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                                 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 June 30, 1997 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 June 30, 1997 was 21,669,405.

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                               TABLE OF CONTENTS


                                                                          PAGE
                                                                          ----
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
Item 3.  Quantitative and Qualitative Disclosures About Market Risk . . .   18
PART II.  OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . .   19


                                     -2-
<PAGE>
                                 INNERDYNE, INC.
                            CONDENSED BALANCE SHEETS

                                    ASSETS

                                                    JUNE 30,      DECEMBER 31,
                                                      1997           1996
                                                   (UNAUDITED)    (*SEE NOTE)
                                                   -----------    ------------
 Current assets:
    Cash and cash equivalents  . . . . . . . . .  $ 5,808,063     $ 7,270,285
    Accounts receivable  . . . . . . . . . . . .    1,447,516       1,290,805
    Interest and other receivables . . . . . . .      883,072         283,913
    Inventory  . . . . . . . . . . . . . . . . .    1,075,026       1,159,098
    Prepaid expenses and other . . . . . . . . .      154,138         151,150
                                                  -----------     -----------
 Total current assets  . . . . . . . . . . . . .    9,367,815      10,155,251
 Equipment and leasehold improvements, net . . .    1,017,407       1,159,309
 Other assets  . . . . . . . . . . . . . . . . .       47,020          47,020
                                                  -----------     -----------
                                                  $10,432,242     $11,361,580
                                                  -----------     -----------
                                                  -----------     -----------
 Current liabilities:   

    Line of credit . . . . . . . . . . . . . . .  $   300,000     $   300,000
     
    Current installments of long-term debt . . .      254,505         223,914
    Accounts payable . . . . . . . . . . . . . .      403,321         301,946
    Accrued liabilities  . . . . . . . . . . . .    1,103,416       1,146,877
                                                  -----------     -----------
     Total current liabilities   . . . . . . . .    2,061,242       1,972,737
 Long-term debt, excluding current 
    installments . . . . . . . . . . . . . . . .      634,501         629,557

 Stockholders' equity:
    Common stock . . . . . . . . . . . . . . . .      216,684         215,420
    Additional paid-in-capital . . . . . . . . .   59,883,853      59,818,445
    Accumulated deficit  . . . . . . . . . . . .  (52,364,038)    (51,274,579)
                                                  -----------     -----------
     Net stockholders' equity  . . . . . . . . .    7,736,499       8,759,286
                                                  -----------     -----------
                                                  $10,432,242     $11,361,580
                                                  -----------     -----------
                                                  -----------     -----------

* Condensed from audited financial statements.

        See accompanying notes to condensed financial statements.


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

<TABLE>
<CAPTION>
                                                                       THREE-MONTH PERIODS               SIX-MONTH PERIODS
                                                                               ENDED                           ENDED
                                                                      JUNE 30,        JUNE 30,        JUNE 30,         JUNE 30, 
                                                                        1997            1996            1997             1996
                                                                        ----            ----            ----             ----
<S>                                                                 <C>             <C>                 <C>             <C>
 Product, licensing and contract revenue . . . . . . .              $ 3,694,778     $ 2,055,391     $ 6,645,982      $ 3,637,791
 Cost of sales . . . . . . . . . . . . . . . . . . . .                1,204,175       1,023,673       2,445,113        1,919,978
 Research, development, regulatory and clinical  . . .                  935,381         618,787       1,557,285        1,198,398
 Sales and marketing . . . . . . . . . . . . . . . . .                1,491,258       1,145,322       2,763,038        2,327,775
 General and administrative  . . . . . . . . . . . . .                  547,481         513,814       1,073,797        1,039,150
                                                                    -----------     -----------     -----------     ------------
     Total costs and expenses  . . . . . . . . . . . .                4,178,295       3,301,596       7,839,233        6,485,301
                                                                    -----------     -----------     -----------     ------------
     Operating loss  . . . . . . . . . . . . . . . . .                 (483,517)     (1,246,205)     (1,193,251)      (2,847,510)
 Interest/other income, net  . . . . . . . . . . . . .                   47,570          41,559         103,793           58,622
                                                                    -----------     -----------     -----------     ------------
     Net loss  . . . . . . . . . . . . . . . . . . . .              $  (435,947)    $(1,204,646)    $(1,089,458)    $ (2,788,888)
                                                                    -----------     -----------     -----------     ------------
                                                                    -----------     -----------     -----------     ------------
 Net loss per share  . . . . . . . . . . . . . . . . .              $      (.02)    $      (.06)    $      (.05)    $       (.15)
                                                                    -----------     -----------     -----------     ------------
                                                                    -----------     -----------     -----------     ------------
 Weighted average shares outstanding . . . . . . . . .               21,656,410      19,918,634      21,637,357       19,127,743
                                                                    -----------     -----------     -----------     ------------
                                                                    -----------     -----------     -----------     ------------
</TABLE>

    See accompanying notes to condensed financial statements.


                                     -4-
<PAGE>

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


<TABLE>
<CAPTION>
                                                                                                  SIX-MONTH PERIODS 
                                                                                                         ENDED
                                                                                                JUNE 30,         JUNE 30, 
                                                                                                  1997            1996
                                                                                                  ----            ----
<S>                                                                                           <C>             <C>
Cash flows from operating activities:
Net loss  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $(1,089,458)    $(2,788,888)
Adjustments to reconcile net loss to net cash used in operating activities: 
   Depreciation and amortization of equipment and leasehold improvements  . . . . . . . .         302,081         269,900
   Decrease (increase) in receivables . . . . . . . . . . . . . . . . . . . . . . . . . .        (755,870)       (386,755)
   Decrease (increase) in inventories . . . . . . . . . . . . . . . . . . . . . . . . . .          84,072        (334,600)
   Decrease (increase) in prepaid expenses, and other assets  . . . . . . . . . . . . . .          (2,988)       (105,700)
   Increase (decrease) in accounts payable  . . . . . . . . . . . . . . . . . . . . . . .         101,375         146,770
   Increase (decrease) in accrued expenses  . . . . . . . . . . . . . . . . . . . . . . .         (43,461)        295,903
                                                                                               ----------      ----------
Net cash used in operating activities . . . . . . . . . . . . . . . . . . . . . . . . . .      (1,404,249)     (2,903,370)
                                                                                               ----------      ----------
Cash flows from investing activities:
   Maturity of cash investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               0         997,604
   Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        (160,179)       (303,150)
                                                                                               ----------      ----------
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . .        (160,179)        694,454
                                                                                               ----------      ----------
Cash flows from financing activities:
   Proceeds from issuance of common stock, net  . . . . . . . . . . . . . . . . . . . . .          66,672       9,309,907
   Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          67,846         389,603
   Proceeds from short-term borrowings  . . . . . . . . . . . . . . . . . . . . . . . . .               0         182,169
   Principal payments on long-term debt, capital leases . . . . . . . . . . . . . . . . .         (32,312)        (76,628)
   Principal payments on short-term debt  . . . . . . . . . . . . . . . . . . . . . . . .               0         (46,839)
                                                                                               ----------      ----------
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . .         102,206       9,758,212
                                                                                               ----------      ----------
Net increase (decrease) in cash and cash equivalents  . . . . . . . . . . . . . . . . . .      (1,462,222)      7,549,296
Cash and cash equivalents at beginning of period  . . . . . . . . . . . . . . . . . . . .       7,270,285       1,720,814
                                                                                               ----------      ----------
Cash and cash equivalents at end of period  . . . . . . . . . . . . . . . . . . . . . . .      $5,808,063      $9,270,110
                                                                                               ----------      ----------
                                                                                               ----------      ----------
</TABLE>


           See accompanying notes to condensed financial statements.


                                     -5-
<PAGE>
                                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 three and six month periods ended June 30, 1997 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, 1996. 

(2)  INVENTORIES

     Inventories consist of the following: 

                                                   JUNE 30,      DECEMBER 31,
                                                     1997           1996
                                                     ----           ----
Raw materials and supplies. . . . . . . . . .    $  472,386     $  657,735
Finished goods. . . . . . . . . . . . . . . .       602,640        501,363
                                                 ----------     ----------
Net inventory . . . . . . . . . . . . . . . .    $1,075,026     $1,159,098
                                                 ----------     ----------
                                                 ----------     ----------


                                     -6-
<PAGE>

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 STEP-TM- 
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 PROCEDURES, THE COMPANY'S ABILITY TO FURTHER 
EXPAND INTO INTERNATIONAL MARKETS, 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, 1996 AND INCLUDED FROM TIME TO TIME 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 

    InnerDyne, Inc. (the "Company" or "InnerDyne") is primarily focused upon 
the development and commercialization of access products used to perform 
minimally invasive surgical ("M.I.S.") procedures. In December 1996, the 
Company announced the signing of an agreement which grants United States 
Surgical Corporation ("U.S. Surgical") exclusive worldwide sales and 
marketing rights for the Company's proprietary thermal ablation technology. 
The Company also intends to continue developing its radial dilation and 
biocompatible coating technologies, internally or through strategic 
alliances. 

    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, and the result is 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 STEP 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 is InnerDyne's first product to be launched on a 
commercial basis. The Company has received 510(k) clearances from the United 
States Food and Drug Administration (the "FDA") to market this device for 
laparoscopic and thorascopic M.I.S. procedures. With the Company's STEP 
access device, a trocar does not need to be utilized, eliminating the risk of 
internal organ damage from contact with the sharp bladed trocar. In contrast 
to conventional trocars, the STEP device utilizes a standard insufflation 
needle for the penetration through the abdominal wall at each site where it 
is utilized, creating only a small puncture wound. Following removal of the 
needle, the sheath that surrounds the needle is then dilated up to a larger 
working channel through the insertion of a dilator and cannula. Following 
dilation, the dilator is removed, leaving a rigid sheath 


                                     -7-
<PAGE>

that serves as a working channel with an integral insufflation valve at the 
proximal end. The radial dilation of the tissue into an appropriately sized 
working channel holds the cannula in place and obviates the need for an 
anchoring system. 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, leaving a residual wound 
that is approximately half the size of that made using a conventional trocar 
of similar size. The STEP is currently utilized 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 outcomes 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. Prospective studies intended to corroborate and expand the findings 
of the published outcomes study are underway, and may be completed during 
1997. 

    Short STEP.  The Short STEP is a conventional STEP device that has been 
reduced in length and is particularly suitable for M.I.S. procedures 
involving smaller individuals, especially children and thin females. The 
Short STEP was commercially introduced in 1995. 

    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, 
primarily outside the United States, where the pressures on cost and the 
recognition of the total costs involved in surgical procedures are perceived 
somewhat differently. Although there is substantial usage of reusable access 
devices in the U.S., and management expects a trend toward a somewhat more 
frequent usage of reusable devices, there are significant offsetting concerns 
relating to total health care system costs and safety involved with 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.  The Mini STEP is a small-diameter radially dilating access 
device designed for use in office micro-laparoscopic surgery utilizing small 
instruments, and in tubal ligation and pediatric procedures. 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 
will be commercially introduced in 1997. 

    R.E.D.  The Radially Expanding Dilator ("R.E.D.") is the second product 
type based upon the Company's proprietary radial dilation technology. The 
R.E.D. is designed to enable access to organs deep within the abdominal 
cavity. The only 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 by the scope. The R.E.D. is designed to provide access through the 
abdominal wall, across the peritoneal space, and into an internal organ. 
InnerDyne believes that with use of the R.E.D. product, substantial 
reductions in patient recovery times may be possible. The Company expects 
that the enhanced capabilities of the R.E.D. may enable additional surgical 
procedures to be performed through minimally invasive techniques. This 
product has been released only on a very limited basis, and feedback 
indicates it enables additional procedures to be performed endoscopically. 
However, initial experience indicates a relatively high surgeon skill level 
and advanced training is necessary to perform these intra-organ procedures 
successfully. Accordingly, widespread commercialization of the R.E.D. will 
require significant market development efforts. 


                                     -8-
<PAGE>

    Other Applications.  InnerDyne has announced agreements for the use of 
its proprietary radial dilation technology for specialized vascular access 
with Endotex Interventional Systems and covering a less traumatic means of 
placing enteral feeding tubes with Sherwood-Davis and Geck (SDG). The single 
regulatory milestone payment associated with the SDG agreement was received 
during the second quarter of 1997, and the Company anticipates that SDG will 
require shipments of the specialized access devices for the placement of 
feeding tubes in 1998. InnerDyne established a business unit during the 
second quarter of 1997 to better define the value radial dilation technology 
may bring to interventional cardiology procedures and, if the assessment is 
positive, to develop access products for such procedures. The Company also 
committed limited resources to an investigation of the potential market 
opportunity for an advanced access device in arthroscopic procedures during 
the second quarter of 1997. In addition, the Company is exploring the 
potential use of its proprietary radial dilation technology in other 
applications, such as access for thoracic and tracheal procedures, and is 
likely to increase resources associated with the pursuit of one or more of 
these opportunities in the ensuing quarters.

    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 or excessive uterine bleeding by 
thermally ablating the endometrial lining of the uterus through the 
controlled introduction and heating of a normal saline solution IN SITU. The 
Company has completed initial safety and preliminary efficacy trials with a 
redesigned system. The results of these limited trials give preliminary 
indications that the ENABL System represents a safe means of ablating uterine 
tissue. However, there can be no assurance that the feasibility of this 
technology will be satisfactorily demonstrated in expanded efficacy trials or 
that the system will be successfully commercialized.

    In December 1996, InnerDyne announced that it had signed an agreement 
which granted U.S. Surgical exclusive worldwide sales and marketing rights 
for the ENABL System. Under the terms of the agreement, in exchange for 
initial license fees, milestone payments, and royalties based upon future 
sales, U.S. Surgical gained the rights to complete development, manufacture 
and market the technology on a worldwide basis.  The agreement also provides 
U.S. Surgical with an option to purchase rights to the technology for defined 
applications. On July 25, 1997, the Company announced that the initial 
milestone under its licensing, development and commercialization agreement 
with U.S. Surgical Corporation for its ENABL thermal ablation technology had 
been satisfied, with U.S. Surgical's receipt of conditional approval of its 
IDE application by the U.S. Food and Drug Administration. U.S. Surgical will 
be free to initiate planned U.S. clinical trials of the system as soon as the 
limited questions raised by the FDA have been addressed. As a result, an 
initial milestone payment will be reflected in InnerDyne's third quarter 
results. Recognition of this revenue is expected to at least double the 
licensing and contract revenue that will be reported by InnerDyne in the 
third quarter, when compared to licensing and contract revenue of $852,168 
reported in the Company's second quarter results.

    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 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 
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. TRC coatings, employed with the 
siloxane layer alone or in combination with bioactive 


                                     -9-
<PAGE>

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 
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 the 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 1996, 
InnerDyne received an order from SENKO to build a second fiber coating 
system, which was delivered in March 1997. In April 1996, the Company 
announced the signing of an agreement with Boston Scientific Corporation 
("Boston Scientific") covering the potential applications 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 involves an equity investment by Boston Scientific in 
InnerDyne, initial research support and future license fees and royalty 
payments if Boston Scientific decides to proceed with a technology transfer. 
The Company has undertaken a number of discussions with other potential 
licensees of the Company's biocompatible 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 
gas exchange, as well as third parties interested in the possible coating of 
in-dwelling devices for various applications. To date, the Company has not 
entered into a contractual arrangement with any such parties.

RESULTS OF OPERATIONS

Total revenue for the three and six month periods ended June 30, 1997 was 
$3,694,778 and $6,645,982, respectively, compared to $2,055,391 and 
$3,637,791 for the corresponding periods in 1996. Total revenue is comprised 
of revenue from product sales and licensing and contract revenue. Revenue 
from product sales increased to $2,842,610 and $5,361,764 for the three and 
six month periods ended June 30, 1997, respectively, from $1,918,924 and 
$3,438,804 for the corresponding periods in 1996, reflecting increased sales 
of the Company's STEP devices. Licensing and contract revenue for the three 
and six month  periods ended June 30, 1997 were $852,168, and $1,284,218, 
respectively, compared to $136,467 and $198,987 for the corresponding periods 
in 1996. These licensing and contract revenues for the 1996 periods included 
revenue earned related to licensing agreements for the Company's 
biocompatible coatings technology and to a license, development and 
manufacturing agreement for vascular access using the Company's radial 
dilation technology. The licensing and contract revenue for the three and six 
month periods ended June 30, 1997 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. On July 25, 1997, the Company announced 
that the initial milestone under its licensing, development and 
commercialization agreement with U.S. Surgical Corporation for its ENABL 
thermal ablation technology had been satisfied, with U.S. Surgical's receipt 
of conditional approval of its IDE application by the U.S. Food and Drug 
Administration. U.S. Surgical will be free to initiate planned U.S. clinical 
trials of the system as soon as the limited questions raised by the FDA have 
been addressed. As a result, an initial milestone payment will be reflected 
in InnerDyne's third quarter results. Recognition of this revenue is expected 
to at least double the licensing and contract revenue that will be reported 
by InnerDyne in the third quarter, when compared to licensing and contract 
revenue of $852,168 reported in the Company's second quarter results. 
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 were $1,204,175 and $2,445,113, respectively, for the three 
and six month periods ended June 30, 1997, compared to $1,023,673 and 
$1,919,978 for the same periods in 1996. The increase in cost of sales for 
the three and six month periods ended June 30, 1997 is mainly attributable to 
the increase in production and sales volumes compared to the same periods in 
1996. 

    Research, development, regulatory and clinical expenses ("R&D") for the 
three and six month periods ended June 30, 1997 were $935,381 and $1,557,285, 
respectively, compared to $618,787 and $1,198,398 for the corresponding 
periods in 1996. In the 1997

                                    -10-
<PAGE>

periods, a significant part of the R&D expenses were reimbursed by 
development partners, thereby generating off-setting licensing and contract 
revenue. The Company expects that internally funded research, development, 
regulatory and clinical expenditures will increase in absolute dollars in 
future periods. It is also possible that reimbursed expenses associated with 
one or more research programs funded by outside development partners may 
increase or decrease in future periods, thereby increasing or reducing 
expected R&D expenditures, and the corresponding licensing and contract 
revenue.

    Sales and marketing expenses were $1,491,258 and $2,763,038, 
respectively, for the three and six month periods ended June 30, 1997, 
compared to $1,145,322 and $2,327,775 for the corresponding periods in 1996, 
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 $547,481 and $1,073,797, 
respectively, for the three and six month periods ended June 30, 1997, 
compared to $513,814 and $1,039,150 for the corresponding periods in 1996. 
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 $47,570 and $103,793, 
respectively, for the three and six month periods ended June 30, 1997, 
compared to $41,559 and $58,622 for the same periods in 1996, primarily as a 
result of  interest income earned on higher average cash and cash equivalents 
balances following the Company's May 1996 secondary offering. 

    The Company incurred a net loss of $435,947 or $.02 per share and 
$1,089,458 or $.05 per share, respectively, for the three and six month 
periods ended June 30, 1997, compared to a net loss of $1,204,646 or $.06 per 
share and $2,788,888 or $.15 per share, for the same periods in 1996.  
Management believes that the Company is likely to incur operating losses 
through much of 1997, and potentially in 1998. 

                                     -11-
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

    From its inception to June 30, 1997, the Company has incurred a 
cumulative net loss of approximately $52 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 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 issuance expenses).

    At June 30, 1997, cash and cash equivalents totaled $5,808,063 compared 
to a total cash and cash equivalents balance of $7,270,285 at December 31, 
1996. The Company had $160,179 and $776,901 in capital expenditures in the 
six months ended June 30, 1997 and the year ended December 31, 1996, 
respectively. Working capital totaled $7,306,573 at June 30, 1997, and the 
Company had long-term debt, excluding current installments, totaling $634,501 
relating to financing of equipment. 

    In June 1997, 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% based on eligible 
receivables.  The Company also has an equipment advance line of credit, which 
allows the Company to borrow up to $500,000 per year based on eligible 
equipment purchases.  Amounts outstanding on this equipment advance line of 
credit are periodically converted to 48 month term loans bearing interest at 
prime plus 1%. As of June 30, 1997, the Company had drawn $300,000 for 
financing of working capital needs on the revolving line of credit, secured 
by certain accounts receivable, but had not borrowed under the current 
agreement with Silicon Valley Bank for the financing of capital expenditures. 
Debt balances as of June 30, 1997 on the Company's balance sheet were loaned 
to the Company under previous equipment lines of credit agreements with 
Silicon Valley Bank.       

    In the future, the Company may incur additional substantial 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'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 of 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 1998, 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>

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 $1.1 million on revenues of $6.6 million, $4.7 million on 
revenues of $9.1 million, $5.6 million on revenues of $5.3 million, and $9.9 
million on revenues of $0.9 million for the six months ended June 30, 1997, 
and the fiscal years ended December 31, 1996, 1995 and 1994, respectively. As 
of June 30, 1997, InnerDyne had an accumulated deficit of approximately $52 
million. 

    In the future, the Company may incur 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 much of 1997, and potentially in 1998. 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.

    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 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, primary competition for the ENABL System 
is current therapies for the treatment of excessive menstrual bleeding, 
including drug therapy, dilatation and curettage, surgical endometrial 
ablation and hysterectomy. The ENABL System 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 and marketed by 
GyneCare, Inc. 

                                     -13-
<PAGE>

    Additionally, there are other companies developing alternative methods of 
uterine tissue ablation that compete with the Company and U.S. Surgical. 
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 and U.S. Surgical 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 
the dominant portion 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. The 
future success of the Company will depend in part on the timely commercial 
introduction and market acceptance of products based on these technologies. 
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 being developed with U.S. 
Surgical. 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; DEPENDENCE ON LIMITED SOURCES OF SUPPLY.  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 
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 Good Manufacturing Practices ("GMP") regulations 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. 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. A number of materials are available only from a limited number of 
sources at the present time.  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 would 
be obtained in a timely fashion, if at all. Failure to maintain production 
volumes or increase production 

                                     -14-
<PAGE>

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. Failure to maintain satisfactory GMP 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. 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.

    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 and contract 
revenue 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 licensing and contract revenue 
during a quarter because the Company generally derives higher gross margins 
from licensing and contract 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 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 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 a network of 
independent sales representatives who typically sell other complementary 
M.I.S. products to the same customer base and direct representatives who are 
employed by the Company within selected geographical areas. 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 


                                     -15-
<PAGE>

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 expects to market 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 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 
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, the ENABL 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 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 


                                     -16-
<PAGE>

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 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. The ENABL System will likely be 
subject to the PMA approval process prior to marketing by U.S. Surgical 
within the United States. There can be no assurance that U.S. Surgical 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.

    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 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 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, it would be 
likely to cause or contribute to a death or serious injury.


                                     -17-
<PAGE>

    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 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.

    DEPENDENCE ON INTERNATIONAL SALES.  In the future, the Company expects to 
derive an increasing portion of its revenue from international sales. To the 
extent that the Company's international sales increase in future periods, a 
significant 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 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. 

    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 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 healthcare 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.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     Not Applicable.


                                     -18-
<PAGE>

PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         Not Applicable.

ITEM 2.  CHANGES IN SECURITIES 

    (a)  Not Applicable.

    (b)  Not Applicable.

    
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES 

         Not Applicable.

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

    (a)  At the Annual Meeting of Stockholders of the Registrant, held on May
         23, 1997, the stockholders approved the following proposals with the 
         vote indicated below.
    
    (b)  Not Applicable
     
    (c)  Voting:
    
         (1)   Election of Directors
    
              NOMINEE                    FOR:                WITHHELD:
              -------                    ----                ---------
              Edward W. Benecke          19,431,503          74,691
              Robert M. Curtis           19,432,523          73,671
              Eugene J. Fischer          19,432,523          73,671
              William G. Mavity          19,431,223          74,971
              Guy P. Nohra               19,432,523          73,671
              Steven N. Weiss            19,432,523          73,671
    
         (2)  The selection of KPMG Peat Marwick as independent auditors for
              the corporation for the fiscal year ending December 31, 1997:

                       FOR:         AGAINST:       ABSTAIN:
                       ----         --------       --------
                    19,427,487       13,181         46,744

ITEM 5.  OTHER ITEMS 

         Not Applicable.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

    Exhibit Number 10.38:     Amended and Restated Loan and Security
                              Agreement dated as of June 19, 1997 by and
                              between the Registrant and Silicon Valley 
                              Bank

                   27.01:     Financial Data Schedule


                                     -19-
<PAGE>

(b) Reports on Form 8-K:         The Company did not file any reports on Form
                                 8-K during the quarter ended June 30, 1997.

                                 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:    July 29, 1997


                                     -20-