ------------
<S>                                                   <C>                <C>                <C>              <C>
Product, licensing and contract revenue ........      $  6,412,280       $  5,310,622       $18,054,091      $ 14,807,403
Costs and expenses:
     Cost of sales .............................         1,658,640          1,475,822         4,652,026         4,238,872
     Research, development, regulatory and
       clinical ................................           670,522            737,987         2,179,422         2,126,799
     Sales and marketing .......................         2,350,235          2,211,616         7,099,983         5,995,226
     General and administrative ................           605,969            559,490         1,858,736         1,635,053
                                                      ------------       ------------       -----------      ------------
         Total costs and expenses ..............         5,285,366          4,984,915        15,790,167        13,995,950
                                                      ------------       ------------       -----------      ------------
Operating income ...............................         1,126,914            325,707         2,263,924           811,453
Interest/other income, net .....................            99,733             37,587           270,653           120,180
                                                      ------------       ------------       -----------      ------------
     Income before income taxes ................         1,226,647            363,294         2,534,577           931,633
Income tax .....................................           (39,821)            (4,349)        1,032,692           (14,349)
                                                      ------------       ------------       -----------      ------------
     Net income ................................         1,186,826            358,945         3,567,269           917,284
                                                      ============       ============       ===========      ============
Basic net income per share .....................              0.05               0.02              0.16              0.04
Diluted net income per share ...................              0.05               0.02              0.14              0.04
Weighted average basic shares outstanding ......        23,062,998         21,981,153        22,710,030        21,932,527
Weighted average diluted shares outstanding ....        25,168,096         23,279,748        24,913,624        23,138,315
</TABLE>



         See accompanying notes to condensed financial statements.

                                       3
<PAGE>   5

                                INNERDYNE, INC.
                       CONDENSED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                  NINE MONTHS ENDED
                                                                          SEPTEMBER 30,      SEPTEMBER 30,
                                                                              2000               1999
                                                                           -----------       -----------
<S>                                                                        <C>               <C>
Cash flows from operating activities:
Net income ..........................................................      $ 3,567,269       $   917,284
Adjustments to reconcile net income to net cash provided by operating
activities:
   Depreciation and amortization ....................................          319,289           417,510
   Compensation expense on stock options ............................           47,188             8,477
   Common stock issued for services .................................           27,129              --
   Gain on sale of fixed assets .....................................              (67)           (3,500)
   (Increase) in receivables ........................................         (477,400)         (254,649)
   Decrease (increase) in inventories ...............................           20,998          (185,012)
   Increase in prepaid expenses, other, and deposits ................       (1,202,133)          (31,049)
   Decrease in accounts payable .....................................          (98,419)          (73,358)
   Increase in accrued liabilities ..................................          440,011            33,312
                                                                           -----------       -----------
Net cash provided by operating activities ...........................        2,643,865           829,015

Cash flows used in investing activities:
   Capital expenditures .............................................         (203,507)         (385,104)
   Proceeds from sale of fixed assets ...............................               67             3,500
                                                                           -----------       -----------
Net cash used in investing activities ...............................         (203,440)         (381,604)

Cash flows from financing activities:
   Proceeds from issuance of common stock, net ......................        1,324,282           210,170
   Proceeds from issuance of long-term debt .........................             --             518,634
   Principal payments on long-term debt .............................       (1,157,602)         (329,569)
                                                                           -----------       -----------
Net cash provided by financing activities ...........................          166,680           399,235

Net increase in cash and cash equivalents ...........................        2,607,105           846,646

Cash and cash equivalents at beginning of period ....................        6,862,313         5,757,538

Cash and cash equivalents at end of period ..........................      $ 9,469,418       $ 6,604,184
                                                                           ===========       ===========
</TABLE>


         See accompanying notes to condensed financial statements.


                                       4
<PAGE>   6

                                 INNERDYNE, INC.
                     NOTES TO CONDENSED FINANCIAL STATEMENTS

(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The accompanying interim condensed financial statements and notes are
unaudited, but in the opinion of management reflect all adjustments (consisting
of normal recurring adjustments) necessary for a fair presentation of the
results of such periods. The results of operations for any interim period are
not necessarily indicative of results for the respective full year. These
condensed financial statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations (MD&A) for the nine-month period
ended September 30, 2000 should be read in conjunction with the audited
financial statements and notes thereto and MD&A included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.

(2)  INVENTORIES

     Inventories consist of the following:

<TABLE>
<CAPTION>
                                        SEPTEMBER 30,       DECEMBER 31,
                                            2000               1999
                                         ----------         ----------
                                         (UNAUDITED)
<S>                                      <C>               <C>
Raw materials and supplies ........      $ 1,216,018       $ 1,339,016
Finished goods ....................          756,084           583,126
Reserve for obsolescence ..........         (390,958)         (319,999)
                                         -----------       -----------
Net inventory .....................      $ 1,581,144       $ 1,602,143
                                         ===========       ===========
</TABLE>


(3)  COMPREHENSIVE INCOME

     The Company adopted Statement of Financial Accounting Standard No.130
("SFAS 130"), "Reporting Comprehensive Income," effective January 1, 1998. SFAS
130 establishes standards for reporting and display of comprehensive income and
its components in financial statements. For the periods ended September 30, 2000
and 1999 comprehensive income was equal to the net income as presented in the
accompanying statement of operations.

(4)  NET INCOME PER COMMON SHARE

     Basic net income per common share is the amount of income for the period
available to each share of common stock outstanding during the reporting period.
Diluted net income per common share is the amount of income for the period
available to each share of common stock outstanding during the reporting period
and to each share that would have been outstanding assuming the issuance of
common shares for all dilutive potential common shares outstanding during the
period.

                                       5
<PAGE>   7

In calculating net income per common share, the net income was the same for both
the basic and diluted calculation. Reconciliation between the basic and diluted
weighted-average number of common shares for the three and nine-month periods
ended September 30, 2000 and 1999 is summarized as follows:


<TABLE>
<CAPTION>
                                                                         (UNAUDITED)                    (UNAUDITED)
                                                                      THREE MONTHS ENDED              NINE MONTHS ENDED
                                                                 SEPTEMBER 30,   SEPTEMBER 30,   SEPTEMBER 30,   SEPTEMBER 30,
                                                                     2000           1999             2000            1999
                                                                  ----------      ----------      ----------      ----------
<S>                                                               <C>             <C>             <C>             <C>
Basic weighted average number of common shares
outstanding during the period ..............................      23,062,998      21,981,153      22,710,030      21,932,527

Weighted average number of dilutive common stock options
outstanding during the period ..............................       2,105,098       1,298,595       2,203,594       1,205,788
                                                                  ----------      ----------      ----------      ----------

Diluted weighted average number of common and common
equivalent shares outstanding during the period ............      25,168,096      23,279,748      24,913,624      23,138,315
                                                                  ==========      ==========      ==========      ==========
</TABLE>


     Common stock equivalents of approximately 76,950 and 689,563 shares
outstanding during the nine-month periods ended September 30, 2000 and 1999 that
could potentially dilute basic earnings per share in the future were not
included in the computation of diluted earnings per share because to do so would
have been anti-dilutive for the period.

(5)  OPERATING SEGMENTS

     The Company operates in one line of business, the development and
commercialization of access products for minimally invasive procedures. The
Company has and/or is also pursuing licensing opportunities related to its
proprietary radial dilation and biocompatible coating technologies. As such, the
Company has only one reportable operating segment as defined by the Financial
Accounting Standards Board Statement No. 131, Disclosures About Segments of an
Enterprise and Related Information.

(6)  RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"), that establishes new
accounting and reporting standards for companies to report information about new
accounting and reporting standards for companies to report information about
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. For a derivative not designated as a hedging instrument, changes in the
fair value of the derivative are recognized in earnings in the period of change.
The Company must adopt SFAS No. 133 by January 1, 2001. Management does not
believe the adoption of SFAS No. 133 will have a material effect on the
Company's results of operations, financial position or liquidity.



                                       6
<PAGE>   8


     In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, Revenue Recognition, ("SAB No. 101") to
provide guidance on the recognition, presentation and disclosure of revenue in
financial statements; however, SAB No. 101 does not change existing literature
on revenue recognition. SAB No. 101 explains the staff's general framework for
revenue recognition, stating that four criteria need to be met in order to
recognize revenue. The four criteria, all of which must be met, are the
following:

o    There must be persuasive evidence of an arrangement;

o    Delivery must have occurred or services must have been rendered;

o    The selling price must be fixed or determinable; and

o    Collectibility must be reasonably assured.

     The Company will adopt SAB No. 101 during the fourth quarter of 2000. The
Company continues to evaluate the impact, if any, of SAB No. 101 and any
possible, subsequent interpretations of SAB No. 101 on the Company's policies
and procedures.

     The FASB issued Interpretation No. 44, Accounting for Certain Transactions
Involving Stock Compensation - an Interpretation of APB Opinion No. 25 (FIN No.
44) in March 2000. The interpretation clarifies the application of Opinion 25
for only certain issues such as the following: (a) the definition of employee
for purposes of applying Opinion 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequence of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. The Company adopted FIN No. 44 during the third quarter of
2000. The adoption of this interpretation did not have a material effect on the
Company's results of operations, financial position or liquidity.

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

     Except for the historical information contained in this Quarterly Report on
Form 10-Q, the matters discussed throughout this Quarterly Report on Form 10-Q
are forward-looking statements that are subject to certain risks and
uncertainties that could cause the actual results to differ materially from
those projected. Factors that could cause actual results to differ materially
include, but are not limited to, the impact of intense competition in the
Company's market, the extent of market acceptance of the Company's StepTM family
of products, the timely development and market acceptance of new products, the
compliance of the Company's manufacturing facilities with Good Manufacturing
Practices ("GMP") regulations, the continued acceptance of minimally invasive
surgical ("M.I.S.") procedures, the Company's ability to further expand into
international markets, present uncertainty and incremental expenses related to
the pending stock tender offer for all of the Company's outstanding shares by an
affiliate of Tyco International Ltd., public policy relating to healthcare
reform in the United States and other countries, approval of the Company's
products by government agencies such as the United States Food and Drug
Administration (the "FDA") and the risks set forth in greater detail below under
the heading "Additional Factors that May Affect Future Results", as well as
those set forth in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999 and included from time to time


                                       7
<PAGE>   9

in the Company's other Securities and Exchange Commission ("SEC") reports and
press releases, copies of which are available from the Company upon request. The
Company undertakes no obligation to publicly release the result of any revisions
to these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.

INTRODUCTION

     On October 4, 2000, InnerDyne, Inc. (the "Company" or "InnerDyne") and Tyco
International Ltd. ("Tyco") announced the execution of a definitive agreement
covering the terms of a stock tender offer by an affiliate of Tyco for all of
the outstanding shares of InnerDyne. The tender offer to InnerDyne stockholders,
which includes and is subject to customary representations and conditions,
including regulatory reviews and clearances, was initiated on October 18, 2000.
The Company's Board of Directors have unanimously recommended that stockholders
tender their shares according to the terms of the tender offer. If a majority of
InnerDyne shares are tendered, and assuming no unanticipated delays are
encountered, the change in ownership is likely to occur during the fourth
quarter of 2000.

     InnerDyne is primarily focused upon the development and commercialization
of access products based on its proprietary radial dilation technology used to
perform M.I.S. procedures. InnerDyne designs, develops, manufactures and
commercializes minimally invasive surgical access products incorporating its
proprietary radial dilation technology in the fields of general surgery,
gynecology, pediatric laparoscopy, and urology. The Company has entered into an
agreement with Maxxim Medical, Inc. to facilitate the commercialization of its
radial dilation technology to enhance percutaneous access for vascular
procedures. The Company has proprietary technology in the areas of biocompatible
coatings, radiation delivery for the potential treatment of various types of
cancer, and drug attachment and diffusion, which it intends to continue to
develop either internally or through strategic alliances. InnerDyne, Inc. common
stock is traded on the Nasdaq National Market under the symbol IDYN.

INNERDYNE'S PRODUCTS AND TECHNOLOGY

Radial Dilation Technology

     The primary focus of the Company is the development and commercial
application of its proprietary radial dilation technology. The key feature of
this proprietary technology is the capability to enter the body of a patient by
creating a small puncture wound which can subsequently be dilated, or increased
in size, to create a larger working channel. Employment of radial dilation
within an expandable sheath permits the dilation to be accomplished in a manner
that tends to minimize tissue trauma. Upon completion of a procedure, the
dilation sequence is reversed, resulting in a smaller residual wound than would
be experienced through the employment of similarly sized conventional access
devices. Potential benefits of radial dilation technology include reduced risk,
less patient trauma and reduced procedure time.

     Step Product Line. The Company has developed a family of products utilizing
InnerDyne's proprietary radial dilation technology. The initial Step products
were introduced commercially in late 1994 and are designed to provide access to
the abdominal cavity in order to facilitate the visualization and treatment of
target areas within the cavity while minimizing the tissue trauma associated
with such access.

     Step. The Step device incorporates the Company's proprietary radial
dilation technology and was InnerDyne's first product to be launched on a
commercial basis. The Company has received 510(k) clearances


                                       8
<PAGE>   10

from the FDA to market this device for laparoscopic and thorascopic M.I.S.
procedures. The Company's Step access device replaces trocars, eliminating the
risk of internal organ damage from contact with the sharp surfaces of a trocar.
In contrast to conventional trocars, the Step device utilizes a standard
insufflation needle for penetration through the abdominal wall, creating only a
small puncture wound. Following removal of the needle, a sheath that surrounds
the needle is then dilated to a larger working channel through the insertion of
a tapered dilator and cannula. Following dilation, the dilator is removed,
leaving a rigid sheath that serves as a working channel with an integral
insufflation valve at the proximal end. The radial dilation of tissue to an
appropriately sized working channel holds the cannula in place and obviates the
need for an anchoring system, which may cause a larger residual wound. After
completion of a procedure, the rigid cannula is removed and the sheath retracts
permitting the opening in each of the muscular layers of the abdominal wall to
recover. The residual wound is approximately half the size of that made using a
conventional trocar of similar size. The Step product is currently utilized
primarily in minimally invasive general, gynecological and pediatric surgical
procedures.

     Management believes that positive attributes of the Step product could
significantly affect health care system costs and patient satisfaction with
M.I.S. procedures in which trocars have traditionally been used. The results of
a Company-sponsored retrospective comparative outcome study examining this issue
were released during late 1995. The study included 98 patients and compared an
almost equal number of procedures performed using Step devices and conventional
trocars for access. Statistically significant results of that study indicated
that Step reduced device-related complications during surgery by over 90% and
resulted in an approximate 22% savings in surgery time. Based upon published
operating room costs, this time savings would equate to dollar savings of $345
to $515 per procedure, a substantial outcome for a product that is believed to
be competitively priced with conventional trocars. Management also believes that
post-procedure complications, such as infection and incisional hernias at access
sites, may be reduced with the use of the Step device as compared to
conventional trocars.

     In January 1999, InnerDyne reported the clearance by the FDA of the
Company's 510(k) premarket notification based on the demonstrated safety and
clinical performance of the Step line of minimally invasive surgical access
devices. The product safety premarket notification resulted from the submittal
of substantial information related to the comparative safety of the Step
radially expanding dilation technology for surgical access versus standard
cutting trocars. The FDA clearance acknowledged that the Step radially expanding
surgical access technology had been shown in independent clinical comparative
studies versus conventional cutting trocars to provide safety benefits
including, but not limited to: (1) a lower prevalence of abdominal wall
bleeding; (2) a lower prevalence of bowel and bladder injuries; (3) a lower
incidence of post operative incisional hernias; and (4) a lower prevalence of
major vascular injury. In addition, the FDA clearance noted that a substantial
number of patients reported reduced pain from Step access sites when compared to
conventional trocar sites. The FDA recently notified the Company that it has
determined a 510(k) filing is not required, both historically and in the future,
for labeling claims related to relative patient safety arising from the use of
access products.

     By December 31, 1999 more than 30 peer reviewed papers or presentations had
been published or presented, concluding that patient safety is enhanced when the
Step product is used. A paper presented in November 1999 at the American
Association of Gynecological Laparoscopy Annual Meeting involved more than 8,000
procedures and more than 21,000 Step insertions. The study concluded that, based
on a comparison to a control group where standard access devices of various
types were used, an adverse event was about ten times more likely to occur with
conventional trocars versus InnerDyne's Step products. The Company's clinical
database presently covers almost 20,000 procedures in which Step has
demonstrated statistically significant


                                       9
<PAGE>   11

reductions of complications and enhanced patient safety and comfort. Other
competitors have claimed that their access devices can provide some benefits
similar to the Step products, though to date, the clinical evidence to support
such competitive claims has been limited.

     Short Step(TM). The Short Step is a conventional Step device that has been
reduced in length to be particularly suitable for M.I.S. procedures involving
smaller individuals, especially children and thin females. The Short Step was
commercially introduced in 1995. In January 1996, the Company announced that its
Short Step device had been awarded the Seal of Acceptance by the Alliance of
Children's Hospitals, Inc. ("Alliance"). The Alliance is a wholly owned
subsidiary of Child Health Corporation of America, which is comprised of
approximately 35 freestanding children's hospitals across the United States. The
Alliance selected the Step system, after extensive research and review, based
upon its ability to reduce both the trauma and operative complications
associated with pediatric laparoscopic surgical procedures. In exchange for an
ongoing royalty payment, the Company is entitled to use this seal in connection
with the marketing and sale of its Step line of products. The Company hopes that
the Seal of Acceptance will continue to help the Company expand awareness and
sales of its Step product line for use in the pediatric environment.

     Reposable Step(TM). Launched in 1996, the Reposable Step incorporates the
radial dilation features of disposable Step devices in a partially reusable
access device. A substantial market for reusable trocars exists, and management
expects a trend toward a somewhat more frequent usage of reusable devices. The
Reposable Step includes a number of reusable components consisting of a
combination of metal and plastic parts that may be cleaned and sterilized by
most conventional methods. The dilator, cannula and needle are reusable, while
the sheath and valve are single use components designed to be disposed of
following surgery.

     Mini Step(TM). The Mini Step is a small-diameter radially dilating access
device designed for use in tubal ligation, pediatric procedures, and
micro-laparoscopic surgeries utilizing small instruments. The working diameter
of the Mini Step ranges from a nominal 2mm to 8mm. Like the Step device, Mini
Step is expected to offer clinicians the potential to reduce device-related
surgical complications and surgery time. The Mini Step devices were commercially
introduced in 1997.

     One Step(TM). The One Step is a device with a universally adjustable valve
and seal system designed to eliminate the need for a reducer. The device is
intended to maintain insufflation while accommodating most conventional surgical
instruments. The One-Step device was commercially introduced in 1998.

     Open Step(TM). The Open Step is a device designed to establish access into
the abdominal cavity using a technique known as open laparoscopy. The Open Step
device was commercially introduced in 1998.

     Nephro-Step(TM). The Nephro-Step product is intended to provide
percutaneous access to the kidney and bladder to facilitate the performance of
selected urological procedures. The Company initiated a limited commercial
launch of the Nephro-Step during the third quarter of 2000.

     Management believes that the positive attributes of the Step product line
may also enable minimally invasive access to organs within the abdominal cavity.
The current alternative for this type of access involves the insertion of a long
flexible channel and scope through a natural body orifice such as the mouth or
the rectum, and only limited procedures are possible due to the restricted size
of the channel and the tortuous path that must be navigated. The Step product
line has been shown to enable laparoscopic access through the abdominal wall and
across the peritoneal space into the stomach for the treatment of benign tumors.
InnerDyne believes that the use of Step products could substantially reduce
recovery times for these types of procedures.


                                       10
<PAGE>   12

The Company also believes that the enhanced capabilities of radially expanding
dilation may enable additional surgical procedures to be performed through
minimally invasive techniques. InnerDyne expects to complete development of an
intra-organ access device based on its proprietary radially expanding dilation
technology during 2000, and assuming this effort is successful, to commercially
launch an intra-organ product in 2001.

     Distribution of Step Products. The Step family of products is distributed
to health care professionals in both domestic and international markets. In the
United States, the Company's M.I.S. access product line is generally sold
directly to health care professionals by a network of sales representatives, a
limited number of whom are employees of the Company. InnerDyne management
employees manage these sales representatives on a regional basis. In order to
enhance the effectiveness of these domestic sales activities, agreements with
buying groups that represent multiple provider institutions have been pursued.
InnerDyne signed two buying group agreements in 1997. These agreements cover
approximately 1,350 hospitals across the United States. Additional buying group
agreements were signed in 1999, adding approximately 2,150 hospitals and surgery
centers to those covered by agreements. In May 2000, InnerDyne announced the
signing of an agreement with Premier Purchasing Partners. The agreement, which
covers the approximately 1,800 member institutions in the Premier system, took
effect on July 1, 2000.

     In selected foreign countries, local distributors purchase products from
the Company for subsequent resale to their respective countries' health care
systems. Distributors in selected foreign markets can and have been changed when
the Company has deemed the performance of individual distributor organizations
to be unsatisfactory.

     Other Applications & Technology. During the second quarter of 1997,
InnerDyne established a business unit to better define the value that radial
dilation technology could potentially bring to interventional cardiology and
radiology procedures and to develop access products based on this assessment.
The Company proceeded with animal studies and device refinements in 1997 and
continued testing the product concept in conjunction with cardiology advisors in
1998. The study results were positive and human use trials to demonstrate the
clinical benefits were initiated in Europe during the second quarter of 1998. In
September 1998, InnerDyne announced that it had received clearance from the FDA
of a 510(k) application for its radially dilatable access device for use in
gaining percutaneous access for the performance of vascular procedures. Limited
domestic use evaluations of a vascular access product were conducted in 1999. An
additional related 510(k) application was filed with the FDA in August 1999, and
cleared in June 2000, to update labeling involving the most current version of
the radially expanding vascular access ("INNERVASC(TM)") product. In March, 2000
InnerDyne announced the signing of an agreement with Maxxim Medical, Inc.
covering the distribution by Maxxim of the Company's INNERVASC vascular access
product in the United States and South America. The initial shipment of radially
dilatable INNERVASC sleeves to Maxxim took place in June 2000, and ongoing
shipments to Maxxim are expected to continue until at least 2002.

     The Company also signed an agreement involving its radial dilation access
technology with a small private development stage company during the first
quarter of 2000. This agreement will permit the partner entity to potentially
utilize InnerDyne's technology in the diagnosis and treatment of selected cancer
tumors.

     There can be no assurance that current or future new product developments
will generate product opportunities that can be commercially sold in sufficient
quantities; failure to achieve commercial success with any or all new product
applications could have a material adverse impact on the Company's profitability
and operations.


                                       11
<PAGE>   13


     InnerDyne announced an agreement covering the development and potential use
of its proprietary radial dilation technology for specialized vascular access
with EndoTex Interventional Systems ("EndoTex") in 1996. In January 1999, the
management of EndoTex notified InnerDyne that it was ceasing to make payments
required for EndoTex to use radial dilation for specialized vascular access. The
termination of the EndoTex agreement did not have a material impact on the
Company's business, financial condition, and results of operations.

     The Company entered into an agreement covering the development of a less
traumatic means of placing enteral feeding tubes with Sherwood-Davis & Geck
("SDG") in 1997. The Company announced that it had received the single
regulatory milestone payment associated with the SDG agreement during the second
quarter of 1997. In the first quarter of 1998, InnerDyne and SDG terminated the
development agreement when SDG was acquired. In the future, the Company may
decide to develop a feeding tube placement system.

     During 1997 and early 1998, InnerDyne committed resources to an
investigation of the market opportunity for a radially dilatable access device
for arthroscopic procedures. Clinical evaluation of an FDA cleared arthroscopic
access product indicated that clinical benefits of the technology in this market
were not sufficient to warrant further investment, and the project was
terminated.

Biocompatible Coating Technologies

     The Company possesses certain proprietary technologies in the area of
biocompatible coatings. The technologies that comprise the Company's
thromboresistant coating ("TRC") capability are believed to have application
when foreign objects remain in contact with various areas of the body,
particularly within the blood stream, for sustained periods of time. These
technologies include the ability to deposit an extremely thin layer
(approximately one micron) of siloxane on a surface and the ability to graft a
bioactive substance, such as the drug heparin, to that siloxane layer. The
Company's TRC utilizes a "tether" molecule to attach heparin, other bioactive
molecules or radioisotopes to the previously applied siloxane subsurface. One
end of the tether molecule is covalently bonded to the siloxane coating and the
other end of the tether molecule is covalently bonded to the bioactive molecule
or radioisotope. Because both points of attachment may utilize covalent bonds,
the Company believes that its coating process may result in a stronger bond to
the surface of a device than some other methods presently in use. TRC coatings,
employed with the siloxane layer alone or in combination with bioactive
substances, can extend the life of blood-gas exchange devices or provide the
capability to extend the duration of contact of a coated device with blood or
other body fluids while minimizing the physiological impacts of such contact.

     InnerDyne is developing a proprietary technology that coats materials with
a coating to which rhenium-188 or another radioisotope can be attached, to
potentially reduce restenosis in patients who have undergone interventional
vascular procedures. InnerDyne completed stent-based animal studies using
rhenium-188 for the treatment of restenosis in early 2000. Though the results of
this animal study demonstrated clinical efficacy, recently published human
clinical results from a competing catheter-based technology have reduced the
probability that the Company can attract a corporate stent partner that will
license the technology under acceptable terms, if at all. InnerDyne is not
currently allocating technical resources to further pursuit of radiation
coatings for restenosis applications.

     In the fourth quarter of 1999, the Company allocated resources to
investigate a proprietary therapeutic coating which may potentially provide a
proprietary bioactive treatment for restenosis. A limited animal trial intended
to further evaluate the potential impact of this coating to reduce restenosis
was initiated during the third quarter of 2000, with results expected in early
2001. If preliminary promising results of this investigation


                                       12
<PAGE>   14

are confirmed in these and future investigations, the Company may increase
associated resources, and endeavor to attract a corporate partner interested in
the technology. There can be no assurances that the results of this further
investigation will be positive, or that a corporate partner will be interested
in licensing or developing this technology on acceptable terms, if at all.

     The Company has begun a research program aimed at developing absorbable
brachytherapy products for the treatment of focal or site-specific cancers such
as breast, prostate, cervical, and neurological cancers. The program's goal is
to develop biocompatible and bio-absorbable brachytherapy sources for use in
radiotherapy or simultaneous radiotherapy and chemotherapy drug delivery. These
novel combined brachytherapy/chemotherapeutic drug sources are being designed
for potential use in the local-regional treatment of primary cancer, including
treatment of the tumor bed after removal of a tumor. The final product could
fundamentally differ from both current brachytherapy sources and drug-delivery
sources and could provide an efficient mechanism to control cancer growth and
limit cancer recurrence. The advantage of localized therapy over other therapies
is the potential to eliminate cancerous cells while sparing normal cells. Other
therapies, such as systemic chemotherapy and external beam radiation, affect
both cancerous and non-cancerous cells and can result in greater pain, longer
recovery times, and higher treatment costs. In contrast, localized therapy may
lower the cost of the therapeutic procedure, reduce hospital stays, and reduce
the pain and suffering experienced by the patient.

     In December 1997, InnerDyne and Oak Ridge National Laboratory ("ORNL")
announced that the Department of Energy had awarded ORNL and Brookhaven National
Laboratories ("BNL") a cooperative research and development agreement ("CRADA")
to support the development of InnerDyne's proprietary method of labeling or
attaching radioactivity to implantable devices. Initially, the ORNL researchers
helped to optimize chemical methods required to efficiently attach a radioactive
source to stents. Generators from ORNL and the new technology were provided to
investigators at BNL who, in conjunction with the Interventional Cardiology
Group at the State University of New York at Stonybrook, prepared radioactive
stents and implanted them into the arteries of swine and rabbits to evaluate the
effectiveness of this unique approach to inhibit restenosis. Initial testing
confirmed the Company's ability to attach radionuclides to metal stents and
other substrates. Additional testing demonstrating the efficacy in animals of
InnerDyne's technology for the treatment of restenosis was completed in early
2000. As indicated previously, upon positive developments by other entities with
competing cardiovascular radiation systems, management has decided to suspend
the Company's radioactive stent research program.

     In October 1998, the CRADA's scope of work was modified to include the
development of absorbable brachytherapy devices for the treatment of focal
cancers because of the rapid strides made under the radiation coated stent
development program.

     In January 1999, InnerDyne announced that it had been awarded a California
Cancer Research Program ("CRP") Cycle I grant, a Community Initiated Research
Collaboration Award ("CIRCA"), to examine the clinical benefits and the
development of absorbable brachytherapy devices. The grant has been extended to
support the completion of limited related initial work.

     In June 1999, the Company announced that the National Institutes of Health
awarded the Company a Small Business Innovation Research ("SBIR") phase 1
research grant to support development of a new form of cancer treatment. This
grant has expired, after the completion of limited initial work. The Company has
recently filed additional S.B.I.R. grant applications to potentially fund
advanced coatings development work in


                                       13
<PAGE>   15

the area of therapeutic stent coatings. There can be no assurances that these
grant applications will be accepted or approved.

     In 1994, the Company signed a license agreement with SENKO Medical
Manufacturing Co., Ltd. ("SENKO"), a Japan-based manufacturer and marketer of
membrane oxygenators used in open-heart surgery, pursuant to which the Company
licensed one of its technologies to SENKO. In connection with this agreement,
the Company transferred its siloxane coating technology to SENKO for the coating
of microporous hollow fibers used in the production of oxygenators. The initial
technology transfer was completed during the first quarter of 1995, at which
time the Company received the balance of an initial payment from SENKO, and the
royalty payment period commenced. In 1996, InnerDyne received an order from
SENKO to build a second fiber coating system, which was delivered during the
first half of 1997. In April 1998, in exchange for an initial payment and
continuing material purchases, SENKO licensed InnerDyne's less complex method
for coating devices with heparin on a non-exclusive basis. The addition of this
new means of attaching the drug heparin to prevent the formation of blood clots
on a surface is expected to further enhance SENKO's oxygenator product offering.
If SENKO continues to use the Company's technologies, royalties will be received
through 2004.

     In April 1996, the Company announced the signing of an agreement with
Boston Scientific Corporation ("Boston Scientific") covering the potential
application and use of InnerDyne's proprietary biocompatible coating
technologies with Boston Scientific's stents, grafts, vena cava filters and
other implantable medical devices. The agreement involved an equity investment
by Boston Scientific in InnerDyne, initial research support, license fees and
future royalty payments. Boston Scientific Corporation notified InnerDyne in
August 1998 that it had decided to proceed with the transfer of technology for
the application and use of InnerDyne's proprietary biocompatible coating
technology with Boston Scientific's stents, grafts, vena cava filters, and other
implantable medical devices. The transfer of the technology was completed during
1999. If Boston Scientific decides to use the Company's technology in
conjunction with commercially sold products, the Company may receive future
related royalties.

     In June 1998, InnerDyne announced the signing of an agreement with U.S.
Surgical ("U.S. Surgical") Corporation covering the licensing of InnerDyne's
proprietary siloxane coating technology to enhance the performance of selected
products used in minimally invasive surgical procedures. Under the terms of the
agreement, InnerDyne constructed a custom coating system and provided coated
product samples for testing by U.S. Surgical, in exchange for payment of initial
license fees and capital equipment costs. In June 2000, U.S. Surgical indicated
they would not use the Company's technology for valve and seal coating on
current products. Therefore, InnerDyne expects that no further license or
royalty payments will be realized as a result of the agreement with U.S.
Surgical, unless alternative applications for the technology are mutually agreed
upon by InnerDyne and U.S. Surgical.

     Because of the strength of the covalent bonds used in the Company's TRC
technology and other properties noted above, the Company believes that its
technology may have advantages over some presently available bioactive coating
technologies. Potential applications include the treatment of restenosis and
specific focal cancers when vascular stents, grafts, vena cava filters and other
implantable devices may be coated with drugs and/or isotopes using InnerDyne's
proprietary technology. The Company has undertaken a number of discussions with
potential licensees of the Company's coating technologies, and samples of coated
products have been provided to several companies. These discussions have been
with parties interested in the use of the technologies to enhance drug delivery
or gas exchange, as well as third parties interested in the possible coating of
in-dwelling devices for various applications. There can be no assurance that
additional agreements with third parties, if any, will be on acceptable terms.


                                       14
<PAGE>   16

Other Technologies

     In September 1999, the Company licensed to William Cook Europe A/S ("Cook")
rights to a Rotatably Actuated Constricting Catheter Valve on a non-exclusive
basis for use in the treatment of aortic aneurysms. The agreement requires that
Cook pay InnerDyne a licensing fee in two installments, and annual minimum
royalty payments. InnerDyne has received the first license fee installment.

     In December 1999, InnerDyne licensed to Alung Technologies, Inc. certain
assets related to the Company's earlier development of an implantable lung
assist product, and associated technologies. Under the terms of the agreement,
InnerDyne received an initial license fee payment in the fourth quarter of 1999
and is to receive a license fee payment in the fourth quarter of 2000.

     Licensing, contract and grant revenues will fluctuate from year to year,
and from quarter to quarter, based upon the number of agreements in effect, the
amount and timing of the payments to be made to InnerDyne pursuant to such
agreements, and the ability of the parties to satisfy performance milestones.

     The future success of the Company will depend upon its ability to develop
and gain regulatory clearance for new and enhanced versions of products in a
timely fashion and to attract corporate partners interested in licensing its
radial dilation and coating technologies. In addition, the Company may seek to
identify opportunities to obtain products or technologies from third parties.
There can be no assurance that the Company will be able to successfully develop
or acquire new products or technologies, license its proprietary technologies to
third parties, obtain regulatory clearance for its products, or gain market
acceptance of new and enhanced products. Delays in development, clearance or
acceptance of new products could have a material adverse effect on the Company's
business, results of operations and financial condition.

RESULTS OF OPERATIONS

     Total revenue for the three and nine month periods ended September 30, 2000
was $6,412,280 and $18,054,091, respectively, compared to $5,310,622 and
$14,807,403 for the corresponding periods in 1999. Total revenue is comprised of
revenue from product sales and licensing and contract revenue. Revenue from
product sales increased to $6,394,644 and $17,888,609, respectively, for the
three and nine month periods ended September 30, 2000, from $5,217,427 and
$14,480,866 for the corresponding periods in 1999, reflecting increased sales of
the Company's Step devices.

     Licensing and contract revenue for the three and nine month periods ended
September 30, 2000 was $17,636 and $165,480, respectively, compared to $93,195
and $326,537 for the same periods in 1999. Licensing and contract revenue for
the September 30, 2000 and September 30, 1999 periods related to agreements with
third parties covering the licensing of the Company's proprietary biocompatible
coating and radial dilation technologies. Licensing and contract revenue
fluctuates from quarter to quarter, based upon the number of agreements in
effect and the amount and timing of the payments to be made to InnerDyne
pursuant to such agreements.

     Cost of sales was $1,658,640 and $4,652,026, respectively, for the three
and nine month periods ended September 30, 2000, compared to $1,475,822 and
$4,238,872 for the same periods in 1999. The increase in cost of sales for the
three and nine month periods ended September 30, 2000 is attributable to the
increase in production and sales volume compared to the same periods in 1999.
Cost of sales as a percentage of revenue was 26% and 26%, respectively, for the
three and nine month periods ended September 30, 2000, compared to


                                       15
<PAGE>   17

28% and 29% for each of the same periods in 1999. This decrease primarily
reflects the impact of increased volume on the Company's manufacturing overhead,
which increased at a slower rate than revenues. Improvements in the efficiency
of the Company's manufacturing operations also positively impacted the cost of
goods as a percentage of revenue, while expenses associated with the initial
manufacture of the INNERVASC and Nephro-Step products negatively impacted the
Company's cost of sales in the third quarter of 2000.

     Research, development, regulatory and clinical expenses for the three and
nine month periods ended September 30, 2000 were $670,522 and $2,179,422,
respectively, compared to $737,987 and $2,126,799 for the corresponding periods
in 1999, reflecting the continuing support of new product development. The
Company expects that research, development, regulatory and clinical expenditures
are likely to increase in absolute dollars in future periods, though it is
possible that expenses associated with one or more research programs could be
funded from outside the Company, thereby reducing expected costs.

     Sales and marketing expenses were $2,350,235 and $7,099,983, respectively,
for the three and nine month periods ended September 30, 2000, compared to
$2,211,616 and $5,995,226 for the corresponding periods in 1999, reflecting the
growth of the Company's sales and marketing functions to support
commercialization of its M.I.S. products. InnerDyne expects that sales and
marketing expenses will generally continue to increase in absolute dollars in
future periods.

     General and administrative expenses were $605,969 and $1,858,736,
respectively, for the three and nine month periods ended September 30, 2000,
compared to $559,490 and $1,635,053 for the corresponding periods in 1999. The
growth of general and administrative expenses are primarily associated with
increased costs for outside professional services. The Company anticipates that
general and administrative expenses will generally increase in absolute dollars
in future periods to support expanding operations.

     The Company generated operating income, before interest and tax, of
$1,126,914 and $2,263,924, respectively, for the three and nine month periods
ended September 30, 2000, compared to $325,707 and $811,453 in the corresponding
periods of 1999. The improvement in operating income primarily reflected higher
margins on increased revenues.

     The Company generated net income after interest and tax of $1,186,826 and
$3,567,269, respectively, for the three and nine month periods ended September
30, 2000, compared to $358,945 and $917,284 in the corresponding periods of
1999. Results in the first half of 2000 included an income tax benefit of
$1,116,700 resulting from the recognition of a portion of a deferred tax asset.
On December 31, 1999, the Company had a deferred tax asset totaling $16.4
million, primarily a result of net operating loss carryforwards, which was fully
reserved. At December 31, 1999, the deferred tax asset had a 100% reserve due to
the uncertainty of the Company's ability to generate future taxable income.
However, based on recent quarters' operating income, historical experience over
the last year, and expected future operating income, management believes the
Company will have the ability to utilize a portion of its deferred tax assets
and has reduced the valuation allowance on the Company's deferred tax asset
during 2000.

LIQUIDITY AND CAPITAL RESOURCES

     From its inception to September 30, 2000, the Company incurred a cumulative
net loss of $46.7 million. Prior to 1992, the Company was funded primarily
through private placements of equity securities. In 1992, the Company completed
an initial public offering of 2,875,000 shares of its Common Stock at $11.00 per
share, which raised approximately $28.8 million (net of underwriter's
commissions and offering expenses). The 1994 acquisition of InnerDyne Medical,
Inc. was accomplished through the issuance of additional Common Stock of


                                       16
<PAGE>   18

the Company. In June 1995, the Company closed a private placement of 1,435,599
shares of the Company's Common Stock and warrants to purchase 287,200 additional
shares of Common Stock, with gross proceeds to the Company of approximately $3.2
million. In March and April of 1996, holders of warrants to purchase an
aggregate of 242,952 shares of Common Stock exercised such warrants, resulting
in gross proceeds to the Company of $704,561. The Company concluded a public
offering on May 20, 1996, with the sale of 2,650,000 shares of Common Stock at
$3.50 per share, which raised $8,015,268 (net of underwriters' commissions and
offering expenses).

     At September 30, 2000, cash and cash equivalents totaled $9,469,418
compared to total cash and cash equivalents balance of $6,862,313 at December
31, 1999. The Company had $50,739 and $203,507, respectively, in capital
expenditures in the three and nine-month periods ended September 30, 2000.
Working capital totaled $14,855,898 at September 30, 2000.

     The Company is able to borrow up to $2,000,000 on a revolving line of
credit with a commercial bank at prime plus one-quarter of one percent (9.75
percent at September 30, 2000) based on eligible receivables. This revolving
line of credit was renewed on April 22, 2000. During the third quarter of 2000,
the Company elected to pay outstanding balances and retired its debt, based on
its expectation that it will continue to generate operating profits and cash in
the immediate future. The Company may desire to borrow funds again in the
future.

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

     InnerDyne experienced operating losses from 1985 until mid 1998. InnerDyne
reported net income of $3,567,269 on revenues of $18,054,091, $1,480,375 on
revenues of $20,415,733, $425,030 on revenues of $17,610,237, and a loss of
$907,000 on revenues of $15,664,365 for the nine months ended September 30, 2000
and the fiscal years ended December 31, 1999, 1998 and 1997, respectively. As of
September 30, 2000, InnerDyne had an accumulated net deficit of $46,709,372.

     Operating results may fluctuate substantially from quarter to quarter as a
result of general economic conditions. Accordingly, the Company could generate
operating losses, and may have cash outflow requirements as a result of
expenditures related to expansion of sales and marketing capability, expansion
of manufacturing capacity, research and development activities, compliance with
regulatory requirements, and possible investment in or acquisition of additional
complementary products, technologies or businesses. The timing and amounts of
these expenditures will depend upon many factors, such as the availability of
capital, progress of the Company's research and development, and factors that
may be beyond the Company's control, such as the results of product trials, the
requirements for and the time required to obtain regulatory approval for
existing products and any other products that may be developed or acquired, the
market acceptance of the Company's products, and the actions of competitors in
the Company's primary markets. The cash needs of the Company have changed
significantly as a result of the merger completed during 1994 and the support
requirements of the added business focus areas. There can be no assurance that
the Company will not incur future losses, that the Company will be able to raise
or generate cash, as necessary, to fund operations or that the Company will
maintain profitable operations.

     Intense Competition. The primary industry in which the Company competes,
minimally invasive surgery, is dominated by two large, well-positioned entities
that are intensely competitive and frequently offer substantial discounts as a
competitive tactic. U.S. Surgical, a unit of Tyco International, Ltd., is
primarily engaged in developing, manufacturing and marketing surgical wound
management products, and has historically been the firm responsible for
providing products that led to the growth of the industry. U.S. Surgical


                                       17
<PAGE>   19

supplies a broad line of products to the M.I.S. industry, including products
which facilitate access, assessment and treatment. Ethicon Endosurgery, a unit
of Johnson and Johnson ("Ethicon"), made a major investment in the M.I.S. field
in recent years and the parent company is one of the leading suppliers of
hospital products in the world. Furthermore, U.S. Surgical and Ethicon each
utilize purchasing contracts that link discounts on the purchase of one product
to purchases of other products in their broad product lines. Substantially all
of the hospitals in the United States have purchasing contracts with one or both
of these entities. Accordingly, customers may be dissuaded from purchasing
access products from the Company rather than U.S. Surgical or Ethicon to the
extent it would cause them to lose discounts on products that they regularly
purchase from U.S. Surgical or Ethicon.

     The Company faces a formidable task in successfully gaining significant
revenues within the M.I.S. access market. In order to succeed, management
believes that the Company will need to objectively demonstrate substantial
product benefits, and its sales effort must be able to effectively present such
benefits to both clinicians and health care administrators. The M.I.S. access
market is dominated by U.S. Surgical and Ethicon. Both entities introduced new
access devices during the past three years. A number of other entities
participate in various segments of the M.I.S. market, including access.

     The Company's products will encounter competition from other companies as
its radial dilation platforms expand into new clinical areas. Within the urology
field, management expects its products will compete with product offerings from
Cook, Boston Scientific, and C.R. BARD, among others. In vascular access, Maxxim
Medical, Inc. will face competition from St. Jude/Daig, Medtronic/AVE, Bard,
Boston Scientific and others.

     There can be no assurance that competitors will not succeed in developing
technologies and products that are more effective than any which have been or
are being developed by the Company or that would render the Company's
technologies or products obsolete or not competitive. Such competition could
have a material adverse effect on the Company's business, financial condition
and results of operations. As a result of the entry of large and small companies
into the market, and continuing consolidation within the medical device and
supply industry, the Company expects competition for devices to generally
increase.

     There can be no assurance that the Company or its partners will be able to
successfully compete in the M.I.S. access, urology access, or vascular access
markets, and failure to do so would have a material adverse effect on the
Company's business, financial condition and results of operations.

     Continued Dependence on Step Products. To date, substantially all of the
Company's revenues from product sales are attributable to Step products, and
InnerDyne currently anticipates that sales of Step products will represent the
majority of the Company's revenues for the immediate future. Accordingly, the
success of the Company is largely dependent upon increased market acceptance of
its Step product line by the medical community as a reliable, safe and
cost-effective access product for minimally invasive surgery. InnerDyne
commenced commercial sales of its Step product in the fourth quarter of 1994
and, to date, sales have been made to a relatively limited number of physicians
and hospitals. Recommendations and endorsements by influential members of the
medical community are important for the increased market acceptance of the
Company's Step products, and there can be no assurance that existing
recommendations or endorsements will be maintained or that new ones will be
obtained. Failure to increase market acceptance of the Company's Step products
would have a material adverse effect upon the Company's business, financial
condition and results of operations.


                                       18
<PAGE>   20


     Reliance on Future Products and New Applications; Uncertainty of Technology
Changes. The medical device industry is characterized by innovation and
technological change. The Company has made significant investments in
researching and developing its proprietary technologies, including radial
dilation and biocompatible coatings. During the next year, the Company may
commercially introduce urology and intra-organ access products, and through a
corporate partner, a vascular access product. The future success of the Company
will depend in part on the timely commercial introduction and market acceptance
of these and other possible products. There can be no assurance that these
products will be timely introduced in commercial quantities, if at all, or that
such products will achieve market acceptance. A failure by the Company to timely
introduce such products or a failure of such products to achieve market
acceptance could have a material adverse effect on the Company's business,
financial condition and results of operations. The future success of the Company
will also depend upon, among other factors, the ability to develop and gain
regulatory clearance for new and enhanced versions of products in a timely
fashion. There can be no assurance that the Company will be able to successfully
develop new products or technologies, manufacture new products in commercial
volumes, obtain regulatory approvals on a timely basis or gain market acceptance
of such products. Delays in development, manufacturing, regulatory approval or
market acceptance of new or enhanced products could have a material adverse
impact on the Company's business, financial condition and results of operations.

     Limited Manufacturing Experience; Compliance with Quality Systems
Regulations. The Company initiated manufacture of commercial quantities of its
Step access device in its Salt Lake City, Utah facility during late 1994.
Accordingly, the Company has relatively limited experience in manufacturing
M.I.S. access products or other products in commercial quantities at acceptable
costs. The Company's success will depend in part on its ability to manufacture
its products in compliance with the FDA's regulations and other regulatory
requirements in sufficient quantities and on a timely basis, while maintaining
acceptable product quality and manufacturing costs. Manufacturers often
encounter difficulties in scaling up production of new products, including
problems involving production yields, quality control and assurance, component
supply and shortages of qualified personnel. In connection with its ISO 9001
certification, InnerDyne now undergoes periodic audits by a regulatory body.
Regulatory changes recently introduced by the FDA have resulted in a system of
United States regulatory requirements for manufacturers of medical devices which
more closely resembles the ISO 9000 series of quality systems standards adopted
by most European countries. The FDA may also periodically inspect the Company's
operations and business practices to evaluate conformance to these standards.
Failure to maintain satisfactory regulatory system compliance could have a
significant impact on the Company's ability to continue to manufacture and
distribute its products and, in the most serious cases, result in the seizure or
recall of products. Failure to maintain production volumes or increase
production volumes in a timely or cost-effective manner would have a material
adverse effect on the Company's business, financial condition and results of
operations.

     Potential Fluctuations in Operating Results. The Company's quarterly
operating results have in the past fluctuated and will continue to fluctuate
significantly in the future depending on the timing and shipment of product
orders; new product introductions and changes in pricing policies by the Company
or its competitors; the timing and market acceptance of the Company's new
products and product enhancements; the continued market acceptance of
InnerDyne's Step product line by the medical community; the Company's product
mix; the mix of distribution channels through which the Company's products are
sold; the extent to which the Company recognizes non-product revenues during a
quarter; and the Company's ability to obtain sufficient supplies of sole or
limited source components for its products. In particular, fluctuations in
production volumes can affect gross margins from quarter to quarter.
Furthermore, gross margins and net income or loss can fluctuate from quarter to
quarter to the extent the Company recognizes non-product revenue during a
quarter because the Company typically derives higher margins from non-product
revenue than from product sales. In response to


                                       19
<PAGE>   21


competitive pressures or new product introductions, the Company may take certain
pricing or other actions that could materially and adversely affect the
Company's operating results. In addition, new product introductions by the
Company could contribute to quarterly fluctuations in operating results as
orders for new products commence and orders for existing products decline.

     The Company's expense levels are based, in part, on its expectations of
future revenues. Because a substantial portion of the Company's revenue in each
quarter normally results from orders booked and shipped in the final weeks of
that quarter, revenue levels are extremely difficult to predict. If revenue
levels are below expectations, net income will be disproportionately affected
because only a small portion of the Company's expenses varies with its revenue
during any particular quarter. In addition, the Company typically does not
operate with any material backlog as of any particular date.

     As a result of the foregoing factors and potential fluctuations in
operating results, results of operations in any particular quarter should not be
relied upon as an indicator of future performance. In addition, in some future
quarter, the Company's operating results may be below the expectations of public
market analysts and investors. In such event, the price of the Company's Common
Stock would likely be materially and adversely affected.

     Reliance on Collaborative Relationships; Restrictions on Activities. The
Company has entered into, and intends to continue to pursue, collaborative
arrangements with corporations and research institutions with respect to the
research, development, regulatory approval and marketing of certain of its
potential products. InnerDyne's future success may depend, in part, on its
relationship with such third parties, their strategic interest in the potential
products under development and, eventually, their success in marketing or
willingness to purchase any such products. The Company's existing and
anticipated contracts with such third parties may restrict the rights of
InnerDyne to engage in certain areas of product development, manufacturing and
marketing. In addition, these third parties may have the unilateral right to
terminate any such arrangement without significant penalty. There can be no
assurance that InnerDyne will be successful in establishing or maintaining any
such collaborative arrangements or that any such arrangements will be
successful.

     Limited Sales, Marketing and Distribution Experience. InnerDyne began
commercial sales of its first M.I.S. access product in the fourth quarter of
1994 and, therefore, has limited sales, marketing and distribution experience.
The Company is marketing its M.I.S. access products mainly to general surgeons,
gynecologists and pediatric laparoscopists. In the United States, InnerDyne
markets its products primarily through direct representatives who are employed
by the Company within selected geographical areas and a network of independent
sales representatives who typically sell other complementary M.I.S. products to
the same customer base. If the need arises, the Company may expand its sales
force, which will require recruiting and training additional personnel. There
can be no assurance that the Company will be able to recruit and train such
additional personnel in a timely fashion. Loss of a significant number of
InnerDyne's current sales personnel or independent sales representatives, or
failure to attract additional personnel, could have a material adverse effect on
the Company's business, financial condition and results of operations.

     The Company markets its products outside of the United States through
international distributors in selected foreign countries after regulatory
approvals, if necessary, are obtained. Although InnerDyne currently has
relationships with a limited number of international distributors, there can be
no assurance that the Company will be able to build or maintain a network of
international distributors capable of effectively marketing its M.I.S. access
products or that such distributors will generate significant sales of such
products.

                                       20
<PAGE>   22


     The Company has limited experience in marketing its products and faces
substantial competition from well-entrenched and formidable competitors. As a
result, there can be no assurance that the Company will successfully achieve
acceptable levels of product sales at prices which provide an adequate return.
Failure to do so would have a material adverse effect on the Company's business,
financial condition and results of operations.

     Patents and Proprietary Rights. The Company's success will depend in large
part on its ability to obtain patent protection for products and processes, to
preserve its trade secrets and to operate without infringing the proprietary
rights of third parties. Although InnerDyne has obtained certain patents and
applied for additional United States and foreign patents covering certain
aspects of its technology, no assurance can be given that any additional patents
will be issued or that the scope of any patent protection will exclude
competitors or provide a competitive advantage, or that any of the Company's
patents will be held valid if subsequently challenged. The validity and breadth
of claims covered in medical technology patents involves complex legal and
factual questions and therefore may be highly uncertain. InnerDyne also relies
upon unpatented trade secrets, and no assurance can be given that others will
not independently develop or otherwise acquire substantially equivalent trade
secrets. In addition, whether or not the Company's patents are issued, others
may hold or receive patents that contain claims having a scope that covers
products developed by InnerDyne.

     There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry, and companies in
the medical device industry have used litigation to gain competitive advantage.
Litigation involving the Company would result in substantial cost to and
diversion of management attention from the day-to-day operation of the business,
but could be necessary to enforce patents issued to the Company, to protect
trade secrets and other specialized knowledge unknown to outside parties, to
defend the Company against claimed infringement of the rights of others or to
determine the scope and validity of the proprietary rights of others. An adverse
determination in litigation could subject the Company to significant liabilities
to third parties, could require the Company to seek licenses from third parties
under less favorable terms than might otherwise be possible and could prevent
the Company from manufacturing, selling or using its products, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations.

     The Company has in the past, and may in the future, receive correspondence
from third parties claiming that the Company's products or technology infringe
intellectual property rights of such third parties. The Company and its patent
counsel thoroughly review such claims and no such outstanding claims currently
exist. However, there can be no assurance that InnerDyne will not receive
additional claims that its products or technology infringe third party rights or
that third parties will not litigate such claims. Any such occurrence could have
a material adverse effect on the Company's business, financial condition and
results of operations.

     Government Regulation. Clinical testing, manufacture and sale of the
Company's products, including the Step product line and the Company's
biocompatible coating technology, are subject to regulation by the FDA and
corresponding state and foreign regulatory agencies. Pursuant to the Federal
Food, Drug, and Cosmetic Act, and the regulations promulgated thereunder, the
FDA regulates the pre-clinical and clinical testing, manufacture, labeling,
distribution and promotion of medical devices. Noncompliance with applicable
requirements can result in, among other things, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant pre-market clearance or
pre-market approval for devices, withdrawal of marketing approvals and criminal
prosecution. The FDA also has the authority to request recall, repair,
replacement or refund of the cost of any device manufactured or distributed by
the Company.


                                       21
<PAGE>   23

     Before a new device can be introduced in the market, the manufacturer must
generally obtain FDA clearance of 510(k) notification or approval of a PMA. A
PMA application must be filed if a proposed device is not "substantially
equivalent" to a legally marketed Class I or Class II device, or if it is a
Class III device for which the FDA has called for PMAs. The PMA process can be
expensive, uncertain and lengthy, and a number of devices for which FDA approval
has been sought by other companies have never been approved for marketing.

     A 510(k) clearance will be granted if the submitted information establishes
that the proposed device is substantially equivalent to a legally marketed Class
I or Class II medical device or a Class III medical device for which the FDA has
not called for PMAs. For any of the Company's devices cleared through the 510(k)
process, modifications or enhancements that could significantly affect the
safety or effectiveness of the device or that constitute a major change to the
intended use of the device will require a new 510(k) submission. There can be no
assurance that the Company will obtain 510(k) premarket clearance within a
reasonable time frame, or at all, for any of the devices or modifications for
which it may file a 510(k).

     The Company has received clearance from the FDA for the marketing of its
Step device for use in accessing the abdominal and thoracic cavities for the
performance of minimally invasive surgical procedures. The Company has also
received FDA clearance for the marketing of its R.E.D. product for use in the
areas of gastrostomy, cystostomy, cholecystotomy, the dilation of biliary and
urethral strictures, laparoscopy and enterostomy. The Company has also received
market clearance for alternative versions of its Step and R.E.D. products,
including products designed to employ its radial dilation technology in
vascular, urological, and arthroscopic applications and for biliary indications.
Although the Company has been successful in preparing requests for 510(k)
clearance, there can be no assurance that 510(k) clearances for future products
or product modifications can be obtained in a timely manner or at all, or that
any existing clearance can be successfully maintained. A delay in receipt of, or
failure to receive or maintain, such clearances would have a material adverse
effect on the Company's business, financial condition and results of operations.

     Although the Company is strictly limited to marketing its products for the
indications for which they were cleared, physicians are not prohibited by the
FDA from using the products for indications other than those cleared by the FDA.
There can be no assurance that the Company will not become subject to FDA action
resulting from physician use of its products outside of their approved
indications.

     The Company has made modifications to its cleared devices that the Company
believes do not require the submission of new 510(k) notices. There can be no
assurance, however, that the FDA would agree with any of the Company's
determinations not to submit a new 510(k) notice for any of these changes or
would not require the Company to submit a new 510(k) notice for any of the
changes made to the device. If the FDA requires the Company to submit a new
510(k) notice for any device modification, the Company may be prohibited from
marketing the modified device until the 510(k) notice is cleared by the FDA.

     Any devices manufactured or distributed by the Company pursuant to FDA
clearance or approval are subject to pervasive and continuing regulation by the
FDA and certain state agencies and various foreign governments. Manufacturers of
medical devices for marketing in the United States are required to adhere to
applicable regulations setting forth detailed Quality Systems Regulations
("QSR") requirements, which include testing, control and documentation
requirements. Manufacturers must also comply with requirements that a firm
report to the FDA any incident in which its product may have caused or
contributed to a death or serious injury,


                                       22
<PAGE>   24


or in which its product malfunctioned and, if the malfunction were to recur, it
would be likely to cause or contribute to a death or serious injury.

     The Company is registered as a manufacturer of medical devices with the
FDA. The Company is subject to routine inspection by the FDA and certain state
agencies for compliance with QSR requirements, MDR requirements and other
applicable regulations. Failure of the Company to maintain satisfactory
regulatory compliance could have a significant adverse effect on the Company's
ability to continue to manufacture and distribute its products and, in the most
serious cases, could result in the seizure or recall of products, injunctions
and/or civil fines.

     Dependence on Sole Sources. The materials utilized in the Company's
products consist of both standard and custom components that are purchased from
a variety of independent sources. The plastic parts used in the Step product are
injection molded by outside vendors. The majority of these parts are produced
utilizing molds that have been specially machined for and are owned by the
Company. Although the Company maintains significant inventories of molded parts,
any inability to utilize these molds for any reason might have a material
adverse effect on the Company's ability to meet its customers' demand for
product. In addition to plastic parts produced from injection molds owned by the
Company, a number of other materials are available only from a limited number of
sources at the present time, including the sheath component of the Company's
Step products. Efforts to identify and qualify additional sources of this sheath
component and other key materials and components are underway. Although
InnerDyne believes that alternative sources of these components can be obtained,
internal testing and qualification of substitute vendors could require
significant lead times and additional regulatory submissions. There can be no
assurance that such internal testing and qualification or additional regulatory
approvals will be obtained in a timely fashion, if at all. Any interruption of
supply of raw materials could have a material adverse effect on the Company's
ability to manufacture its products and, therefore, on its business, financial
condition and results of operations.

     Uncertainty Relating to Third Party Reimbursement. In the United States,
health care providers that purchase medical devices, such as the Company's
products, generally rely on third-party payors, principally federal Medicare,
state Medicaid and private health insurance plans, to reimburse all or part of
the cost of the procedure in which the medical device is being used. In
addition, certain health care providers are moving toward a managed care system
in which such providers contract to provide comprehensive health care for a
fixed cost per person. Managed care providers are attempting to control the cost
of health care by authorizing fewer elective surgical procedures. The Company is
unable to predict what changes will be made in the reimbursement methods
utilized by third-party health care payors. Furthermore, the Company could be
adversely affected by changes in reimbursement policies of governmental or
private health care payors, particularly to the extent any such changes affect
reimbursement for procedures in which the Company's products are used. Failure
by physicians, hospitals and other users of the Company's products to obtain
sufficient reimbursement from health care payors for procedures in which the
Company's products are used or adverse changes in governmental and private
third-party payors' policies toward reimbursement for such procedures would have
a material adverse effect on the Company's business, financial condition and
results of operations.

     If the Company obtains the necessary foreign regulatory approvals, market
acceptance of the Company's products in international markets would be
dependent, in part, upon the availability of reimbursement within prevailing
health care payment systems. Reimbursement and health care payment systems in
international markets vary significantly by country, and include both
government-sponsored health care and private insurance. The Company intends to
seek international reimbursement approvals, although there can be no


                                       23
<PAGE>   25

assurance that any such approvals will be obtained in a timely manner, if at
all, and failure to receive international reimbursement approvals could have an
adverse effect on market acceptance of the Company's products in the
international markets in which such approvals are sought.

     Dependence on International Sales. In the future, the Company expects to
derive a portion of its revenue from international sales. To the extent that the
Company's international sales increase in future periods, a portion of the
Company's revenues could be subject to the risks associated with international
sales, including economic or political instability, shipping delays, changes in
applicable regulatory policies, fluctuations in foreign currency exchange rates
and various trade restrictions, all of which could have a significant impact on
the Company's ability to deliver products on a competitive and timely basis.
Future imposition of, or significant increases in the level of, customs duties,
import quotas or other trade restrictions could have an adverse effect on the
Company's business, financial condition and results of operations. The
regulation of medical devices, particularly in the European Economic Community,
continues to expand, and there can be no assurance that new laws or regulations
will not have an adverse effect on the Company.

     Dependence on Key Personnel. InnerDyne is dependent upon a limited number
of key management and technical personnel. The Company's future success will
depend in part upon its ability to attract and retain highly qualified
personnel. The Company will compete for such personnel with other companies,
academic institutions, government entities and other organizations. There can be
no assurance that the Company will be successful in hiring or retaining
qualified personnel. The loss of key personnel or the inability to hire or
retain qualified personnel could have a material adverse effect on the Company's
business, financial condition and results of operations.

     Product Liability; Claims in Excess of Insurance Coverage. The development,
manufacture and sale of the Company's products entail the risk of product
liability claims, involving both potential financial exposure and associated
adverse publicity. The Company's current product liability insurance coverage
limits are $2,000,000 per occurrence and $2,000,000 in the aggregate, and there
can be no assurance that such coverage limits are adequate to protect the
Company from any liabilities it might incur in connection with the development,
manufacture and sale of its current and potential products. Product liability
insurance is expensive and may not be available in the future on acceptable
terms, or at all. In addition, if such insurance is available, there can be no
assurance that the limits of coverage of such policies will be adequate. A
successful product liability claim in excess of the Company's insurance coverage
could have a material adverse effect on the Company's business, financial
condition and results of operations.

     Stock Price Volatility. The stock market in general and stocks of medical
device companies in particular, have from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock. In addition, the market price of the
Company's Common Stock has been and is likely to continue to be highly volatile.
Factors such as fluctuations in the Company's operating results, announcements
of technological innovations or new products by the Company or its competitors,
FDA and international regulatory actions, actions with respect to reimbursement
matters, developments with respect to patents or proprietary rights, public
concern as to the safety of products developed by the Company or others, changes
in health care policy in the United States and internationally, changes in stock
market analyst recommendations regarding the Company, other medical device
companies or the medical device industry generally or general market conditions
may have a significant effect on the market price of the Common Stock.


                                       24
<PAGE>   26


     Environmental Regulations. The Company is subject to a variety of local,
state and federal governmental regulations relating to the use, storage,
handling, manufacture and disposal of toxic and other hazardous substances used
to manufacture the Company's products. The Company believes that it is currently
in compliance in all material respects with applicable governmental
environmental regulations. Nevertheless, the failure by the Company to comply
with current or future environmental regulations could result in the imposition
of substantial fines on the Company, suspension of production, alteration of its
manufacturing processes or cessation of operations. Compliance with such
regulations could require the Company to acquire expensive remediation equipment
or to incur substantial expenses. Any failure by the Company to control the use,
disposal, removal or storage of, or to adequately restrict the discharge of, or
assist in the cleanup of, hazardous or toxic substances, could subject the
Company to significant liabilities, including joint and several liability under
certain statutes. The imposition of such liabilities could have a material
adverse effect on the Company's business, financial condition, and results of
operations.

     Anti-Takeover Effect of Certain Charter Provisions of Common Stock.
Provisions of the Company's Certificate of Incorporation that allow the Company
to issue Preferred Stock without any vote or further action by the stockholders,
the fact that the Company's Certificate of Incorporation does not permit
stockholders to cumulate votes in the election of directors as well as the
Company's adoption of a poison pill Preferred Share Purchase Rights plan in
September 1997 may have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from attempting to acquire, control
of the Company. Certain provisions of Delaware law applicable to the Company
could also delay or make more difficult a merger, tender offer or proxy contest
involving the Company, including Section 203, which prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years unless certain conditions are met. The
possible issuance of Preferred Stock, the inability of stockholders to cumulate
votes in the election of directors, the poison pill and provisions of Delaware
law could have the effect of delaying, deferring or preventing a change in
control of the Company, including without limitation, discouraging a proxy
contest or making more difficult the acquisition of a substantial block of the
Company's Common Stock. The possible issuance of Preferred Stock, the poison
pill and these provisions could also limit the price that investors might be
willing to pay in the future for shares of the Company's Common Stock.

     For information about the stock tender offer announced by the Company on
October 4, 2000, you should read the information set forth above under the
heading "Introduction."

     Risks Associated With Computer Software and Hardware. InnerDyne relies on a
variety of internal computer systems and programs in the operations of its
business. The Company also utilizes outside computer systems in the management
of certain business functions. The Company's internal systems run on personal
computers and microprocessor-based computer servers set up in a workstation
environment which the Company believes are not susceptible to universal
failures. These systems were extensively tested as part of the Company's
preparations for the Year 2000 changeover.

     The Company believes that the failure of a system would not materially
affect the Company's ability to conduct its business operations, though such
failure could cause the expenditure of significant funds to affect a rapid
remedy to a systems failure. However, should a system fail, and the Company was
unable to restore or replace its function within a reasonable time frame, such
failure could have a material impact upon the Company's business, financial
condition, or results of operations. Similarly, should the Company internal or
external computer systems experience widespread failure that could not be
remedied quickly, such failure could have a similar impact.


                                       25
<PAGE>   27


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.


     The following discusses our exposure to market risk related to changes in
interest rates, equity prices, and foreign currency exchange rates. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number of
factors including those set forth above under the heading "Additional Factors
That May Affect Future Results."

INTEREST RATE RISK

     As of September 30, 2000, InnerDyne had short-term investments of
$8,042,727. Substantially all of these short-term investments consist of highly
liquid money market funds and commercial paper investments with remaining
maturities at the date of purchase of less than ninety days. These investments
are subject to interest rate risk and will decrease in value if market interest
rates increase. A hypothetical increase or decrease in market interest rates by
10% from the September 30, 2000 rates would cause the fair market value of these
short-term investments to change by an immaterial amount. The Company presently
has the ability to hold these investments until maturity; and therefore, the
value of these investments is not expected to be affected to any significant
degree by sudden changes in market interest rates. Declines in interest rates
over time will, however, reduce interest income. The Company has not used
derivative financial instruments.

     InnerDyne does not own any equity investments; therefore, the Company is
not currently exposed to any direct equity price risk.

FOREIGN CURRENCY RISK

     International revenues represented less than 10% of total revenues as of
September 30, 2000. International sales are made mostly through international
distributors with payments to the Company typically denominated in U.S. dollars.
The Company's international business is subject to risks typical of an
international business, including but not limited to differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. The
Company's future results could be materially adversely impacted by changes in
these or other factors. The effect of foreign exchange rate fluctuations on the
Company during the three and nine-month periods ended September 30, 2000 was not
material.


                                       26
<PAGE>   28

PART II. OTHER INFORMATION

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:

              27.1  Financial Data Schedule

         (b)  Reports on Form 8-K: The Company did not file any reports on Form
              8-K during the quarter ended September 30, 2000.


                                       29

<PAGE>   29

                                   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.

INNERDYNE, INC.



/s/ William G. Mavity
----------------------
William G. Mavity
President, Chief Executive Officer and
Acting Chief Financial Officer and
Principal Financial Officer
(Duly Authorized Signatory)

Date:    November 8, 2000



                                       28
<PAGE>   30

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER    DESCRIPTION
-------   -----------
<S>       <C>
27.1      Financial Data Schedule
</TABLE>