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

                                    FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 1996 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)

             DELAWARE                               87-0431168
          (State or other                        (I.R.S. Employer
          jurisdiction of                       Identification No.)
          incorporation)

                    1244 REAMWOOD AVENUE, SUNNYVALE, CA 94089
                    (Address 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 September 30, 1996 was 21,502,878.
<PAGE>   2
                                TABLE OF CONTENTS



<TABLE>
<CAPTION>
                                                                                                                        PAGE
                                                                                                                        ----

<S>          <C>                                                                                                        <C>
PART I.  FINANCIAL INFORMATION
Item 1.      Condensed Balance Sheets...............................................................................      3

             Condensed Statements of Operations.....................................................................      4

             Condensed Statements of Cash Flows.....................................................................      5

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

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

PART II.  OTHER INFORMATION.........................................................................................     19
</TABLE>


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<PAGE>   3
                                 INNERDYNE, INC.
                            CONDENSED BALANCE SHEETS

                                     ASSETS


<TABLE>
<CAPTION>
                                                                                      SEPTEMBER 30,       DECEMBER 31,
                                                                                          1996                1995
                                                                                       (UNAUDITED)        (*SEE NOTE)
                                                                                     ------------        ------------
<S>                                                                                  <C>                 <C>
Current assets:

   Cash and cash equivalents .................................................       $  8,043,450        $  1,720,814
   Marketable investment securities ..........................................                  0             997,604
   Accounts receivable .......................................................          1,082,098             735,911
   Interest and other receivables ............................................            237,543             195,646
   Inventory .................................................................          1,062,063             585,123
   Prepaid expenses and other ................................................            219,482              78,959
                                                                                     ------------        ------------

     Total current assets ....................................................         10,644,636           4,314,057
Equipment and leasehold improvements, net ....................................            999,425             948,295
Other assets .................................................................             53,427             107,251
                                                                                     ------------        ------------

                                                                                     $ 11,697,488        $  5,369,603
                                                                                     ============        ============


                                          LIABILITIES AND STOCKHOLDERS' EQUITY


Current liabilities:

   Current installments of long-term debt ....................................       $    178,940        $     85,058
   Current obligations under capital leases ..................................              3,462              29,683
   Notes payable .............................................................            314,871                   0
   Accounts payable ..........................................................            270,319             206,320
   Accrued liabilities .......................................................          1,050,194             852,035
                                                                                     ------------        ------------
        Total current liabilities ............................................          1,817,786           1,173,096
Long-term debt, excluding current installments ...............................            414,695             186,689

Stockholders' equity:
   Common stock ..............................................................            213,362             183,155
   Additional paid-in-capital ................................................         59,733,469          50,442,159
   Accumulated deficit .......................................................        (50,481,824)        (46,615,496)
                                                                                     ------------        ------------
        Net stockholders' equity .............................................          9,465,007           4,009,818
                                                                                     ------------        ------------
                                                                                     $ 11,697,488        $  5,369,603
                                                                                     ============        ============
</TABLE>

* Condensed from audited financial statements.

         See accompanying notes to condensed financial statements.


                                      -3-
<PAGE>   4
                                 INNERDYNE, INC.
                       CONDENSED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                    THREE-MONTH PERIODS ENDED               NINE-MONTH PERIODS ENDED
                                                 SEPTEMBER 30,       SEPTEMBER 30,       SEPTEMBER 30,       SEPTEMBER 30,
                                                      1996                1995               1996                1995
                                                 ------------        ------------        ------------        ------------


<S>                                              <C>                 <C>                 <C>                 <C>
Product, contract and licensing revenue ...      $  2,458,449        $  1,204,154        $  6,096,240        $  3,836,747

  Cost of product sales ...................         1,178,862             820,362           3,098,840           2,282,487

  Research, development, regulatory and
    clinical .............................            796,490             496,891           1,994,888           1,685,486

  Sales and marketing ....................          1,175,667             794,336           3,503,442           2,701,433

  General and administrative .............            452,030             443,099           1,491,180           1,429,509
                                                 ------------        ------------        ------------        ------------

      Total costs and expenses ...........          3,603,049           2,554,688          10,088,350           8,098,915
                                                 ------------        ------------        ------------        ------------

      Operating loss .....................         (1,144,600)         (1,350,534)         (3,992,110)         (4,262,168)
 
Interest/other income, net ...............             67,160              53,238             125,782             170,803
                                                 ------------        ------------        ------------        ------------

      Net loss ...........................       $ (1,077,440)       $ (1,297,296)       $ (3,866,328)       $ (4,091,365)
                                                 ============        ============        ============        ============

Net loss per share .......................       $       (.05)       $       (.07)       $       (.19)       $       (.24)
                                                 ============        ============        ============        ============

Weighted average shares outstanding ......         21,490,659          18,195,553          19,921,131          17,325,560
                                                 ============        ============        ============        ============
</TABLE>


         See accompanying notes to condensed financial statements.


                                      -4-
<PAGE>   5
                                 INNERDYNE, INC.
                       CONDENSED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                                                     NINE-MONTH PERIODS ENDED
                                                                                  SEPTEMBER 30,      SEPTEMBER 30,
                                                                                      1996               1995
                                                                                  -----------        -----------
<S>                                                                               <C>                <C>
Cash flows from operating activities:
Net loss ..................................................................       $(3,866,328)       $(4,091,365)
Adjustments to reconcile net loss to net cash used in operating activities:
   Depreciation and amortization of equipment and leasehold improvements ..           413,075            393,020
   Decrease (increase) in receivables .....................................          (388,084)          (529,590)
   Decrease (increase) in inventories .....................................          (476,940)           (85,874)
   Decrease (increase) in prepaid expenses, and other assets ..............           (86,699)          (137,209)
   Increase (decrease) in accounts payable ................................            63,999           (106,694)
   Increase (decrease) in accrued expenses ................................           198,159           (102,947)

Net cash used in operating activities .....................................        (4,142,818)        (4,660,659)
                                                                                  -----------        -----------

Cash flows from investing activities:
   Maturity of (investment in) cash investments ...........................           997,604           (185,604)
   Capital expenditures ...................................................          (464,205)          (321,598)
                                                                                  -----------        -----------

Net cash provided by (used in) investing activities .......................           533,399           (506,662)
                                                                                  -----------        -----------

Cash flows from financing activities:
   Proceeds from issuance of common stock, net ............................         9,321,517          3,299,653
   Proceeds from long-term debt ...........................................           396,560             83,894
   Proceeds from short-term borrowings ....................................           389,603            135,268
   Principal payments on long-term debt, capital leases ...................          (100,893)          (142,861)
   Principal payments on short-term debt ..................................           (74,732)          (111,119)
                                                                                  -----------        -----------

Net cash provided by financing activities .................................         9,932,055          3,264,835
                                                                                  -----------        -----------

Net increase (decrease) in cash and cash equivalents ......................         6,322,636         (1,902,486)

Cash and cash equivalents at beginning of period ..........................         1,720,814          3,981,060
                                                                                  -----------        -----------

Cash and cash equivalents at end of period ................................       $ 8,043,450        $ 2,078,574
                                                                                  ===========        ===========
</TABLE>

         See accompanying notes to condensed financial statements.


                                      -5-
<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 accruals) 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 three month period ended
September 30, 1996 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-KSB for the year ended December 31, 1995.

(2)      INVENTORIES

         Inventories consist of the following:

<TABLE>
<CAPTION>
                                                  SEPTEMBER 30,       DECEMBER 31,
                                                      1996               1995
                                                  -------------       ------------

<S>                                                <C>                  <C>
Raw materials and supplies .............           $  522,954           $404,800
Finished goods .........................              539,109            180,323
                                                   ----------           --------

Net Inventory ..........................           $1,062,063           $585,123
                                                   ----------           ========
</TABLE>


                                      -6-
<PAGE>   7
ITEM     2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS.

         This Quarterly Report on Form 10-Q contains, in addition to historical
information, forward-looking statements which involve risks and uncertainties.
The Company's actual results may differ significantly from the results discussed
in the forward-looking statements. Factors that might cause such a difference
include those discussed below (see "Additional Factors that May Affect Future
Results"), as well as those set forth in the Company's Annual Report on Form
10-KSB, as amended, for the year ended December 31, 1995, in the Company's
Registration Statement on Form S-1 (File No. 333-3196), as amended, and any
Prospectus included therein, and in the Company's Quarterly Report on Form 10-Q
for the quarters ended March 31, 1996 and June 30, 1996. The Company undertakes
no obligation to publicly release the result of any revisions to these
forward-looking statements which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.

INTRODUCTION

         InnerDyne, Inc. (the "Company" or "InnerDyne") designs, develops,
manufactures and commercializes minimally invasive surgical (M.I.S.) access
products incorporating its proprietary radial dilation technology. The Company
also has proprietary technology in the areas of thermal ablation and
biocompatible coatings, which it intends to continue developing either
internally or through strategic alliances.

         Radial Dilation Technology

         The Company believes that its proprietary radial dilation technology
enables a physician performing a M.I.S. procedure to access a patient's body
through a less invasive means than a conventional trocar. The Company's Step(TM)
device, which was introduced in the United States in November 1994, is 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. With the Company's Step access
device, a trocar does not need to be utilized, reducing the risk of internal
organ damage from contact with the sharp bladed trocar. Following insufflation,
the expandable sheath enters the body cavity through the use of a standard
insufflation needle, creating only a small puncture wound. The insufflation
needle is then removed and the sheath is expanded to an appropriately sized
working channel by insertion of a blunt dilator and cannula into the sheath. The
blunt dilator is then removed, leaving a cannula in place with an integral
insufflation valve at the proximal end. The radial dilation of the tract created
by the passage of the insufflation needle holds the cannula in place and
obviates the need for an anchoring system. Therefore, the Company believes, and
studies have shown, that the use of the Step access device can in many cases
reduce operative complications and surgery time, and thereby result in lower
operating costs. The Step access device is currently utilized in minimally
invasive general, gynecological and pediatric surgical procedures.

         The Company believes that its proprietary radial dilation technology
may be useful in accessing the vasculature as part of minimally invasive
percutaneous catheter-based procedures that are used to diagnose and treat
vascular disease. Utilizing the Company's proprietary radial dilation
technology, a flexible sheath could potentially be inserted into the patient's
vasculature and dilated to form a working channel to accommodate devices. When
using conventional access devices, the physician may have to retract and replace
sheaths in order to accommodate larger therapeutic or diagnostic devices that
may be used during the procedure. Such retraction and replacement of sheaths is
not believed to be necessary when using an access device incorporating the
Company's radial dilation technology and, therefore, the trauma to the patient's
arterial system may be reduced. Because the Company's radial dilation technology
enables the flexible sheath to contract, and leave a smaller residual opening,
an access device based on the Company's proprietary radial dilution technology
could potentially reduce bleeding complications.


                                      -7-
<PAGE>   8
         The Company has also used its radial dilation technology to develop the
Radially Expanding Dilator(TM) ("R.E.D."), which is designed as an access device
for intra-organ surgery. The Company believes that the R.E.D. overcomes some of
the limitations of conventional open surgery techniques and alternative less
invasive methods because the R.E.D. is designed to provide minimally invasive
access through the abdominal wall, across the peritoneal space, and into an
internal organ. The Company believes that the use of the R.E.D. can reduce
patient recovery time as compared to conventional open surgical techniques.

         Thermal Ablation Technology

         The Company has developed proprietary technology that is intended to
thermally ablate the lining of a body organ. The Company's EnAbl(TM) Thermal
Ablation System (the "EnAbl System") is based on this proprietary technology and
is designed to treat menorrhagia by thermally ablating the endometrial lining of
the uterus through the controlled introduction and heating of a normal saline
solution "in situ". The EnAbl System is designed to be a minimally invasive
approach that can be performed in a clinic or a physician's office without the
use of general anesthesia. Although this procedure is expected to result in the
infertility of the patient, the Company believes that the EnAbl System has the
potential to result in fewer complications and adverse side effects and reduced
recovery times compared to current therapies. For these reasons the Company also
believes that the EnAbl System has the potential to be more cost-effective than
many current therapies. The Company is currently in the process of exploring
alternatives through which to commercialize the EnAbl System. The Company
expects to determine an optimal course for this business prior to the
end of 1997. However, there can be no assurance that the Company will implement
such an alternative prior to the end of 1997, or at all, or that such
alternative will result in the successful commercialization of the EnAbl
System. See "--Additional Factors That May Affect Future Results -- Government
Regulation."

         Biocompatible Coatings Technologies

         The Company possesses certain proprietary technologies in the area of
biocompatible coatings. The technologies that comprise the Company's thrombo
resistant 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. 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.

         In 1994 the Company signed a license agreement with SENKO Medical
Instrument 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 TRC 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 production of oxygenators.
The technology transfer was completed during the first quarter of 1995, at which
time the Company received the balance of the initial payment from SENKO, and the
royalty payment period commenced. In May 1996, the Company announced that a
second unit for the coating of fiber for membrane oxygenators had been ordered
by SENKO.

         The Company's TRC utilizes a "tether" molecule to attach heparin or
other bioactive molecules 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.
Because both points of attachment utilize covalent bonds, the Company believes
that its coating process results in a stronger bonding of


                                      -8-
<PAGE>   9
heparin or other bioactive molecules to the surface of the device than other
methods presently in use, which it believes generally use a weaker ionic bond in
at least one of the attachment points.

         The Company presently is working with Boston Scientific Corporation to
explore using InnerDyne's TRC technology to bond bioactive substances to medical
devices such as vascular stents. Because of the strength of the covalent bonds
used in the Company's TRC technology and its other properties noted above, the
Company believes that this technology may have advantages over presently
available bioactive coating technologies in several potential applications,
including the coating of vascular stents, vena cava filters and other
implantable devices.


                                      -9-
<PAGE>   10
RESULTS OF OPERATIONS

         Total revenues for the three and nine month periods ended September 30,
1996 were $2,458,449 and $6,096,240, respectively, compared to $1,204,154 and
$3,836,747 for the corresponding periods in 1995. Product sales increased to
$2,048,046 and $5,486,849 for the three and nine month periods ended September
30, 1996, respectively, from $1,133,432 and $3,408,759 for the corresponding
periods in 1995, reflecting increased sales of the Company's Step device.
Licensing and contract revenues for the three and nine month periods ended
September 30, 1996 were $410,404 and $609,391, respectively, compared to $70,722
and $427,988 for the corresponding periods in 1995. These revenues for the 1995
periods related to agreements with third parties covering the development of the
Company's proprietary thermal ablation technology, the development of
non-competing applications for the Company's radial dilation technology and the
licensing of the Company's proprietary biocompatible coatings technology. The
licensing, contract and grant revenues for the three and nine month periods
ended September 30, 1996 included revenue earned related to licensing agreements
for the Company's coating technology and to a license, development and
manufacturing agreement for vascular access using the Company's radial dilation
technology. Licensing, contract and grant revenues fluctuate 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 product sales was $1,178,862 and $3,098,840 for the three and
nine month periods ended September 30, 1996, respectively, compared to $820,362
and $2,282,487 for the same periods in 1995. The increase in cost of product
sales for the nine month period ended September 30, 1996 is attributable to the
increase in production and sales volume compared to the same period in 1995. In
addition, cost of product sales for the nine months ended September 30, 1995
included significant start-up manufacturing costs.

         Research, development, regulatory and clinical expenses for the three
and nine month periods ended September 30, 1996 were $796,490 and $1,994,888,
respectively, compared to $496,891 and $1,685,486 for the corresponding periods
in 1995. The Company expects that research, development, regulatory and clinical
expenditures will 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 possibly reducing expected costs.

         Sales and marketing expenses were $1,175,667 and $3,503,442 for the
three and nine month periods ended September 30, 1996, respectively, compared to
$794,336 and $2,701,433 for the corresponding periods ended September 30, 1995,
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 $452,030 and $1,491,180 for
the three and nine month periods ended September 30, 1996, respectively,
compared to $443,099 and $1,429,509 for the corresponding periods ended
September 30, 1995. The Company anticipates that general and administrative
expenses will generally increase in absolute dollars in future periods to
support expanding operations.

         Interest/other income, net increased to $67,160 and decreased to
$125,782, respectively, for the three and nine month periods ended September 30,
1996, respectively, compared to $53,238 and $170,803 for the same periods in
1995, primarily as a result of interest income earned on higher average cash and
cash equivalents balances following the Company's May 1996 secondary offering
during the three months ended September 30, 1996, but lower yields on cash, cash
equivalents and marketable investment securities balances and higher interest
expense on debt during the nine months ended September 30, 1996.

         The Company incurred a net loss of $1,077,440, or $.05 per share, for
the three month period ended September 30, 1996, compared to a net loss of
$1,297,296, or $.07 per share for the same period in 1995. For the


                                      -10-
<PAGE>   11
nine month period ended September 30, 1996, the net loss was $3,866,328 or $.19
per share, compared to a net loss of $4,091,365, or $.24 per share, for the
comparable nine month period in 1995. Management believes that the Company is
likely to incur operating losses at least through 1996.


                                      -11-
<PAGE>   12
LIQUIDITY AND CAPITAL RESOURCES

         From its inception to September 30, 1996, the Company has incurred a
cumulative net loss of approximately $50.5 million. Since inception, the
Company's cash expenditures have exceeded its revenues. 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 discounts and offering expenses). The 1994 acquisition of
InnerDyne Medical, Inc. was accomplished through the issuance of additional
Common Stock of 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 financing on May 20, 1996, with the sale
of 2,500,000 shares of Common Stock at $3.50 per share, which raised $7,873,483
(net of commissions and dealer expenses). The underwriter, Cruttenden Roth,
subsequently exercised its overallotment option of 375,000 shares on May 28,
1996, from which the Company received net proceeds from the sale of an
additional 150,000 shares totaling $472,409.

         At September 30, 1996, cash and cash equivalents totaled $8,043,450
compared to a total cash, cash equivalents and marketable investment securities
balance of $2,718,418 at December 31, 1995. The Company had $464,205 and
$542,658 in capital expenditures in the nine months ended September 30, 1996 and
the year ended December 31, 1995, respectively. Working capital totaled
$8,826,850 at September 30, 1996, and the Company had long-term debt, excluding
current installments, totaling $414,695 relating to financing of equipment.

         In February 1996, the Company renewed its credit facility with Silicon
Valley Bank. Subject to certain covenants and conditions, the Company may borrow
up to $2,000,000 on a revolving credit basis at prime plus 1 1/4% and $750,000
as a 42-month term loan at prime plus 1 3/4%. The revolving credit portion of
the facility is available based on the existence and magnitude of eligible
receivables, and the term loan portion of the facility is available based on
eligible equipment purchases. As of December 31, 1995, the Company had borrowed
$241,712 under the previous agreement with Silicon Valley Bank, and as of
September 30, 1996 has additionally borrowed $396,560 under the current
agreement for the financing of capital expenditures and $300,000 under the
revolving credit facility for financing of working capital needs.

         In the future, the Company expects to incur substantial additional
operating losses and cash outflow requirements. The Company's capital
requirements will depend on numerous factors, including market acceptance and
demand for its products; the resources the Company devotes to the development,
manufacture and marketing of its products; the progress of the Company's
clinical research and product development programs; the receipt of, and the time
required to obtain regulatory clearances and approvals; the resources required
to protect the Company's intellectual property; and other factors. The timing
and amount of such capital requirements cannot be accurately predicted. Funds
may also be used for the acquisition of businesses, products and technologies
that are complementary to those of the Company. Consequently, although the
Company believes that the proceeds the public offering of shares of its Common
Stock completed in May 1996, together with revenues, credit facilities and other
sources of liquidity, will provide adequate funding for its capital requirements
through at least 1997, the Company may be required to raise additional funds
through public or private financings, collaborative relationships or other
arrangements. There can be no assurance that the Company will not require
additional funding or that such additional funding, if needed, will be available
on terms attractive to the Company, or at all. Any additional equity financings
may be dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants.


                                      -12-
<PAGE>   13
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

         History of Losses; Profitability Uncertain. InnerDyne has experienced
operating losses since its inception in December 1985. InnerDyne reported net
losses of $3.9 million on revenues of $6.1 million, $5.6 million on revenues of
$5.3 million, $9.9 million on revenues of $878,909 and $10.4 million on revenues
of $42,821 for the nine months ended September 30, 1996 and the fiscal years
ended December 31, 1995, 1994 and 1993, respectively. As of September 30, 1996,
InnerDyne had an accumulated deficit of approximately $50.5 million.

         In the future, the Company expects to incur substantial additional
operating losses and 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 progress of the
Company's research and development, and will include 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, and the market
acceptance of the Company's products. The Company believes that it is likely to
incur operating losses at least through 1997. 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 continue to incur losses, that the Company
will be able to raise cash as necessary to fund operations or that the Company
will ever achieve profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of 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. The United States Surgical Corporation ("U.S.
Surgical") is primarily engaged in developing, manufacturing and marketing
surgical wound management products, and has historically been the firm most
responsible for providing products that have led to the growth of the industry.
U.S. Surgical supplies a broad line of products to the M.I.S. industry,
including products which facilitate access, assessment and treatment. Ethicon
Endo-Surgery ("Ethicon"), a Johnson & Johnson company, has made a major
investment in the M.I.S. field in recent years and 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, trocars with added features, during the past two years. A number
of other entities participate in various segments of the M.I.S. access market.

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

         In the thermal ablation market, the Company considers its primary
competition to be current therapies for the treatment of excessive menstrual
bleeding, including drug therapy, dilatation and curettage, surgical endometrial


                                      -13-
<PAGE>   14
ablation and hysterectomy. The Company will also compete against other
techniques under development for the treatment of excessive menstrual bleeding,
including endometrial ablation techniques that employ radio frequency ("RF")
energy or freezing techniques ("cryoablation") and the uterine balloon therapy
system being clinically tested by GyneCare, Inc.

         There are many large companies with significantly greater financial,
manufacturing, marketing, distribution and technical resources and clinical
experience than the Company that are developing and marketing devices for
surgical removal of the uterus, uterine fibroids, the endometrial lining of the
uterus and other uterine tissues or are developing non-surgical methods for
treating these conditions. Additionally, there are smaller companies developing
alternative methods of uterine tissue ablation that compete with the Company.
There can be no assurance that these companies 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, the Company expects competition for devices and systems used to
treat excessive menstrual bleeding to increase.

         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
substantially all of the Company's revenues in 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.

         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, thermal ablation and biocompatible coatings. During June 1996, the
Company commercially introduced the Reposable Step on a limited basis in Europe
and in August of 1996 the Company commercially introduced Reposable Step on a
limited basis in the United States. The Company also expects to introduce
MiniStep sometime in late 1996, which is a further enhancement of its Step
product line. The future success of the Company will depend in part on the
timely commercial introduction and market acceptance of these 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, its ability to develop and gain regulatory clearance for new and
enhanced versions of products in a timely fashion, including, but not limited
to, the EnAbl Thermal Ablation System. 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 Good Manufacturing
Practices. The Company initiated manufacture of commercial quantities of its
Step access device in its Salt Lake City, Utah facility during


                                      -14-
<PAGE>   15
late 1994. Accordingly, the Company has 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 Good Manufacturing Practices ("GMP")
regulations of the United States Food and Drug Administration (the "FDA") and
other regulatory requirements in sufficient quantities and on a timely basis,
while maintaining product quality and acceptable 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. 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. See "--Government
Regulation."

         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 licensing 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 affect gross margins from quarter to quarter. Furthermore,
gross margins can fluctuate from quarter to quarter to the extent the Company
recognizes license revenue during a quarter because the Company may derive
differing gross margins from license revenue than from product sales. In
response to competitive pressures or new product introductions, the Company may
take certain pricing or other actions that could materially 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 adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

         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
and gynecologists. 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


                                      -15-
<PAGE>   16
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, have been 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 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. 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 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
technologies 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 technologies
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, the EnAbl Thermal Ablation
System and the Company's biocompatible coatings 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 preclinical 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


                                      -16-
<PAGE>   17
products, total or partial suspension of production, failure of the government
to grant premarket clearance or premarket 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.

         Before a new device can be introduced in the domestic market, the
manufacturer must generally obtain FDA clearance of 510(k) notification or
approval of a premarket approval ("PMA") application. 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. Management expects that the EnAbl System will
be subject to the PMA approval process prior to marketing within the United
States. There can be no assurance that the Company will be able to obtain the
necessary regulatory approval on a timely basis, or at all, and a delay in
receipt of or failure to receive such approval would have a material adverse
effect on the Company's business, financial condition and results of operations.
InnerDyne recently completed the initial human efficacy trials of its EnAbl
system for the treatment of dysfunctional uterine bleeding in the United
Kingdom. Due to an inadequate understanding of certain recently promulgated
standards regulating the conduct of clinical trials in the United Kingdom, it
appears these trials may have been inadvertently initiated two days prior to the
expiration of a required notification period. The Company was notified by the
United Kingdom's Medical Device Agency (the "MDA") that the MDA is investigating
this situation, and the Company does not expect to conduct further clinical
trials in the United Kingdom until the situation is fully resolved. The Company
has obtained approval to commence clinical trials of the EnAbl System in Ireland
and Mexico. Although there can be no assurances, the Company believes that
neither the outcome of this investigation nor the current delay in the clinical
trials of the EnAbl System in the United Kingdom will have a material adverse
effect on the progress of the EnAbl System or on the business, financial
condition or results of operations of the Company.

         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 Radial Expanding Dilator
("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 and orthopedic 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.


                                      -17-
<PAGE>   18
         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 GMP requirements, which include
testing, control and documentation requirements. Manufacturers must also comply
with Medical Device Reporting ("MDR") 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, or in which its product malfunctioned and, if the malfunction
were to recur, 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 GMP requirements, MDR requirements and other
applicable regulations. Failure of the Company to maintain satisfactory GMP
compliance in the future 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,
injunction and/or civil fines. See "--Limited Manufacturing Experience;
Compliance with Good Manufacturing Practices."

         Dependence on Sole Sources. The materials utilized in the Company's
M.I.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 upon 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.


                                      -18-
<PAGE>   19
PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

                  Not Applicable.

ITEM 2.  CHANGES IN SECURITIES

                  Not Applicable.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

                  Not Applicable.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

                  Not Applicable.

ITEM 5.  OTHER ITEMS

                  Not Applicable.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

    Exhibit Number 27.01:                   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, 1996.


                                      -19-
<PAGE>   20
                                   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/ Robert A. Stern
-----------------------------
Robert A. Stern
Vice President and Chief
Financial Officer
(Duly Authorized Signatory,
Principal Financial and Accounting Officer)



Date:    November 14, 1996


                                      -20-