<PAGE>

                                UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                   FORM 10-Q


[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     For the quarterly period ended March 31, 2001

                                       or

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     For the transition period from _________________ to _________________


                        Commission File Number:  0-26082


                                 VIDAMED, INC.
             (exact name of registrant as specified in its charter)



                Delaware                              77-0314454
     (State or other jurisdiction of       (IRS Employer Identification No.)
     incorporation or organization)


                             46107 Landing Parkway
                               Fremont, CA  94538
                    (Address of principal executive offices)

                                 (510) 492-4900
              (Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X]  Yes       [_]  No

The number of outstanding shares of the registrant's Common Stock, $.001 par
value, was 35,098,112 as of March 31, 2001.

                                                                    Page 1 of 15
<PAGE>

                                 VIDAMED, INC.

                                     INDEX
<TABLE>
<CAPTION>

PART I.    FINANCIAL INFORMATION                                           Page
<S>        <C>                                                             <C>

Item 1.    Condensed Consolidated Financial Statements - unaudited

           Condensed consolidated balance sheets - March 31, 2001
             and December 31, 2000                                          3

           Condensed consolidated statements of operations - three months
             ended March 31, 2001 and 2000                                  4

           Condensed consolidated statements of cash flows - three months
             ended March 31, 2001 and 2000                                  5

           Notes to condensed consolidated financial statements             6

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

Item 3     Quantitative and Qualitative Disclosure About Market Risk       14


PART II.   OTHER INFORMATION

Item 5.    Other Information                                               15

Item 6.    Exhibits and Reports on Form 8-K                                15


Signatures                                                                 15
</TABLE>

                                                                    Page 2 of 15
<PAGE>

ITEM 1: FINANCIAL STATEMENTS


                                 VidaMed, Inc.
                     Condensed Consolidated Balance Sheets
                                (In thousands)

<TABLE>
                                                            March 31, 2001         December 31, 2000
                                                        --------------------     -------------------
                                                             (Unaudited)                  (*)
<S>        <C>                                            <C>                      <C>

Assets
Current assets:
     Cash and cash equivalents                                     $   6,601               $   6,491
     Short-term investments                                            5,120                   9,060
     Accounts receivable, net                                          1,141                     800
     Inventories                                                       1,174                     649
     Other current assets                                                361                     389
                                                        --------------------     -------------------
           Total current assets                                       14,397                  17,389

     Property and equipment, net                                       2,035                   1,898
     Other assets, net                                                    97                      99
                                                        --------------------     -------------------
           Total assets                                            $  16,529               $  19,386
                                                        ====================     ===================


Liabilities and stockholders' equity
Current liabilities:
     Notes payable, current                                        $   1,447               $   1,776
     Accounts payable                                                  1,375                     283
     Accrued liabilities                                               2,276                   2,821
                                                        --------------------     -------------------
           Total current liabilities                                   5,098                   4,880

     Notes payable, long-term                                              -                       -

Stockholders' equity:
     Capital stock                                                   124,864                 124,347
     Accumulated deficit                                            (113,433)               (109,841)
                                                        --------------------     -------------------
           Total stockholders' equity                                 11,431                  14,506
                                                        --------------------     -------------------
           Total liabilities and stockholder's equity              $  16,529               $  19,386
                                                        ====================     ===================
</TABLE>

* The Balance Sheet at December 31, 2000 has been derived from the audited
  financial statements at that date but does not include all of the information
  and footnotes required by generally accepted accounting principles for
  complete financial statements.

                            See accompanying notes.

                                                                    Page 3 of 15
<PAGE>

                                 VidaMed, Inc.
                Condensed Consolidated Statement of Operations
                    (In thousands except per share amounts)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                          Three Months Ended March 31,
                                                ---------------------------------------------
                                                         2001                     2000
                                                --------------------      -------------------
<S>                                             <C>                       <C>
Revenues                                                     $ 2,269                  $ 2,524

Cost of products sold                                          1,039                      767
                                                 --------------------      -------------------
        Gross profit                                           1,230                    1,757

Operating expenses:
Research and development                                         842                      783
Selling, general and administrative                            3,416                    3,265
                                                --------------------      -------------------
        Total operating expenses                               4,258                    4,048

                                                --------------------      -------------------
        Loss from operations                                  (3,028)                  (2,291)

Other income, net                                                356                      153
                                                --------------------      -------------------
Net loss                                                     $(2,672)                 $(2,138)
                                                ====================      ===================
Basic and diluted net loss per share                          $(0.08)                  $(0.07)
                                                ====================      ===================
Shares used in computing basic and diluted
  net loss per share                                          35,021                   28,936
                                                ====================      ====================
</TABLE>
                             See accompanying notes.


                                                                    Page 4 of 15
<PAGE>

                                VidaMed, Inc.
               Condensed Consolidated Statement of Cash Flows
                               (In thousands)
                                 (Unaudited)
<TABLE>
<CAPTION>
                                                                                 Three Months Ended March 31,
                                                                        -----------------------------------------------
                                                                                2001                     2000
                                                                        ----------------------     --------------------
<S>                                                                     <C>                        <C>
Cash flows from operating activities:
    Net loss                                                                           $(2,672)                 $(2,138)
    Adjustments to reconcile net loss to net cash
      used in operating activities:
        Depreciation and amortization                                                      287                      380
        Amortization of deferred compensation                                               20                        -
        Realized gain on sales of short-term investments                                  (413)                       -
        Changes in current assets and liabilities:
            Accounts receivable                                                           (341)                    (310)
            Inventory                                                                     (525)                      66
            Other current assets                                                            28                      141
            Other assets                                                                     2                       65
            Accounts payable                                                             1,092                      107
            Accrued liabilities                                                           (545)                    (379)
            Deferred revenue                                                                 -                       67
                                                                        ----------------------     --------------------
Net cash used in operating activities                                                   (3,067)                  (2,001)
                                                                        ----------------------     --------------------
Cash flows from investing activities:
    Expenditures for property and equipment                                               (424)                    (789)
    Proceeds from the sale of short-term investments                                     3,413                        -
    Purchases of short-term investments                                                      -                   (8,777)
                                                                        ----------------------     --------------------
Net cash provided by (used in) investing activities                                      2,989                   (9,566)
                                                                        ----------------------     --------------------
Cash flows from financing activities:
    Principal payments of notes payable                                                   (329)                    (205)
    Net cash proceeds from issuance of common stock                                        517                   12,420
                                                                        ----------------------     --------------------
Net cash provided by financing activities                                                  188                   12,215
                                                                        ----------------------     --------------------

Net increase (decrease) in cash and cash equivalents                                       110                      648
Cash and equivalents at the beginning of the period                                      6,491                    2,748
                                                                        ----------------------     --------------------
Cash and equivalents at the end of the period                                          $ 6,601                  $ 3,396
                                                                        ======================     ====================

Supplemental disclosure of cash flows information:
Cash paid for interest                                                                 $    50                  $   153
                                                                        ======================     ====================
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
                            See accompanying notes.

                                                                    Page 5 of 15
<PAGE>

                                 VIDAMED, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2001
                                  (Unaudited)

1.  Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of
VidaMed, Inc. (the "Company" or "VidaMed") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions for Form 10-Q and Rule 10 of Regulation S-X.  The balance
sheet as of March 31, 2001 and the statements of operations for the three months
ended March 31, 2001 and 2000, and the statements of cash flows for the three
months ended March 31, 2001 and 2000, are unaudited but include all adjustments
(consisting of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the financial position at such date and the
operating results and cash flows for those periods.  Certain information
normally included in financial statements and related footnotes prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission.  The accompanying financial statements should be read in conjunction
with the financial statements and notes included in the Company's annual report
on Form 10-K for the year ended December 31, 2000, filed with the Securities and
Exchange Commission.

Certain amounts have been reclassified for the three months ended March 31, 2000
to conform to the current quarter's presentation.  These reclassifications did
not impact the Company's net loss from operations.

Results for any interim period shown in this report are not necessarily
indicative of results to be expected for any other interim period or for the
entire year.


2.  Net Loss Per Share

Basic and diluted net loss per share is computed using the weighted-average
number of shares of common stock outstanding during the periods presented.
Diluted net loss per share is computed based on the weighted average number of
shares of our common stock and common equivalent shares (stock options and
warrants to purchase common stock) if dilutive. As the Company has incurred
losses from operations in each of the periods presented, there is no difference
between basic and diluted net loss per share amounts. As of March 31, 2001, we
had 4,868,862 options outstanding under employee and director plans. The options
will be included in the calculation at such time as the effect is no longer
anti-dilutive, as calculated using the treasury stock method.


3.   Inventories

Inventories are stated at the lower of cost (determined using the first-in,
first-out method) or market value.  Inventories at March 31, 2001 and December
31, 2000 consist of the following (in thousands):

<TABLE>
<CAPTION>
                            March 31,  December 31,
                              2001         2000
                            ---------  ------------
         <S>                <C>        <C>
         Raw materials      $     378       $   120
         Work in process          128             5
         Finished goods           668           524
                            ---------  ------------
                            $   1,174       $   649
                            =========  ============
</TABLE>

                                                                    Page 6 of 15
<PAGE>

4.  Notes Payable

In October 1998, we finalized a $5.5 million debt facility with Transamerica
Technology Finance, a division of Transamerica Corporation.  The facility is
secured by the Company's assets and consists of a revolving accounts receivable-
based credit line of up to $3 million and a $2.5 million equipment term loan.
The term loan was funded in full as of December 31, 1998, at an interest rate of
12% per year.  Repayment of that loan is amortized over a three-year period,
with the first monthly payment having been made in December 1998 and continuing
monthly thereafter.  As of March 31, 2001, we borrowed approximately $741,000
against the revolving accounts receivable-based line at a rate of 10.5% per
year.

In January 2001, our debt financing with Transamerica automatically renewed.


5.  Comprehensive Income (Loss)

We follow Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (Statement 130).  Statement 130 establishes new rules for
the reporting and display of comprehensive income and its components.  Statement
130 requires unrealized gains or losses on our available-for-sale securities and
foreign currency translation adjustments, to be included in other comprehensive
income (loss).  During the three months ended March 31, 2000, the total
comprehensive loss was not materially different from the net loss.

During the three months ended March 31, 2001, the Company's total comprehensive
loss was $3,198,000 compared to its net loss of $2,672,000.  As a result of
equity investments acquired through a 1994 cross licensing agreement, the
Company had an unrealized gain of $1,148,000 at December 31, 2000.  During the
quarter ended March 31, 2001, we sold a portion of the investment, realizing a
gain of $413,000 and the fair market value of the unsold portion decreased by
$526,000.


6.  Common Stock

During the three months ended March 31, 2001, we issued 141,615 shares of common
stock upon the exercise of outstanding warrants, an additional 47,152 shares
under our stock option plans and 76,308 shares under our employee stock purchase
plan.


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

The following is a discussion and analysis of VidaMed's consolidated financial
condition and results of operations for the three months ended March 31, 2001
and 2000.  We also discuss certain factors that may affect our prospective
financial condition and results of operations.  This section should be read in
conjunction with the Condensed Consolidated Financial Statements and related
Notes in Item 1 of this report and the Company's Annual Report on Form 10-K for
the year ended December 31, 2000, which has been filed with the Securities and
Exchange Commission and is available from the Company at no charge.


Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements.  For
this purpose, any statements contained in this Quarterly Report on Form 10-Q
that are not statements of historical fact may be deemed to be forward-looking
statements.  You can identify forward-looking statements by those that are not
historical in nature, particularly those that use terminology such as "may,"
"will," "should," "expects," "anticipates," "contemplates," "estimates,"
"believes," "plans," "projected," "predicts," "potential" or "continue" or the
negative of these or similar

                                                                    Page 7 of 15
<PAGE>

terms. In evaluating these forward-looking statements, you should consider
various factors, including the risk factors listed under the heading "Certain
Important Factors" and in VidaMed's other filings with the Securities and
Exchange Commission and in material incorporated by reference into those
filings. These factors may cause our actual results to differ materially from
any forward-looking statement.


Overview

Since its founding in 1992, VidaMed has been engaged in the design, development
and marketing of urological systems primarily focused on the treatment of the
enlarged prostate or benign prostatic hyperplasia, commonly known as BPH.
International sales of the patented TUNA system commenced in late 1993, and
commercial sales began in the United States in late 1996, after receiving FDA
clearance. In 1997, the TUNA system was sold to office-based urology practices
in the U.S., assuming that after receiving FDA clearance, that third party
reimbursement, including Medicare, would be approved for those locations.   In
mid-1998, Medicare announced that approval of any new office-based or ambulatory
surgery center procedure, would be delayed until at least mid-2000, due to year
2000 compliance issues. As a result, Medicare reimbursement for the TUNA
procedure was made available only for procedures performed in hospital-based
settings, on a reasonable cost basis, and required individual state-by-state
approval.  Starting in late 1998 and through 2000, we focused our sales and
marketing efforts on obtaining the required individual state Medicare
reimbursement approvals and implementing a new U.S. hospital-based "fee-per-use"
sales and marketing model.  As of March 31, 2001, 49 states had approved
hospital-based Medicare reimbursement coverage for the TUNA procedure.  Under
the reasonable cost basis method of reimbursement, we charged the hospital a
fee-per-use charge of approximately $2,600 for each TUNA procedure performed,
and combined with other direct and indirect overhead costs the hospital incurs
in conducting the TUNA procedure, the hospital was reimbursed by Medicare for
these reasonable costs.  In addition to the hospital, the urologist that
performs the TUNA procedure was reimbursed by Medicare approximately $600 per
procedure.

In August 2000, the U.S. Health Care Financing Administration, or HCFA, which
administers Medicare reimbursement, replaced the reasonable cost basis
reimbursement for outpatient hospital-based procedures, like the TUNA procedure,
with a new fixed rate or "prospective payment system."  Under this new method of
reimbursement, a hospital receives a fixed reimbursement of approximately $1,875
for each TUNA procedure performed in its facility, this rate can be higher or
lower depending on a wage index factor for each hospital.  The urologist
performing the TUNA procedure continues to be reimbursed approximately $600 per
procedure.  With this change in reimbursement, we continue to market and sell
the TUNA procedure to hospitals on a fee-per-use basis, but our fee-per-use
pricing has been reduced.

In July 2000, HCFA published new Medicare payment rates and a schedule for
implementing minimally invasive heat therapies for the treatment of BPH in the
urologist's office.  Coverage of the TUNA procedure was included in the ruling,
which became effective in January 2001. The approximate reimbursement rate
(inclusive of physician's fee) for the TUNA procedure in the urologist's office
is $2,455 in 2001 and $3,043 in 2002.

In February 2001, we received FDA clearance for our new TUNA "Precision" office
system, which was specifically designed to treat PBH patients in the physicians'
office.  We anticipate that the demand for the TUNA procedure will increase as
we expand the TUNA treatment from the outpatient hospital setting to the
convenience and control of physicians' offices.  Our goal is to establish the
TUNA system as a global standard of care for the treatment of BPH.  Our business
strategy to achieve this goal is to continue to support our existing hospital-
based customers, aggressively promote our product to the physician office-based
market and focus our marketing and sales efforts on patient education and
physician support.

                                                                    Page 8 of 15
<PAGE>

Results of Operations

Net revenue for the three months ended March 31, 2001 was $2,269,000.  A
decrease of $255,000 or 10% from $2,524,000 for the same period in 2000.  While
procedure volume increased, the decrease in revenue is primarily due to the
reduction of our average selling price resulting from the implementation of the
HCFA prospective payment system and the introduction of in-office reimbursement,
which became effective January 1, 2001, at rates less than the "cost plus"
hospital reimbursement rates.  Net revenue in the first quarter of 2001
increased 40% from $1,622,000 in the three months ended December 31, 2000.  The
difference is primarily due to a 47% increase in U.S. procedure volume.

Cost of product sold for the three months ended March 31, 2001 was $1,039,000,
an increase of 35% or $272,000 from $767,000 the three months ended March 31,
2000.  The increase is a result of increased unit sales due to higher procedure
volume.

Gross margin expressed as a percentage of sales in the three months ended March
31, 2001 was 54%, down from 70% for the three months ended March 31, 2000. This
decrease in gross margin is primarily attributed to the reduction of our average
selling price resulting from the implementation of the prospective payment
system.  Gross profit for the for the three months ended March 31, 2001 was
$1,230,000 compared to $1,757,000 for the comparable period in 2000.

Gross profit for the three months ended December 31, 2000 was $751,000.  This
increase of  $479,000 for the quarter ended March 31, 2001, is primarily
attributed to increased volume.

Research and development (R&D) expenses included expenditures for regulatory
compliance and clinical trials.  Clinical trial costs consisted largely of
payments to clinical investigators, product for clinical trials, and costs
associated with initiating and monitoring clinical trials.  R&D expenses
increased 8% to $842,000 in the three months ended March 31, 2001, from $783,000
in the three months ended March 31, 2000.  R&D expenses for the first quarter of
2001 increased $60,000 from $782,000 in the three months ended December 31,
2000.  The increase was primarily due to increased level of spending associated
with the introduction of our new "Precision" product.

Selling, general and administrative (SG&A) expenses for the three months ended
March 31, 2001 was $3,416,000, an increase of less than 5%, compared to 2000
expenditures to $3,265,000 in the three months ended March 31, 2000. SG&A
expenses for the first quarter of 2001 increased $70,000 from $3,346,000 in the
three months ended December 31, 2000. These increases were due to increases in
sales training and tools necessary to successfully market and service the in-
office market, which was approved by HCFA effective January 1, 2001.

Other income is primarily composed of gains on the sale of short term
investments and interest income and expense.  Other income/expense for the three
months ended March 31, 2001 increased to net other income of $356,000 compared
to net other income of $153,000 for the comparable period in 2000.  Other
income/expense in the three months ended December 31, 2000 was a net expense of
$16,000.  These changes were primarily a result of $413,000 gain realized on
sales of short term investments during the three months ended March 31, 2001.

Total comprehensive loss for the quarter ended March 31, 2001 was $3,198,000
compared to net loss of $2,672,000. The difference is the result of the decrease
in the fair market value of short-term investments. Total comprehensive loss and
net loss for the three months ended March 31, 2000, was $2,138,000.

History of Operating Losses

As of March 31, 2001, we had incurred operating losses of approximately $113.4
million since inception in 1992. We expect to continue to incur operating losses
in the near future as we expend funds on sales and marketing activities,
clinical trials in support of reimbursement approvals and research and
development.  Our future profitability depends upon our ability to sell
sufficient quantities of our TUNA system and the related disposables to generate
revenue in excess of our planned expenditures.  Our ability to sell sufficient
quantities of our TUNA system and the related disposables depends upon numerous
factors, including:

                                                                    Page 9 of 15
<PAGE>

        .     our success in achieving market acceptance of the TUNA system;

        .     our success in expanding our sales and marketing efforts to sell
              the TUNA system into urologists' offices;

        .     our success in obtaining and maintaining necessary regulatory
              clearances and approvals; and

        .     the extent to which Medicare and other healthcare payors continue
              to reimburse the costs of TUNA procedures and the amounts of
              reimbursement provided.


Liquidity and Capital Resources

At March 31, 2001, our cash and cash equivalents and short-term investments were
$11.7 million.  For the quarter ended March 31, 2001, our cash and cash
equivalents increased by $0.1 million to $6.6 million, compared to $6.5 million
at December 31, 2000.  The increase is due to $3.4 million sale of available-
for-sale securities plus $0.4 million realized gain from the sale of short-term
investments, offset by operating expenses incurred in the normal course of
business. In addition to the sale of available-for-sale securities, our
operating activities during the period were financed by the sales of $0.5
million of common stock, less $0.3 million to reduce debt.  We used $3.0
million in operating activities, primarily as a result of our net loss, and
purchased $0.4 million in property and equipment.

Short-term investments at March 31, 2001, consisted of corporate commercial
paper and bonds with a fair market value of $4.9 million and investments in
equities of $0.2 million.

We have debt financing with Transamerica Technology Finance, a division of
Transamerica Corporation. This facility is secured by our assets and consists of
a revolving accounts receivable-based credit line of up to $3 million and a $2.5
million equipment term loan.  The term loan was funded in full as of December
31, 1998, at an interest rate of 12% per year.  Repayment of that loan is
amortized over a three-year period, with the first monthly payment having been
made in December 1998.  As of March 31, 2001, we owed $706,000 on this equipment
term loan.  As of March 31, 2001, we borrowed approximately $741,000 against the
revolving accounts receivable-based line at a rate of 10.50% per year. The
revolving credit line has a minimum interest payment of $96,000 per year.  In
January 2001, our debt financing with Transamerica automatically renewed.

Management believes that our current cash balances, short term investments and
projected cash flows from operations will be sufficient to meet our current
operating and capital requirements through the end of 2001.  We have based this
estimate, however, on assumptions that may prove to be wrong.  As a result, we
may need to obtain additional financing prior to that time.


Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," or SFAS 133,
which was adopted buy us on January 1, 2001.  The adoption of SFAS 133 did not a
significant effect on our operating results or financial position.

                                                                   Page 10 of 15
<PAGE>

Certain Important Factors

In addition to the factors identified above, there are several important factors
that could cause our actual results to differ materially from those anticipated
by us or which are reflected in any of our forward-looking statements.  These
factors, and their impact on the success of our operations and our ability to
achieve our goals, include the following:


We have incurred substantial losses since our inception, and if physicians do
not purchase and use our TUNA system and the related disposables in sufficient
quantities, we may be unable to achieve and maintain profitability.

We incurred a net loss of approximately $2.7 million for the three months ended
March 31, 2001, and have incurred substantial losses since our inception from
costs relating to the development and commercialization of our TUNA system.  As
of March 31, 2001, we had an accumulated deficit of approximately $113.4
million.  We expect to continue to incur operating losses in the near future as
we expend funds on sales and marketing activities, clinical trials in support of
reimbursement approvals and research and development.  Our future profitability
depends upon our ability to sell sufficient quantities of our TUNA system and
the related disposables to generate revenue in excess of our planned
expenditures.  Our ability to sell sufficient quantities of our TUNA system and
the related disposables depends upon numerous factors, including:

        .    our success in achieving market acceptance of the TUNA system;

        .    our success in expanding our sales and marketing efforts to sell
             the TUNA system into urologists' offices;

        .    our success in obtaining and maintaining necessary regulatory
             clearances and approvals; and

        .    the extent to which Medicare and other healthcare payors continue
             to reimburse the costs of TUNA procedures and the amounts of
             reimbursement provided.


We depend upon our TUNA system, which is our only product, for all of our
revenues.

All of our revenues are derived from sales of our TUNA system.  As a result, our
success is solely dependent upon the success of our TUNA system.  We began
selling the TUNA system in late 1993.  To date, our TUNA system has not received
widespread market acceptance.  Any factors adversely affecting the pricing of,
demand for or market acceptance of our TUNA system, such as competition or
technological change, would significantly harm our business.

Our TUNA system consists of a radio frequency generator, a reusable handle, a
disposable cartridge and an optical telescope.  If a material problem develops
with any one or more of those components, our revenues would suffer.  Possible
problems that we may experience with our TUNA system include:

        .    malfunctions;

        .    failure to comply with or changes in governmental regulations;

        .    product recalls;

        .    product obsolescence;

        .    patent infringement claims;

        .    inability to protect our intellectual property; and

        .    shortages of one or more of the components of the system.

                                                                   Page 11 of 15
<PAGE>

We outsource almost all of our manufacturing and rely upon several single source
suppliers to manufacture two of the four major components to our TUNA system.
The termination of these relationships or the failure of these manufacturers to
supply us components on a timely basis or in significant quantities would likely
cause us to be unable to meet customer orders for our TUNA system and harm our
business.

We outsource all of our manufacturing, except for the assembly of the reusable
handle.  We obtain components to the reusable handle from a number of different
suppliers, including a few single source suppliers.  We are aware of a few other
qualified suppliers for many of these components.  We contract with Humphrey
Systems, a division of Carl Zeiss, Inc., and Circon Corporation to manufacture
the disposable cartridge, Telo Electronics, a subsidiary of Sanmina MPD, to
manufacture the radio frequency generator, and Karl Storz in Germany to
manufacture the telescope.  We have not qualified any alternative sources of
supply for our radio frequency generator or telescope.  We have written
agreements with Humphrey Systems and Circon Corporation to manufacture the
disposable cartridge.  Either party may terminate these agreements for any
reason upon at least 180 days prior written notice.  We do not have any other
supply agreements with these suppliers or any of our other suppliers that
require them to supply us with components to our TUNA system.

Manufacturers often encounter difficulties in scaling up production of new
products, including problems involving production yields, product recalls,
quality control and assurance, component supply and lack of qualified personnel.
If any of our manufacturers experience production problems, we may not be able
to locate an alternate manufacturer promptly.  Identifying and qualifying
alternative suppliers of components takes time and involves significant
additional costs and may delay the production of the TUNA system.  The FDA
requires us to identify any supplier we use.  The FDA may require additional
testing of any component from new suppliers prior to our use of these
components.  The termination of our relationships with these single source
suppliers or the failure of these parties to supply us with the components to
the TUNA system on a timely basis and in sufficient quantities would likely
cause us to be unable to meet customer orders for our products in a timely
manner or within our budget and harm our business.


The TUNA procedure is a new therapy and may not be accepted by physicians,
patients and healthcare payors, which would significantly harm our business.

Physicians will not recommend the TUNA procedure unless they conclude, based on
clinical data and other factors, that it is an effective alternative to other
methods of enlarged prostate treatment, including more established methods.  In
particular, physicians may elect not to recommend the TUNA procedure until the
long term duration of the relief provided by the procedure has been established.
Clinical data for assessing the durability of relief provided by the TUNA
therapy does not extend beyond five years.  Some physicians may consider five
years of clinical data to be sufficient evidence of durability and others may
not.  As time passes since the first TUNA procedures were performed, and as more
procedures are performed, the clinical data will continue to be developed.  We
are in the process of conducting multi-year patient follow-up studies to assess
the durability of the relief provided by the TUNA procedure.  We cannot assure
you that these studies will support the durability of the relief provided by the
TUNA procedure.  Even if the clinical efficacy of the TUNA procedure is
established, physicians may elect not to recommend the procedure unless
acceptable reimbursement from healthcare payors is available.  Healthcare payor
acceptance of the TUNA procedure will require evidence of its cost effectiveness
compared with other therapies for an enlarged prostate, which will depend in
large part upon the duration of the relief provided by the TUNA procedure.
Patient acceptance of the procedure will depend in part upon physician
recommendations and on other factors, including the degree of invasiveness and
the rate and severity of complications associated with the TUNA procedure
compared with other therapies.  Patient acceptance of the TUNA procedure will
also depend upon the ability of physicians to educate these patients on their
treatment choices.  Our marketing strategy must overcome the difficulties
inherent in the introduction of new technology to the medical community.

                                                                   Page 12 of 15
<PAGE>

We depend upon several of our executive officers and key employees, and if we
are unable to retain these individuals, our business could suffer.

Our ability to grow and our future success will depend to a significant extent
upon the continued contributions of our senior management and key employees,
many of whom would be difficult to replace.  Our Chairman of the Board,
President and Chief Executive Officer, Randy D. Lindholm, joined VidaMed in
1998.  Many other members of our management and key employees have been with
VidaMed for a number of years and have extensive experience with other medical
technology companies.  The success of our business is dependent upon the
ability, experience and performance of these individuals and our ability to
retain these individuals.  We do not have key person life insurance on any of
our personnel.


If we are unable to attract and retain qualified personnel, our business could
suffer.

Our future success depends in large part upon our ability to identify, attract
and retain highly qualified managerial, technical and sales and marketing
personnel.  Competition for these individuals is intense, especially in the
Silicon Valley area where our principal executive office is located.  We may not
succeed in identifying, attracting and retaining these personnel.  Our inability
to identify, attract or retain qualified personnel in the future or delays in
hiring qualified personnel, particularly managerial, technical and sales and
marketing personnel, could make it difficult for us to manage our business and
meet key objectives, which would harm our business.  There is intense
competition for skilled sales and marketing employees, especially for
individuals who have experience selling medical devices.  We may be unable to
hire skilled individuals to sell our TUNA system, which could harm our business.


If we fail to compete successfully in our market, our revenues and operating
results may be adversely affected and we may not achieve future growth.

Although there is a large market for the treatment of men suffering from
enlarged prostate, there are a number of therapies competing for market share.
Competition in the market for minimally invasive devices to treat this condition
is primarily two competitors, Urologix, Inc. and Johnson & Johnson.  Both of
these competitors have:

        .    better name recognition;

        .    more widely accepted products and broader product lines;

        .    greater sales, marketing and distribution capabilities; and

        .    more established relationships with some of our existing and
             potential customers.

Johnson & Johnson also has significantly greater financial resources and larger
research and development staffs and facilities than us.  Our competitors will
likely continue to improve their products and develop new competing products.
Other competitors will likely also emerge.  We may be unable to compete
effectively with our competitors if we cannot keep up with existing or new
alternative products, techniques, therapies and technology in the treatment of
BPH market.  Our competitors may commercially introduce new technologies and
products that are more effective than our products or render our products
obsolete.  Competition in our market may also result in pricing pressures that
may decrease the sales prices for our products.

                                                                   Page 13 of 15
<PAGE>

If our patents and other intellectual property rights do not adequately protect
our products or if we are sued for violating the intellectual property rights of
others, we may be unable to gain market share or operate our business
profitably.

We rely on patents, trade secrets, trademarks, copyrights, know-how, license
agreements and contractual provisions to establish and protect our intellectual
property rights.  These legal means, however, afford us only limited protection
and may not adequately protect our rights or remedies to gain or keep any
advantages we may have over our competitors.  In addition, litigation may be
necessary to enforce our intellectual property rights, to protect our patents
and trade secrets and to determine the validity and scope of our proprietary
rights.  Any litigation would likely result in substantial expense and divert
our attention from implementing our business strategy.  Furthermore, we cannot
assure you that others have not developed or will not develop similar products
or manufacturing processes, duplicate any of our products or manufacturing
processes, or design around any of our patents.

The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage.  We are aware of patents held by other participants in
our market, and we cannot assure you that we will not in the future become
subject to patent infringement claims and litigation or United States Patent and
Trademark Office interference proceedings.  Intellectual property litigation
would likely result in substantial cost to and diversion of effort by us.  If we
lose one of these proceedings, a court, or a similar foreign governing body,
could require us to pay significant damages to third parties, require us to seek
licenses from third parties and pay ongoing royalties, require us to redesign
our products, or prevent us from manufacturing, using or selling our products.
In addition to being costly, protracted litigation regarding our ability to
incorporate intellectual property into our products could result in our
customers or potential customers deferring or limiting their purchase or use of
the affected products until resolution of the litigation.


Our future revenues depend upon our customers receiving third party
reimbursement.

The continuing efforts of government and insurance companies, health maintenance
organizations and other payors of healthcare costs to contain or reduce costs of
health care may affect our future revenues and profitability.  In the United
States, given recent federal and state government initiatives directed at
lowering the total cost of health care, the U.S. Congress and state legislatures
will likely continue to focus on healthcare reform, including the reform of
Medicare and Medicaid systems, and on the cost of medical products and services.
Our ability to commercialize the TUNA system successfully will depend in part
upon the extent to which the users of our product obtain appropriate
reimbursement for the cost of the TUNA procedure.


ITEM 3   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We are exposed to interest rate risk on the investments of our excess cash.
The primary objective of our investment activities is to preserve principal
while at the same time maximize yields without significantly increasing risk.
To achieve this objective, we invest in highly liquid and high quality debt
securities.  To minimize the exposure due to adverse shifts in interest rates,
we invest in short-term securities with maturities of less than one year.  Due
to the nature of our short-term investments, we have concluded that we do not
have a material market risk exposure.

                                                                   Page 14 of 15
<PAGE>

PART II: OTHER INFORMATION



ITEM 5.  OTHER INFORMATION


Management Changes

In February 2001, Lewis P. Chapman, who served as an independent contractor
working as Vice President of Business Development for Arthrosome, Inc., became
our Vice President of Global Marketing and Sales, Chief Business Officer.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Exhibits

          None.

     (b)  Reports on Form 8-K.

          No reports on Form 8-K were filed during the quarter ended March 31,
          2001.


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                               VIDAMED, INC.


Date:     May 14, 2001         By:     /s/   Randy D. Lindholm
       ----------------------       --------------------------------------
                                       Randy D. Lindholm
                                       President, Chief Executive Officer
                                       (Principal Executive Officer)

Date:     May 14, 2001         By:     /s/   John F. Howe
       ----------------------       --------------------------------------
                                       John F. Howe
                                       VP Finance, Chief Financial Officer
                                       (Principal Financial Officer)

Date:     May 14, 2001         By:     /s/   L. Phillip Brooks
        ---------------------       --------------------------------------
                                       Controller
                                       (Principal Accounting Officer)

                                                                   Page 15 of 15