INNERDYNE INC, S-1/A, 1996-05-10

INNERDYNE INC
S-1/A, 1996-05-10
SURGICAL & MEDICAL INSTRUMENTS & APPARATUS

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 10, 1996

REGISTRATION NO. 333-3196
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2

TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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INNERDYNE, INC.
(Exact Name of Registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 3841 87-0431168
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>

1244 REAMWOOD AVENUE
SUNNYVALE, CA 94089
(408) 745-6010
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)

WILLIAM G. MAVITY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
INNERDYNE, INC.
1244 REAMWOOD AVENUE
SUNNYVALE, CA 94089
(408) 745-6010
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------

COPIES TO:

<TABLE>
<S> <C>
Cathryn S. Chinn Mark E. Bonham
Glen R. Van Ligten Robert D. Brownell
Laura A. Gordon Warren Chao
VENTURE LAW GROUP, WILSON SONSINI GOODRICH & ROSATI,
A Professional Corporation Professional Corporation
2800 Sand Hill Road 650 Page Mill Road
Menlo Park, CA 94025 Palo Alto, CA 94304-1050
(415) 854-4488 (415) 493-9300
</TABLE>

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /

------------------------------

REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

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INNERDYNE, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(b) of Regulation S-K Showing Location in
Prospectus of Part I Items of Form S-1

<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING
IN FORM S-1 REGISTRATION STATEMENT LOCATION IN PROSPECTUS
- ----------------------------------------------------------- ---------------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus......... Outside Front Cover Page

2. Inside Front and Outside Back Cover Pages of
Prospectus..................................... Inside Front and Outside Back Cover Page

3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges...................... Prospectus Summary; Risk Factors

4. Use of Proceeds................................. Use of Proceeds

5. Determination of Offering Price................. Underwriting

6. Dilution........................................ Dilution

7. Selling Security Holders........................ Principal and Selling Stockholders

8. Plan of Distribution............................ Outside and Inside Front Cover Pages; Underwriting

9. Description of Securities to be Registered...... Description of Capital Stock; Underwriting

10. Interests of Named Experts and Counsel.......... Legal Matters; Experts

11. Information with Respect to the Registrant...... Outside and Inside Front Cover Pages; Prospectus Summary;
The Company; Risk Factors; Dividend Policy;
Capitalization; Selected Financial Data; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business; Management; Certain
Transactions; Principal and Selling Stockholders;
Description of Capital Stock; Shares Eligible for Future
Sale; Financial Statements

12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.................................... Not Applicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS

SUBJECT TO COMPLETION, DATED MAY 10, 1996
2,350,000 SHARES

[LOGO]
COMMON STOCK

All of the 2,350,000 shares of Common Stock offered hereby are being sold by
InnerDyne, Inc. ("InnerDyne" or the "Company"). The Company's Common Stock is
traded on the Nasdaq National Market under the symbol "IDYN." On May 8, 1996,
the last sale price of the Common Stock was $3.875 per share. See "Price Range
of Common Stock."

------------------------

PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE DISCUSSION UNDER "RISK
FACTORS" COMMENCING ON PAGE 5.
--------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE

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<S> <C> <C> <C>
UNDERWRITING
DISCOUNTS
PRICE TO AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
Per Share................................. $ $ $
Total (3)................................. $ $ $
</TABLE>

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). The Company has also agreed to sell to
Cruttenden Roth Incorporated, the representative (the "Representative") of
the several Underwriters (the "Underwriters"), for nominal consideration,
warrants to purchase up to 235,000 shares of Common Stock exercisable at a
per share price equal to 120% of the Price to Public. See "Underwriting."

(2) Before deducting expenses payable by the Company estimated to be $575,000
(including the Representative's nonaccountable expense allowance). See
"Underwriting."

(3) The Company and the selling stockholders (the "Selling Stockholders") have
granted to the Underwriters a 45-day option to purchase up to an aggregate
of 352,500 additional shares of Common Stock solely to cover
over-allotments, if any. To the extent that the option is exercised, the
Underwriters will offer the additional shares at the Price to Public shown
above. If the Underwriters exercise the over-allotment option, the Company's
independent directors will determine whether such shares will be sold by the
Company or by the Selling Stockholders. If all shares subject to the
over-allotment option are sold by the Company, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively. If the over-allotment
shares are sold by the Selling Stockholders, no additional proceeds will be
received by the Company, and Selling Stockholders will receive proceeds of
$ . See "Underwriting."

The shares of Common Stock are offered by the several Underwriters when, as
and if delivered to and accepted by the Underwriters, subject to the right to
reject any order in whole or in part and certain other conditions. It is
expected that delivery of such shares will be made at the offices of Cruttenden
Roth Incorporated, Irvine, California or at the facilities of the Depository
Trust Company on or about , 1996.

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CRUTTENDEN ROTH
INCORPORATED

THE DATE OF THIS PROSPECTUS IS , 1996
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[LOGO]

InnerDyne designs, develops, manufactures and commercializes minimally
invasive surgical access products incorporating its proprietary radial dilation
technologies for laparoscopic procedures. The Company is exploring the potential
use of its radial dilation technology in other applications, such as intra-organ
access, vascular access, orthopedic procedures and feeding tube placement. The
Company also has proprietary technology in the areas of thermal ablation and
biocompatible coatings, which it intends to continue developing either
internally or through strategic alliances.

A pictorial depiction of a STEP product that has partially penetrated an
abdominal wall.
RADIALLY EXPANDING STEP-REGISTERED TRADEMARK- WITH BLUNT DILATOR

A pictorial depiction of a trocar that is being manipulated by a hand and that
has partially penetrated an abdominal wall.
CONVENTIONAL TROCAR WITH SHARP METAL TIP

A COMPANY-SPONSORED STUDY HAS SHOWN THAT THE WOUND LEFT BY THE Step DEVICE
AFTER A LAPAROSCOPIC PROCEDURE IS APPROXIMATELY ONE-HALF THE SIZE OF THAT MADE
WITH A TROCAR.
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON NASDAQ IN ACCORDANCE
WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."

R.E.D.-Registered Trademark- and TRC-Registered Trademark- are registered
trademarks of the Company. ENABL-TM-, INNERDYNE-TM-, the InnerDyne logo and
STEP-TM- are trademarks of the Company. Trademarks of other entities may also be
referred to in this Prospectus.
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS," AND FINANCIAL STATEMENTS AND NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE DISCUSSION IN THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTIONS ENTITLED "RISK
FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN
THIS PROSPECTUS.

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

The Company's STEP access products enable a surgeon to perform an M.I.S.
procedure without the use of a sharp-bladed trocar to gain access to the
patient's abdominal cavity. Access with the Company's STEP product is provided
by inserting an expandable sheath into the body cavity through the use of a
standard insufflation needle, creating only a small puncture wound. The needle
is then removed and the sheath is expanded to an appropriately sized working
channel by insertion of a blunt dilator and cannula into the sheath. The blunt
dilator is then removed, leaving the cannula in place. The radial dilation of
the puncture wound into an appropriately sized working channel holds the cannula
in place and obviates the need for an anchoring system that can increase the
wound size left following surgery and increase trauma to adjacent tissues. After
completion of the procedure, the rigid cannula is removed and the sheath
retracts, permitting the opening in the abdominal musculature to recover to a
residual wound size that is approximately half the size of that made with a
trocar of similar size.

The Company believes that the 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 the fourth quarter of 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 approximately 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. 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.

It is estimated that in 1994 over 1.0 million procedures traditionally
accomplished through open surgery were performed in the United States using
M.I.S. techniques. Domestic M.I.S. procedures are expected by industry sources
to grow at a rate of almost 11% through 1997, to a level of over 1.4 million
procedures. Furthermore, it is estimated that more than 5.3 million domestic
surgical procedures performed in 1994 were considered to be potential candidates
for minimally invasive approaches.

InnerDyne is exploring the potential use of its proprietary radial dilation
technology for intra-organ access with its Radially Expanding Dilator ("R.E.D.")
product and in other applications such as vascular access, feeding tube
placement and orthopedic procedures. The Company has also made significant
investments in research and development of its proprietary thermal ablation and
biocompatible coatings technology. The Company's ENABL Thermal Ablation System
is designed to treat excessive menstrual bleeding by thermally ablating the
endometrial lining of the uterus. The Company recently 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 Company intends to continue to pursue
licensing of its biocompatible coatings technologies to third parties for
various applications.

3
<PAGE>
THE OFFERING

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<S> <C>
Common Stock offered hereby....... 2,350,000 shares
Common Stock to be outstanding
after the offering............... 20,939,911 shares (1)(2)
Use of Proceeds................... To fund additional development activities and expansion
of marketing, sales and manufacturing activities and for
general corporate purposes, including working capital.
Nasdaq National Market Symbol..... IDYN
</TABLE>

SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- --------------------
1993 1994 1995 1995 1996
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<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................................ $ 43 $ 879 $ 5,275 $ 1,235 $ 1,582
Operating loss..................................... (10,765) (10,061) (5,848) (1,539) (1,601)
Net loss........................................... (10,359) (9,904) (5,627) (1,469) (1,584)
Net loss per share (3)............................. (0.69) (0.61) (0.32) (0.09) (0.09)
Weighted average shares outstanding (3)............ 15,103 16,197 17,561 16,633 18,337
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1996
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ACTUAL AS ADJUSTED(1)(4)
--------- -----------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable investment securities........................ $ 1,820 $ 9,623
Working capital.................................................................... 2,312 10,115
Total assets....................................................................... 4,725 12,528
Long-term debt, excluding current installments..................................... 230 230
Net stockholders' equity........................................................... 3,095 10,898
</TABLE>

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(1) Assumes the Underwriters' over-allotment option from the Company is not
exercised. See "Underwriting."

(2) Based on the number of shares outstanding as of March 31, 1996. Includes
242,952 shares issued upon exercise of warrants on or prior to April 1,
1996. Excludes (i) an aggregate of 1,993,784 shares of Common Stock issuable
upon exercise of options outstanding as of March 31, 1996, (ii) 1,881,739
shares of Common Stock reserved for issuance pursuant to the Company's stock
option and stock purchase plans, (iii) 235,000 shares of Common Stock
issuable upon exercise of the Representative's Warrant and (iv) 166,667
shares of Common Stock to be issued to Boston Scientific Corporation in May
1996. See "Management -- Stock Plans," "Underwriting" and Note 8 of Notes to
Financial Statements.

(3) For an explanation of the determination of the number of shares used in
computing net loss per share, see Note 2 of Notes to Financial Statements.

(4) As adjusted to give effect to the sale of 2,350,000 shares of Common Stock
offered by the Company at an assumed offering price of $3.875 per share. See
"Use of Proceeds" and "Capitalization."

------------------------

EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO
EXERCISE OF THE UNDERWRITER'S OVER-ALLOTMENT OPTION. SEE "UNDERWRITING."

4
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RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING SHARES OF THE COMMON STOCK OFFERED HEREBY. THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW. THE
COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS
TO THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.

HISTORY OF LOSSES; PROFITABILITY UNCERTAIN. InnerDyne has experienced
operating losses since its inception in December 1985. InnerDyne reported net
losses of $1.6 million on revenues of $1.6 million, $5.6 million on revenues of
$5.3 million, $9.9 million on revenues of $878,909 and $10.4 million on revenues
of $42,821 for the three months ended March 31, 1996 and the fiscal years ended
December 31, 1995, 1994 and 1993, respectively. As of March 31, 1996, InnerDyne
had an accumulated deficit of approximately $48.2 million.

In the future, the Company expects to incur substantial additional operating
losses and have cash outflow requirements as a result of expenditures related to
expansion of sales and marketing capability, expansion of manufacturing
capacity, research and development activities, compliance with regulatory
requirements, and possible investment in or acquisition of additional
complementary products, technologies or businesses. The timing and amounts of
these expenditures will depend upon many factors, such as the progress of the
Company's research and development, and will include factors that may be beyond
the Company's control, such as the results of product trials, the requirements
for and the time required to obtain regulatory approval for existing products
and any other products that may be developed or acquired, and the market
acceptance of the Company's products. The Company believes that it is likely to
incur operating losses at least through 1996. The cash needs of the Company have
changed significantly as a result of the merger completed during 1994 and the
support requirements of the added business focus areas. There can be no
assurance that the Company will not continue to incur losses, that the Company
will be able to raise cash as necessary to fund operations or that the Company
will ever achieve profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

INTENSE COMPETITION. The primary industry in which the Company competes,
minimally invasive surgery, is dominated by two large, well-positioned entities
that are intensely competitive and frequently offer substantial discounts as a
competitive tactic. The United States Surgical Corporation ("U.S. Surgical") is
primarily engaged in developing, manufacturing and marketing surgical wound
management products, and has historically been the firm most responsible for
providing products that have led to the growth of the industry. U.S. Surgical
supplies a broad line of products to the M.I.S. industry, including products
which facilitate access, assessment and treatment. Ethicon Endo-Surgery
("Ethicon"), a Johnson & Johnson company, has made a major investment in the
M.I.S. field in recent years and is one of the leading suppliers of hospital
products in the world. Furthermore, U.S. Surgical and Ethicon each utilize
purchasing contracts that link discounts on the purchase of one product to
purchases of other products in their broad product lines. Substantially all of
the hospitals in the United States have purchasing contracts with one or both of
these entities. Accordingly, customers may be dissuaded from purchasing access
products from the Company rather than U.S. Surgical or Ethicon to the extent it
would cause them to lose discounts on products that they regularly purchase from
U.S. Surgical or Ethicon.

5
<PAGE>
dominated by U.S. Surgical and Ethicon. Both entities introduced new access
devices, trocars with added features, during the past two years. A number of
other entities participate in various segments of the M.I.S. access market.

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

In the thermal ablation market, the Company considers its primary
competition to be current therapies for the treatment of excessive menstrual
bleeding, including drug therapy, dilatation and curettage, surgical endometrial
ablation and hysterectomy. The Company will also compete against other
techniques under development for the treatment of excessive menstrual bleeding,
including endometrial ablation techniques that employ radio frequency ("RF")
energy or freezing techniques ("cryoablation") and the uterine balloon therapy
system being clinically tested by Gynecare, Inc.

There are many large companies with significantly greater financial,
manufacturing, marketing, distribution and technical resources and clinical
experience than the Company that are developing and marketing devices for
surgical removal of the uterus, uterine fibroids, the endometrial lining of the
uterus and other uterine tissues or are developing non-surgical methods for
treating these conditions. Additionally, there are smaller companies developing
alternative methods of uterine tissue ablation that compete with the Company.
There can be no assurance that these companies will not succeed in developing
technologies and products that are more effective than any which have been or
are being developed by the Company or that would render the Company's
technologies or products obsolete or not competitive. Such competition could
have a material and 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. See "Business --
Competition."

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
("M.I.S."). 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. See "Business -- Products and
Technology."

RELIANCE ON FUTURE PRODUCTS AND NEW APPLICATIONS; UNCERTAINTY OF TECHNOLOGY
CHANGES. The medical device industry is characterized by innovation and
technological change. The Company has made significant investments in
researching and developing its proprietary technologies, including radial
dilation, thermal ablation and biocompatible coatings. During 1996, the Company
expects to commercially introduce on a limited basis the Reposable STEP and the
MiniSTEP, each of which is a further enhancement of its STEP product line. The
future success of the Company will depend in part on the timely commercial
introduction and market acceptance of these products. There can be no assurance
that these products will be timely introduced in commercial quantities, if at
all, or that such products will achieve market acceptance. A failure by the
Company to timely introduce such products or a failure of such products to
achieve market acceptance could have a material adverse effect on the Company's
business, financial condition and results of operations. The future success of
the Company will also depend upon, among other factors, its ability to develop
and gain regulatory clearance for new and enhanced versions of products in a
timely fashion, including, but not limited to, the ENABL

6
<PAGE>
Thermal Ablation System. There can be no assurance that the Company will be able
to successfully develop new products or technologies, manufacture new products
in commercial volumes, obtain regulatory approvals on a timely basis or gain
market acceptance of such products. Delays in development, manufacturing,
regulatory approval or market acceptance of new or enhanced products could have
a material adverse impact on the Company's business, financial condition and
results of operations. See "Business -- Research and Development."

LIMITED MANUFACTURING EXPERIENCE; COMPLIANCE WITH GOOD MANUFACTURING
PRACTICES. The Company initiated manufacture of commercial quantities of its
STEP access device in its Salt Lake City, Utah facility during late 1994.
Accordingly, the Company has limited experience in manufacturing M.I.S. access
products or other products in commercial quantities at acceptable costs. The
Company's success will depend in part on its ability to manufacture its products
in compliance with the Good Manufacturing Practices ("GMP") regulations of the
United States Food and Drug Administration (the "FDA") and other regulatory
requirements in sufficient quantities and on a timely basis, while maintaining
product quality and acceptable manufacturing costs. Manufacturers often
encounter difficulties in scaling up production of new products, including
problems involving production yields, quality control and assurance, component
supply and shortages of qualified personnel. Failure to maintain production
volumes or increase production volumes in a timely or cost-effective manner
would have a material adverse effect on the Company's business, financial
condition and results of operations. The Company was recently inspected by the
FDA and cited for certain GMP deficiencies. See "Risk Factors -- Government
Regulation" and "Business -- Manufacturing" and "-- Government Regulation."

POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's quarterly
operating results have in the past fluctuated and will continue to fluctuate
significantly in the future depending on the timing and shipment of product
orders, new product introductions and changes in pricing policies by the Company
or its competitors, the timing and market acceptance of the Company's new
products and product enhancements, the continued market acceptance of
InnerDyne's STEP product line by the medical community, the Company's product
mix, the mix of distribution channels through which the Company's products are
sold, the extent to which the Company recognizes licensing revenues during a
quarter, and the Company's ability to obtain sufficient supplies of sole or
limited source components for its products. In particular, fluctuations in
production volumes affect gross margins from quarter to quarter. Furthermore,
gross margins can fluctuate from quarter to quarter to the extent the Company
recognizes license revenue during a quarter because the Company derives higher
gross margins from license revenue than from product sales. In response to
competitive pressures or new product introductions, the Company may take certain
pricing or other actions that could materially 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. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

7
<PAGE>
LIMITED SALES, MARKETING AND DISTRIBUTION EXPERIENCE. InnerDyne began
commercial sales of its first M.I.S. access product in the fourth quarter of
1994 and, therefore, has limited sales, marketing and distribution experience.
The Company is marketing its M.I.S. access products mainly to general surgeons
and gynecologists. In the United States, InnerDyne markets its products
primarily through direct representatives who are employed by the Company within
selected geographical areas and a network of independent sales representatives
who typically sell other complementary M.I.S. products to the same customer
base. If the need arises, the Company may expand its sales force, which will
require recruiting and training additional personnel. There can be no assurance
that the Company will be able to recruit and train such additional personnel in
a timely fashion. Loss of a significant number of InnerDyne's current sales
personnel or independent sales representatives, or failure to attract additional
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. See "Business -- Sales
and Marketing."

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

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

8
<PAGE>
its products or technologies infringe third party rights or that third parties
will not litigate such claims. Any such occurrence could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Patents and Proprietary Rights."

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

Before a new device can be introduced in the market, the manufacturer must
generally obtain FDA clearance of 510(k) notification or approval of a premarket
appoval ("PMA") application. A PMA application must be filed if a proposed
device is not substantially equivalent to a legally marketed Class I or Class II
device, or if it is a Class III device for which the FDA has called for PMAs.
The PMA process can be expensive, uncertain and lengthy, and a number of devices
for which FDA approval has been sought by other companies have never been
approved for marketing. Management expects that the ENABL System will be subject
to the PMA approval process prior to marketing within the United States. There
can be no assurance that the Company will be able to obtain the necessary
regulatory approval on a timely basis, or at all, and a delay in receipt of or
failure to receive such approval would have a material adverse effect on the
Company's business, financial condition and results of operations.

The Company has received clearance from the FDA for the marketing of its
STEP device for use in accessing the abdominal and thoracic cavities for the
performance of minimally invasive surgical procedures. The Company has also
received FDA clearance for the marketing of its Radial Expanding Dilator
("R.E.D.") product for use in the areas of gastrostomy, cystostomy,
cholecystotomy, the dilation of biliary and urethral strictures, laparoscopy and
enterostomy. The Company has also received market clearance for alternative
versions of its STEP and R.E.D. products, including products designed to employ
its radial dilation technology in vascular 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.

9
<PAGE>
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 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 other
applicable regulations. The Company's Salt Lake City, Utah manufacturing
facility was inspected by the FDA for the first time in January 1996. That
inspection resulted in the issuance by the FDA of a Form FDA 483, which detailed
specific areas where the FDA inspector observed that the Company's operations
were not in full compliance with applicable areas of the GMP regulations.
Corrective action addressing all identified GMP deficiencies was initiated
immediately, and the Company responded to the FDA District Office. The FDA
District Office issued a Warning Letter stating that it appears that the
Company's response to the Form FDA 483 is adequate; however, an FDA reinspection
is required to assure that the corrections the Company has taken adequately
address the noted GMP deficiencies. The FDA also notified the Company that until
the agency determines that corrections are adequate, federal agencies will be
advised of the issuance of the Warning Letter so that they may take this
information into account when considering awards of contracts, and no pending
510(k) notifications for devices to which the observed GMP deficiencies are
reasonably related will be cleared, and no requests for Certificates For
Products For Export will be approved. The Company submitted a written response
to the Warning Letter and requested a meeting with District officials to discuss
the matter. During that meeting, District official acknowledged that the GMP
deficiencies observed during the inspection were "borderline" with respect to
the agency's policies regarding the issuance of a Warning Letter. They
explained, however, that the Warning Letter was based on observations that the
Company was not following its own written procedures and on the fact that the
Company's internal audits had not found these deficiencies. Following the
meeting, the FDA acknowledged the Company's representation that the corrective
action plan would be completed by April 8, 1996, and stated that the agency
would initiate a reinspection within 60 days of that date. The scope of the FDA
reinspection could be more comprehensive than the initial inspection. At the
current time, the Company has no pending submissions for either clearance to
market new or modified products, or to export to new foreign markets. However,
failure to adequately address these GMP deficiencies within a reasonable time
frame would have an adverse effect on future product sales. Accordingly, the
Company has undertaken a review of the GMP compliance of its entire
manufacturing process. However, there can be no assurance that the FDA will deem
the Company's corrective action to be adequate or that additional corrective
action, in areas not addressed by the Form FDA 483, will not be required.
Failure to achieve 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. See "Risk Factors -- Manufacturing"
and "Business -- Government Regulation."

10
<PAGE>
DEPENDENCE ON SOLE SOURCES. The materials utilized in the Company's M.I.S.
products consist of both standard and custom components that are purchased from
a variety of independent sources. The plastic parts used in the STEP product are
injection molded by outside vendors. The majority of these parts are produced
utilizing molds that have been specially machined for and are owned by the
Company. Although the Company maintains significant inventories of molded parts,
any inability to utilize these molds for any reason might have a material
adverse effect upon the Company's ability to meet its customers' demand for
product. In addition to plastic parts produced from injection molds owned by the
Company, a number of other materials are available only from a limited number of
sources at the present time, including the sheath component of the Company's
STEP products. Efforts to identify and qualify additional sources of this sheath
component and other key materials and components are underway. Although
InnerDyne believes that alternative sources of these components can be obtained,
internal testing and qualification of substitute vendors could require
significant lead times and additional regulatory submissions. There can be no
assurance that such internal testing and qualification or additional regulatory
approvals will be obtained in a timely fashion, if at all. Any interruption of
supply of raw materials could have a material adverse effect on the Company's
ability to manufacture its products, and therefore on its business, financial
condition and results of operations. See "Business -- Manufacturing."

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

If the Company obtains the necessary foreign regulatory approvals, market
acceptance of the Company's products in international markets would be
dependent, in part, upon the availability of reimbursement within prevailing
health care payment systems. Reimbursement and health care payment systems in
international markets vary significantly by country, and include both
government-sponsored health care and private insurance. The Company intends to
seek international reimbursement approvals, although there can be no assurance
that any such approvals will be obtained in a timely manner, if at all, and
failure to receive international reimbursement approvals could have an adverse
effect on market acceptance of the Company's products in the international
markets in which such approvals are sought.

DEPENDENCE ON INTERNATIONAL SALES. In the future, the Company expects to
derive an increasing portion of its revenue from international sales. To the
extent 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,

11
<PAGE>
particularly in the European Community, continues to expand and there can be no
assurance that new laws or regulations will not have an adverse effect on the
Company. For example, the European Union has promulgated rules which require
that medical products receive the right by mid-1998 to affix the CE mark, an
international symbol of adherence to quality assurance standards and compliance
with applicable European medical device directives. Failure to receive the right
to affix the CE mark will prohibit the Company from selling its products in
member countries of the European Union. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

FUTURE ADDITIONAL CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE
AVAILABLE. 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; the resources expended, if any, to acquire complementary businesses,
products and technologies; 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 this Offering, together with revenues, credit facilities and other
sources of liquidity, will provide adequate funding for its capital requirements
through at least 1997, the Company may be required to raise additional funds
through public or private financings, collaborative relationships or other
arrangements. There can be no assurance that the Company will not require
additional funding or that such additional funding, if needed, will be available
on terms attractive to the Company, or at all. Any additional equity financings
may be dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

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

PRODUCT LIABILITY; CLAIMS IN EXCESS OF INSURANCE COVERAGE. The development,
manufacture and sale of the Company's products entail the risk of product
liability claims, involving both potential financial exposure and associated
adverse publicity. The Company's current product liability insurance coverage
limits are $1,000,000 per occurrence and $2,000,000 in the aggregate, and there
can be no assurance that such coverage limits are adequate to protect the
Company from any liabilities it might incur in connection with the development,
manufacture and sale of its current and potential products. In addition, the
Company may require increased product liability insurance. Product liability
insurance is expensive and may not be available in the future on acceptable
terms, or at all. In addition, if such insurance is available, there can be no
assurance that the limits of coverage of such policies will be adequate. A
successful product liability claim in excess of the Company's insurance coverage
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Product Liability and
Insurance."

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

12
<PAGE>
respect to reimbursement matters, developments with respect to patents or
proprietary rights, public concern as to the safety of products developed by the
Company or others, changes in health care policy in the United States and
internationally, changes in stock market analyst recommendations regarding the
Company, other medical device companies or the medical device industry generally
or general market conditions may have a significant effect on the market price
of the Common Stock.

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

CONTROL BY DIRECTORS AND PRINCIPAL STOCKHOLDERS. Following completion of
this Offering, directors and principal stockholders of the Company, and certain
of their affiliates, will beneficially own approximately 29% of the Company's
outstanding Common Stock. Accordingly, these persons, as a group, may be able to
control the Company and significantly affect the direction of the Company's
affairs and business, including any determination with respect to the
acquisition or disposition of assets by the Company, future issuances of Common
Stock or other securities by the Company and the election of directors. Such
concentration of ownership may also have the effect of delaying, deferring or
preventing a change in control of the Company. See "Principal and Selling
Stockholders."

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

DILUTION. Assuming a price to public of $3.88, investors purchasing shares
of Common Stock in the offering will incur immediate and substantial dilution in
net tangible book value of the Common Stock of $3.35 per share. To the extent
that currently outstanding options to purchase the Company's Common Stock are
exercised, there will be further dilution. See "Dilution."

LACK OF DIVIDENDS. The Company has not paid any dividends and does not
anticipate paying any dividends in the foreseeable future. See "Dividend
Policy."

13
<PAGE>
THE COMPANY

The Company was incorporated in Utah in December 1985 as Midsix
Cardiovascular/Pulmonary, Inc. and changed its name in July 1987 to
CardioPulmonics, Inc. and in April 1994 to InnerDyne, Inc. The Company
reincorporated in Delaware in January 1992. The Company's principal executive
offices are located at 1244 Reamwood Avenue, Sunnyvale, California 94089 and its
telephone number at that location is (408) 745-6010.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,350,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$7,803,000 ($9,032,000 if the Underwriters' over-allotment option is exercised
in full and all of the shares subject to such option are sold by the Company),
at an assumed offering price of $3.875 per share and after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company. The principal purposes of this offering are to fund additional
development activities and to obtain additional capital to fund the expansion of
marketing, sales and manufacturing activities for the Company's M.I.S. access
products. The Company expects to use the balance of the net proceeds from this
offering for general corporate purposes, including working capital. A portion of
the net proceeds may also be used for the acquisition of businesses, products
and technologies that are complementary to those of the Company. The Company has
no current plans, agreements or commitments and is not currently engaged in any
negotiations with respect to any such transaction. The amounts and timing of the
Company's actual expenditures to fund the expansion of marketing, sales and
manufacturing activities for the Company's M.I.S. access products and to fund
additional development activities may vary significantly depending upon numerous
factors, including the extent to which the Company's products gain greater
market acceptance; the costs and timing of expansion of marketing, sales and
manufacturing activities; the progress of the Company's development activities,
including clinical trials; actions relating to regulatory and reimbursement
matters; and competition. Pending such uses, the net proceeds of this offering
will be invested in investment grade, interest-bearing securities.

14
<PAGE>
PRICE RANGE OF COMMON STOCK

The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol IDYN since the merger in April 1994 with InnerDyne Medical,
Inc. From January 1992 to April 1994, the Company's Common Stock traded on the
Nasdaq National Market under the symbol CRDS. The prices per share reflected in
the table below represent the range of low and high closing sale prices for the
Company's Common Stock as reported in the Nasdaq National Market for the
quarters indicated. These prices reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
----- ---
<S> <C> <C>
FISCAL 1994
First Quarter ended March 31, 1994....................................................... 3 3/8 1 3/4
Second Quarter ended June 30, 1994....................................................... 2 5/8 1 5/8
Third Quarter ended September 30, 1994................................................... 2 5/8 1 3/8
Fourth Quarter ended December 31, 1994................................................... 4 1/4 2 1/4

HIGH LOW
----- ---
<S> <C> <C>
FISCAL 1995
First Quarter ended March 31, 1995....................................................... 5 1/4 3 1/4
Second Quarter ended June 30, 1995....................................................... 4 5/8 2 1/2
Third Quarter ended September 30, 1995................................................... 3 7/8 1 7/8
Fourth Quarter ended December 31, 1995................................................... 3 3/8 2 1/4
<CAPTION>

HIGH LOW
----- ---
<S> <C> <C>
FISCAL 1996
First Quarter ended March 31, 1996....................................................... 4 1/4 2 3/8
</TABLE>

The closing sale price of the Company's Common Stock was $3.875 per share on
May 8, 1996. As of March 31, 1996, there were approximately 300 stockholders of
record of the Company.

DIVIDEND POLICY

The Company has not historically paid cash dividends. The Company currently
intends to retain all future earnings, if any, for use in its business and does
not anticipate paying any cash dividends in the foreseeable future. The Company
is prohibited from paying dividends or making any other distributions under the
terms of its credit agreement with Silicon Valley Bank. See Note 6 of Notes to
Financial Statements.

15
<PAGE>
CAPITALIZATION

The following table sets forth the capitalization of the Company at March
31, 1996 (i) on an actual basis and (ii) as adjusted to reflect the sale of
2,350,000 shares of Common Stock offered by the Company hereby at an assumed
offering price of $3.875 per share (after deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company). This table
should be read in conjunction with the Financial Statements of the Company and
Notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
ACTUAL AS ADJUSTED
----------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
------------------------
<S> <C> <C>
Long-term debt, excluding current installments............................... $ 230 $ 230
Stockholders' equity:
Preferred Stock, $.01 par value, 1,000,000 shares authorized; no shares
issued and outstanding actual and as adjusted............................. -- --
Common Stock, $.01 par value, 40,000,000 shares authorized; 18,566,111
shares issued and outstanding actual, 20,916,111 shares issued and
outstanding as adjusted (1)............................................... 186 209
Additional paid-in capital................................................. 51,109 58,889
Accumulated deficit........................................................ (48,200) (48,200)
----------- -----------
Net stockholders' equity................................................. $ 3,095 $ 10,898
----------- -----------
----------- -----------
Total capitalization..................................................... $ 3,325 $ 11,128
----------- -----------
----------- -----------
</TABLE>

- ------------------------

(1) Common Stock issued and outstanding does not include (i) 1,993,784 shares
issuable upon exercise of stock options outstanding as of March 31, 1996
under the Company's 1987 Stock Option Plan (the "1987 Plan"), 1989 Incentive
Stock Plan (the "1989 Plan") and 1991 Directors' Stock Option Plan (the
"Directors' Plan"), (ii) 643,406 shares of Common Stock available for future
grant pursuant to the Company's 1987 Plan, 1989 Plan and Directors' Plan or
(iii) 68,048 shares issuable upon exercise of warrants outstanding as of
March 31, 1996 (such warrants expired at 5:00 p.m. (Pacific time) on April
1, 1996 to the extent not exercised prior to such time). For the period from
April 1, 1996 through May 1, 1996, the Company issued 12,018 shares of
Common Stock upon exercise of options outstanding as of March 31, 1996,
granted options under the 1987 Plan to purchase 225,000 shares of Common
Stock and issued 23,800 shares of Common Stock upon exercise of warrants
outstanding as of March 31, 1996. Common Stock issued and outstanding also
excludes 235,000 shares issuable upon exercise of the Representative's
Warrant. See "Management -- Stock Plans" and Note 8 of Notes to Financial
Statements.

16
<PAGE>
DILUTION

The net tangible book value of the Company as of March 31, 1996 was
approximately $3,095,000, or $0.167 per share. "Net tangible book value per
share" represents the amount of the Company's total tangible assets less total
liabilities, divided by 18,566,111, the number of outstanding shares of Common
Stock. After giving effect to the sale by the Company of the 2,350,000 shares of
Common Stock offered hereby at an assumed offering price of $3.875 per share and
after deduction of underwriting discounts and commissions and estimated offering
expenses payable by the Company, the Company's net tangible book value at March
31, 1996 would have been approximately $10,898,000, or $0.521 per share of
Common Stock. This represents an immediate increase in net tangible book value
of $0.354 per share to existing stockholders and an immediate dilution of $3.354
per share to investors purchasing shares of Common Stock in this offering. The
following table illustrates this per share dilution:

<TABLE>
<CAPTION>
Assumed offering price per share................................... $ 3.875
<S> <C> <C>
Net tangible book value per share at March 31, 1996.............. $ 0.167
Increase in net tangible book value per share attributable to new
investors....................................................... 0.354
---------
Net tangible book value per share after this offering.............. 0.521
---------
Dilution per share to new investors................................ $ 3.354
---------
---------
</TABLE>

The foregoing table assumes no exercise of the Underwriters' over-allotment
option and no exercise of outstanding options or warrants. As of March 31, 1996,
there were options outstanding to purchase 1,993,784 shares of Common Stock at a
weighted average exercise price of $2.07 per share and warrants outstanding to
purchase 68,048 shares of Common Stock at an exercise price of $2.90 per share
(as amended). To the extent such options and warrants are exercised, there may
be further dilution to new investors. See "Management -- Stock Plans" and Note 8
of Notes to Financial Statements.

17
<PAGE>
SELECTED FINANCIAL DATA

The following selected financial data of the Company is qualified by
reference to and should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations and with the Company's
financial statements and notes thereto included elsewhere in this Prospectus.
The statements of operations data for the years ended December 31, 1993, 1994
and 1995 and the quarters ended March 31, 1995 and 1996 and the balance sheets
data as of December 31, 1994 and 1995 and as of March 31, 1996, are derived
from, and are qualified by reference to, the audited financial statements
included elsewhere in this Prospectus. The statements of operations data for the
years ended December 31, 1991 and 1992 and the balance sheets data as of
December 31, 1991, 1992 and 1993, are derived from, and are qualified by
reference to, audited financial statements not included in this Prospectus.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- ---------- ---------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Product sales..................... $ 292 $ 133 $ -- $ 276 $ 4,730 $ 954 $ 1,520
Licensing, contract and grant
revenue.......................... 84 -- 43 603 545 281 63
--------- --------- ---------- ---------- --------- --------- ---------
Revenue......................... 376 133 43 879 5,275 1,235 1,582
Costs and Expenses:
Cost of product sales........... 197 93 490 1,940 3,149 680 896
Research, development,
regulatory and clinical........ 4,334 6,728 5,793 3,952 2,299 582 580
Sales and marketing............. -- -- 1,107 2,063 3,895 994 1,182
General and administrative...... 1,188 2,509 3,417 2,985 1,779 518 525
--------- --------- ---------- ---------- --------- --------- ---------
Total costs and expenses...... 5,718 9,330 10,808 10,940 11,123 2,774 3,184
--------- --------- ---------- ---------- --------- --------- ---------
Operating loss.............. (5,342) (9,197) (10,765) (10,061) (5,848) (1,539) (1,601)
Other income (expense):
Interest income................. 133 972 605 460 251 75 25
Interest expense................ (75) (90) (148) (64) (29) (6) (9)
Gain (loss) on asset disposal... -- -- (52) (240) (1) 1 1
--------- --------- ---------- ---------- --------- --------- ---------
Total other income............ 58 882 406 157 221 70 17
--------- --------- ---------- ---------- --------- --------- ---------
Net loss.................... $ (5,284) $ (8,315) $ (10,359) $ (9,904) $ (5,627) $ (1,469) $ (1,584)
--------- --------- ---------- ---------- --------- --------- ---------
--------- --------- ---------- ---------- --------- --------- ---------
Net loss per share (1)............ $ (.57) $ (.64) $ (.69) $ (.61) $ (.32) $ (0.09) $ (0.09)
--------- --------- ---------- ---------- --------- --------- ---------
--------- --------- ---------- ---------- --------- --------- ---------
Weighted average shares
outstanding (1).................. 9,267 12,895 15,103 16,197 17,561 16,633 18,337
--------- --------- ---------- ---------- --------- --------- ---------
--------- --------- ---------- ---------- --------- --------- ---------
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------------------------- -----------
1991 1992 1993 1994 1995 1996
--------- --------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEETS DATA:
Cash, cash equivalents and marketable
investment securities.................... $ 690 $ 23,358 $ 15,788 $ 5,731 $ 2,718 $ 1,820
Working capital........................... (1,331) 22,727 14,519 5,138 3,141 2,312
Total assets.............................. 2,695 25,609 17,550 7,847 5,370 4,725
Long-term debt, excluding current
installments............................. 131 338 199 30 187 230
Net stockholders' equity.................. (220) 23,903 15,667 6,292 4,010 3,095
</TABLE>

- ------------------------
(1) See Note 2 of Notes to Financial Statements for an explanation of the
determination of the number of shares used to compute net loss per share.

18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE
THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY
REVISIONS TO THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT
EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.

BACKGROUND

InnerDyne, Inc. (the "Company" or "InnerDyne") is the successor corporation
resulting from the merger of CardioPulmonics, Inc. ("CardioPulmonics") and
InnerDyne Medical, Inc. ("IMI") in April 1994. CardioPulmonics was founded in
1985 to develop, manufacture and market proprietary pulmonary and
cardiopulmonary products. These efforts resulted in the development of a
blood-gas exchange device and proprietary biocompatible coatings technologies.
IMI was founded in 1989 to develop medical devices used in M.I.S. procedures
incorporating IMI's proprietary radial dilation and thermal ablation
technologies. Subsequent to the merger, InnerDyne discontinued efforts to
develop and commercialize the blood-gas exchange device and focused primarily on
the development, manufacture and commercialization of proprietary M.I.S. access
products. InnerDyne commercially introduced its first M.I.S. access device,
STEP, in the fourth quarter of 1994. The Company intends to continue developing
its proprietary radial dilation, thermal ablation and biocompatible coatings
technologies, internally or through strategic alliances.

InnerDyne has experienced operating losses since its inception in December
1985. InnerDyne reported net losses of $5,627,115 on revenues of $5,275,060,
$9,904,142 on revenues of $878,909 and $10,359,233 on revenues of $42,821 for
the fiscal years ended December 31, 1995, 1994 and 1993, respectively. As of
December 31, 1995, the Company had an accumulated deficit of $46,615,496.

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 M.I.S.
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. See "Risk Factors -- Continued
Dependence on STEP Products" and "Business -- Products and Technology."

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

Total revenues of $5,275,060 were realized during the year ended December
31, 1995, compared to total revenues of $878,909 in 1994 and $42,821 in 1993.
Total revenues are comprised of revenues from product sales and licensing,
contract and grant revenues. Product sales increased to $4,729,651 in 1995 from
$275,517 in 1994, reflecting sales of the STEP device, which was commercially
introduced in the fourth quarter of 1994. Licensing, contract and grant revenues
were $545,409, $603,392 and $42,281 in 1995, 1994 and 1993, respectively. These
revenues related to agreements with third parties covering the development of
the Company's proprietary thermal ablation technology and licensing of the
Company's proprietary biocompatible coatings technology. Licensing, contract and
grant revenues

19
<PAGE>

fluctuate from year to year, and 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 costs and expenses were $11,122,791 in 1995, compared to $10,939,559
in 1994 and $10,807,855 in 1993. Expenses in 1995 and 1994 include start-up
costs to build the Company's manufacturing capability and increases in sales and
marketing expenses for M.I.S. products, as the Company built the sales and
marketing resources necessary to support commercialization of M.I.S. products,
which began in the fourth quarter of 1994. Expenses in 1994 and 1993 include
costs related to development programs that have been completed or discontinued.
Expenses associated with the Company's merger are also reflected in the
Company's 1994 and 1993 results.

Cost of product sales were $3,148,915 in 1995, compared to $1,939,974 in
1994 and $489,692 in 1993. Cost of product sales are primarily comprised of
direct material costs of components for finished products, as well as labor
costs and an allocated portion of overhead expenses. Cost of product sales in
1995 and late 1994 include start-up manufacturing and "pilot" production
expense, as well as costs of producing higher volumes of the STEP device.
Although the Company anticipates that cost of product sales will continue to
increase in absolute dollars in future periods, cost of product sales as a
percentage of revenue is expected to decrease in 1996 if sales and production
volume increase.

Research, development, regulatory and clinical expenses were $2,299,311 in
1995 compared to $3,951,536 in 1994 and $5,793,455 in 1993. Research,
development, regulatory and clinical expenses are primarily comprised of salary
and benefits, costs incurred in protecting the Company's intellectual property
and an allocated portion of overhead expenses. The decreases in 1995 and 1994
reflect the completion or discontinuation of development programs, including
costs associated with development, clinical trials and regulatory submission of
a device using the Company's gas exchange and blood pumping technologies. The
Company anticipates that research, development, regulatory and clinical
expenditures will not continue to decline in absolute dollars, and are likely to
increase in future periods.

Sales and marketing expenses were $3,895,338 in 1995 compared to $2,063,123
in 1994 and $1,107,334 in 1993. Sales and marketing expenses are primarily
comprised of salary, benefits and commissions; an allocated portion of overhead
expenses; advertising, promotional and customer service expenses and cost of
product samples. The increase reflects the expansion of sales and marketing
functions for M.I.S. products as sales volumes increased in 1995 and as the
Company assembled its sales force of direct and independent representatives and
international distributors following the initial commercialization of its M.I.S.
products in the fourth quarter of 1994. The increase in 1995 included
compensation to sales representatives, costs of sample and demonstration
product, costs to complete outcomes studies, costs of promotional and
advertising programs and costs associated with establishing foreign
distributors. InnerDyne expects that sales and marketing expenses will continue
to increase in absolute dollars.

General and administrative expenses were $1,779,227 in 1995, compared to
$2,984,926 in 1994 and $3,417,374 in 1993. General and administrative expenses
are primarily comprised of salary and benefits, an allocated portion of overhead
expenses, as well as legal, accounting, insurance and other general corporate
expenses. The decrease in expenses in 1995 compared to 1994 and 1993 reflects
efficiencies resulting from the Company's April 1994 merger, particularly in the
areas of general and administrative staffing, insurance costs and professional
services. Also, 1994 expenses included legal, accounting, consulting, filing and
other expenses related to the merger, as well as expenses associated with the
integration of the two companies. The 1993 expenses included significant costs
related to reductions in force and consulting expenses for interim management
while the Company conducted a search for a Chief Executive Officer. The Company
anticipates that general and administrative expenses will increase in absolute
dollars to support expanding operations.

Interest income was $250,594 in 1995, $459,830 in 1994 and $605,343 in 1993.
The decreases in 1995 and 1994 were due to lower interest earned as the
Company's cash, cash equivalents and marketable investment securities declined.
Interest expense was $28,908 in 1995, $63,511 in 1994 and

20
<PAGE>
$147,610 in 1993. This interest expense was primarily the result of debt and
capital leases incurred to finance equipment to support operations of the
Company, in addition to interest incurred in 1994 and 1993 related to loans to
IMI from its stockholders.

Primarily for the reasons outlined above, InnerDyne incurred net losses of
$5,627,115 or $.32 per share in 1995, $9,904,142 or $.61 per share in 1994 and
$10,359,233 or $.69 per share in 1993. Management believes that the Company is
likely to incur operating losses at least through 1996.

THREE MONTHS ENDED MARCH 31, 1995 AND 1996

Total revenues for the three-month period ended March 31, 1996 were
$1,582,400, compared to $1,235,136 for the corresponding period in 1995. Product
sales increased to $1,519,880 for the three month period ended March 31, 1996
from $954,466 for the corresponding period in 1995, reflecting increased sales
of the Company's STEP device. Licensing, contract and grant revenues for the
three month period ended March 31, 1996 were $62,520, compared to $280,670 for
the corresponding period in 1995. These revenues related to agreements with
third parties covering the development of the Company's proprietary thermal
ablation technology, the development of non-competing applications for the
Company's radial dilation technology and the licensing of the Company's
proprietary biocompatible coatings technology. The licensing, contract and grant
revenues for the three-month period ended March 31, 1995 included a one-time
payment from a single licensor. Licensing, contract and grant revenues fluctuate
from quarter to quarter, based upon the number of agreements in effect and the
amount and timing of the payments to be made to InnerDyne pursuant to such
agreements.

Cost of product sales was $896,305 for the three-month period ended March
31, 1996, compared to $680,488 for the same period in 1995. The increase in cost
of product sales for the three month period ended March 31, 1996 is attributable
to the increase in production and sales volume compared to the same period in
1995. In addition, cost of product sales for the three months ended March 31,
1995 included significant start-up manufacturing costs. Although the Company
anticipates that cost of product sales will continue to increase in absolute
dollars in future periods, cost of product sales as a percentage of revenue is
expected to decrease in 1996 if sales and production volumes increase.

Research, development, regulatory and clinical expenses for the three-month
period ended March 31, 1996 were $579,611, relatively unchanged compared to
$582,101 for the corresponding period in 1995. The Company expects that
research, development, regulatory and clinical expenditures will increase in
absolute dollars in future periods.

Sales and marketing expenses were $1,182,453 for the three-month period
ended March 31, 1996, compared to $993,519 for the three-month period ended
March 31, 1995, reflecting the growth of the Company's sales and marketing
functions to support commercialization of its M.I.S. products. InnerDyne expects
that sales and marketing expenses will continue to increase in absolute dollars.

General and administrative expenses were $525,336 for the three months ended
March 31, 1996, relatively unchanged from $517,766 for the three months ended
March 31, 1995. The Company anticipates that general and administrative expenses
will increase in absolute dollars to support expanding operations.

Interest/other income, net decreased to $17,063 for the three-month period
ended March 31, 1996, compared to $69,860 for the same period in 1995, primarily
as a result of lower interest income in the 1996 period due to lower cash, cash
equivalent and marketable investment securities balances.

The Company incurred a net loss of $1,584,242, or $0.09 per share, for the
three-month period ended March 31, 1996, compared to a net loss of $1,468,878,
or $0.09 per share, for the same period in 1995. Management believes that the
Company is likely to incur operating losses at least through 1996.

LIQUIDITY AND CAPITAL RESOURCES

For the period from its inception to March 31, 1996, the Company has
incurred a cumulative net loss of approximately $48.2 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 per share, which raised approximately $28.8 million (net
of underwriter's

21
<PAGE>
discounts and offering expenses). 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. The 1994 acquisition of IMI was
accomplished through issuance of additional Common Stock of the Company.

At March 31, 1996, cash and cash equivalents totaled $1,820,049, compared to
a total cash, cash equivalents and marketable investment securities balance of
$2,718,418 at December 31, 1995. The Company had $89,153 and $542,658 in capital
expenditures in the quarter ended March 31, 1996 and the year ended December 31,
1995, respectively. Working capital totaled $2,311,504 at March 31, 1996, and
the Company had long-term debt, excluding current installments, totaling
$230,249 relating to financing of equipment.

In February 1996, the Company renewed its credit facility with Silicon
Valley Bank. Subject to certain covenants and conditions, the Company may borrow
up to $2,000,000 on a revolving credit basis at prime plus 1 1/4% and $750,000
as a 42-month term loan at prime plus 1 3/4%. The revolving credit portion of
the facility is available based on the existence and magnitude of eligible
receivables, and the term loan portion of the facility is available based on
eligible equipment purchases. As of March 31, 1996, the Company had borrowed
$326,245 under the term loan provision of the credit facility for the financing
of capital expenditures.

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 total
proceeds to the Company of $704,561.

In the future, the Company expects to incur substantial additional operating
losses and cash outflow requirements as a result of expenditures related to
expansion of sales and marketing capability, expansion of manufacturing
capacity, research and development activities, compliance with regulatory
requirements, and possible investment in or acquisition of additional
complementary products, technologies or businesses. The timing and amounts of
these expenditures will depend upon many factors, such as the availability of
capital, progress of the Company's research and development, and factors which
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
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 this
Offering, together with revenues, credit facilities and other sources of
liquidity, will provide adequate funding for its capital requirements through at
least 1997, the Company may be required to raise additional funds through public
or private financings, collaborative relationships or other arrangements. There
can be no assurance that the Company will not require additional funding or that
such additional funding, if needed, will be available on terms attractive to the
Company, or at all. Any additional equity financings may be dilutive to
stockholders, and debt financing, if available, may involve restrictive
covenants. See "Risk Factors -- Future Additional Capital Requirements; No
Assurance Future Capital Will Be Available" and "Use of Proceeds."

22
<PAGE>
BUSINESS

THE COMPANY

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, thermal ablation and biocompatible coatings
technologies, internally or through strategic alliances.

INDUSTRY BACKGROUND

MINIMALLY INVASIVE SURGICAL PROCEDURES

Medical practitioners have, for many years, sought means to improve the care
of their patients and minimize the trauma and recovery time associated with such
care. In addition, as life expectancy has increased, overall health care costs
have far outpaced the average inflation rate in recent years. The performance of
surgical procedures utilizing minimally invasive techniques has been a response
to both the need to continuously improve the quality of patient care and the
increasing pressures to control the total cost of providing that care. Minimally
invasive surgical procedures typically involve a few small incisions rather than
the large incisions used in traditional open surgery, thereby reducing patient
trauma. M.I.S. procedures require three basic capabilities: (1) a means to gain
access to the treatment site; (2) a means to assess the treatment site; and (3)
a means to provide therapy.

Although less invasive alternatives to traditional open surgery have existed
for a number of years, the trend towards minimally invasive techniques was not
widespread until the late 1980s. At that time, surgeons developed and perfected
a technique for gall bladder removal through the use of specialized access,
diagnostic and treatment devices. By 1994, an estimated 85% of the approximately
625,000 gall bladder procedures in the United States were performed using
minimally invasive techniques. A number of surgical procedures other than gall
bladder surgery have also been converted to minimally invasive approaches,
including the treatment of gynecological disorders and the diagnosis and
treatment of vascular disease. In addition, M.I.S. procedures may be useful for
intra-organ diagnostic and treatment procedures. It is estimated that in 1994
over 1.0 million procedures traditionally accomplished through open surgery were
performed in the United States using M.I.S. techniques. Domestic M.I.S.
procedures are expected by industry sources to grow at a rate of almost 11%
through 1997, to a level of over 1.4 million procedures. Furthermore, it is
estimated that more than 5.3 million domestic surgical procedures performed in
1994 were considered to be potential candidates for minimally invasive
approaches.

M.I.S. ACCESS DEVICES

The trocar is the conventional device that is used by surgeons to access a
possible treatment site in a M.I.S. procedure. A trocar is a sharply pointed
cutting instrument surrounded by a rigid sheath, or cannula, that is forced
through the abdominal wall by the surgeon and cuts through the muscle and skin
layers which make up the abdominal wall. Trocar insertion is normally preceded
by the insertion of an insufflation (inflation) needle into the abdominal cavity
through which a gas can be pumped to insufflate the abdominal cavity as a means
of providing working space and added clearance such that internal body organs
are less likely to be damaged as the sharp-bladed trocar is inserted. Once a
trocar has penetrated the abdominal wall, the cutting surface is removed,
leaving the cannula through which instruments and diagnostic tools can be placed
into the abdominal cavity of the patient. The proximal end of the trocar, which
remains outside the body, is normally equipped with a valve system designed to
allow the passage of instruments while maintaining the insufflation gas
pressure. Trocars are most commonly provided in 5mm, 10mm and 12mm working
channel sizes, and leave residual wounds which approximate these nominal sizes.
From one to as many as five trocars are used for access in M.I.S. procedures,
depending on the extent and complexity of the particular procedure. In addition,
anchors are frequently used with trocars to assure maintenance of insufflation
pressure and to

23
<PAGE>
prevent slippage of the trocars as instruments are passed through them during a
procedure. These anchor devices, when used, can further enlarge the wound size
and increase trauma to adjacent tissues.

Trocars consist of two types: disposable and reusable. Industry sources
estimate that in 1995 sales of disposable trocars in the United States totaled
approximately $230 to $240 million and that global sales totaled approximately
$300 million. Reusable trocars are used to a greater extent internationally than
in the United States. Reusable trocars must be sharpened from time to time when
they become dull. Between sharpening and after a number of sharpenings, a
reusable trocar may not consistently and cleanly cut through the muscle and skin
layers that make up the abdominal wall. As a result, the potential risk of
serious trauma to the patient is increased because greater pressure must be
applied to force the trocar through the abdominal wall, causing it to partially
collapse and reduce the space created by the insufflation. In addition, as a
trocar is a sharply-pointed cutting instrument, medical personnel that handle
and clean reusable trocars are subject to the significant risk of cuts and skin
punctures from a device that has been in contact with a patient's blood.

Another device commonly used in M.I.S. procedures is the percutaneous
catheter. A number of minimally invasive percutaneous catheter-based therapies
have been developed to treat vascular disease, including coronary and peripheral
transluminal angioplasty, artherectomy and vascular stenting. In addition,
minimally invasive catheter-based diagnostic procedures such as x-ray
angiography and ultrasound imaging are also used by physicians in connection
with therapeutic procedures. Industry sources estimate that in 1994
approximately 2.2 million minimally invasive vascular access procedures were
performed worldwide.

Surgeons who perform M.I.S. procedures to diagnose or treat vascular
diseases undertake a multiple step process to obtain access to the vasculature.
The physician first punctures the femoral artery to create an access site for
the catheter devices. The physician then inserts an introducer sheath (a
flexible cannula) into the femoral artery and places a guiding catheter through
the introducer sheath to create a path from outside the patient to the arterial
system. The physician advances a small guidewire through the inside of the
guiding catheter into the femoral artery and up into the arterial system. The
physician then delivers the therapeutic or diagnostic catheter over the
guidewire through the inside of the guiding catheter into the artery and across
the treatment site. The insertion of the introducer sheath and the guiding
catheter is normally preceded by the administration of an anticoagulant drug,
which is generally continued throughout the procedure.

The conventional technique used to access the vasculature suffers from
certain drawbacks. If a physician needs to utilize a device that exceeds the
diameter of the introducer sheath, the physician must insert a new sheath with a
wider diameter. Depending on the width and number of devices used by the
physician, this process can increase the likelihood of trauma to the arterial
vessel. Additionally, following catheter-based procedures, the physician must
close the arterial access site. In current practice, anticoagulation therapy is
generally discontinued for up to four hours prior to closure of the access site
to allow the patient's clotting function to normalize. During this period, an
introducer sheath is typically left in place, and the patient must remain
immobile to prevent bleeding at the access site.

Advanced access devices may also prove useful for intra-organ surgical
procedures. The surgical treatment of an organ deep within the abdominal cavity
is typically conducted through open surgery, involving a three to five inch
incision that is made in the abdominal wall to give access to the organ. Open
surgery requires a hospital stay and a prolonged recovery period. Alternatively,
the organ can be treated through a less invasive technique that involves the
insertion of a long flexible channel and scope through a natural body orifice
such as the mouth or the rectum to gain access to the organ. However, this
technique is limited in its effectiveness due to the restricted size of the
channel and the torturous path that must be navigated by the scope.

24
<PAGE>
M.I.S. TREATMENT FOR MENORRHAGIA

In recent years, M.I.S. procedures have been developed to treat excessive
menstrual bleeding. Women who perceive their menstrual bleeding to be excessive,
including women who are clinically diagnosed with excessive menstrual bleeding
("menorrhagia"), may seek treatment if this condition interferes with their
daily lives. A World Health Organization survey of menstrual perceptions and
patterns among 5,322 women in 10 countries found that approximately 19% of women
consider their menstruation abnormally heavy. The most common surgical procedure
for definitive treatment of excessive menstrual bleeding is hysterectomy, the
surgical removal of the uterus through the vagina or abdominal wall, which
results in permanent infertility. Industry sources estimate that approximately
19% of the estimated 600,000 hysterectomy procedures in the United States each
year are performed to treat excessive menstrual bleeding. Currently available,
less invasive treatment options include long-term drug therapy using
estrogen-progesterone medications or other drugs such as GnRH agonists,
temporary treatment by dilatation and curettage, a procedure generally used in
conjunction with drug therapy in which the uterine contents are either scraped
away by an instrument or removed through vacuum aspiration, and surgical
endometrial ablation. Surgical endometrial ablation is a minimally invasive
procedure that utilizes a resectoscope, a video monitor, a fluid distention
medium such as glycine or sorbitol, and a surgical ablation device such as an
electrode loop, rollerball or laser.

Each of these treatment methods bears certain risks and limitations. A
hysterectomy can require up to seven days of hospitalization and eight weeks of
recovery time, depending on the type of hysterectomy performed. Serious
complications from hysterectomy include hemorrhaging requiring blood
transfusions, injury to the bowel or bladder, intestinal obstruction,
life-threatening cardiopulmonary events and death. Other complications include
postoperative fever and infections. Although less invasive than a hysterectomy,
the dilatation and curettage procedure must be repeated periodically, since it
is usually effective only during the first few menstrual cycles after the
procedure, and consequently subjects the patient to the risks of uterine
perforation, infection and the complications of general anesthesia each time it
is performed. Uterine perforation is a possible complication of surgical
endometrial ablation and is potentially fatal when it results in damage to the
internal iliac vessels, ureter, bowel or bladder. Other complications of
surgical endometrial ablation include major hemorrhaging from uterine vessels,
air embolus from gas-cooled lasers, postoperative intrauterine or tubal
infection, complications associated with general anesthesia and fluid overload
due to use of glycine and sorbitol. Surgical endometrial ablation will also
result in patient infertility.

In light of the limitations of current therapies for menorrhagia, other less
invasive procedures are currently being developed. Although these procedures
also result in patient infertility, they are designed to result in fewer
complications and adverse side effects and a shorter recovery time. These
procedures include endometrial ablation techniques that employ RF energy or
freezing techniques and techniques that are designed to treat excessive
menstrual bleeding by thermally ablating the endometrial lining of the uterus
through the introduction of a heated balloon catheter or a heated solution.
These procedures are designed to destroy the endometrial lining, thereby
reducing or eliminating excessive menstrual bleeding.

M.I.S. APPLICATIONS FOR BIOCOMPATIBLE COATINGS TECHNOLOGIES

Cardiovascular disease is the leading cause of death in the United States.
Atherosclerosis, the principal cause of cardiovascular disease, results from the
progressive accumulation of plaque as a result of the deposit of cholesterol and
other fatty materials on the walls of arteries. Atherosclerosis results in
reduced blood flow to the muscles of the heart and peripheral anatomy.
Atherosclerosis in the coronary arteries can ultimately lead to heart attack and
death. Arteries diseased with atherosclerosis may be treated with medical
procedures designed to increase blood flow. Established treatments include open
heart surgery, a highly invasive surgical procedure, and less invasive
percutaneous catheter-based procedures such as coronary and peripheral
transluminal angioplasty.

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In recent years, a number of new percutaneous catheter-based therapies have
been developed to increase blood flow, including atherectomy and vascular
stenting. Industry sources estimate that during 1994 approximately 900,000
balloon angioplasty, atherectomy and stenting procedures were performed
worldwide. Industry sources also indicate that cardiovascular stenting is a
growing procedure for treating cardiovascular disease due to its demonstrated
ability to reduce the occurrence of restenosis, a re-narrowing of a treated
blood vessel that typically occurs within six months of treatment in
approximately one-third of the patients that undergo percutaneous catheter-based
procedures. Stents are implantable medical devices that reduce arterial
obstruction by providing a rigid scaffolding to dilate an occluded blood vessel.
Once placed, stents exert radial force against the walls of blood vessels to
enable the blood vessels to remain open and functional. Recent studies indicate
that restenosis of vessels treated with stents may be significantly reduced when
the stents are coated with anticoagulants.

In light of the growth of stenting as a procedure for treating
cardiovascular disease and preliminary indications that restenosis following
stenting can be reduced through the coating of stents, the Company believes that
opportunities exist for companies with technology for effectively coating stents
with anticoagulants or other therapeutic drugs.

THE INNERDYNE SOLUTION

RADIAL DILATION TECHNOLOGY

The Company believes that its proprietary radial dilation technology enables
a physician performing a M.I.S. procedure to access a patient's body through a
less invasive means than a conventional trocar. The Company's STEP device, which
was introduced in the United States in November 1994, is based upon the
Company's proprietary radial dilation technology and is designed to provide
access to the abdominal cavity in order to facilitate the visualization and
treatment of target areas within the cavity while minimizing the tissue trauma
associated with such access. With the Company's STEP access device, a trocar
does not need to be utilized, eliminating the risk of internal organ damage from
contact with the sharp-bladed trocar. Following insufflation of the body cavity,
if needed, the expandable sheath enters the body cavity through the use of a
standard insufflation needle, creating only a small puncture wound. The
insufflation needle is then removed and the sheath is expanded to an
appropriately sized working channel by insertion of a blunt dilator and cannula
into the sheath. The blunt dilator is then removed, leaving the cannula in place
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. Therefore, the Company
believes that the use of the STEP can in many cases reduce operative
complications and surgery time, and thereby result in lower operating costs. The
STEP is currently utilized in minimally invasive general, gynecological and
pediatric surgical procedures.

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

The Company has also used its radial dilation technology to develop the
Radially Expanding Dilator ("R.E.D."), which is designed as an access device for
intra-organ surgery. The Company believes that the R.E.D. overcomes the
limitations of conventional open surgery techniques and alternative less
invasive methods because the R.E.D. is designed to provide minimally invasive
access

26
<PAGE>
through the abdominal wall, across the peritoneal space, and into an internal
organ. The Company believes that the use of the R.E.D. can reduce patient
recovery time as compared to conventional open surgical techniques.

THERMAL ABLATION TECHNOLOGY

The Company has developed proprietary thermal ablation technology that is
intended to thermally ablate the lining of a body organ. The Company's ENABL
Thermal Ablation System (the "ENABL System") is based on this proprietary
technology and is designed to treat menorrhagia by thermally ablating the
endometrial lining of the uterus through the controlled introduction and heating
of a normal saline solution IN SITU. The ENABL System is designed as a minimally
invasive procedure that can be performed in a clinic or a physician's office
without the use of general anesthesia. Although this procedure is expected to
result in the infertility of the patient, the Company believes that the ENABL
System has the potential to result in fewer complications and adverse side
effects and reduced recovery times compared to current therapies. For these
reasons the Company also believes that the ENABL System has the potential to be
more cost-effective than many current therapies.

BIOCOMPATIBLE COATINGS TECHNOLOGIES

The Company has developed proprietary biocompatible coatings technologies
for bonding the anticoagulant drug heparin and other bioactive molecules to a
siloxane subsurface or a variety of other subsurfaces by means of chemical bonds
that it believes are stronger than those generally used for this purpose. The
Company's thrombo resistant coating ("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.

The Company recently 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. Because of the strength of the covalent bonds used in the
Company's TRC technology and its other properties noted above, the Company
believes that this technology may have advantages over presently available
bioactive coating technologies in several other potential applications.

STRATEGY

The Company's primary objective is to leverage its proprietary technology to
develop, manufacture and commercialize leading access products used to perform
M.I.S. procedures. The Company also intends to continue developing its radial
dilation, thermal ablation and biocompatible coatings technologies, internally
or through strategic alliances. The key elements of the Company's strategy to
achieve its objectives include:

- INCREASE MARKET PENETRATION OF Step PRODUCTS. InnerDyne entered into its
first buying group agreement, with Surgical Care Affiliates, Inc., in late
1995 and recently announced that its Short STEP was awarded the Seal of
Acceptance by the Alliance of Children's Hospitals, Inc. The Company
intends to further penetrate the market for M.I.S. access devices by
entering into additional national buying group agreements, expanding its
international distribution network, and leveraging the results of clinical
outcomes and acceptance studies.

- EXPAND Step PRODUCT LINE. The Company intends to continue to broaden its
STEP product line, with the objective of providing a comprehensive set of
access devices for M.I.S. procedures. In particular, the Company
anticipates commercial introduction on a limited basis of two new STEP
products, MiniSTEP and Reposable STEP, in late 1996.

27
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- COMMERCIALIZE VASCULAR ACCESS TECHNOLOGY. The Company intends to leverage
its proprietary radial dilation technology for use in vascular access
applications such as angioplasty and angiography. In February 1996, the
Company granted a license with limited exclusivity provisions to use its
radial dilation technology for access in the treatment of carotid disease
and aortic aneurysms.

- COMMERCIALIZE EnAbl THERMAL ABLATION TECHNOLOGY. The Company's ENABL
System utilizes proprietary thermal ablation technology that the Company
believes may offer significant therapeutic advantages compared to
currently available treatments for excessive menstrual bleeding. The
Company has recently completed initial human clinical safety trials and is
preparing to initiate efficacy trials in two foreign countries. The
Company is evaluating whether to continue the internal funding of the
ENABL System or to pursue strategic alternatives for the continued
development of this system.

- BROADLY LICENSE BIOCOMPATIBLE COATINGS TECHNOLOGY. In addition to
utilizing its biocompatible coatings technology internally, the Company is
pursuing the licensing of this technology to third parties for various
applications. InnerDyne believes that its biocompatible coating
technologies may be applicable in the manufacture of coated stents or
other in-dwelling devices. The Company recently announced the signing of
an agreement with Boston Scientific pursuant to which the Company granted
a license with limited exclusivity provisions to Boston Scientific to use
InnerDyne's proprietary biocompatible coating technologies with Boston
Scientific's stents, grafts, vena cava filters and other implantable
medical devices. In addition, in 1994, the Company entered into an
agreement pursuant to which it licensed and transferred its biocompatible
coatings technology to SENKO Medical Instrument Manufacturing, Inc.
("SENKO") for the enhancement of membrane oxygenators used in heart-lung
machines.

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<PAGE>
PRODUCTS AND TECHNOLOGY

The following table summarizes the Company's products and technologies. The
following table contains information concerning products and technologies under
development, and there can be no assurance that such products will be
successfully introduced or that such products or technologies will be
successfully commercialized in accordance with the dates set forth in the
following table, or at all.

<TABLE>
<CAPTION>
COMMERCIAL
PRODUCT/TECHNOLOGY APPLICATION/INDICATIONS AVAILABILITY/STATUS
<S> <C> <C>
RADIAL DILATION TECHNOLOGY
STEP PRODUCT LINE
STEP 1.0 Disposable access devices for 510(k) clearance; First
various general and commercial sales (U.S. &
gynecological M.I.S. International) commenced in
procedures 1994
STEP 1.5 510(k) clearance; First
commercial sales (U.S. &
International) commenced in
1995
STEP 2.0 510(k) clearance; Commercial
sales anticipated in late
1996
Short STEP Disposable access device for 510(k) clearance; First
various general and commercial sales (U.S. &
gynecological M.I.S. International) commenced in
procedures on smaller 1995
individuals
MiniSTEP Disposable access device for 510(k) clearance; Commercial
various general and sales anticipated in late
gynecological M.I.S. 1996
procedures performed with
smaller instruments
Reposable STEP Reusable/with certain 510(k) clearance; Commercial
disposable parts access sales anticipated in late
device for general and 1996
gynecological M.I.S.
procedures
RADIALLY EXPANDING DILATOR Disposable intra-organ access 510(k) clearance; Limited
(R.E.D.) device for general M.I.S. release
procedures
OTHER APPLICATIONS Vascular access 510(k) clearance; Under
evaluation
Carotid disease & aortic Licensed to EndoTex in 1996
aneurysm access
Orthopedic access Under evaluation
Feeding tube placement Under evaluation
THERMAL ABLATION TECHNOLOGY
ENABL THERMAL ABLATION SYSTEM Treatment of excessive uterine Completed initial human
bleeding clinical safety trials;
Preparing to initiate
efficacy studies
BIOCOMPATIBLE COATINGS
Stent, graft, vena cava filter Licensed to Boston Scientific
and other implantable medical in 1996
device coatings
Blood oxygenation enhancement Licensed to SENKO in 1994
</TABLE>

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<PAGE>
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.

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 FDA to
market this device for laparoscopic and thorascopic M.I.S. procedures. 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. Following removal of the needle, an expandable sheath that
surrounds the needle is then dilated up to a 5mm, 10mm or 12mm working channel
through the insertion of a dilator and cannula. Following dilation, the dilator
is removed, leaving a rigid sheath that serves as a working channel with an
integral insufflation valve at the proximal end. 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.

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 the fourth quarter of 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. A prospective study intended to
corroborate and expand the findings of the published outcomes study is underway,
and is expected to be completed during 1996.

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, particularly children and thin females. The Short STEP was
commercially introduced in 1995.

REPOSABLE Step. 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, currently 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
sleeve and valve are single-use components, designed to be disposed of following
surgery.

MINIStep. The MiniSTEP is a small-diameter radially dilating access device
designed for use in office micro-laparoscopic surgery utilizing small
instruments. The working diameter of the MiniSTEP

30
<PAGE>
ranges from 2mm to 8mm. The product will be targeted at general and
gynecological surgeons performing M.I.S. procedures. Procedures would include
diagnostic laparascopy, as well as therapeutic procedures such as tubal
sterilization. Like the STEP device, MiniSTEP is expected to reduce device-
related surgical complications and surgery time.

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. InnerDyne intends to use a
portion of the proceeds from this offering to conduct seminars teaching the use
of the R.E.D. product at advanced training centers across the United States.

OTHER APPLICATIONS. InnerDyne is exploring the potential use of its
proprietary radial dilation technology in other applications such as feeding
tube placement, vascular access, carotid disease and aortic aneurysm access and
access for orthopedic procedures.

THERMAL ABLATION TECHNOLOGY

EnAbl SYSTEM

The Company's proprietary ENABL Thermal Ablation System (the "ENABL System")
has been designed to treat excessive menstrual bleeding by thermally ablating
the endometrial lining of the uterus. The ENABL System relies on precisely
controlled introduction and heating of a sterile saline solution IN SITU to
thermally injure the lining of the uterus.

The Company recently announced the results of an initial safety trial with a
newly redesigned system. The results of this limited trial give preliminary
indications that the ENABL System might represent a safe means of ablating
uterine tissue. However, there can be no assurance that the feasibility of this
technology will be satisfactorily demonstrated in efficacy trials, or that the
system will be successfully commercialized, either by the Company or in
collaboration with another entity.

Historically, the development of the Company's ENABL System had received
financial support from CooperSurgical, Inc. ("CooperSurgical") during late 1994
and the first half of 1995. In May 1995, the Company received notice from
CooperSurgical advising the Company of its desire to discontinue funding and
forfeit its future commercialization option related to InnerDyne's proprietary
endometrial ablation technology under the previously agreed upon terms. The
notification from CooperSurgical did include an alternative proposal that would
have preserved a future commercialization option under significantly different
economic terms. These terms were deemed unacceptable by InnerDyne, and the
thermal ablation program has been internally funded since that time.

BIOCOMPATIBLE COATINGS TECHNOLOGIES

The Company possesses certain proprietary technologies in the area of
biocompatible coatings. The technologies that comprise the Company's TRC
capability are believed to have application when foreign objects remain in
contact with various areas of the body, particularly within the blood stream,
for sustained periods of time. These technologies include the ability to deposit
an extremely thin layer (approximately one micron) of siloxane on a surface and
the ability to graft a bioactive substance, such as the drug heparin, to that
siloxane layer. TRC Coatings, employed with the siloxane layer alone or in
combination with bioactive substances, can extend the life of blood-gas exchange
devices or provide the capability to extend the duration of contact of a coated
device with blood or other body fluids while minimizing the physiological
impacts of such contact.

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<PAGE>
The Company recently announced the signing of an agreement with 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 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.

In addition, in 1994, the Company signed a license agreement with SENKO, a
Japan-based manufacturer and marketer of membrane oxygenators used in open heart
surgery, pursuant to which the Company licensed one of its TRC technologies to
SENKO. In connection with this agreement, the Company transferred its siloxane
coating technology to SENKO for the coating of microporous hollow fibers used in
production of oxygenators. The technology transfer was completed during the
first quarter of 1995, at which time the Company received the balance of the
initial payment from SENKO, and the royalty payment period commenced. InnerDyne
recently announced it has received an order from SENKO to build a second fiber
coating system.

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 devices
for various applications. To date, the Company has not entered into a
contractual arrangement with any such parties.

RESEARCH AND DEVELOPMENT

The Company has made significant investments in the research and development
of its proprietary technologies, including radial dilation, thermal ablation and
biocompatible coatings. Research, development, clinical and regulatory expenses
for the years ended December 31, 1995, 1994 and 1993 were approximately $2.3
million, $4.0 million and $5.8 million respectively. The decrease was primarily
the result of expenses included in the 1993 and 1994 periods that related to
completed or discontinued development programs, including costs associated with
development, clinical trials and regulatory submission of a device using the
Company's gas exchange and blood pumping technologies. As of December 31, 1995,
the Company had 17 full-time employees engaged in research, development,
clinical and regulatory activities. Currently, the Company's research and
development efforts are primarily focused on providing enhanced versions of the
STEP device including the Reposable STEP and the MiniSTEP. In addition, limited
usage of the Company's R.E.D. product by a select group of physicians is being
routinely monitored to determine both the effectiveness and utility of the
product in intra-organ procedures.

InnerDyne also devotes research and development efforts to pursue potential
partnerships that might lead to utilization of the Company's radial dilation
technology in areas outside its primary business focus. The Company's first
agreement involving licensing and development of its proprietary radial dilation
technology was announced in February 1996. The agreement with EndoTex covers the
development of access products expected to be used in conjunction with EndoTex's
technologies to treat carotid disease and aortic aneurysms.

The Company is also continuing development of its proprietary thermal
ablation technology and its ENABL System. The Company recently completed initial
human clinical safety trials and is preparing to initiate efficacy studies in
two foreign countries.

The Company's proprietary biocompatible coating technologies have been
evaluated by a number of potential licensees. These evaluations are focused
primarily on coating gas exchange fibers and coating devices (such as stents)
intended for implantation within the human vascular system.

The future success of the Company will depend upon its ability to develop
and gain regulatory clearance for new and enhanced versions of products in a
timely fashion. In addition, it is likely that the Company will seek to identify
opportunities to obtain products or technologies from third parties. There can
be no assurance that the Company will be able to successfully develop or acquire
new

32
<PAGE>
products or technologies, license its proprietary technologies to third parties,
obtain regulatory clearance for its products, or gain market acceptance of new
and enhanced products. Delays in development, clearance, or acceptance of new
products could have a material adverse effect on the Company's business, results
of operations and financial condition.

SALES AND MARKETING

The Company is marketing its M.I.S. access products mainly to general
surgeons and gynecologists. A domestic network of independent sales
representatives, who typically sell other complementary products to the same
customer base, was selected and trained during late 1994 and early 1995. In
spite of these efforts, some domestic geographic areas were still not covered by
what management believed to be adequate representation. As a result, a decision
was made during the last half of 1995 to hire a limited number of direct
representatives, who are InnerDyne employees compensated on a commission-only
basis. As of the end of 1995, approximately 15 direct representatives had been
hired to complement the Company's network of independent sales representatives.
Although it is too early to evaluate the success of this organizational change,
management believes that it may improve the effectiveness of its marketing
efforts. This United States network of sales representatives is managed on a
regional basis by Company employees who possess substantial expertise and
industry experience. Their efforts are supported by a marketing and customer
service organization, that also coordinates the Company's advertising and sales
material support, as well as the Company's participation in major industry trade
meetings.

The Company's sales activities have been aided since October 1995 by the
completion of a retrospective outcomes study comparing the use of the STEP
device and conventional trocars in a number of laparoscopic procedures. The
study summary has proven to be valuable, based upon limited experience to date,
in conveying the benefits of the STEP device to health care providers in an
effective manner. The outcomes comparison is believed to have represented a
positive contribution to discussions with Surgical Care Affiliates, Inc.
("SCA"), one of the largest operators of surgery centers in the United States;
the Company announced the signing of its first buying group agreement with SCA
in October 1995. In order to facilitate distribution to SCA and other customers,
the Company also executed a domestic distribution agreement with General
Medical, Inc. in October 1995. Additional agreements of a similar nature are
being pursued with other provider and distribution organizations, in an effort
to acquire greater market share for the Company's M.I.S. access products.

In January 1996, the Company announced that its Short STEP device, a smaller
version of the standard STEP product, had been awarded the Seal of Acceptance by
the Alliance of Children's Hospitals, Inc. ("Alliance"). The Alliance is a
wholly-owned subsidiary of Child Health Corporation of America, which is
comprised of 35 free-standing children's hospitals across the United States. The
Alliance selected the STEP system, after extensive research and review, based
upon its ability to reduce both the trauma and operative complications
associated with pediatric laparoscopic surgical procedures. In exchange for an
ongoing royalty payment, the Company is entitled to use this seal in connection
with the marketing and sale of its STEP line of products. It is hoped that the
Seal of Acceptance can help the Company expand awareness and sales of its STEP
product line for use in the pediatric environment.

Internationally, the Company expects to utilize a network of independent
distributors to market its products in selected foreign countries. The effort to
identify and reach agreements with appropriate foreign distributors gained
substantial momentum during the latter portion of 1995. At year end, initial
orders had been received from distributors in 11 countries, primarily in Europe.
Management expects to make additional progress in this regard during 1996, and
expects foreign sales to positively impact future revenue growth.

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 that provide an adequate return or
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. Failure to do so
would have a material adverse impact on the Company's business, results of
operations and financial condition.

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<PAGE>
MANUFACTURING

The Company initiated manufacture of commercial quantities of its STEP
device in its Salt Lake City, Utah facility during late 1994. Current
manufacturing operations consist primarily of the assembly and testing of
purchased components to produce finished products, which are then packaged for
sterilization in an outside facility. During 1995, the Company implemented steps
to automate various aspects of the STEP assembly operation to help reduce
product costs and to achieve a more uniform standard of product consistency.
During the assembly process and following sterilization, the Company conducts
appropriate tests and inspection of its products in an effort to assure that
products meet established specifications, and to verify appropriate levels of
product sterility.

The Company has limited experience in manufacturing M.I.S. access products
or other products in commercial quantities at acceptable costs. The Company is
registered as a manufacturer of medical devices with appropriate state and
federal authorities, including the FDA, and is pursuing registration to
standards which would confirm compliance with a number of foreign quality
systems. See "-- Government Regulation." The Company's success will depend in
part on its ability to manufacture its products in compliance with the FDA's 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. Failure to
maintain production volumes or increase production volumes in a timely or
cost-effective manner would have a material adverse effect on the Company's
business, financial condition and results of operations.

The Company was recently inspected by the FDA and cited for certain GMP
deficiencies. See "Risk Factors -- Limited Manufacturing Experience; Compliance
with Good Manufacturing Practices," "-- Government Regulation" and "Business --
Government Regulation."

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

The Company believes that future regulatory changes currently being
considered by the FDA are likely to result in a system of United States
regulatory requirements for manufacturers of medical devices which more closely
resembles the system that has been adopted by most European countries, namely,
the International Standards Organization 9000 ("ISO 9000") series of quality
systems standards. Accordingly, the Company has taken steps to bring its
operations into compliance with these additional requirements. An audit by a
recognized "notified body," which is charged with assessing compliance to the
ISO 9000 standards on behalf of a specific European regulatory agency, was
initiated during the latter portion of 1995 and concluded in January 1996.
Company operations and

34
<PAGE>
documentation were found to be in satisfactory compliance to the ISO 9000
standards and recommendation for certification has been given by the auditors to
the registration body. Such certification should facilitate the introduction and
sale of the Company's access products to the member countries of the European
Economic Community. This certification, if successfully obtained, may also
positively impact the Company's compliance with the regulatory requirements of
other countries, which have adopted or may adopt a similar regulatory structure
or recognize such compliance as adequate assurance of product quality and
conformance in the future.

PATENTS AND PROPRIETARY RIGHTS

It is the Company's policy to aggressively protect its technology by, among
other things, filing patent applications for the patentable technologies that it
considers important to the development of its business. The Company holds six
issued United States patents, and has several additional U. S. and foreign
patent applications pending, covering various aspects of its radial dilation
technology. The Company also has a license agreement giving it exclusive rights,
assuming certain defined minimum payments are met, to a related access
technology that is covered by two issued and one pending patent. In addition,
during 1995 the Company obtained a non-exclusive license to a patent covering a
specialized access device which facilitates the placement of a vision device
into the abdominal cavity.

The Company holds five issued United States patents and one granted European
patent and has several additional foreign and U. S. patent applications pending
relating to its thermal ablation system technology. The Company also holds five
issued United States patents and several issued foreign patents relating to its
biocompatible coating technologies, and has additional related U.S. and foreign
applications that are pending. The Company has continued to pursue the expansion
of its coating-related intellectual property, as opportunities for business
partnerships in this area have been pursued. See " -- Products and Technology --
Biocompatible Coating Technologies." In addition to patent rights related to its
radial dilation, thermal ablation and biocompatible coating technologies, the
Company also has a number of issued and pending patents relating to its blood
gas exchange and pumping technologies. There can be no assurances that any
pending patent applications will be issued in their present scope, or at all.

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.

35
<PAGE>
possible and could prevent the Company from manufacturing, selling or using its
products, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.

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

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
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 purchasers 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.

Notwithstanding the challenges faced by the Company in selling in a market
dominated by two large competitors, substantially all of the Company's revenues
since the fourth quarter of 1994 have come from product sales in this market.
U.S. Surgical and Ethicon purchasing contracts typically include a provision
allowing a certain percentage of purchases from other vendors, and the Company
has taken and intends to continue to take advantage of such provisions.

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 segment is dominated by U.S. Surgical and Ethicon. Both entities
introduced new access devices, trocars with added features, during the past two
years. A number of other entities participate in various segments of the M.I.S.
access market.

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

In the thermal ablation market, the Company considers its primary
competition to be current therapies for the treatment of excessive menstrual
bleeding, including drug therapy, dilatation and curettage, surgical endometrial
ablation and hysterectomy. The Company will also compete against other
techniques under development for the treatment of excessive menstrual bleeding,
including endometrial ablation techniques that employ RF energy or freezing
techniques ("cryoablation") and the uterine balloon therapy system being
clinically tested by Gynecare, Inc.

There are many large companies with significantly greater financial,
manufacturing, marketing, distribution and technical resources and clinical
experience than the Company that are developing

36
<PAGE>
and marketing devices for surgical removal of the uterus, uterine fibroids, the
endometrial lining of the uterus and other uterine tissues or are developing
non-surgical methods for treating these conditions. Additionally, there are
smaller companies developing alternative methods of uterine tissue ablation that
compete with the Company. There can be no assurance that these companies will
not succeed in developing technologies and products that are more effective than
any which have been or are being developed by the Company or that would render
the Company's technologies or products obsolete or not competitive. Such
competition could have a material and 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. See "Risk
Factors -- Intense Competition."

GOVERNMENT REGULATION

Clinical testing, manufacture and sale of the Company's products, including
the STEP product line, the ENABL Thermal Ablation System and the Company's
biocompatible coatings technology, are subject to regulation by the FDA and
corresponding state and foreign regulatory agencies. Pursuant to the Federal
Food, Drug, and Cosmetic Act, and the regulations promulgated thereunder, the
FDA regulates the preclinical and clinical testing, manufacture, labeling,
distribution and promotion of medical devices. Noncompliance with applicable
requirements can result in, among other things, fines, injunctions, civil
penalties, recall or seizure of 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.

In the United States, medical devices are classified into one of three
classes (I.E., Class I, II or III) on the basis of the controls deemed necessary
by the FDA to reasonably ensure their safety and effectiveness. Class I devices
are subject to general controls (E.G., labeling, premarket notification and
adherence to GMPs) and Class II devices are subject to general and special
controls (E.G., performance standards, postmarket surveillance, patient
registries and FDA guidelines). Generally, Class III devices are those which
must receive premarket approval by the FDA to ensure their safety and
effectiveness (E.G., life-sustaining, life-supporting and implantable devices,
or new devices which have been found not to be substantially equivalent to
legally marketed devices).

Before a new device can be introduced in the market, the manufacturer must
generally obtain FDA clearance of a 510(k) notification or approval of a PMA. A
PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed Class I or Class II device, or if it is a Class
III device for which the FDA has called for PMAs. The PMA application must
contain the results of clinical trials, the results of all relevant bench tests,
laboratory and animal studies, a complete description of the device and its
components, and a detailed description of the methods, facilities and controls
used to manufacture the device. The FDA's review of a PMA application generally
takes one to two years from the date the PMA is accepted for filing, but it may
take significantly longer. The review time is often significantly extended by
the FDA asking for more information or clarification of information already
provided in the submission. Modifications to a device that is the subject of an
approved PMA, its labeling or manufacturing process may require approval by the
FDA of PMA supplements or new 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.

If human clinical trials of a device are required, and the device presents a
"significant risk," the sponsor of the trial (usually the manufacturer or the
distributor of the device) will have to file an Investigational Device Exemption
("IDE") application prior to commencing human clinical trials. The IDE
application must be supported by data, typically including the results of animal
and laboratory testing. If the IDE application is approved by the FDA and one or
more appropriate Institutional Review Boards ("IRBs"), human clinical trials may
begin at a specific number of investigational sites

37
<PAGE>
with a specific number of patients, as approved by the FDA. If the device
presents a "nonsignificant risk" to the patient, a sponsor may begin the
clinical trial after obtaining approval for the study by one or more appropriate
IRBs without the need for FDA approval. Sponsors of clinical trials are
permitted to sell investigational devices distributed in the course of the study
provided such compensation does not exceed recovery of the costs of manufacture,
research, development and handling. An IDE supplement must be submitted to and
approved by the FDA before a sponsor or investigator may make a change to the
investigational plan that may affect its scientific soundness or the rights,
safety or welfare of human subjects.

Management expects that the ENABL System will be subject to the PMA approval
process prior to marketing within the United States. There can be no assurance
that the Company will be able to obtain the necessary regulatory approval on a
timely basis, or at all, and a delay in receipt of or failure to receive such
approval would have a material adverse effect on the Company's business,
financial condition and results of operations.

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. The FDA recently has been requiring more rigorous
demonstration of substantial equivalence than in the past, including in some
cases requiring submission of clinical trial data. The FDA may determine that
the proposed device is not substantially equivalent to a predicate device, or
that additional information is needed before a substantial equivalence
determination can be made. It generally takes from four to 12 months from
submission to obtain 510(k) premarket clearance, but may take longer. The FDA
may determine that a proposed device is not substantially equivalent to a
legally marketed device, or that additional information is needed before a
substantial equivalence determination can be made. A "not substantially
equivalent" determination, or a request for additional information, could
prevent or delay the market introduction of new products that fall into this
category and could have a material adverse effect on the Company's business,
financial condition and results of operations. 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 the above time frames, 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
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

38
<PAGE>
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. Labeling and promotional activities are subject to scrutiny by the FDA
and, in certain circumstances, by the Federal Trade Commission. Current FDA
enforcement policy prohibits the marketing of approved medical devices for
unapproved uses.

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. The Company's Salt Lake City, Utah manufacturing
facility was inspected by the FDA for the first time in January 1996. That
inspection resulted in the issuance by the FDA of a Form FDA 483, which detailed
specific areas where the FDA inspector observed that the Company's operations
were not in full compliance with applicable areas of the GMP regulations.
Corrective action addressing all identified GMP deficiencies was initiated
immediately, and the Company responded to the FDA District Office. The FDA
District Office issued a Warning Letter stating that it appears that the
Company's response to the Form FDA 483 is adequate; however, an FDA reinspection
is required to assure that the corrections the Company has taken adequately
address the noted GMP deficiencies. The FDA also notified the Company that until
the agency determines that corrections are adequate, federal agencies will be
advised of the issuance of the Warning Letter so that they may take this
information into account when considering awards of contracts, and no pending
510(k) notifications for devices to which the observed GMP deficiencies are
reasonably related will be cleared, and no requests for Certificates For
Products For Export will be approved. The Company submitted a written response
to the Warning Letter and requested a meeting with District officials to discuss
the matter. During the requested meeting, District officials acknowledged that
the GMP deficiencies observed during the inspection were "borderline" with
respect to the agency's policies regarding the issuance of a Warning Letter.
They explained, however, that the Warning Letter was based on observations that
the Company was not following its own written procedures and on the fact that
the Company's internal audits had not found these deficiencies. Following the
meeting, the FDA acknowledged the Company's representation that the corrective
action plan would be completed by April 8, 1996, and stated that the agency
would initiate a reinspection within 60 days of that date. The scope of the FDA
reinspection could be more comprehensive than the initial inspection. At the
current time, the Company has no pending submissions for either clearance to
market new or modified products, or to export to new foreign markets. However,
failure to adequately address these GMP deficiencies within a reasonable time
frame would have an adverse effect on future product sales. Accordingly, the
Company has undertaken a review of the GMP compliance of its entire
manufacturing process. However, there can be no assurance that the FDA will deem
the Company's corrective action to be adequate or that additional corrective
action, in areas not addressed by the Form FDA 483, will not be required.
Failure to achieve satisfactory GMP compliance could have a significant adverse
effect on the Company's ability to continue to manufacture and distribute its
produts and, in the most serious cases, result in the seizure or recall of
products, injunction and/or civil fines. See "Business -- Manufacturing."

The FDA has proposed changes to the GMP regulations that will likely
increase the cost of compliance with GMP requirements. Changes in existing
requirements or adoption of new requirements could have a material adverse
effect on the Company's business, financial condition and results

39
<PAGE>
of operations. There can be no assurance that the Company will not incur
significant costs to comply with laws and regulations in the future or that laws
and regulations will not have a material adverse effect upon the Company's
business, financial condition or results of operations.

In addition, the Company is subject to medical device regulations in foreign
countries where the Company's products are sold. Such regulations, particularly
in the European Community, continue to expand, and there can be no assurance
that new laws or regulations will not have an adverse effect on the Company. For
example, the European Union has promulgated rules which require that medical
products receive the right by mid-1998 to affix the CE mark, an international
symbol of adherence to quality assurance standards and compliance with
applicable European medical device directives. Failure to receive the right to
affix the CE mark will prohibit the Company from selling its products in member
countries of the European Union.

PRODUCT LIABILITY AND INSURANCE

The development, manufacture and sale of the Company's products entail the
risk of product liability claims, involving both potential financial exposure
and associated adverse publicity. To date, InnerDyne has not experienced any
product liability claims. The Company's current product liability insurance
coverage limits are $1,000,000 per occurrence and $2,000,000 in the aggregate,
and there can be no assurance that such coverage limits are adequate to protect
the Company from any liabilities it might incur in connection with the
development, manufacture and sale of its current and potential products. In
addition, the Company may require increased product liability insurance. Product
liability insurance is expensive and may not be available in the future on
acceptable terms, or at all. In addition, if such insurance is available, there
can be no assurance that the limits of coverage of such policies will be
adequate. A successful product liability claim in excess of the Company's
insurance coverage could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk Factors --
Product Liability and Insurance."

EMPLOYEES

At March 31, 1996, the Company had 91 full-time and 15 temporary and
part-time employees. The majority of the temporary and part-time employees
worked at the Company's Salt Lake City facility, and were primarily involved in
manufacturing and support activities related to the Company's M.I.S. access
products. Of the 91 full-time employees on March 31, 1996, 36 were involved in
manufacturing operations, 14 in research and development and regulatory/clinical
affairs, 4 in biocompatible coatings development, 10 in administration, and 27
in sales, marketing and customer service.

None of the Company's employees is covered by a collective bargaining
agreement, and management believes that its relationship with its employees is
good.

FACILITIES

InnerDyne leases approximately 20,500 square feet in Sunnyvale, California
to house the Company's administrative personnel, research and development,
marketing and sales support activities, of which approximately 6,000 square feet
are subleased to another entity. The Sunnyvale facility is leased through
December 1998.

Additional space is leased in two separate buildings, totaling approximately
27,000 square feet, in Salt Lake City, Utah. These facilities house
administrative personnel, manufacturing operations, biocompatible coating
research activities and the Company's primary distribution function. The leases
for the Salt Lake City buildings expire in August 1997 and August 1999.

Management believes that currently leased facilities will be sufficient for
the immediate future, and that adequate additional space is available within the
same geographical areas. If additional space was required, and it could not be
obtained in near proximity to current facilities at an acceptable cost, it could
have a material adverse effect on the Company's operations.

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The current directors and executive officers of the Company and their ages
as of March 31, 1996 are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --------- ------------------------------------------------------------
<S> <C> <C>
William G. Mavity 46 President, Chief Executive Officer and Director
Robert A. Stern 39 Vice President and Chief Financial Officer
Daniel Genter 59 Senior Vice President of Sales and Marketing
Edward W. Benecke 53 Director
Robert M. Curtis 50 Director
Eugene J. Fischer (1)(2) 49 Director
Guy P. Nohra (2) 35 Director
Steven N. Weiss (1)(2) 49 Director
</TABLE>

- ------------------------
(1) Member of the Audit Committee.

(2) Member of the Compensation Committee.

WILLIAM G. MAVITY joined the Company as President, Chief Executive Officer
and a director in October 1993, after having spent more than twenty years in
various capacities with the 3M Company ("3M"), including more than ten years
within a number of the operating units of 3M's health care business. From August
1992 until October 1993, Mr. Mavity served as Operations Director for 3M's
Medical Device Division. From April 1989 until August 1992, Mr. Mavity served as
General Manager of 3M's Sarns cardiovascular surgery business unit. From July
1988 until April 1989, Mr. Mavity served as Manufacturing Manager for the Sarns
subsidiary. Mr. Mavity holds a B.E.A. degree from the University of Delaware.

ROBERT A. STERN joined the Company in January of 1996 as Vice President and
Chief Financial Officer. From October 1991 to January 1996, Mr. Stern held the
position of Chief Financial Officer, Vice President of Corporate Finance and
member of the Board of Directors of RhoMed Incorporated, a New Mexico-based
biopharmaceutical company. Mr. Stern has had ten years experience in investment
banking and cash management, and was the principal stockholder and Managing
Director of R. A. Stern and Associates from December 1986 to April of 1990. R.
A. Stern Associates was sold to PaineWebber in 1989. Mr. Stern received a B.S.
from the University of New Hampshire, Whittemore School of Business and
Economics.

DANIEL J. GENTER joined the Company in April of 1996 as Senior Vice
President of Sales and Marketing. From May 1993 to April 1996, Mr. Genter held
the position of Divisional Vice President of the Kanetta Pharmacal Division of
Sanofi Winthrop Pharmaceuticals, a business unit established for the
development, manufacture and marketing of sterile parenteral multisource
pharmaceutical products. From December 1990 to May 1993, Mr. Genter served as
Vice President of Marketing for Schein Pharmaceutical, Inc., a manufacturer and
distributor of pharmaceutical products. Mr. Genter spent over twenty years with
Johnson & Johnson in its McNeil Laboratories, Critikon and Home Health Care
companies, holding positions in general management, sales management, marketing
and clinical development. Mr. Genter also served as President of Sharplan
Lasers, Inc., a medical laser manufacturer. Mr. Genter studied Mechanical
Engineering at Tulane University and holds a B.S. in Mathematics from the State
University of New York and an MBA from Pepperdine University.

EDWARD W. BENECKE has served as a director of the Company since 1995. Mr.
Benecke serves as the President of Medical Contracts Associates, an organization
that provides consulting services to health care companies in the areas of
marketing and distribution. Prior to forming the above entity in 1994, Mr.
Benecke spent 25 years within various units of Johnson & Johnson, one of the
world's leading

41
<PAGE>
suppliers of health care products. From 1987 to 1993, he was Vice President of
Corporate National Accounts and headed an organization responsible for
implementing and managing Johnson & Johnson's multi-company agreements and
overall business relationships with the major multi-hospital systems and
alliances in the United States. Mr. Benecke holds a B.S. degree in business
administration from Southeast Missouri State University.

ROBERT M. CURTIS became a director of the Company in January 1993 and has
also served as a consultant to the Company since that time. Since December 1991,
Mr. Curtis has been Principal of Robert Curtis Associates ("RCA"), which
provides business development and management consulting services to the medical
device industry. Prior to his activities with RCA, Mr. Curtis was President,
Chief Executive Officer and Chairman of the Board of Urosystems, Inc., a
clinical trial-stage device startup which was acquired by Medtronic Inc. From
1976 to 1990, he held a number of positions at Shiley, Inc., a manufacturer of
medical devices, and its parent corporation, Pfizer, Inc., a diversified health
care products company. He has served, at various times, as President, Chief
Executive Officer and Chairman of the Board of Shiley, Inc. and as Senior Vice
President and member of the Board of Directors of Pfizer Hospital Products
Group, the medical device division of Pfizer, Inc. Mr. Curtis holds B.S. and
M.S. degrees from the University of California, Berkeley.

EUGENE J. FISCHER has served as a director of the Company since 1989. Since
1989, he has been a general partner of Pathfinder Venture Capital Funds, a group
of venture capital funds. From 1983 to 1988, he was a general partner of
Technology Funding, Ltd., a venture capital management company, where he was
responsible for investments in computer and software technology, medical systems
and pharmaceuticals. Mr. Fischer holds B.S. and M.S. degrees from the University
of Minnesota and the University of California, respectively. Mr. Fischer also
serves as a director of a number of privately held companies.

GUY P. NOHRA has served as a director of InnerDyne since 1994. He has been
with Burr, Egan, Deleage & Co. since 1989. His investment activity is
specialized to the health care marketplace, which includes biotechnology,
medical devices and medical instrumentation. Prior to joining Burr, Egan,
Deleage & Co., Mr. Nohra was Product Manager of Medical Products with Security
Pacific Trading Corporation. He holds a B.A. from Stanford University and an
M.B.A. from the University of Chicago's Graduate School of Business. Mr. Nohra
also serves as a director of Interpore International, an orthopedics company.

STEVEN N. WEISS has served as a director of the Company since 1987. Since
1987, he has been a general partner of Montgomery Medical Ventures II, a venture
capital firm. Mr. Weiss has held a number of senior management positions in the
medical device industry and holds B.S. and M.S. degrees from City College of New
York and an M.B.A. from Fordham University. Mr. Weiss also serves as a director
of KeraVision, Inc. and a number of privately held companies.

BOARD MEETINGS AND COMMITTEES

The Board of Directors of the Company held a total of eight meetings during
the fiscal year ended December 31, 1995. The Board of Directors has an Audit
Committee and a Compensation Committee. There is no committee performing the
functions of a nominating committee.

The Audit Committee of the Board of Directors reviews the results and scope
of the audit and other services provided by the Company's independent auditors,
approves fee arrangements with auditors and reports the results of its review to
the full Board of Directors and to management. This Committee, which consists of
directors Fischer and Weiss, held one meeting during fiscal 1995.

The Compensation Committee of the Board of Directors makes recommendations
regarding salaries and incentive compensation for employees of the Company,
makes recommendations with respect to purchase and option arrangements for
individuals subject to Section 16 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and makes recommendations regarding other
compensation matters to the full Board of Directors. This Committee, which
consists of directors Fischer, Nohra and Weiss, held two meetings during fiscal
1995.

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<PAGE>
COMPENSATION OF DIRECTORS

Directors of the Company are reimbursed for expenses actually incurred in
attending meetings of the Board of Directors and its committees. In addition,
nonemployee members of the Board of Directors receive a quarterly fee of $1,500
(pro rated in the event that the director serves for only part of the quarter)
and are reimbursed for expenses actually incurred in attending meetings of the
Board of Directors and its committees. Nonemployee members of the Board of
Directors are also eligible to receive options under the Directors' Plan. See
"-- Stock Plans." Mr. Curtis and an entity affiliated with Mr. Benecke have
entered into consulting agreements with the Company. See "Certain Transactions."

EXECUTIVE COMPENSATION

The following table sets forth the compensation awarded or paid by the
Company for each of the years in the three-year period ended December 31, 1995
to the Company's Chief Executive Officer. No other executive officer earned in
excess of $100,000 during the fiscal year ended December 31, 1995.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION -------------
-------------------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($)(3) BONUS ($) COMPENSATION ($) OPTIONS (#) COMPENSATION ($)(1)
- --------------------------- --------- ------------ ------------- ---------------- ------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
William G. Mavity (2) 1995 $ 193,846 $ 20,000(4) $ 100,775 0 $ 34
President and Chief 1994 161,578 40,000 47,660 350,000 62
Executive Officer 1993 38,256 0 13,356 200,000 5
</TABLE>

- ------------------------
(1) Reflects the cost of insurance premiums paid by the Company for term life
insurance under the Company's group life insurance employee benefit.

(2) Mr. Mavity has a severance arrangement with the Company pursuant to which he
is entitled to the equivalent of one year's salary in the event his
employment is terminated without cause. Other Annual Compensation for 1993,
1994 and 1995 consists of amounts paid by the Company related to temporary
housing and relocation for Mr. Mavity, in addition to lease costs for an
automobile provided for Mr. Mavity's use. Mr. Mavity's 1993 salary reflects
compensation paid from October 6, 1993 (when Mr. Mavity joined the Company
as President and Chief Executive Officer).

(3) Does not include $9,117, $7,327 and $2,511 deferred by Mr. Mavity in 1995,
1994 and 1993, respectively, pursuant to the Company's 401(k) Plan.

(4) Includes amounts earned in 1995 but paid in 1996.

STOCK OPTION GRANTS IN FISCAL 1995

There were no grants of options to purchase Common Stock of the Company made
during the fiscal year ended December 31, 1995 to the named executive officer.

OPTION EXERCISE AND HOLDINGS

The following table sets forth information for the named executive officer
with respect to exercises of options to purchase Common Stock of the Company in
the fiscal year ended December 31, 1995.

43
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
SHARES ACQUIRED VALUE YEAR-END (#) AT FISCAL YEAR-END ($)
NAME ON EXERCISE (#) REALIZED ($)(1) (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE) (1)
- ------------------------ ----------------- ------------------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C>
William G. Mavity 0 0 166,666/383,334 $167,708/$444,792
</TABLE>

- ------------------------
(1) Value calculated by determining the difference between the fair market value
of underlying securities at exercise date (for value realized) or year-end
(for value at year-end), and the exercise price.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the Compensation Committee of the Board of Directors are
Eugene J. Fischer, Guy P. Nohra and Steven N. Weiss. No member of the
Compensation Committee or executive officer of the Company has a relationship
that would constitute an interlocking relationship with executive officers or
directors of another entity.

STOCK PLANS

1987 STOCK OPTION PLAN. InnerDyne's 1987 Stock Option Plan (the "1987
Plan") was adopted by the Board of Directors and approved by the stockholders in
July 1987. The 1987 Plan has been amended by action of the Board and the
stockholders from time to time since that date to reserve additional shares for
issuance under the 1987 Plan and make certain other amendments. There are
currently 2,650,000 shares reserved for issuance under the 1987 Plan. As of
March 31, 1996, 630,798 shares had been issued upon exercise of stock options
granted under the 1987 Plan, 1,607,796 shares were subject to outstanding
options and 411,406 shares were available for future grant. The 1987 Plan
provides for the grant to employees of the Company (including officers and
employee directors) of incentive stock options within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended (the "Code") and for the grant
of nonstatutory stock options to employees and consultants of the Company. The
1987 Plan is administered by the Board of Directors or a committee appointed by
the Board. Members of the Board receive no additional compensation for their
services in connection with the administration of the 1987 Plan. Most options
granted under the 1987 Plan become exercisable cumulatively over a four-year
period beginning on the optionee's commencement of employment with InnerDyne
(for new employees) or the date of grant (for existing employees), as
applicable. The exercise price of options granted under the 1987 Plan is
determined by the Board, but may not in any event be less than 100% of the fair
market value of InnerDyne's Common Stock on the date of grant, as determined by
the Board or a committee of the Board. In the case of stock options granted to
an optionee who owns more than 10% of the voting power or value of all classes
of stock of InnerDyne, the exercise price must not be less than 110% of the fair
market value on the date of grant. The fair market value per share is the
closing sales price on the Nasdaq National Market reported in THE WALL STREET
JOURNAL or by such other source as the Board shall deem reliable on the last
trading day immediately preceding the date of grant of the option. Options
granted under the 1987 Plan generally expire five years from the date of grant,
unless otherwise provided in the option agreement.

In the event of certain changes in control of the Company, the 1987 Plan
requires that each outstanding option accelerate and become exercisable in full
at least ten days prior to the consummation of such change in control on such
conditions as the Board shall determine unless the successor corporation assumes
the outstanding options, substitutes substantially equivalent options or
provides other consideration in payment of such options in an amount and payment
form which the Board, in its judgment, deems reasonable. Unless terminated
sooner, the 1987 Plan will terminate ten years from its effective date. The
Board has authority to amend or terminate the 1987 Plan, provided no such action
would impair the rights of the holder of any outstanding options without the
written consent of such holder.

44
<PAGE>

INNERDYNE MEDICAL, INC. 1989 INCENTIVE STOCK PLAN. In connection with the
merger in 1994 of CardioPulmonics, Inc. and InnerDyne Medical, Inc., all
outstanding options under the InnerDyne Medical, Inc. 1989 Incentive Stock Plan
(the "1989 Plan") were assumed by the Company and became exercisable to purchase
shares of Common Stock of the Company. An aggregate of 1,453,536 shares of
Common Stock were reserved for issuance under the 1989 Plan. As of March 31,
1996, 1,051,422 shares had been issued upon exercise of stock options granted
under the 1989 Plan and 319,988 shares were subject to outstanding options. No
options have been granted under the 1989 Plan since the merger. The 1989 Plan
has been terminated and no shares are available for future grant under the 1989
Plan.

1996 STOCK OPTION PLAN. The Company's 1996 Stock Option Plan (the "1996
Plan") was adopted by the Board of Directors in March 1996 and will be submitted
to the stockholders for approval in May 1996. A total of 1,000,000 shares of
Common Stock have been reserved for future issuance under the 1996 Plan. As of
March 31, 1996, no stock options had been granted under the 1996 Plan. The 1996
Plan provides for the grant to employees of the Company (including officers and
employee directors) of incentive stock options within the meaning of Section 422
of the Code and for the grant of nonstatutory stock options to employees and
consultants of the Company. The 1996 Plan is administered by the Board of
Directors or a committee of the Board of Directors (the "Administrator"), which
selects the optionees, determines the number of shares to be subject to each
option and determines the exercise price of each option. In no event, however,
may an individual employee receive option grants of more than 800,000 shares
under the 1996 Plan in any fiscal year. The exercise price of all incentive
stock options granted under the 1996 Plan must be at least equal to the fair
market value of the Common Stock on the date of grant. The exercise price of all
nonstatutory stock options granted under the 1996 Plan must be at least equal to
the fair market value of the Common Stock on the date of grant for grants made
to certain of the Company's executive officers and at least 85% of the fair
market value of the Common Stock on the date of grant for all other persons.
With respect to any participant who owns stock possessing more than 10% of the
voting power of all classes of stock of the Company, the exercise price of any
incentive stock option granted must equal at least 110% of the fair market value
on the grant date, and the maximum term of the option must not exceed five
years. The term of all other options granted under the 1996 Plan may not exceed
ten years.

In the event of certain changes in control of the Company, the 1996 Plan
requires that each outstanding option be assumed or an equivalent option
substituted by the successor corporation; provided, however, that the
Administrator may, in lieu of such assumption or substitution, provide for the
optionee to have the right to exercise the option as to all or a portion of the
stock subject thereto, including shares which would not otherwise be
exercisable, in which case each option will be exercisable for 15 days from the
date of notice of such determination. Unless terminated sooner, the 1996 Plan
will terminate ten years from its effective date. The Board has authority to
amend or terminate the 1996 Plan, provided no such action would impair the
rights of the holder of any outstanding options without the written consent of
such holder.

1991 EMPLOYEE STOCK PURCHASE PLAN. InnerDyne's 1991 Employee Stock Purchase
Plan (the "Purchase Plan") was adopted by the Board of Directors in October 1991
and was approved by stockholders in January 1992. The Purchase Plan was amended
in 1995 by action of the Board of Directors and stockholders to reserve
additional shares for issuance thereunder. The Purchase Plan is intended to
qualify under Section 423 of the Code. InnerDyne has reserved 300,000 shares of
Common Stock for issuance under the Purchase Plan. As of March 31, 1996, 61,667
shares had been issued under the Purchase Plan and 238,333 shares were available
for future issuance. Under the Purchase Plan, an eligible employee may purchase
shares of Common Stock from InnerDyne through payroll deductions of up to 10% of
the employee's base compensation, bonuses, overtime and sale commissions, at a
price per share equal to 85% of the lesser of the fair market value of InnerDyne
Common Stock as of the first day or the last day of each offering period under
the Purchase Plan. The offering periods are generally six months long and
commence on or about May 1 and November 1 of each year.

45
<PAGE>

1991 DIRECTORS' STOCK OPTION PLAN. InnerDyne's 1991 Directors' Stock Option
Plan (the "Directors' Plan") was adopted by the Board of Directors in October
1991 and was approved by the stockholders in January 1992. The Directors' Plan
was amended in 1995 by action of the Board of Directors and stockholders to
reserve additional shares for issuance thereunder and make certain other
amendments. InnerDyne has reserved 300,000 shares of Common Stock for issuance
under the Directors' Plan. As of March 31, 1996, 2,000 shares had been issued
upon exercise of stock options granted under the Directors' Plan, 66,000 shares
were subject to outstanding options and 232,000 shares were available for future
grant. The Directors' Plan is designed to operate automatically and not to
require administration; however, to the extent administration is necessary, it
will be provided by the Board of Directors. Only nonemployee directors are
eligible to participate in the Directors' Plan. On the date of each annual
meeting of stockholders, each nonemployee director elected at such annual
meeting receives an option grant for 10,000 shares. If a nonemployee director is
appointed to the Board to fill a vacancy after the date of the annual meeting of
stockholders (the "Prior Meeting"), that director will receive an option to
purchase the number of shares of the Company's Common Stock determined by
multiplying 10,000 times a fraction, the numerator of which is the difference
between the number twelve and the number of full months since the Prior Meeting
and the denominator of which is twelve. The options granted on the date of each
annual meeting of stockholders become exercisable in whole on the first
anniversary of the date of grant. Options granted after the date of such meeting
(the Prior Meeting) to a director appointed to fill a vacancy become exercisable
in whole on the later of one year from the date of the Prior Meeting or six
months from the date of grant. The exercise price of an option granted under the
Directors' Plan is the fair market value (based on the closing price on the
Nasdaq National Market) of InnerDyne Common Stock on the date the option is
granted. In the event of a merger in which InnerDyne is not the surviving
corporation, a transfer of all of InnerDyne's stock, a sale of substantially all
of InnerDyne's assets or a dissolution or liquidation of InnerDyne, all
outstanding options will become exercisable in full at least ten days prior to
such event on such conditions as the Board shall determine, unless the successor
corporation assumes the outstanding options or substitutes substantially
equivalent options.

During fiscal year 1995, options to purchase 10,000 shares of Common Stock
at an exercise price of $3.875 per share were granted under the Directors' Plan
to each of Edward W. Benecke, Robert M. Curtis, Eugene J. Fischer and Guy P.
Nohra. Pursuant to the policies of the venture capital firm with which he is
associated, Mr. Weiss declined his option.

401(k) Plan. In January 1988, the Board of Directors adopted a Defined
Contribution Plan that is intended to qualify under Section 401(k) of the Code
(the "401(k) Plan"). All employees who are at least 21 years of age and have
completed at least three months of service with InnerDyne are eligible to
participate in the 401(k) Plan. Pursuant to the 401(k) Plan, eligible employees
may elect to reduce their current compensation by up to the statutorily
prescribed annual limit ($9,500 in 1996) and have the amount of such reduction
contributed to the 401(k) Plan. The 401(k) Plan permits, but does not require,
additional matching and discretionary contributions to the 401(k) Plan by
InnerDyne on behalf of certain participants in the 401(k) Plan. The 401(k) Plan
is intended to qualify under Section 401 of the Code so that contributions by
employees or by InnerDyne to the 401(k) Plan, and income earned on plan
contributions, are not taxable to employees until withdrawn from the 401(k)
Plan, and so that contributions by InnerDyne, if any, will be deductible by
InnerDyne when made. To date, InnerDyne has made no contributions to the 401(k)
Plan.

LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY AND INDEMNIFICATION

The Company has adopted provisions in its Certificate of Incorporation and
Bylaws providing that InnerDyne shall indemnify its directors and officers to
the fullest extent permitted by the General Corporation Law of the State of
Delaware ("Delaware Law"), including circumstances in which indemnification is
otherwise discretionary under Delaware Law. The Company has entered into
indemnification agreements with its officers and directors containing provisions
that are in some respects broader than the specific indemnification provisions
contained in the Delaware Law. The

46
<PAGE>
indemnification agreements may require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may arise
by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified and to obtain directors' and officers' insurance if
available on reasonable terms.

At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company in which indemnification
will be required or permitted. The Company is not aware of any threatened
litigation or proceeding that may result in a claim for such indemnification.

47
<PAGE>
CERTAIN TRANSACTIONS

On June 2, 1995, the Company issued an aggregate of 1,435,999 shares of its
Common Stock and warrants to purchase 287,200 shares of its Common Stock in a
private placement. The warrants, as amended, have an exercise price of $2.90 per
share and terminated at 5:00 p.m. (Pacific time) on April 1, 1996, unless
exercised prior to such time. Entities affiliated with Pathfinder Venture
Capital Funds (of which Eugene J. Fischer, a director of the Company, is a
general partner) purchased an aggregate of 221,240 shares of Common Stock and
warrants to purchase 44,248 shares of Common Stock in the financing. These
warrants expired on April 1, 1996. Entities affiliated with Burr, Egan, Deleage
& Co. (of which Guy P. Nohra, a director of the Company, is a Vice President)
purchased an aggregate of 110,620 shares of Common Stock and warrants to
purchase 22,124 shares of Common Stock in the financing. These warrants were
exercised prior to April 1, 1996.

William G. Mavity and Robert A. Stern, officers of the Company, have
severance arrangements with the Company pursuant to which they are entitled to
the equivalent of one year's and six month's salary, respectively, in the event
of termination of employment without cause.

The Company has entered into a consulting agreement with Mr. Curtis. Such
agreement has a one-year term beginning February 1, 1995 (with automatic
renewals unless modified or terminated by either party) and provides that Mr.
Curtis will provide consulting services on an "as-needed" basis, subject to Mr.
Curtis' availability. Mr. Curtis is paid at a rate of $1,250 per day or $156.25
per hour. Such consulting agreement supersedes a previous consulting agreement
entered into between the Company and Mr. Curtis pursuant to which the Company
made payments amounting to $67,437.50 to Mr. Curtis during the year ended
December 31, 1994. The Company made no payments to Mr. Curtis pursuant to such
consulting agreement during the year ended December 31, 1995. In connection with
his consulting relationship, Mr. Curtis also received nonstatutory stock options
to purchase 12,000 and 30,000 shares of the Company's Common Stock at exercise
prices of $6.50 and $2.00 per share on January 8, 1993 and August 12, 1993,
respectively, which represented the fair market value of the Company's Common
Stock on the date of the respective grants. The options become exercisable over
a four-year period.

Certain of the Company's stockholders have rights to require the Company to
register shares of the Company's Common Stock from time to time pursuant to the
Securities Act of 1933, as amended (the "Securities Act"). See "Description of
Capital Stock -- Registration Rights of Certain Holders."

The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties.

48
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of March 31, 1996 and as
adjusted to reflect the sale by the Company of the shares offered hereby, (i) by
each person known to the Company to own beneficially more than five percent of
the outstanding shares of Common Stock, (ii) by each director of the Company who
beneficially owns shares of Common Stock, (iii) by the executive officer named
in the Summary Compensation Table and (iv) by all directors and executive
officers of the Company as a group.

<TABLE>
<CAPTION>
SHARES PERCENT BENEFICIALLY
BENEFICIALLY OWNED
OWNED (1) ---------------------------
----------- BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OFFERING OFFERING (2)
- ----------------------------------------------------------------------------- ----------- ------------ -------------
<S> <C> <C> <C>
Entities affiliated with Burr, Egan, Deleage & Co. (3) ...................... 2,351,067 12.7% 11.2%
One Embarcadero Center, Suite 4050
San Francisco, CA 94111
Entities affiliated with Pathfinder Venture Capital Funds (4) ............... 2,174,705 11.7% 10.4%
3000 Sand Hill Road
Building 3, Suite 255
Menlo Park, CA 94025
Montgomery Medical Ventures II .............................................. 1,303,918 7.0% 6.2%
600 Montgomery Street
San Francisco, CA 94111
Perkins Capital Management, Inc. (5) ........................................ 1,426,700 7.7% 6.8%
730 East Lake Street
Wayzata, MN 55391-1769
William G. Mavity (6) ....................................................... 208,388 1.1% 1.0%
InnerDyne, Inc.
1244 Reamwood Avenue
Sunnyvale, CA 94089
Edward W. Benecke (7) ....................................................... 10,000 * *
MedAlliance
18 Country Place
Lebanon, NJ 08833
Robert M. Curtis (8) ........................................................ 46,625 * *
P.O. Box 1494
Healdsburg, CA 95448
Eugene J. Fischer (9) ....................................................... 2,184,705 11.8% 10.4%
Pathfinder Ventures
3000 Sand Hill Road
Building 3, Suite 255
Menlo Park, CA 94025
Guy P. Nohra (10) ........................................................... 2,365,067 12.7% 11.3%
Burr, Egan, Deleage & Co.
One Embarcadero Center, Suite 4050
San Francisco, CA 94111
Steven N. Weiss (11) ........................................................ 1,303,918 7.0% 6.2%
Montgomery Medical Ventures
600 Montgomery Street
San Francisco, CA 94111
</TABLE>

49
<PAGE>

<TABLE>
<CAPTION>
SHARES PERCENT BENEFICIALLY
BENEFICIALLY OWNED
OWNED (1) --------------------------
----------- BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OFFERING OFFERING
- -------------------------------------------------------------------------------- ----------- ------------ ------------
<S> <C> <C> <C>
All directors and executive officers as a group 6,118,653 32.4% 28.8%
(7 persons) (12)...............................................................
</TABLE>

- ------------------------
* Less than 1%

(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock subject
to options and warrants currently exercisable, or exercisable within 60
days, are deemed outstanding for computing the percentage of the person
holding such option but are not outstanding for computing the percentage of
any other person. Except as indicated by footnote, and subject to community
property laws where applicable, the persons named in the table above have
sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them.

(2) Assumes no exercise of the Underwriters' over-allotment option. See
"Underwriting." If the Underwriters' over-allotment option is exercised in
full, certain stockholders will sell up to an aggregate of 352,500 shares
of Common Stock to the Underwriters. Specifically, entities affiliated with
Burr, Egan, Deleage & Co., entities affiliated with Pathfinder Venture
Capital Funds and Montgomery Medical Ventures II have indicated an interest
in selling the shares subject to the over-allotment option. If the
over-allotment option is exercised and if the Company's independent
directors determine that all or a portion of the shares subject to the
over-allotment option will be sold by Selling Stockholders, such shares
will be allocated, on a pro rata basis, among the Selling Stockholders
interested, at such time, in selling shares upon exercise of the
over-allotment option. If the over-allotment option is exercised in full
and each of these entities sells their pro rata share of the 352,500 shares
subject to the over-allotment option, (i) entities affiliated with Burr,
Egan, Deleage & Co. will sell an aggregate of up to 142,163 shares and will
beneficially own 2,208,904 shares, or 10.5% of the Company's outstanding
Common Stock, after completion of this Offering, (ii) entities affiliated
with Pathfinder Venture Capital Funds will sell an aggregate of up to
131,483 shares and will beneficially own 2,043,222 shares, or 9.7% of the
Company's outstanding Common Stock, after completion of this Offering and
(iii) Montgomery Medical Ventures II will sell an aggregate of up to 78,854
shares and will beneficially own 1,225,064 shares, or 5.8% of the Company's
outstanding Common Stock, after completion of this Offering.

(3) Includes 1,988,337 shares held by ALTA IV Limited Partnership and 362,730
shares held by C.V. Sofinnova Partners Five.

(4) Includes 798,880 shares held by Pathfinder Venture Capital Fund II, A
Limited Partnership ("Pathfinder II"), and 1,375,825 shares held by
Pathfinder Venture Capital Fund III, A Limited Partnership ("Pathfinder
III"). Excludes 44,248 shares subject to warrants that expired unexercised
on April 1, 1996.

(5) Consists of 429,600 shares with sole voting power and 1,426,700 shares with
sole dispositive power. Based solely on information contained in the
Schedule 13G dated January 31, 1996 filed by the stockholder with the
Commission.

(6) Includes 205,729 shares subject to options exercisable within 60 days of
March 31, 1996.

(7) Includes 10,000 shares subject to options exercisable within 60 days of
March 31, 1996.

(8) Includes 46,625 shares subject to options exercisable within 60 days of
March 31, 1996.

(9) Includes 798,880 shares held by Pathfinder II, of which Mr. Fischer is a
general partner, and 1,375,825 shares held by Pathfinder III, of which Mr.
Fischer is a general partner. He may be

50
<PAGE>

deemed to be a beneficial owner of such shares because of his position as a
general partner of such partnerships. Includes 10,000 shares subject to
options exercisable within 60 days of March 31, 1996.

(10) Includes 1,988,337 shares held by ALTA IV Limited Partnership and 362,730
shares held by C.V. Sofinnova Partners Five. These funds are affiliated
with Burr, Egan, Deleage & Co., of which Mr. Nohra is a Vice President. He
disclaims beneficial ownership of such shares. Includes 14,000 shares
subject to options exercisable within 60 days of March 31, 1996.

(11) Includes 1,303,918 shares held by Montgomery Medical Ventures II, of which
Mr. Weiss is a general partner of the general partner of such entity. He
may be deemed to be a beneficial owner of such shares because of his
position as a general partner of such partnership.

(12) Includes 286,355 shares subject to options and warrants exercisable within
60 days of March 31, 1996 held by executive officers and directors of the
Company.

51
<PAGE>
DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 40,000,000 shares of
Common Stock, $0.01 par value, and 1,000,000 shares of Preferred Stock, $0.01
par value.

COMMON STOCK

The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders, except that, upon giving the
legally required notice, stockholders may cumulate their votes in the election
of directors. Subject to preferences that may be applicable to any outstanding
Preferred Stock, the holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of InnerDyne, the holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior rights of Preferred Stock, if any, then
outstanding. The Common Stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
available to the Common Stock. All outstanding shares of Common Stock are fully
paid and non-assessable.

At March 31, 1996, 18,566,111 shares of Common Stock were outstanding, and
options and warrants to purchase an aggregate of 2,061,832 shares of Common
Stock were also outstanding.

The Company has agreed to issue to Cruttenden Roth Incorporated a warrant to
purchase up to 235,000 shares of Common Stock in connection with the offering.
See "Certain Transactions."

PREFERRED STOCK

The Company is authorized to issue 1,000,000 shares of undesignated
Preferred Stock. The Board of Directors has the authority to issue the
undesignated Preferred Stock in one or more series and to determine the powers,
preferences and rights and the qualifications, limitations or restrictions
granted to or imposed upon any wholly unissued shares of undesignated Preferred
Stock and to fix the number of shares constituting any series and the
designation of such series without any further vote or action by the
stockholders. The issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company without further
action by the stockholders and may adversely affect the voting and other rights
of the holders of Common Stock. At present, the Company has no plans to issue
any shares of Preferred Stock.

REGISTRATION RIGHTS OF CERTAIN HOLDERS

The holders of approximately 5,475,706 shares of Common Stock, and certain
of their transferees, are entitled to certain rights with respect to the
registration of such shares under the Securities Act. Under the terms of the
agreements between the Company and the holders of securities with registration
rights, if the Company proposes to register any of its securities under the
Securities Act, either for its own account or the account of any holder of
securities in the Company, such holders are entitled to notice of such
registration and are entitled to include shares of their Common Stock in such
registration, provided, among other conditions, that the underwriters of any
such offering shall have the right to limit the number of such shares included
in such registration.

In addition, the holders, and certain of their transferees, of approximately
5,475,706 of the shares of Common Stock described in the previous paragraph may
require the Company at any time prior to the earlier of (i) February 15, 1999 or
(ii) such date as the holder can sell all of his or her shares under Rule 144
under the Securities Act during any 90-day period, on not more than two
occasions, to file a registration statement under the Securities Act at its
expense with respect to their shares of Common Stock. The Company is required to
use its best efforts to effect such registration, subject to certain conditions
and limitations. Further, holders of Common Stock with registration rights may
require the Company to register all or a portion of their shares of Common Stock
on Form S-3, subject to certain conditions and limitations.

52
<PAGE>
CERTAIN CHARTER PROVISIONS AND DELAWARE ANTI-TAKOVER STATUTE

Provisions of the Company's Certificate of Incorporation that allow the
Company to issue Preferred Stock without any vote or further action by the
stockholders as well as the fact that the Company's Certificate of Incorporation
does not permit stockholders to cumulate votes in the election of directors may
have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of the Company.
The Company is subject to the provisions of Section 203 of the Delaware Law
("Section 203") regulating corporate takeovers. Section 203 prevents certain
Delaware corporations, including those whose securities are listed on the Nasdaq
National Market, from engaging, under certain circumstances, in a "business
combination" (which includes a merger or sale of more than 10% of the
corporation's assets) with any "interested stockholder" (a stockholder who
acquired 15% or more of the corporation's outstanding voting stock without the
prior approval of the corporation's Board of Directors) for three years
following the date that such stockholder became an "interested stockholder." A
Delaware corporation may "opt out" of Section 203 with an express provision in
its original certificate of incorporation or an express provision in its
certificate of incorporation or bylaws resulting from an amendment approved by
at least a majority of the outstanding voting shares. The Company has not "opted
out" of the provisions of Section 203. The possible issuance of Preferred Stock,
the inability of stockholders to cumulate votes in the election of directors and
provisions of Delaware law could have the effect of delaying, deferring or
preventing a change in control of the Company, including without limitation,
discouraging a proxy contest or making more difficult the acquisition of a
substantial block of the Company's Common Stock. The possible issuance of
Preferred Stock and these provisions could also limit the price that investors
might be willing to pay in the future for shares of the Company's Common Stock.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company. Its telephone number is (212) 936-5100.

LISTING

The Company's Common Stock is listed on the Nasdaq National Market under the
trading symbol "IDYN."

SHARES ELIGIBLE FOR FUTURE SALE

At March 31, 1996, the Company had 18,566,111 outstanding shares of Common
Stock. All but 6,000 of such shares (the "Restricted Shares") are freely
tradeable without restriction under the Securities Act, except for 5,832,299
shares held by "affiliates" of the Company, as that term is defined in the
Securities Act ("Affiliates"), which shares are subject to the resale provisions
of Rule 144 promulgated under the Securities Act. The Restricted Shares are
subject to the resale provisions of Rule 144, including holding period
requirements. Certain directors of the Company and their Affiliates have agreed
with the Representative of the Underwriters not to sell, directly or indirectly,
(a) any of the 5,829,690 shares owned by them for a period of 90 days after the
date of this Prospectus or (b) any shares in excess of (x) the number of shares
that could be sold under Rule 144 less (y) the number of shares, if any, sold by
such entities upon exercise of the Underwriters' over-allotment option during
the period beginning 91 days and ending 180 days after the date of this
Prospectus, in each case without the prior written consent of the Representative
of the Underwriters. The officers, other directors and certain key employees of
the Company and their Affiliates have agreed with the Representative of the
Underwriters not to sell, directly or indirectly, the approximately 91,640
shares owned by them for a period of 180 days after the date of this Prospectus
without the prior written consent of the Representative of the Underwriters.

In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated) who has beneficially owned "restricted securities,"
as that term is defined in the Securities Act, for at least two years or who is
an Affiliate, is entitled to sell, within any three-month period, a

53
<PAGE>
number of shares that does not exceed the greater of 1% of the then outstanding
shares of the Company's Common Stock (approximately 209,400 shares immediately
after this offering) or the average weekly trading volume during the four
calendar weeks preceding such sale, provided that certain public information
about the Company as required by Rule 144 is then available and the seller
complies with certain other requirements. A person who is not an Affiliate, has
not been an Affiliate within three months prior to sale and has beneficially
owned the restricted shares for at least three years is entitled to sell such
shares under Rule 144(k) without regard to any of the limitations described
above.

As of March 31, 1996, there were outstanding options to acquire 1,993,784
shares under the Company's 1987 Plan, the InnerDyne Medical, Inc. 1989 Incentive
Stock Plan and the 1991 Directors' Stock Option Plan, 1,255,553 of which shares
are subject to the lock-up agreements described above.

The Company has also agreed not to offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock for a period of 180 days
after the date of this Prospectus, without the prior written consent of the
Representative of the Underwriters, subject to certain limited exceptions.

54
<PAGE>
UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom Cruttenden Roth
Incorporated is acting as representative (the "Representative"), have agreed to
purchase from the Company the following respective number of shares of Common
Stock:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------------------------------------------------------- -----------
<S> <C>
Cruttenden Roth Incorporated...............................................................

-----------
Total.................................................................................. 2,350,000
-----------
-----------
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent. The nature of the Underwriters'
obligation is such that they are committed to purchase all shares of Common
Stock offered hereby if any of such shares are purchased. The Underwriting
Agreement contains certain provisions whereby if any Underwriter defaults in its
obligation to purchase shares, and the aggregate obligations of the Underwriters
so defaulting do not exceed 10% of the shares offered hereby, the remaining
Underwriters, or some of them, must assume such obligations.

The Representative has advised the Company that the Underwriters propose to
offer the shares of Common Stock directly to the public at the offering price
set forth on the cover of this Prospectus, and to certain dealers at such price
less a concession not in excess of $ per share. The Underwriters may allow
and such dealers may reallow a concession not in excess of $ per share to
certain other dealers. After the public offering of the shares of Common Stock,
the offering price and other selling terms may be changed by the Underwriters.

The Company and the Selling Stockholders have granted to the Underwriters an
option, exercisable no later than 45 days after the date of this Prospectus, to
purchase up to an aggregate of 352,500 additional shares of Common Stock solely
to cover over-allotments, if any, at the public offering price set forth on the
cover page of this Prospectus, less the underwriting discounts and commissions.
To the extent that the Underwriters exercise this option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage thereof which the number of shares of Common Stock to be purchased by
it shown in the above table bears to the total number of shares of Common Stock
offered hereby. If the Underwriters exercise the over-allotment option, a
majority of the Company's directors that are not affiliated with the Selling
Stockholders will determine whether such shares will be sold by the Company or
by the Selling Stockholders. The number of shares sold by the Company and the
Selling Stockholders, in the aggregate, will not exceed 352,500. The Company or
the Selling Stockholders, as the case may be, will be obligated, pursuant to the
option, to sell such shares to the Underwriters.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.

The Company has agreed to pay the Representative a nonaccountable expense
allowance equal to two percent of the aggregate Price to Public (including with
respect to shares of Common Stock underlying the over-allotment option, if and
to the extent it is exercised) set forth on the front cover of this Prospectus
for expenses in connection with this offering, of which the sum of $30,000 has
been

55
<PAGE>
paid. The Representative's expenses in excess of such allowance will be borne by
the Representative. To the extent that the expenses of the Representative are
less than such allowance, the excess may be deemed to be compensation to the
Representative.

The Company has agreed to sell to Cruttenden Roth Incorporated, for $235, a
warrant (the "Representative's Warrant") to purchase up to 235,000 shares of
Common Stock at an exercise price per share equal to 120% of the public offering
price per share set forth on the cover page of this Prospectus. The
Representative's Warrant is exercisable for a period of five years beginning one
year from the date of this Prospectus and is not transferable for a period of
one year from the date of this Prospectus except to officers of Cruttenden Roth
Incorporated or any successor to Cruttenden Roth Incorporated. The
Representative's Warrant includes a net exercise provision permitting the
holder(s) to pay the exercise price by cancellation of the exercisability of a
number of shares with a fair market value equal to the aggregate exercise price
of the Representative's Warrant. In addition, the Company has granted certain
rights to the holders of the Representative's Warrant to register the
Representative's Warrant and the Common Stock underlying the Representative's
Warrant under the Securities Act.

The Company has granted to Cruttenden Roth Incorporated a right of first
refusal for a period ending three years from the date of this Prospectus to
serve as co-manager with respect to future public or private financings of the
Company's securities, whether such securities are offered by the Company or its
principal stockholders, with the principal objective of raising capital.

Certain directors of the Company and their Affiliates have agreed with the
Representative of the Underwriters not to sell, directly or indirectly, (a) any
of the 5,829,690 shares owned by them for a period of 90 days after the date of
this Prospectus or (b) any shares in excess of (x) the number of shares that
could be sold under Rule 144 less (y) the number of shares, if any, sold by such
entities upon exercise of the Underwriters' over-allotment option during the
period beginning 91 days and ending 180 days after the date of this Prospectus,
in each case without the prior written consent of the Representative of the
Underwriters. The officers, other directors and certain key employees of the
Company and their Affiliates have agreed with the Representative of the
Underwriters not to sell, directly or indirectly, the approximately 91,640
shares owned by them for a period of 180 days after the date of this Prospectus
without the prior written consent of the Representative of the Underwriters. The
Company has agreed that it will not, without the prior written consent of
Cruttenden Roth Incorporated, offer, sell or otherwise dispose of any shares of
Common Stock, options or warrants to acquire shares of Common Stock for a period
of six months after the date of this Prospectus, except that the Company may
issue shares in connection with acquisitions and strategic commercial
transactions, grant additional options under its stock option plans, issue
shares upon the exercise of outstanding stock options and issue shares pursuant
to the Purchase Plan.

The Representative has advised the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority in excess of five percent of the Common Stock offered hereby.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Venture Law Group, A Professional Corporation, 2800 Sand Hill Road,
Menlo Park, California 94025. Certain legal matters in connection with this
offering will be passed upon for the Underwriters by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, 650 Page Mill Road, Palo Alto, California
94304.

EXPERTS

The audited financial statements and schedule of InnerDyne, Inc. as of
December 31, 1995 and 1994 and for each of the years in the three year period
ended December 31, 1995 included in this Prospectus and Registration Statement
have been included herein and in the Registration Statement

56
<PAGE>
in reliance upon the reports of KPMG Peat Marwick LLP, independent certified
public accountants appearing elsewhere herein and in the Registration Statement
and upon the authority of said firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement, of which this Prospectus constitutes a
part, under the Securities Act with respect to the shares of Common Stock
offered hereby. This Prospectus omits certain information contained in the
Registration Statement, and reference is made to the Registration Statement and
the exhibits and schedules thereto for further information with respect to the
Company and the Common Stock offered hereby. Statements contained herein
concerning the provisions of any documents are not necessarily complete, and in
each instance reference is made to the copy of such document filed as an exhibit
to the Registration Statement. Each such statement is qualified in its entirety
by such reference.

The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance
therewith files reports, proxy statements and other information with the
Commission. Reports, proxy statements and other information filed by the Company
with the Commission pursuant to the Exchange Act and the Registration Statement,
including exhibits and schedules filed therewith, may be inspected without
charge at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at 7 World Trade Center, Suite 1300,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials may be obtained from the
Public Reference Section of the Commission, Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and its public reference facilities
in New York, New York and Chicago, Illinois, at prescribed rates.

57
<PAGE>
INNERDYNE, INC.
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
FINANCIAL STATEMENTS, INNERDYNE, INC.

Report of KPMG Peat Marwick LLP, Independent Auditors.................................................... F-2

Balance Sheets as of December 31, 1995 and 1994.......................................................... F-3

Statements of Operations for the three years ended December 31, 1995..................................... F-4

Statements of Stockholders' Equity for the three years ended December 31, 1995........................... F-5

Statements of Cash Flows for the three years ended December 31, 1995..................................... F-6

Notes to Financial Statements.............................................................................. F-7

CONDENSED FINANCIAL STATEMENTS, INNERDYNE, INC. (UNAUDITED)

Condensed Balance Sheets as of March 31, 1996 and December 31, 1995...................................... F-15

Condensed Statements of Operations for the three month periods ended March 31, 1996 and 1995............. F-16

Condensed Statements of Cash Flows for the three month periods ended March 31, 1996 and 1995............. F-17

Notes to Condensed Financial Statements.................................................................. F-18
</TABLE>

F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
InnerDyne, Inc.:

We have audited the accompanying balance sheets of InnerDyne, Inc. as of
December 31, 1995 and 1994, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of InnerDyne, Inc. as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1995, in
conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP

San Francisco, California
March 15, 1996

F-2
<PAGE>
INNERDYNE, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994

ASSETS

<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................................... $ 1,720,814 $ 3,981,060
Marketable investment securities (note 4)...................................... 997,604 1,750,000
Accounts receivables, less allowance for doubtful accounts of $73,290 in 1995
and $-0- in 1994.............................................................. 735,911 229,603
Interest and other receivables................................................. 195,646 171,393
Inventories (note 5)........................................................... 585,123 393,911
Prepaid expenses............................................................... 78,959 101,305
-------------- --------------
Total current assets......................................................... 4,314,057 6,627,272
-------------- --------------
Equipment and leasehold improvements:
Equipment...................................................................... 2,473,578 1,998,608
Leasehold improvements......................................................... 135,333 375,833
-------------- --------------
2,608,911 2,374,441
Less accumulated depreciation and amortization................................... 1,660,616 1,389,533
-------------- --------------
Net equipment and leasehold improvements..................................... 948,295 984,908
Deposits......................................................................... 107,251 234,418
-------------- --------------
$ 5,369,603 $ 7,846,598
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt (note 6)................................ $ 85,058 $ 168,902
Current installments under capital leases (note 7)............................. 29,683 41,294
Accounts payable............................................................... 206,320 387,530
Accrued expenses............................................................... 852,035 891,814
-------------- --------------
Total current liabilities.................................................... 1,173,096 1,489,540
Long-term debt, excluding current installments (note 6).......................... 186,689 30,035
Obligations under capital leases, excluding current installments (note 7)........ -- 35,264
Commitments (note 7)
Stockholders' equity (note 8):
Preferred stock, $.01 par value. Authorized 1,000,000 shares; no shares issued
and outstanding in 1995 and 1994.............................................. -- --
Common stock, $.01 par value. Authorized 40,000,000 shares; issued and
outstanding 18,315,501 shares in 1995 and 16,616,302 shares in 1994........... 183,155 166,163
Additional paid-in capital..................................................... 50,442,159 47,113,977
Accumulated deficit............................................................ (46,615,496) (40,988,381)
-------------- --------------
Net stockholders' equity..................................................... 4,009,818 6,291,759
-------------- --------------
$ 5,369,603 $ 7,846,598
-------------- --------------
-------------- --------------
</TABLE>

See accompanying notes to financial statements.

F-3
<PAGE>
INNERDYNE, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993

<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Product sales.................................................... $ 4,729,651 $ 275,517 $ --
Licensing, contract and grant revenue (note 10).................. 545,409 603,392 42,821
-------------- -------------- --------------
Revenue...................................................... 5,275,060 878,909 42,821
Costs and expenses:
Cost of product sales.......................................... 3,148,915 1,939,974 489,692
Research, development, regulatory and clinical................. 2,299,311 3,951,536 5,793,455
Sales and marketing............................................ 3,895,338 2,063,123 1,107,334
General and administrative..................................... 1,779,227 2,984,926 3,417,374
-------------- -------------- --------------
Total costs and expenses..................................... 11,122,791 10,939,559 10,807,855
-------------- -------------- --------------
Operating loss............................................... (5,847,731) (10,060,650) (10,765,034)
Other income (expense):
Interest income................................................ 250,594 459,830 605,343
Interest expense............................................... (28,908) (63,511) (147,610)
Loss on asset disposal......................................... (1,070) (239,811) (51,932)
-------------- -------------- --------------
Total other income........................................... 220,616 156,508 405,801
-------------- -------------- --------------
Net loss..................................................... $ (5,627,115) $ (9,904,142) $ (10,359,233)
-------------- -------------- --------------
-------------- -------------- --------------
Net loss per share............................................... $ (.32) $ (.61) $ (.69)
-------------- -------------- --------------
-------------- -------------- --------------
Weighted average shares outstanding.............................. 17,561,480 16,196,903 15,102,710
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>

See accompanying notes to financial statements.

F-4
<PAGE>
INNERDYNE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
NOTES
ADDITIONAL RECEIVABLE NET
COMMON PAID-IN ACCUMULATED FROM STOCKHOLDERS'
STOCK CAPITAL DEFICIT STOCKHOLDERS EQUITY
--------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1992................. $ 145,436 $44,498,354 $(20,725,006) $ (16,250) $ 23,902,534
Issuance of shares upon exercise of stock
options, under employee stock purchase
plan, and for services rendered............ 2,202 185,022 -- -- 187,224
Issuance of shares for conversation of notes
and accrued interest....................... 9,728 1,926,570 -- -- 1,936,298
Net loss.................................... -- -- (10,359,233) -- (10,359,233)
--------- ----------- ------------ ----------- ------------
Balances at December 31, 1993................. 157,366 46,609,946 (31,084,239) (16,250) 15,666,823
Issuance of shares upon exercise of stock
options and under employee stock purchase
plan....................................... 6,641 133,321 -- -- 139,962
Issuance of shares for services............. 572 113,866 -- -- 114,438
Issuance of shares for conversion of notes
and accrued interest....................... 1,103 228,869 -- -- 229,972
Issuance of shares upon exercise of warrants
for cash and on a net exercise basis....... 481 27,975 -- -- 28,456
Repayment of notes receivable from
stockholders............................... -- -- -- 16,250 16,250
Net loss.................................... -- -- (9,904,142) -- (9,904,142)
--------- ----------- ------------ ----------- ------------
Balances at December 31, 1994................. 166,163 47,113,977 (40,988,381) -- 6,291,759
Issuance of shares upon exercise of stock
options and under employee stock purchase
plan....................................... 2,632 155,475 -- -- 158,107
Issuance of shares for private placement
(note 8)................................... 14,360 3,230,998 -- -- 3,245,358
Private placement expenses (note 8)......... -- (58,291) -- -- (58,291)
Net loss.................................... -- -- (5,627,115) -- (5,627,115)
--------- ----------- ------------ ----------- ------------
Balances at December 31, 1995................. $ 183,155 $50,442,159 $(46,615,496) $ -- $ 4,009,818
--------- ----------- ------------ ----------- ------------
--------- ----------- ------------ ----------- ------------
</TABLE>

See accompanying notes to financial statements.

F-5
<PAGE>
INNERDYNE, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................................................. $(5,627,115) $(9,904,142) $(10,359,233)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization of equipment and leasehold
improvements....................................................... 578,201 674,668 553,576
Amortization of intangible assets................................... -- 77,808 47,405
Amortization of discount on marketable investment securities........ (51,540) -- --
Provision for allowance on doubtful accounts........................ 73,290 -- --
Provision for obsolete inventory.................................... 43,881 -- --
Loss on asset disposal.............................................. 1,070 239,811 51,932
Expense for stock options and shares granted for services........... -- 114,438 51,750
Interest accrued on convertible note payable........................ -- 9,972 61,235
Decrease (increase) in accounts receivable, interest, and other
receivables........................................................ (603,851) (325,246) 314,079
Decrease (increase) in inventories.................................. (235,093) (254,334) 77,834
Decrease (increase) in prepaid expenses and deposits................ 149,513 (115,079) (134,839)
Increase (decrease) in accounts payable............................. (181,210) 118,459 224,401
Increase (decrease) in accrued expenses............................. (39,779) (214,698) 76,499
----------- ----------- ------------
Net cash used in operating activities............................. (5,892,633) (9,578,343) (9,035,361)
----------- ----------- ------------
Cash flows from investing activities:
Purchase of marketable investment securities.......................... (1,935,064) (2,788,934) (539,784)
Maturity of marketable investment securities.......................... 2,739,000 3,578,718 4,204,480
Proceeds from notes receivable from stockholders...................... -- 16,250 --
Capital expenditures.................................................. (542,658) (652,430) (356,353)
Proceeds from disposal of equipment and leasehold improvements........ -- 1,321 --
----------- ----------- ------------
Net cash provided by investing activities......................... 261,278 154,925 3,308,343
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of convertible notes payable................... -- 220,000 1,875,063
Proceeds from issuance of long-term debt.............................. 241,712 -- 47,327
Proceeds from issuance of common stock, net........................... 3,345,174 168,418 135,474
Principal payments under capital leases............................... (46,875) (54,760) (43,372)
Principal payments on long-term debt.................................. (168,902) (176,917) (194,075)
----------- ----------- ------------
Net cash provided by financing activities......................... 3,371,109 156,741 1,820,417
----------- ----------- ------------
Net decrease in cash and cash equivalents............................... (2,260,246) (9,266,677) (3,906,601)
Cash and cash equivalents at beginning of year.......................... 3,981,060 13,247,737 17,154,338
----------- ----------- ------------
Cash and cash equivalents at end of year................................ $ 1,720,814 $ 3,981,060 $ 13,247,737
----------- ----------- ------------
----------- ----------- ------------
Supplemental Disclosure of Cash Flow Information
Cash paid for interest.................................................. $ 28,908 $ 52,060 $ 85,447
Supplemental Schedule of Noncash Investing and Financing Activities
Capital lease obligations incurred for purchase of property and
equipment............................................................ $ -- $ -- $ 64,580
Issuance of common stock in exchange for convertible promissory notes
and/or accrued interest.............................................. $ -- $ 229,972 $ 1,936,298
</TABLE>

See accompanying notes to financial statements.

F-6
<PAGE>
INNERDYNE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993

(1) DESCRIPTION OF THE COMPANY
InnerDyne, Inc. (the Company) is engaged primarily in the development and
commercialization of access products used to perform minimally invasive surgery
(MIS) procedures. The Company markets its MIS access products domestically
through a network of direct and independent representatives, mainly to general
surgeons and gynecologists, who represent the primary medical disciplines
performing MIS procedures in the U.S. Internationally, the Company markets its
MIS products through independent distributors for resale to foreign health care
institutions. The Company intends to continue developing its radial dilation,
thermal ablation and biocompatible coatings technologies, internally or through
strategic alliances.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) CASH EQUIVALENTS

The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash equivalents
consist of money market funds and commercial paper of $1,137,013,
$3,851,990, and $13,076,518 at December 31, 1995, 1994, and 1993,
respectively.

(b) INVENTORIES

Raw materials and supplies inventories are stated at the lower of cost
or market. Finished goods are stated on the basis of accumulated
manufacturing costs, but not in excess of market (net realizable value).
Cost is determined using the first-in, first-out (FIFO) method.

Equipment and leasehold improvements are stated at cost. Depreciation
and amortization of equipment and leasehold improvements is provided using
the straight-line method over the estimated useful lives of the assets which
range from 3 to 8 years.

(d) INTANGIBLE ASSETS

Patent costs related to products and technologies still in the
development stage are expensed as incurred.

(e) REVENUE RECOGNITION

Revenues are recognized upon shipment of products.

(f) RESEARCH AND DEVELOPMENT COSTS

Research and development costs are expensed as incurred.

(g) NET LOSS PER SHARE

The Company's loss per share is based on the weighted average number of
common shares outstanding during the periods. Common stock equivalents
(stock options and warrants) have not been included in the computation as
they would not have a dilutive effect.

(h) INCOME TAXES

The Company accounts for income taxes using the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those

F-7
<PAGE>
INNERDYNE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.

(i) USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

(j) RECLASSIFICATION

Certain amounts in 1994 and 1993 have been reclassified to conform with
the 1995 presentation.

(k) FAIR VALUE DISCLOSURE

At December 31, 1995 and 1994, the book value of the Company's financial
instruments approximates fair value.

(3) MERGER
On April 28, 1994, InnerDyne, Inc. (formerly CardioPulmonics, Inc.)
completed a merger, whereby it issued 7,465,237 shares of its common stock in
exchange for all of the outstanding common and preferred stock, warrants and
retirement of certain notes payable from stockholders of InnerDyne Medical,
Inc., a privately held California corporation that was founded to develop and
manufacture proprietary medical devices used in minimally invasive surgical
procedures. In addition, CardioPulmonics, Inc. assumed outstanding options to
purchase shares of common stock of InnerDyne Medical, Inc. Subsequent to the
merger, CardioPulmonics, Inc. changed its name to InnerDyne, Inc. The merger has
been accounted for as a pooling-of-interests combination and, accordingly, the
Company's financial statements have been restated for all periods prior to the
merger to include the results of operations, financial positions and cash flows
of InnerDyne Medical, Inc.

Net revenue and net loss for the individual entities prior to the merger are
as follows:

<TABLE>
<CAPTION>
CARDIO-
PULMONICS, INNERDYNE
INC. MEDICAL, INC. COMBINED
------------- ------------- --------------
<S> <C> <C> <C>
Three months ended March 31, 1994:
Net revenue............................................ $ -- $ 28,957 $ 28,957
Net loss............................................... 1,271,409 1,350,271 2,621,680
Year ended December 31, 1993:
Net revenue............................................ $ 26,600 $ 16,221 $ 42,821
Net loss............................................... 6,471,279 3,887,954 10,359,233
</TABLE>

Merger expenses totaling $687,807 and $150,000 related to the merger with
InnerDyne Medical, Inc. were charged to expense during 1994 and 1993,
respectively.

F-8
<PAGE>
INNERDYNE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(4) MARKETABLE INVESTMENT SECURITIES
Marketable debt and equity securities are grouped into one of three
categories: held-to-maturity, trading, or available-for-sale. Held-to-maturity
securities are those securities that the Company has the ability and the intent
to hold until maturity. Trading securities are bought and held principally for
the purposes of selling them in the near term. All other securities not included
in held-to-maturity or trading are classified as available-for-sale. At December
31, 1995 and 1994, all the Company's marketable investment securities are
classified as held-to-maturity.

Held-to-maturity securities are recorded at cost, adjusted for the
amortization or accretion of premiums or discounts. Gains and losses on
investment security transactions are reported on the specific-identification
method. Dividend and interest income are recognized when earned. A decline in
the market value of any available-for-sale or held-to-maturity security below
cost that is deemed other than temporary results in a charge to earnings and the
establishment of a new cost basis for the security.

The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and fair value for securities by major security type at December 31, 1995
and 1994, were as follows:

<TABLE>
<CAPTION>
GROSS
GROSS UNREALIZED
AMORTI- UNREALIZED HOLDING
ZED COST HOLDING GAINS LOSSES FAIR VALUE
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
At December 31, 1995:
Corporate commercial paper
(due within one year)....................... $ 997,604 $ -- $ 104 $ 997,500
------------- ------------- ----------- -------------
$ 997,604 $ -- $ 104 $ 997,500
------------- ------------- ----------- -------------
------------- ------------- ----------- -------------
At December 31, 1994:
U.S. government obligations.................. $ -- $ -- $ -- $ --
Corporate bonds.............................. 1,750,000 -- 11,684 1,738,316
------------- ------------- ----------- -------------
$ 1,750,000 $ -- $ 11,684 $ 1,738,316
------------- ------------- ----------- -------------
------------- ------------- ----------- -------------
</TABLE>

There were no realized gains or losses on marketable investment securities
for the years ending December 31, 1995, 1994 and 1993.

(5) INVENTORIES
Inventories consist of the following:

<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Raw materials and supplies.................................................... $ 445,936 $ 344,289
Finished goods................................................................ 198,647 65,201
Reserve for obsolescence...................................................... (59,460) (15,579)
----------- -----------
$ 585,123 $ 393,911
----------- -----------
----------- -----------
</TABLE>

F-9
<PAGE>
INNERDYNE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(6) LONG-TERM DEBT
Long-term debt consists of the following:

<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
11.5%-16.6% installment financing agreements secured by equipment, payable in
monthly installments of $13,181 including interest through 1996.............. $ 30,035 $ 198,937
Prime plus 1.75% (10.25% at December 31, 1995) loan payable to bank, secured
by equipment, payable in monthly installments of $6,931 including interest
through 1999................................................................. 241,712 --
----------- -----------
Total long-term debt........................................................ 271,747 198,937
Less current installments..................................................... 85,058 168,902
----------- -----------
Long-term debt, excluding current installments.............................. $ 186,689 $ 30,035
----------- -----------
----------- -----------
</TABLE>

The maturities of long-term debt for the years ended December 31, are as
follows: 1996, $85,058, 1997, $66,355, 1998, $73,667, and 1999, $46,667.

In February 1996, the Company renewed its credit facility with Silicon
Valley Bank. Subject to certain covenants and conditions, the Company may borrow
up to $2,000,000 on a revolving credit basis at prime plus 1 1/4 percent based
on eligible receivables and $750,000 as a 42-month term loan at prime plus 1 3/4
percent based on eligible equipment purchases. As of December 31, 1995, the
Company had not drawn on the revolving line of credit and had drawn $241,712 on
the term loan as indicated above.

(7) LEASES
The Company leases certain of its furniture, machinery and equipment under
long-term capital leases. Obligations under capital leases represent the present
value of future noncancelable rental payments under various lease agreements.
Capitalized costs of $213,713 and accumulated amortization of $191,150 are
included in property and equipment at December 31, 1995 ($213,713 and $151,299,
respectively, in 1994). Amortization of assets held under capital leases is
included with depreciation expense.

The Company also has several noncancelable operating leases, primarily for
its facilities, that expire over the next four years. It is generally expected
that, in the normal course of business, operating leases that expire will be
renewed or replaced by other leases with similar terms. Rental expense for all
operating leases was $347,294 in 1995, $263,070 in 1994 and $193,426 in 1993.

Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of December 31, 1995 are:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- -------------
<S> <C> <C>
Year ending December 31:
1996....................................................................... $ 31,445 $ 346,160
1997....................................................................... -- 320,458
1998....................................................................... -- 286,240
1999....................................................................... -- 70,560
--------- -------------
Total minimum lease payments............................................. 31,445 $ 1,023,418
-------------
-------------
Less amount representing interest............................................ 1,762
---------
Present value of net minimum lease payments.............................. $ 29,683
---------
---------
</TABLE>

F-10
<PAGE>
INNERDYNE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(8) CAPITAL STOCK
The Company completed a private placement of securities on June 2, 1995
wherein it sold 1,435,999 shares of common stock and 287,200 warrants to
purchase common stock for cash proceeds of $3,245,358. The Company has reserved
287,200 shares of its common stock for exercise of the warrants. The warrants
(as amended) are exercisable at an exercise price of $2.90 per share and expire
on April 1, 1996.

The Company has a 1987 Stock Option Plan (the "1987 Plan") and a 1989
Incentive Stock Plan (the "1989 Plan") under which 2,650,000 and 1,453,536
shares have been reserved for issuance, respectively. The exercise price of all
granted options under the 1987 Plan and the 1989 Plan must be at least equal to
fair market value on the date of grant. The number of shares, option price and
dates the options become exercisable and expire are determined by the Board of
Directors on an option-by-option basis. As of December 31, 1995, 707,751 shares
remained available for future grant under the 1987 Plan and no shares were
available for future grant under the 1989 Plan.

The Company's Board of Directors and stockholders have adopted the 1991
Directors' Stock Option Plan (the "Directors Plan") for non-employee directors
under which a total of 300,000 shares of common stock are reserved for issuance.
Directors are granted options annually to acquire 10,000 shares which become
exercisable on the first anniversary of the date of grant. The exercise price of
options granted is the fair market value on the date of grant. As of December
31, 1995, 232,000 shares remain available for future grant.

A summary of activity under the 1987 Plan, the 1989 Plan and the Directors
Plan follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1995 1994 1993
------------------------- ------------------------- -------------------------
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year........... 1,815,898 $ .09-6.50 1,941,660 $ .04-9.25 1,526,731 $ .02-9.25
Options granted.............. 455,439 2.50-4.50 894,009 .15-4.00 1,061,621 .15-6.50
----------- ----------- -----------
2,271,337 2,835,669 2,588,352
----------- ----------- -----------
Options exercised............ 214,093 .13-1.88 657,559 .04-1.88 214,673 .13-.62
Options canceled............. 318,199 .13-4.50 362,212 .13-9.25 432,019 .02-6.50
----------- ----------- -----------
532,292 1,019,771 646,692
----------- ----------- -----------
Options outstanding at end of
year........................ 1,739,045 $ .09-6.50 1,815,898 $ .09-6.50 1,941,660 $ .04-9.25
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

At December 31, 1995, outstanding options for 582,632 shares of common stock
are exercisable. The Company charged to compensation expense $51,750 in 1993
related to issuance of stock options in 1991.

The Board of Directors adopted the Company's 1996 Stock Option Plan ("1996
Plan") in March of 1996 and plans to submit the 1996 Plan to the stockholders
for approval in May 1996. A total of 1,000,000 shares of common stock have been
reserved for issuance under the 1996 Plan. The exercise price of all incentive
stock options granted under the 1996 Plan must be at least equal to the fair
market value of the common stock on the date of grant. The exercise price of all
nonstatutory stock options granted under the 1996 Plan must be at least equal to
the fair market value of the common stock on the date of grant for grants made
to certain of the Company's executive officers and at least

F-11
<PAGE>
INNERDYNE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(8) CAPITAL STOCK (CONTINUED)
85% of the fair market value of the common stock on the date of grant for all
other persons. The optionees, number of shares subject to each option, exercise
price and expiration are determined by the Board of Directors.

The Company has an employee stock purchase plan, under which 300,000 shares
of common stock are reserved, whereby qualified employees are allowed to
purchase limited amounts of the Company's common stock at the lesser of 85
percent of the market value of the stock at the beginning or end of the offering
period. As of December 31, 1995, 61,667 shares had been issued under the
employee stock purchase plan and 238,333 shares were available for future
issuance.

(9) INCOME TAXES
The Company has reported no income tax expense or benefit for the years
ended December 31, 1995, 1994, and 1993, due to net operating losses. The
difference between the expected tax benefit and actual tax benefit is primarily
attributable to the effect of these net operating losses being offset by an
increase in the Company's valuation allowance.

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1995 and
1994, are presented below:

<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts...................................... $ 27,337 $ --
Inventories, principally due to additional costs inventoried for tax
purposes pursuant to the Tax Reform Act of 1986, and reserves for
obsolescence........................................................ 134,078 109,120
Equipment, principally due to differences in depreciation............ 132,046 68,451
Accrued expenses..................................................... 106,955 147,305
Startup and package design costs..................................... 5,830 100,261
Research and development credit carryforwards........................ 338,723 338,000
Net operating loss carryforwards..................................... 13,425,908 11,040,000
Other................................................................ 21,342 213,916
-------------- --------------
Total gross deferred tax assets.................................... 14,192,219 12,017,053
Less valuation allowance........................................... 14,192,219 12,017,053
-------------- --------------
Net deferred tax assets................................................ $ -- $ --
-------------- --------------
-------------- --------------
</TABLE>

The valuation allowance for deferred tax assets as of January 1, 1994 was
$12,865,118. The net change in the valuation allowance for the years ended
December 31, 1995 and 1994, is an increase (decrease) of $2,175,166 and
($848,065), respectively. The increase in the valuation allowance in 1995 is
primarily attributable to the increase in the net operating loss carryforwards
and credits incurred in 1995.

Subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets as of December 31, 1995, will be allocated as an income tax
benefit to be reported in the statement of operations.

F-12
<PAGE>
INNERDYNE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(9) INCOME TAXES (CONTINUED)
At December 31, 1995, the Company has net operating loss and research
activities credit carryforwards to offset future income for federal income tax
purposes approximately as follows:

<TABLE>
<CAPTION>
NET OPERATING
LOSS CARRYFORWARD RESEARCH
FOR REGULAR ACTIVITIES
INCOME TAX CREDIT
EXPIRING PURPOSES CARRYFORWARD
- ----------------------------------------------------------- ----------------- --------------
<S> <C> <C>
2001....................................................... $ 56,000 $ --
2002....................................................... 170,000 --
2003....................................................... 797,000 --
2004....................................................... 1,879,000 182,000
2005....................................................... 3,675,000 267,000
2006....................................................... 6,139,000 354,000
2007....................................................... 11,309,000 294,000
2008....................................................... 8,185,000 33,000
2009....................................................... 7,885,000 127,000
2010....................................................... 5,955,000 77,000
Estimated NOLs and credits which will expire unutilized due
to the change in ownership described below................ (10,000,000) (995,000)
----------------- --------------
$ 36,050,000 $ 339,000
----------------- --------------
----------------- --------------
</TABLE>

As a result of the merger discussed in note 3, the Company has undergone
greater than 50 percent changes of ownership under the rules of the Tax Reform
Act of 1986. Consequently, certain of the Company's net operating loss
carryforwards and research credit carryforwards will expire unutilized. Such
estimated amounts have been disclosed in the table above. The maximum amount of
the remaining net operating loss carryforwards available to offset future income
in a given year is limited to the product of the Company's value on the date of
ownership change and the federal long-term tax-exempt rate, plus any limited
carryforward not utilized in prior years. Net operating losses of approximately
$12,000,000 incurred after the merger are not subject to the change in ownership
limitation.

(10) COLLABORATIVE AND LICENSING AGREEMENTS
During 1995, the Company had collaborative development and licensing
agreements with SENKO Medical Instrument Manufacturing Co., Ltd. (SENKO) and
with CooperSurgical, Inc., (CooperSurgical) a subsidiary of The Cooper
Companies, Inc.

(a) SENKO

Effective April 5, 1994, the Company entered into a license agreement
covering its proprietary coating technology. Under the terms of the
agreement, the Company licensed its siloxane coating of microporous hollow
fibers to SENKO, in exchange for an initial payment and continuing
royalties. The Company assisted in the construction and startup of the
coating system in SENKO's manufacturing facility in Japan. The fibers coated
by means of this process will be used in SENKO's membrane oxygenator line.
The agreement covers a period of up to ten years. Revenue totaling $156,693
was recognized in 1995, $225,700 in 1994 and $0 in 1993.

(b) COOPERSURGICAL

Effective August 25, 1994, the Company entered into an agreement
covering the development and future commercialization of the Company's
proprietary thermal ablation technology for gynecological applications, such
as the control of excessive uterine bleeding. Under the terms of the
agreement, CooperSurgical funded the continuing development and clinical
trials of the

F-13
<PAGE>
INNERDYNE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(10) COLLABORATIVE AND LICENSING AGREEMENTS (CONTINUED)
proprietary technology and application system. In May 1995, CooperSurgical
discontinued funding and thus forfeited its future commercialization option
related to this technology. Revenues related to this agreement and
development effort totaling $258,683 were recognized in 1995, $335,983 in
1994 and $0 in 1993.

As a part of earlier development programs focused upon a lung assist device,
the Company also developed advanced proprietary technologies related to blood
gas exchange and blood pumping. These technologies had been licensed to an
entity, formed by former employees of the Company, Oxygenator Technology
Development, Inc. (OTD), which intended to pursue research in these areas. The
Company had a 45 percent interest in OTD and has regained all rights to these
technologies due to a failure by OTD to meet certain minimum milestones
incorporated within the agreement between the parties. The financial impact of
OTD is insignificant and accordingly disclosure of summarized financial
information is not included.

(11) 401(k) Plan
The Board of Directors has adopted a defined contribution plan (the 401(k)
Plan) intended to qualify under Section 401(k) of the internal revenue code. All
employees who are at least 21 years of age and have completed at least three
months of service with the Company are eligible to participate. Eligible
employees may elect to contribute to the plan an amount up to the statutorily
prescribed annual limit ($9,240 in 1995). The 401(k) Plan permits, but does not
require, additional matching and discretionary contributions to the 401(k) Plan
by the Company. To date the Company has made no contributions to the 401(k)
Plan.

(12) ACCOUNTING STANDARDS ISSUED NOT YET ADOPTED
In October of 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation (FASB 123). The Company is required to adopt the provisions of this
statement for years beginning after December 15, 1995. This statement encourages
all entities to adopt a fair value based method of accounting for employee stock
options or similar equity instruments. However, it also allows an entity to
continue to measure compensation cost for those plans using the intrinsic-value
method of accounting prescribed by APB opinion No. 25, Accounting for Stock
Issued to Employees (APB 25). Entities electing to remain with the accounting in
APB 25 must make pro forma disclosures of net income and earnings per share as
if the fair value based method of accounting defined in this statement had been
applied. It is currently anticipated that the Company will continue to measure
compensation costs in accordance with APB 25 and provide the disclosures
required by FASB 123.

F-14
<PAGE>

INNERDYNE, INC.
CONDENSED BALANCE SHEETS
ASSETS

<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31,
--------------- 1995
(UNAUDITED) ---------------
(*SEE NOTE)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................... $ 1,820,049 $ 1,720,814
Marketable investment securities............................................. -- 997,604
Accounts receivable.......................................................... 891,635 735,911
Interest and other receivables............................................... 40,893 195,646
Inventory.................................................................... 714,064 585,123
Prepaid expenses and other................................................... 245,024 78,959
--------------- ---------------
Total current assets....................................................... 3,711,665 4,314,057
Equipment and leasehold improvements, net...................................... 905,450 948,295
Other assets................................................................... 107,986 107,251
--------------- ---------------
$ 4,725,101 $ 5,369,603
--------------- ---------------
--------------- ---------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt....................................... $ 102,286 $ 85,058
Current obligations under capital leases..................................... 18,040 29,683
Notes payable................................................................ 71,007 --
Accounts payable............................................................. 311,917 206,320
Accrued liabilities.......................................................... 896,911 852,035
--------------- ---------------
Total current liabilities.................................................. 1,400,161 1,173,096
Long-term debt, excluding current installments................................. 230,249 186,689
Obligations under capital leases, excluding current installments............... -- --
Stockholders' equity
Common stock................................................................. 185,661 183,155
Additional paid-in-capital................................................... 51,108,768 50,442,159
Accumulated deficit.......................................................... (48,199,738) (46,615,496)
--------------- ---------------
Net stockholders' equity................................................... 3,094,691 4,009,818
--------------- ---------------
$ 4,725,101 $ 5,369,603
--------------- ---------------
--------------- ---------------
</TABLE>

- ------------------------

*Condensed from audited financial statements.

See accompanying notes to condensed financial statements

F-15
<PAGE>

INNERDYNE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE-MONTH PERIODS ENDED
------------------------------
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
<S> <C> <C>
Product, contract and licensing revenue.......................................... $ 1,582,400 $ 1,235,136
Cost of product sales.......................................................... 896,305 680,488
Research, development, regulatory and clinical................................. 579,611 582,101
Sales and marketing............................................................ 1,182,453 993,519
General and administrative..................................................... 525,336 517,766
-------------- --------------
Total costs and expenses..................................................... 3,183,705 2,773,874
-------------- --------------
Operating loss............................................................... (1,601,305) (1,538,738)
Interest/other income, net....................................................... 17,063 69,860
-------------- --------------
Net loss..................................................................... $ (1,584,242) $ (1,468,878)
-------------- --------------
-------------- --------------
Net loss per share............................................................... $ (0.09) $ (0.09)
-------------- --------------
-------------- --------------
Weighted average shares outstanding.............................................. 18,336,852 16,632,708
-------------- --------------
-------------- --------------
</TABLE>

See accompanying notes to condensed financial statements

F-16
<PAGE>

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

<TABLE>
<CAPTION>
THREE-MONTH PERIODS ENDED
------------------------------
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................................ $ (1,584,242) $ (1,468,878)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of equipment and leasehold improvements......... 131,999 166,070
Amortization of intangible assets............................................. -- --
Decrease (increase) in receivables............................................ (971) (458,057)
Decrease (increase) in inventories............................................ (128,941) (199,893)
Decrease (increase) in prepaid expenses, and other assets..................... (166,800) (212,812)
Increase (decrease) in accounts payable....................................... 105,597 (63,360)
Increase (decrease) in accrued expenses....................................... 44,876 80,633
-------------- --------------
Net cash used in operating activities....................................... (1,598,482) (2,156,297)
-------------- --------------
Cash flows from investing activities:
Maturity of (investment in) cash investments.................................... 997,604 1,250,000
Capital expenditures............................................................ (89,153) (120,936)
-------------- --------------
Net cash provided by (used in) investing activities......................... 908,451 1,129,064
-------------- --------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net..................................... 669,115 9,553
Proceeds from issuance of long-term debt........................................ 85,533 --
Proceeds from short-term borrowings............................................. 89,603 108,680
Principal payments on long-term debt............................................ (24,745) (35,571)
Principal payments under capital leases......................................... (11,643) (13,063)
Principal payments on short-term debt........................................... (18,597) (10,660)
-------------- --------------
Net cash provided by financing activities................................... 789,266 58,939
-------------- --------------
Net increase (decrease) in cash and cash equivalents.............................. 99,235 (968,294)
Cash and cash equivalents at beginning of period.................................. 1,720,814 3,981,060
-------------- --------------
Cash and cash equivalents at end of period........................................ $ 1,820,049 $ 3,012,766
-------------- --------------
-------------- --------------
Supplemental disclosure of cash flow information:
Cash paid for interest.......................................................... $ 8,744 $ 5,839
</TABLE>

See accompanying notes to condensed financial statements

F-17
<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 accruals) necessary for a fair presentation of the results
of such periods. The results of operations for any interim period are not
necessarily indicative of results for the respective full year. These condensed
financial statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) for the three month period ended
March 31, 1996 should be read in conjunction with the audited financial
statements and notes thereto and MD&A included elsewhere in this Prospectus.

(2) INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Raw materials and supplies........................................ $ 527,863 $ 404,800
Finished goods.................................................... 186,201 180,323
----------- ------------
$ 714,064 $ 585,123
</TABLE>

F-18
<PAGE>

A picture of four of InnerDyne's STEP products.

InnerDyne's broad STEP product line utilizes its proprietary radial dilation
technology.

A pictorial depiction of InnerDyne's Radially Expanding Dilator, which has
accessed an organ within the abdominal cavity.

InnerDyne's Radially Expanding Dilator is designed to enable access to organs
deep within the abdominal cavity.
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------

NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary............................ 3
Risk Factors.................................. 5
The Company................................... 14
Use of Proceeds............................... 14
Price Range of Common Stock................... 15
Dividend Policy............................... 15
Capitalization................................ 16
Dilution...................................... 17
Selected Financial Data....................... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 19
Business...................................... 23
Management.................................... 41
Certain Transactions.......................... 48
Principal and Selling Stockholders............ 49
Description of Capital Stock.................. 52
Shares Eligible for Future Sale............... 53
Underwriting.................................. 55
Legal Matters................................. 56
Experts....................................... 56
Additional Information........................ 57
Index to Financial Statements................. F-1
</TABLE>

------------------------

2,350,000 SHARES

[LOGO]
COMMON STOCK

----------------------

PROSPECTUS

----------------------

CRUTTENDEN ROTH
INCORPORATED

, 1996

- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Company in connection with the sale of
Common Stock being registered. All amounts are estimates except the registration
fee and the NASD filing fee.

<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
-----------
<S> <C>
Registration Fee................................................................. $ 3,293
NASD Filing Fee.................................................................. 1,455
Nasdaq Listing Fee............................................................... 17,500
Printing......................................................................... 100,000
Legal Fees and Expenses.......................................................... 150,000
Accounting Fees and Expenses..................................................... 75,000
Blue Sky Fees and Expenses....................................................... 10,000
Transfer Agent and Registrar Fees................................................ 5,000
Representative's nonaccountable expense allowance................................ 182,125
Miscellaneous.................................................................... 30,627
-----------
Total........................................................................ $ 575,000
-----------
-----------
</TABLE>

ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS

Section 145 of the General Corporation Law of the State of Delaware (the
"Delaware Law") authorizes a court to award, or a corporation's Board of
Directors to grant, indemnification to directors and officers in terms
sufficiently broad to permit such indemnification under certain circumstances
for liabilities (including reimbursement for expenses incurred) arising under
the Securities Act. Article Tenth of the Registrant's Amended and Restated
Certificate of Incorporation (Exhibit 3.1 hereto) and Article VI of the
Registrant's Bylaws (Exhibit 3.2 hereto) provide for indemnification of its
directors, officers, employees and other agents to the maximum extent permitted
by the Delaware Law. In addition, the Registrant has entered into
Indemnification Agreements (Exhibit 10.6 hereto) with its officers and
directors. Reference is also made to Section 8 of the Underwriting Agreement
contained in Exhibit 1.1 hereto, indemnifying officers and directors of the
Registrant against certain liabilities.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

(a) Since January 1, 1993, the Registrant issued and sold (without payment
of any selling commission to any person) the following unregistered securities:

(1) In June 1995, the Registrant issued 1,435,999 shares of its Common
Stock and warrants to purchase 287,200 shares of its Common Stock to 24
purchasers for aggregate gross proceeds of $3,245,358.

(2) In January 1996, the Registrant issued 6,000 shares of its Common
Stock to a single entity in connection with a license agreement with such
entity. The Registrant did not receive any cash proceeds from such issuance.

(3) 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 total proceeds to the Registrant of $704,568.

(4) In May 1996, the Registrant issued 166,667 shares of its Common
Stock to a single entity in connection with a license agreement with such
entity, for an aggregate purchase price of $500,001

II-1
<PAGE>
(b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).

The issuances of the securities set forth in Item 15(a) were deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2) of
such Act as transactions by an issuer not involving any public offering. The
recipients of securities in each such transaction represented their intentions
to acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof and appropriate legends where
affixed to the securities issued in such transactions. All recipients had
adequate access, through their relationships with the Company, to information
about the Registrant.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE

(a) Exhibits

II-2
<PAGE>
<TABLE>
<C> <S>
10.27(9)(11) Licensing, Development and Manufacturing Agreement dated as of February 2, 1996 between
the Registrant and EndoTex Interventional Systems, Inc.
10.28(9)(11) National Contract dated October 1995 between the Registrant and Surgical Care Affiliates,
Inc.
10.29(9)(11) License Agreement dated as of January 1, 1996 between the Registrant and Alliance of
Children's Hospitals, Inc.
10.30*(9) Consulting Agreement dated as of September 1, 1995 between the Registrant and Don Murray &
Associates, Inc. and Medical Contracts Associates.
10.31*(9) Letter Agreement with Robert A. Stern dated as of January 10, 1996.
10.32+ Letter Agreement with Daniel J. Genter dated as of March 13, 1996.
10.33+ Waiver and Amendment to Series B Preferred Stock Purchase Agreement, dated as of March 27,
1996, by and among the Company and certain investors.
10.34+ Form of Representative's Warrant Agreement to be entered into by the Registrant and
Cruttenden Roth Incorporated in connection with the offering.
10.35(11)(12) Technology Development, Transfer and Licensing Agreement dated as of April 17, 1996
between the Registrant and Boston Scientific Corporation.
10.36(12) Common Stock Purchase Agreement dated as of April 17, 1996 between the Registrant and
Boston Scientific Corporation.
23.1 Consent of Independent Certified Public Accountants (see page II-6).
23.2+ Consent of Counsel (included in Exhibit 5.1).
24.1+ Power of Attorney.
</TABLE>

- ------------------------
*Management compensatory plan or arrangement.

+Previously filed.

(1) Incorporated by reference to exhibits filed in response to Item 16(a),
"Exhibits," of the Registrant's Registration Statement on Form S-1, as
amended (File No. 33-44361), filed December 4, 1991.

(2) Incorporated by reference to exhibits filed in response to Item 14(a)(3),
"Exhibits," of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1992.

(3) Incorporated by reference to exhibits filed in response to Item 6,
"Exhibits and Reports on Form 8-K," of the Registrant's Quarterly Report on
Form 10-Q for quarterly period ended September 30, 1993.

(4) Incorporated by reference to exhibits filed in response to Item 21,
"Exhibits and Financial Statement Schedules," of the Registrant's
Registration Statement on Form S-4, as amended (File No. 33-74624), filed
January 31, 1994.

(5) Incorporated by reference to exhibits filed in response to Item 6,
"Exhibits and Reports on Form 8-K," of the Registrant's Quarterly Report on
Form 10-QSB for the quarterly period ended June 30, 1994.

(6) Incorporated by reference to exhibits filed in response to Item 6 "Exhibits
and Reports on Form 8-K," of the Registrant's Quarterly Report on Form
10-QSB for the quarterly period ended September 30, 1994.

II-3
<PAGE>
(7) Incorporated by reference to exhibits filed in response to Item 13,
"Exhibit List and Reports on Form 8-K," of the Registrant's Annual Report
on Form 10-KSB for the year ended December 31, 1994.

(8) Incorporated by reference to exhibits filed in response to Item 6,
"Exhibits and Reports on Form 8-K" of the Registrant's Quarterly Report on
Form 10-QSB for the Quarterly period ended June 30, 1995.

(9) Incorporated by reference to exhibits filed in response to Item 13,
"Exhibit List and Reports on Form 8-K," of the Registrant's Annual Report
on Form 10-KSB for the year ended December 31, 1995.

(10) Confidential treatment granted for portions of this exhibit by order of
the Securities and Exchange Commission.

(11) Confidential treatment requested.

(12) Incorporated by reference to exhibits filed in response to Item 7,
"Financial Statements and Exhibits," of the Registrant's Current Report on
Form 8-K dated April 17, 1996.

(b) Financial Statement Schedule

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.

ITEM 17. UNDERTAKINGS

The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act, and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered hereunder,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.

II-4
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Sunnyvale, State of
California, on May 9, 1996.

INNERDYNE, INC.

By: /s/ ROBERT A. STERN
-----------------------------------
Robert A. Stern
VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ----------------------------------------- ----------------

<C> <S> <C>
WILLIAM G. MAVITY*
------------------------------------------- President, Chief Executive Officer and May , 1996
William G. Mavity Director (Principal Executive Officer)

/s/ ROBERT A. STERN Vice President and Chief Financial
------------------------------------------- Officer (Principal Financial and May , 1996
Robert A. Stern Accounting Officer)

EDWARD W. BENECKE*
------------------------------------------- Director May , 1996
Edward W. Benecke

ROBERT M. CURTIS*
------------------------------------------- Director May , 1996
Robert M. Curtis

EUGENE J. FISCHER*
------------------------------------------- Director May , 1996
Eugene J. Fischer

GUY P. NOHRA*
------------------------------------------- Director May , 1996
Guy P. Nohra

STEVEN N. WEISS*
------------------------------------------- Director May , 1996
Steven N. Weiss

*By: /s/ ROBERT A. STERN
---------------------------------------
Robert A. Stern
ATTORNEY-IN-FACT
</TABLE>

II-5
<PAGE>
EXHIBIT 23.1

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We consent to the use of our report dated March 15, 1996 included herein and
to the reference to our firm under the heading "Experts" in the prospectus.

KPMG Peat Marwick LLP

San Francisco, California
May 9, 1996

II-6
<PAGE>
SCHEDULE II

INNERDYNE, INC.

VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
DEDUCTIONS
ADDITIONS -------------
----------- ACCOUNTS
BALANCE AT CHARGED TO RECEIVABLE BALANCE AT
BEGINNING COSTS AND AND INVENTORY END OF
OF PERIOD EXPENSES CHARGED OFF PERIOD
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1995:
Allowance for doubtful accounts.......................... $ 0 $ 73,290 $ -- $ 73,290
Inventory reserves....................................... 15,579 43,881 -- 59,460
Year ended December 31, 1994:
Allowance for doubtful accounts.......................... 14,770 -- 14,770 --
Inventory reserves....................................... 187,556 28,236 200,213 15,579
Year ended December 31, 1993:
Allowance for doubtful accounts.......................... 39,330 -- 24,560 14,770
Inventory reserves....................................... 103,000 185,442 100,886 187,556
</TABLE>

- ------------------------

Schedules not included above have been omitted because the financial
information required to be set forth therein is not applicable or is shown in
the financial statements or notes thereto.

S-1
<PAGE>
EXHIBIT INDEX

<TABLE>
<C> <S>
1.1+ Form of Underwriting Agreement.
3.1 (7) Restated Certificate of Incorporation of Registrant.
3.2 (2) Bylaws of Registrant.
5.1+ Opinion of Venture Law Group.
10.1 *(4) 1987 Stock Option Plan, as amended.
10.2 *(8) 1991 Directors' Stock Option Plan, as amended.
10.3 *(8) 1991 Employee Stock Purchase Plan, as amended.
10.4 (1) Purchase Agreement (Series C) dated as of June 26, 1990, as amended.
10.6 (1) Form of Indemnification Agreement between the Registrant and its officers and directors.
10.7 *(1) Defined Contribution "401(k)" Plan as amended January 1, 1990.
10.8 (1) Equipment Financing Agreement dated as of June 1, 1990 between Lease Management Services,
Inc. and the Registrant.
10.9 (2) Lease dated June 1989 between the Registrant and William J. Lowenberg.
10.12*(2) Form of Nondisclosure and Consulting Agreement with Herbert G. Taus.
10.13*(3) Letter Agreement with William G. Mavity.
10.14*(4) Consulting Agreement with Robert M. Curtis dated January 12, 1994.
10.16(5) Lease Extension with BSL Associates.
10.17(5) Lease Agreements with QAD Associates.
10.18(5)(10) Licensing Agreement with SENKO Medical Instrument Mfg. Co., Ltd.
10.19*(5) InnerDyne Medical, Inc. 1989 Incentive Stock Plan.
10.20*(5) Interventional Thermodynamics Inc. 401(k) Plan.
10.22(6)(10) License and Development Agreement dated as of August 25, 1994 by and among InnerDyne,
Inc., InnerDyne Medical, Inc. and CooperSurgical, Inc.
10.23(7) Loan and Security Agreement and Collateral Assignment, Patent Mortgage and Security
Agreement dated as of February 23, 1995 between the Registrant and Silicon Valley Bank.
10.24(8) Common Stock and Warrant Purchase Agreement dated as of June 2, 1995 by and among the
Registrant and the purchasers named therein, including form of Common Stock Warrant.
10.25(9) Amendment to Loan and Security Agreement dated as of February 29, 1996 between the
Registrant and Silicon Valley Bank.
10.26*(9) 1996 Stock Option Plan.
10.27(9)(11) Licensing, Development and Manufacturing Agreement dated as of February 2, 1996 between
the Registrant and EndoTex Interventional Systems, Inc.
10.28(9)(11) National Contract dated October 1995 between the Registrant and Surgical Care Affiliates,
Inc.
10.29(9)(11) License Agreement dated as of January 1, 1996 between the Registrant and Alliance of
Children's Hospitals, Inc.
10.30*(9) Consulting Agreement dated as of September 1, 1995 between the Registrant and Don Murray &
Associates, Inc. and Medical Contracts Associates.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.31*(9) Letter Agreement with Robert A. Stern dated as of January 10, 1996.
10.32+ Letter Agreement with Daniel J. Genter dated as of March 13, 1996.
10.33+ Waiver and Amendment to Series B Preferred Stock Purchase Agreement, dated as of March 27,
1996, by and among the Company and certain investors.
10.34+ Form of Representative's Warrant Agreement to be entered into by the Registrant and
Cruttenden Roth Incorporated in connection with the offering.
10.35(11)(12) Technology Development, Transfer and Licensing Agreement dated as of April 17, 1996
between the Registrant and Boston Scientific Corporation.
10.36(12) Common Stock Purchase Agreement dated as of April 17, 1996 between the Registrant and
Boston Scientific Corporation.
23.1 Consent of Independent Certified Public Accountants (see page II-6).
23.2+ Consent of Counsel (included in Exhibit 5.1).
24.1+ Power of Attorney.
</TABLE>

- ------------------------
*Management compensatory plan or arrangement.

+Previously filed.

(1) Incorporated by reference to exhibits filed in response to Item 16(a),
"Exhibits," of the Registrant's Registration Statement on Form S-1, as
amended (File No. 33-44361), filed December 4, 1991.

(2) Incorporated by reference to exhibits filed in response to Item 14(a)(3),
"Exhibits," of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1992.

(7) Incorporated by reference to exhibits filed in response to Item 13,
"Exhibit List and Reports on Form 8-K," of the Registrant's Annual Report
on Form 10-KSB for the year ended December 31, 1994.

(9) Incorporated by reference to exhibits filed in response to Item 13,
"Exhibit List and Reports on Form 8-K," of the Registrant's Annual Report
on Form 10-KSB for the year ended December 31, 1995.

(10) Confidential treatment granted for portions of this exhibit by order of
the Securities and Exchange Commission.

(11) Confidential treatment requested.

(12) Incorporated by reference to exhibits filed in response to Item 7,
"Financial Statements and Exhibits," of the Registrant's Current Report on
Form 8-K dated April 17, 1996.