<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, 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 September 30, 1997 was 21,687,078.

================================================================================
<PAGE>   2
6                                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

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.........................   20
                                  
PART II.  OTHER INFORMATION...................................................................   21
</TABLE>


                                      -2-
<PAGE>   3
                                 INNERDYNE, INC.
                            CONDENSED BALANCE SHEETS

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

    Cash and cash equivalents............................   $  6,788,802            $7,270,285
    Accounts receivable..................................      1,665,634             1,290,805
    Interest and other receivables.......................        455,871               283,913
    Inventory............................................      1,265,329             1,159,098
    Prepaid expenses and other...........................        150,021               151,150
                                                            ------------          ------------
 Total current assets....................................     10,325,657            10,155,251
 Equipment and leasehold improvements, net...............        953,890             1,159,309
 Other assets............................................         45,695                47,020
                                                            ------------          ------------
                                                            $ 11,325,242          $ 11,361,580
                                                            ============          ============
                    LIABILITIES & STOCKHOLDERS EQUITY

Current liabilities:

    Line of credit.......................................       $300,000              $300,000
    Current installments of long-term debt...............        297,281               223,914
    Accounts payable.....................................        451,073               301,946
    Accrued liabilities..................................      1,458,784             1,146,877
                                                            ------------          ------------
       Total current liabilities.........................      2,507,138             1,972,737
 Long-term debt, excluding current installments..........        577,077               629,557

 Stockholders' equity:
    Common stock.........................................        216,861               215,420
    Additional paid-in capital...........................     59,887,002            59,818,445
    Accumulated deficit..................................    (51,862,836)          (51,274,579)
                                                            ------------          ------------
        Net stockholders' equity.........................      8,241,027             8,759,286
                                                            ------------          ------------
                                                            $ 11,325,242          $ 11,361,580
                                                            ============          ============
</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                  NINE-MONTH PERIODS
                                                                  ENDED                               ENDED
                                                     -------------------------------      --------------------------------
                                                     SEPTEMBER 30      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                                         1997              1996               1997                1996
                                                         ----              ----               ----                ----
<S>                                                 <C>               <C>                <C>                <C>         
Product, licensing and contract revenue ......      $  4,960,477      $  2,458,449       $ 11,606,459       $  6,096,240
Cost of sales ................................         1,299,201         1,178,862          3,744,314          3,098,840
Research, development, regulatory and clinical           988,175           796,490          2,545,460          1,994,888
Sales and marketing ..........................         1,648,224         1,175,667          4,411,262          3,503,442
General and administrative ...................           579,876           452,030          1,653,673          1,491,180
                                                    ------------      ------------       ------------       ------------
        Total costs and expenses .............         4,515,476         3,603,049         12,354,709         10,088,350
                                                    ------------      ------------       ------------       ------------
        Operating income (loss) ..............           445,001        (1,144,600)          (748,250)        (3,992,110)
Interest/other income, net ...................            56,200            67,160            159,993            125,782
                                                    ------------      ------------       ------------       ------------
        Net income (loss) ....................      $    501,201      $ (1,077,440)      $   (588,257)      $ (3,866,328)
                                                    ============      ============       ============       ============
Net income (loss) per share ..................      $        .02      $       (.05)      $       (.03)      $       (.19)
                                                    ============      ============       ============       ============
Weighted average shares outstanding ..........        21,678,986        21,490,659         21,651,386         19,921,131
                                                    ============      ============       ============       ============
</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,
                                                                                1997             1996
                                                                                ----             ----
<S>                                                                         <C>              <C>         
Cash flows from operating activities:
Net loss...............................................................      $ (588,257)     $(3,866,328)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization of equipment and leasehold improvements..         455,331          413,075
   Decrease (increase) in receivables..................................       (546,787)        (388,084)
   Decrease (increase) in inventories..................................       (106,231)        (476,940)
   Decrease (increase) in prepaid expenses, and other assets...........           2,454         (86,699)
   Increase (decrease) in accounts payable.............................         149,127           63,999
   Increase (decrease) in accrued expenses.............................         311,907          198,159
                                                                             ----------      -----------

Net cash used in operating activities..................................        (322,456)      (4,142,818)
                                                                             ----------      -----------

Cash flows from investing activities:
   Maturity of marketable investment securities........................               0          997,604
   Capital expenditures................................................        (249,912)        (464,205)
                                                                             ----------      -----------

Net cash provided by (used in) investing activities....................        (249,912)         533,399
                                                                             ----------      -----------

Cash flows from financing activities:
   Proceeds from issuance of common stock, net.........................          69,998        9,321,517
   Proceeds from long-term debt........................................         103,115          396,560
   Proceeds from short-term borrowings.................................               0          389,603
   Principal payments on long-term debt, capital leases................         (82,228)        (100,893)
   Principal payments on short-term debt...............................               0         (74,732)
                                                                             ----------      -----------

Net cash provided by financing activities..............................          90,885        9,932,055
                                                                             ----------      -----------

Net increase (decrease) in cash and cash equivalents...................        (481,483)       6,322,636

Cash and cash equivalents at beginning of period.......................       7,270,285        1,720,814
                                                                             ----------      -----------

Cash and cash equivalents at end of period.............................      $6,788,802       $8,043,450
                                                                             ==========       ==========
</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 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 nine
month period ended September 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:
<TABLE>
<CAPTION>
                                                                 SEPTEMBER 30,     DECEMBER 31,
                                                                     1997              1996
                                                                     ----              ----

            <S>                                                  <C>              <C>       
            Raw materials and supplies........................    $  580,285       $  657,735
            Finished goods....................................       685,044          501,363
                                                                  ----------       ----------

            Net inventory.....................................    $1,265,329       $1,159,098
                                                                  ----------       ----------
</TABLE>


                                      -6-
<PAGE>   7
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 Form10-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/oo
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. The Company also intends to
continue developing its radial dilation and biocompatible coating technologies,
internally or through strategic alliances. In addition, United States Surgical
Corporation ("U.S. Surgical") has been granted exclusive worldwide sales and
marketing rights for the Company's proprietary EnAbl thermal ablation technology
for the treatment of excessive uterine bleeding.

        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>   8
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 MIS
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
were commercially introduced in 1997.

        Distribution of Step Products. The Step family of products is
distributed to health care professionals in both international and domestic
markets. In selected foreign countries, local distributors purchase product from
the Company, for subsequent resale to their respective countries' health care
systems. This international distribution network normally involves one
distributor per selected country. Distributors in selected foreign markets can
and have been changed when the Company has deemed the performance of individual
distributor organizations to be unsatisfactory.

        In the domestic market, the Company's MIS access product line is
generally sold directly to health care professionals by a network of sales
representatives, a limited number of which are employees of the Company. These
sales representatives are managed on a regional basis by InnerDyne management
employees. In order to attempt to enhance the effectiveness of these domestic
sales activities, agreements with buying groups which represent multiple
provider institutions have been pursued. InnerDyne signed two buying group
agreements in the third quarter of 1997. 


                                      -8-

<PAGE>   9
These agreements cover approximately 1,350 hospitals across the United States
and will allow the Company to compete for a portion of the minimally invasive
surgical access business in these hospitals.

        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 intended 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 and the Company has not
established definitive plans for completion of development and commercialization

        Other Applications. InnerDyne has announced agreements for the use of
its proprietary radial dilation technology for specialized vascular access with
Endotex Interventional Systems and an agreement covering a less traumatic means
of placing enteral feeding tubes with Sherwood Davis and Geck (SDG). The Company
announced that it received the single regulatory milestone payment associated
with the SDG agreement during the second quarter of 1997 and anticipates that
SDG will require shipments of the specialized access devices for the placement
of feeding tubes in 1998.

        InnerDyne also established a business unit during the second quarter of
1997 to better define the value radial dilation technology can bring to the
estimated 4.7 million interventional cardiology procedures performed annually in
the United States and to develop access products based on this assessment, if
the value statement is positive. The Company proceeded with animal studies and
device refinements in the third quarter and will continue testing the product
concept in animals with cardiology advisors. If the animal trial results are
positive and subsequent human use demonstrates clinical benefits, the Company
expects to launch a radial dilation vascular access device in 1998.

        InnerDyne committed resources to an investigation of the potential
market opportunity in arthroscopic procedures during the second quarter of 1997.
Limited clinical usage of the initial design accompanied by substantial exposure
and feedback from arthroscopic surgeons was completed during the third quarter.
Product design revisions based upon this feedback are in process and may result
in a limited launch of an advanced arthroscopic access product in 1998. 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.
Developmental expenditures on new applications for the Company's proprietary
radial dilation technology will impact the timing and achievement of sustained
profitability.

        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.


                                      -9-

<PAGE>   10
        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 for this technology has been
satisfied, with U.S. Surgical's receipt of conditional approval of its IDE
application by the FDA. 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. This milestone payment was reflected in InnerDyne's third
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 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.

        The Company has continued to pursue modifications of its proprietary
coating technologies to simplify and expand the available means and potential
applications of heparin attachment to the surfaces of medical devices. Based
upon promising indications of initial feasibility of this effort, limited
discussions with potential interested partners have been initiated. There can be
no assurances that this additional heparin attachment technology will ultimately
be proven to be feasible, or that it will be of interest to any potential
partner.

        InnerDyne recently filed a provisional patent application covering
improved methods for preparing and fabricating devices and substrates to deliver
radioactivity to patients utilizing Company's proprietary biocompatible coatings
technology. The process may be useful with both permanently implanted devices,
such as vascular stents, grafts, and coils, as well as temporarily implanted
devices, such as catheters, wires, and pellets. The Company recently filed a
grant application with Oak Ridge National Laboratory and is working with George
Washington University to demonstrate the feasibility of this technology. There
can be no assurances that a proprietary position will successfully be
established in this technology area, or that the Company's approach will prove
to be feasible or of interest to potential partners.

        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 of
1997.

        In April 1996, the Company announced the signing of an agreement with
Boston Scientific Corporation ("Boston Scientific") covering the potential
application and use of InnerDyne's proprietary biocompatible coating
technologies with Boston Scientific's stents, grafts, vena cava filters and
other implantable medical devices. The agreement involves 


                                      -10-
<PAGE>   11
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 believes that it has satisfied
most of the key technical parameters associated with Boston Scientific's primary
areas of product interest, and is awaiting a decision relative to technology
transfer by Boston Scientific.

        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 entered
into one other development arrangement with a company in the cardiovascular
arena and recognized initial revenue from this agreement in the third quarter.


RESULTS OF OPERATIONS

        Total revenue for the three and nine month periods ended September 30,
1997 were $4,960,477 and $11,606,459, respectively, compared to $2,458,449 and
$6,096,240 for the corresponding periods in 1996. Total revenue is comprised of
revenue from product sales, and licensing and contract revenue. Product sales
increased to $3,138,728 and $8,500,492 for the three and nine month periods
ended September 30, 1997, from $2,048,045 and $5,486,849 for the corresponding
periods in 1996, reflecting increased sales of the Company's Step devices.
Licensing and contract revenue for the three and nine month periods ended
September 30, 1997 were $1,821,749, and $3,105,967 compared to $410,404 and
$609,3911 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
nine month periods ended September 30, 1997 related to agreements with third
parties covering the licensing and 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 for its EnAbl thermal ablation
technology has been satisfied, with U.S. Surgical's receipt of conditional
approval of its IDE application by the FDA. U.S. Surgical will be free to
initiate U.S. clinical trials of the system as soon as the limited questions
raised by the FDA have been addressed. An associated milestone payment was
reflected in InnerDyne's third 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.

        Total cost of sales was $1,299,201 and $3,744,314 for the three and nine
month periods ended September 30, 1997, compared to $1,178,862 and $3,098,840
for the same periods in 1996. The increase in cost of sales for the three and
nine month periods ended September 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 for the three
and nine month periods ended September 30, 1997 were $988,175 and $2,545,460,
compared to $796,490 and $1,994,888 for the corresponding periods in 1996. In
the 1997 periods, a significant part of the R&D expenses were reimbursed by
development partners, thereby generating license or contract revenue. The
Company expects that internally funded research, development, regulatory and
clinical expenditures will increase in absolute dollars in future periods.
Research and development expenditures on new applications for the Company's
proprietary radial dilation technology will impact the timing and achievement of
sustained profitability. Reimbursed expenses associated with one or more
research programs funded by outside development partners may decrease in future
periods, thereby reducing expected research and development expenditures, and
the corresponding license and contract revenue.


                                      -11-

<PAGE>   12
        Sales and marketing expenses were $1,648,224 and $4,411,262 for the
three and nine month periods ended September 30, 1997, compared to $1,175,667
and $3,503,442 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 $579,876 and $1,653,673 for the
three and nine month periods ended September 30, 1997, compared to $452,030 and
$1,491,180 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 decreased to $56,200 and increased to $159,993 for
the three and nine month periods ended September 30, 1997, compared to $67,160
and $125,782 for the same periods in 1996, reflecting interest income earned on
average cash and cash equivalents balances following the Company's May 1996
secondary offering, and usage of cash and equivalents to support expanding
operations.

        The Company earned net income of $501,201, or ($.02) per share and
incurred a net loss of ($588,257) or ($.03) per share, for the three and nine
month periods ended September 30, 1997, compared to a net loss of ($1,077,440)
or $.05 per share and ($3,866,328) or ($.19) per share, for the same periods in
1996. Management believes that the Company is likely to incur operating losses
for the balance of 1997, and at least a portion of 1998.


                                      -12-
<PAGE>   13
LIQUIDITY AND CAPITAL RESOURCES

        From its inception to September 30, 1997, the Company has incurred a
cumulative net loss of approximately $52 million. Since inception, the Company's
cash expenditures have generally 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 September 30, 1997, cash and cash equivalents totaled $6,788,802
compared to a total cash and cash equivalents balance of $7,270,285 at December
31, 1996. The Company had $249,912 and $776,901 in capital expenditures in the
nine months ended September 30, 1997 and the year ended December 31, 1996,
respectively. Working capital totaled $7,818,519 at September 30, 1997, and the
Company had long-term debt, excluding current installments, totaling $577,077
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 September 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 September 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 


                                      -13-


<PAGE>   14
Company, or at all. Any additional equity financings may be dilutive to
stockholders, and debt financing, if available, may involve restrictive
covenants.


                                      -14-
<PAGE>   15
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

        History of Losses; Profitability Uncertain. InnerDyne has experienced
operating losses in every quarter except the third quarter of 1997, since its
inception in December 1985. InnerDyne reported net losses of $588,257on revenues
of $11.6 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
nine months ended September 30, 1997, and the fiscal years ended December 31,
1996, 1995 and 1994, respectively. As of September 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. Management believes that the Company is likely to incur
operating losses for at least the balance of 1997, and possibly for a
significant portion of 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 incur future losses, that the Company will be able to raise
cash as necessary to fund operations or that the Company will achieve sustained
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 commercialized by GyneCare, Inc.


                                      -15-
<PAGE>   16
        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
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. 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 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 volumes in a timely or cost-effective
manner would have a material adverse effect on the Company's business, financial


                                      -16-
<PAGE>   17
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 non-product revenues during a
quarter, and the Company's ability to obtain sufficient supplies of sole or
limited source components for its products. In particular, fluctuations in
production volumes affect gross margins from quarter to quarter. Furthermore,
gross margins can fluctuate from quarter to quarter to the extent the Company
recognizes non-product revenue during a quarter because the Company generally
derives higher gross margins from non-product 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 be able to recruit
and train such additional personnel in a timely fashion. Loss of a significant
number of InnerDyne's 


                                      -17-



<PAGE>   18
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 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.


                                      -18-
<PAGE>   19
        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)
clearance within a reasonable time frame, or at all, for any of the devices or
modifications for which it may file a 510(k) notification.

        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.

        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 


                                      -19-
<PAGE>   20
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.


                                      -20-
<PAGE>   21
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

               Not Applicable.

ITEM 5. OTHER INFORMATION

               On September 19, 1997, the Company declared a dividend
         distribution of one Preferred Share Purchase Right (a "Right") on each
         outstanding share of the Company's Common Stock. Each Right will
         entitle stockholders to buy one one-thousandth of a share of the
         Company's Series A Participating Preferred Stock a an exercise price of
         $20.00 per share. The Rights will become exercisable at the close of
         business on the tenth day (or such later date as may be determined by a
         majority of the Continuing Directors, as defined in the Preferred
         Shares Rights Agreement dated as of September 19, 1997) after a person
         or group announces the acquisition of 15% or more of the Company's
         Common Stock or announces commencement of a tender offer or exchange
         offer, the consummation of which would result in ownership by the
         person or group of 15% or more of the Common Stock. The Company will be
         entitled to redeem the Rights at $0.01 per Right at any time prior to
         the close of business on the tenth day (or such later date as may be
         determined by a majority of the Continuing Directors) following
         acquisition by a person or group of 15% or more of the Company's Common
         Stock. The dividend distribution was made on October 15, 1997. The
         Rights will expire on September 19, 2007. For a more complete
         description of the Rights see the Company's Registration on Form 8-A
         filed with the Securities and Exchange Commission on September 23,
         1997.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)     Exhibits:

        Exhibit Number 27.01:       Financial Data Schedule

(b)     Reports on Form 8-K:        N/A


                                      -21-
<PAGE>   22
                                   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, 1997


                                      -22-
<PAGE>   23


                               INDEX TO EXHIBITS


<TABLE>
<CAPTION>
Exhibit
Number                             Description
-------                            -----------
<S>                           <C>
 27.01                        Financial Data Schedule
</TABLE>