<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 June 30, 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 35,934,858 as of June 30, 2001.

                                                                    Page 1 of 15
<PAGE>

                                 VIDAMED, INC.

                                     INDEX

PART I. FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                                                            Page
<S>                                                                                                         <C>
Item 1.      Condensed Consolidated Financial Statements - unaudited

             Condensed consolidated balance sheets - June 30, 2001
                  and December 31, 2000                                                                      3

             Condensed consolidated statements of operations - three months
                  ended June 30, 2001 and 2000 and six months ended
                  June 30, 2001 and 2000.                                                                    4

             Condensed consolidated statements of cash flows - six months
                  ended June 30, 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                                                                   8

Item 3       Quantitative and Qualitative Disclosure About Market Risk                                      14


PART II. OTHER INFORMATION

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>
<CAPTION>
                                                                            June 30,        December 31,
                                                                              2001              2000
                                                                         --------------     -------------
                                                                           (Unaudited)           (*)
<S>                                                                        <C>              <C>
Assets
Current Assets:
     Cash and cash equivalents                                           $      6,553       $     6,491
     Short-term investments                                                     3,295             9,060
     Accounts receivable, net                                                   1,669               800
     Inventories                                                                1,725               649
     Other current assets                                                         277               389
                                                                         ------------       -----------
      Total current assets                                               $     13,519       $    17,389

     Property and equipment, net                                                1,867             1,898
     Other assets, net                                                             97                99
                                                                         ------------       -----------
      Total assets                                                       $     15,483       $    19,386
                                                                         ============       ===========

Liabilities and stockholders' equity
Current liabilities:
     Notes payable, current                                              $      1,476       $     1,776
     Accounts payable                                                             876               283
     Accrued liabilities                                                        2,500             2,821
                                                                         ------------       -----------
      Total current liabilities                                          $      4,852       $     4,880

Stockholders' equity:
    Capital stock                                                             126,274           124,063
    Accumulated deficit                                                      (115,643)         (109,557)
                                                                         ------------       -----------
      Total stockholders' equity                                               10,631            14,506
                                                                         ------------       -----------
      Total liabilities and stockholder's equity                         $     15,483       $    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            Six Months Ended
                                                                         June 30,                     June 30,
                                                                ---------------------------- ---------------------------
                                                                     2001           2000          2001          2000
                                                                --------------  ------------ -------------  ------------
<S>                                                                  <C>            <C>          <C>            <C>
Revenues                                                        $       2,977   $     2,418  $      5,245   $     4,944
Cost of Products Sold                                                   1,239           891         2,278         1,659
                                                                --------------  ------------ -------------  ------------
      Gross Profit                                                      1,738         1,527         2,967         3,285

Operating Expenses:
Research and development                                                  827           822         1,669         1,604
Selling, general and administrative                                     3,511         2,980         6,927         6,247
                                                                --------------  ------------ -------------  ------------
      Total operating expenses                                          4,338         3,802         8,596         7,851
                                                                --------------  ------------ -------------  ------------
      Loss from operations                                             (2,600)       (2,275)       (5,629)       (4,566)

Other income, net                                                         111            48           467           201
                                                                --------------  ------------ -------------  ------------
Net loss                                                        $      (2,489)  $    (2,227) $     (5,162)  $    (4,365)
                                                                ==============  ============ =============  ============
Basic and diluted net loss per share                            $       (0.07)  $     (0.07) $      (0.15)  $     (0.15)
                                                                ==============  ============ =============  ============
Shares used in computing basic and diluted
      net loss per share                                               35,534        30,198        35,278        29,567
                                                                ==============  ============ =============  ============

</TABLE>

                             See accompanying notes.

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

                                                                    Page 4 of 15
<PAGE>

                                 VidaMed, Inc.
                Condensed Consolidated Statement of Cash Flows
                                (In thousands)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                Six Months Ended
                                                                                    June 30,
                                                                     ---------------------------------------
                                                                           2001                 2000
                                                                     ------------------   ------------------
<S>                                                                  <C>                  <C>
Cash flows from operating activities:
      Net loss                                                            $    (5,162)         $    (4,365)
      Adjustments to reconcile net loss to net cash
         used in operating activities:
         Depreciation and amortization                                            567                  882
         Amortization of deferred compensation                                     60                    -
         Gain realized on sales of short-term investments                        (413)
         Issuance of warrants for renewal of loan                                   -                   58
         Changes in current assets and liabilities:
            Accounts receivable                                                  (869)                 176
            Inventory                                                          (1,076)                  10
            Other current assets                                                  112                  (34)
            Other assets                                                            2                   65
            Accounts payable                                                      593                  562
            Accrued liabilities                                                  (322)                 (83)
            Deferred revenue                                                        -                 (154)
                                                                     ------------------   -----------------
Net cash used in operating activities                                          (6,508)              (2,883)
                                                                     ------------------   -----------------
Cash flows from investing activities:
      Expenditures for property and equipment                                    (536)              (1,345)
      Proceeds from the sale of short-term investments                          5,255                    -
                                                                     ------------------   -----------------
      Net cash provided by (used in) investing activities                       4,719               (1,345)
                                                                     ------------------   -----------------
Cash flows from financing activities:
      Principal payments of notes payable                                        (300)                (482)
      Net cash proceeds from issuance of common stock                           2,151               12,832
                                                                     ------------------   -----------------
Net cash provided by financing activities                                       1,851               12,350
                                                                     ------------------   -----------------
Net increase in cash and cash equivalents                                          62                8,122
Cash and equivalents at the beginning of the period                             6,491                2,748
                                                                     ------------------   -----------------
Cash and equivalents at the end of the period                             $     6,553          $    10,870
                                                                     ==================   =================

Supplemental disclosure of cash flows information:
Cash paid for interest                                                    $       174          $       227
                                                                     ==================   =================

Supplemental disclosure of non-cash information:
Unrealized gain on investments                                            $       923          $         -
                                                                     ==================   =================
</TABLE>

                            See accompanying notes.

                                                                    Page 5 of 15
<PAGE>

                                 VIDAMED, INC.
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 June 30, 2001
                                  (Unaudited)

1.   Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of
VidaMed, Inc. (the "Company", "VidaMed", "we" or "our") 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 June 30, 2001, the statements of operations for
three months and six months ended June 30, 2001 and 2000 and the statements of
cash flows for the six months ended June 30, 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 six months ended June 30, 2000 to
conform to the current period'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 our 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 June 30, 2001, we
had 4,929,496 options outstanding under our equity compensation plans and
1,938,000 outstanding warrants. The options and warrants 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 June 30, 2001 and December 31,
2000 consist of the following (in thousands):

                                         June 30,                 December 31,
                                           2001                       2000
                                    -----------------          ----------------
          Raw materials             $             749          $            120
          Work in process                           -                         5
          Finished goods                          976                       524
                                    -----------------          ----------------
                                    $           1,725          $            649
                                    =================          ================

                                                                    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 June 30, 2001, approximately
$497,000 was outstanding on our term loan and we borrowed approximately $979,000
against the revolving accounts receivable-based line at a rate of 10.5% per
year.

5.   Comprehensive Income (Loss)

We follow Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (Statement 130). Statement 130 establishes 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 and six months ended June 30, 2000, the total
comprehensive loss was not materially different from the net loss. Total
comprehensive loss for the quarter ended June 30, 2001 was $2,474,000, compared
to a net loss of $2,489,000. For the six months ended June 30, 2001, total
comprehensive loss was $5,673,000 compared to a net loss of $5,162,000 the
differences are the result of an increase of $15,000 in the fair market value of
the short-term investments for the three months ended June 30, 2001 and a
decrease in their fair market value of $511,000 for the six months ended June
30, 2001.

6.   Common Stock

During the six months ended June 30, 2001, we issued 891,302 shares of common
stock upon the exercise of outstanding warrants, 134,211 shares under our equity
compensation plans and 76,308 shares under our employee stock purchase plan.

7.   Recently Issued Accounting Standards

In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"),
which we adopted on January 1, 2001. This statement establishes accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement also requires that changes in the derivative's fair value be
recognized in earnings unless specific hedge accounting criteria are met. The
adoption of SFAS 133 did not have a material effect on our operating results or
financial position since we currently do not invest in derivative instruments or
engage in hedging activities.

In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141, Business Combinations ("SFAS 141"). SFAS 141 establishes new standards for
accounting and reporting for business combinations and will require that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Use of the pooling-of-interests method will be prohibited.
We will adopt this statement during the first quarter of fiscal 2002 and we do
not believe that SFAS 141 will have a material effect on our operating results
or financial position.


In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets ("SFAS 142"), which supersedes APB
Opinion No. 17, Intangible Assets. SFAS 142 establishes new

                                                                    Page 7 of 15
<PAGE>

standards for goodwill, including the elimination of goodwill amortization to be
replaced with methods of periodically evaluating goodwill for impairment. We
will adopt this statement during the first quarter of fiscal 2002, and we do not
believe that SFAS 142 will have a material effect on our operating results or
financial position.


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 and six months ended
June 30, 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 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, 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 June 30, 2001, all 50 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 physician that performs
the TUNA procedure was reimbursed by Medicare approximately $600 per procedure.

In August 2000, the U.S. Health Care Financing Administration, recently renamed
Centers for Medicare and Medicaid Services, or CMS, 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, although this rate can be higher or lower

                                                                    Page 8 of 15
<PAGE>

depending upon a wage index factor for each hospital. The physician 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, CMS published new Medicare payment rates and a schedule for
implementing minimally invasive heat therapies for the treatment of BPH in the
physician'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 BPH 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.

Results of Operations

Net revenue for the three months ended June 30, 2001 was $2,977,000. This
represents an increase of $559,000, or 23%, from $2,418,000 in the three months
ended June 30, 2000. Net revenues for the six months ended June 30, 2001,
increased 6% to $5,245,000, from $4,944,000 in the same period of 2000. These
increases were primarily due to a 99% increase in U.S. procedure volume for the
three months ended June 30, 2001 compared to the three months ended June 30,
2000 and a 74% increase in U.S. procedure volume compared to the six months
ended June 30, 2000. These increases, however, were offset by the reduction of
our average selling price resulting from the implementation of the CMS
prospective payment system, which became effective August, 1 2000. For the three
months ended June 30, 2001, revenues increased sequentially by 31%, or $716,000,
from $2,261,000 for the three months ended March 31, 2001. This sequential
quarter growth is primarily attributed to the growth in the physician's office
market and a related 25% sequential quarter increase in U. S. procedure volume.

Cost of product sold for the three months ended June 30, 2001 was $1,239,000, an
increase of 39%, or $348,000, from $891,000 for the three months ended June 30,
2000. For the six months ended June 30, 2001 cost of product sold was
$2,278,000, an increase of 39%, or $619,000, from $1,659,000 for the six months
ended June 30, 2000. These increases were due to higher product sales in the
respective periods.

Gross profit for the three months ended June 30, 2001, was $1,738,000, an
increase of 14%, or $211, 000, from $1,527,000 for the three months ended June
30, 2000. The increase is attributed to product volume increases exceeding the
effects of reduced average selling prices resulting from the introduction of
hospital fixed rates. Gross profit for the six months ended June 30, 2001 was
$2,967,000, a decrease of 10%, or $318,000, from $3,285,000 for the six months
ended June 30, 2000. This is a result of product volume increases not
off-setting the impact of reduced average selling price.

Gross margin expressed as a percentage of sales in the three months ended June
30, 2001 was 58%, down from 63% for the three months ended June 30, 2000. Gross
margin expressed as a percentage of sales for the six months ended June 30, 2001
was 57%, down from 66% for the six months ended June 30, 2000. These decreases
in gross margin are primarily attributed to the reduction of our average selling
price, resulting from the implementation of the prospective payment system.
Gross margin for the three months ended June 30, 2001 improved sequentially to
58% from 54% for the three months ended March 31, 2001. This increase is
primarily attributed to increased manufacturing expense absorption at higher
procedure volumes and margin improvements resulting from the increased
proportion of procedures performed in the physician's office, where margins are
higher than those realized from procedures performed in the hospital.

                                                                    Page 9 of 15
<PAGE>

Research and development (R&D) expenses for the three months ended June 30, 2001
and 2000 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 of $827,000 in the three months ended June 30,
2001 remained relatively unchanged from $822,000 in the three months ended June
30, 2000. R&D expenses for the six months ended June 30, 2001 of $1,669,000 was
slightly higher than R&D expenses of $1,604,000 for the six months ended June
30, 2000, as the Company maintained its product improvement and incremental cost
reduction efforts.

Selling, general and administrative (SG&A) expenses for the three months ended
June 30, 2001 was $3,511,000, an increase of 18%, or $531,000, compared to
expenditures of $2,980,000 in the three months ended June 30, 2000. SG&A
expenses for the six months ended June 30, 2001 was $6,927,000, an increase of
11%, or $680,000, from SG&A expenses $6,247,000 for the six months ended June
30, 2000. These increases are due to increases in sales staff, training and
tools necessary to aggressively market and service the in-office market, which
was approved for Medicare reimbursement by CMS effective January 1, 2001. SG&A
expenses for the three months ended June 30, 2001 was only slightly higher than
the $3,416,000 for the three months ended March 31, 2001 as the company closely
manages expenses.

Other income, net 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 June 30, 2001 increased 131% to $111,000 compared to net other
income of $48,000 for the comparable period in 2000. The increase is primarily
attributed to increased interest income resulting from a higher average invested
balance of cash and investments. For the six months ended June 30, 2001, other
income was $467,000, an increase of 132% from other income of $201,000, for the
six months ended June 30, 2000. This change was primarily a result of $413,000
realized on sales of short-term investments during the six months ended June 30,
2001.


History of Operating Losses

As of June 30, 2001, we had incurred operating losses of approximately $115.6
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 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 physicians' 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 June 30, 2001, our cash and cash equivalents and short-term investments were
$9.8 million. For the quarter ended June 30, 2001, our cash and cash equivalents
decreased by $.05 million to $6.6 million. The decrease is due to $3.4 million
used in operating activities, $0.1 million used for purchases of property and
equipment, $1.8 million realized from the sale of short-term investments and
$1.65 million realized from the issuance of common stock. For the six months
ended June 30, 2001, cash and cash equivalents increased $0.1 million compared
to $6.5 million at December

                                                                   Page 10 of 15
<PAGE>

31, 2000. The increase is due to $5.3 million in proceeds from the sale of
short-term investments, $2.1 million realized from the issuance of common stock,
less $6.5 million expended in operating activities, $0.5 million expended for
the purchase of property and equipment and a $0.3 million reduction in notes
payable.

Short-term investments at June 30, 2001 consisted of corporate commercial paper
and bonds with a fair market value of $3.0 million and investments in equities
of $0.3 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 June 30, 2001, we owed $497,000 on this equipment term
loan. As of June 30, 2001, we borrowed approximately $979,000 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.

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 June 2002. 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 through public or
private transactions, strategic relationships or other arrangements. We cannot
assure you that such financing, if needed, will be available on terms attractive
to us, or at all. Furthermore, any additional equity financing may be dilutive
to our stackholders, and debt financing, if available, may involve restrictive
covenants that could limit the operations of our business.

Recent Accounting Pronouncements

In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"),
which we adopted on January 1, 2001. This statement establishes accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement also requires that changes in the derivative's fair value be
recognized in earnings unless specific hedge accounting criteria are met. The
adoption of SFAS 133 did not have a material effect on our operating results or
financial position since we currently do not invest in derivative instruments or
engage in hedging activities.

In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141, Business Combinations ("SFAS 141"). SFAS 141 establishes new standards for
accounting and reporting for business combinations and will require that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Use of the pooling-of-interests method will be prohibited.
We will adopt this statement during the first quarter of fiscal 2002 and we do
not believe that SFAS 141 will have a material effect on our operating results
or financial position.


In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets ("SFAS 142"), which supersedes APB
Opinion No. 17, Intangible Assets. SFAS 142 establishes new standards for
goodwill, including the elimination of goodwill amortization to be replaced with
methods of periodically evaluating goodwill for impairment. We will adopt this
statement during the first quarter of fiscal 2002, and we do not believe that
SFAS 142 will have a material effect on our operating results or financial
position.

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:

                                                                   Page 11 of 15
<PAGE>

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 $2.6 million for the three months ended
June 30, 2001, and have incurred substantial losses since our inception from
costs relating to the development and commercialization of our TUNA system. As
of June 30, 2001, we had an accumulated deficit of approximately $115.6 million.
We expect to continue to incur operating losses in the near future as we expend
funds on sales and marketing activities, clinical trials 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 physicians' 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.

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

                                                                   Page 12 of 15
<PAGE>

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.

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

The continuing efforts of governments and insurance companies, health
maintenance organizations and other payors of healthcare costs to contain or
reduce health care costs may affect our future revenues and profitability.
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. 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.

The TUNA procedure is a new therapy and may not be accepted by physicians and
patients, 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.
Clinical data for assessing the durability of relief provided by the TUNA
therapy extends beyond five years, but some physicians may not consider this to
be sufficient evidence of durability. 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. Patient
acceptance of the procedure will depend in part upon physician recommendations
and 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.

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.

                                                                   Page 13 of 15
<PAGE>

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. 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.

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. 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.


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 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

VidaMed, Inc. held its annual meeting of stockholders on May 10, 2001. Our
stockholders voted on the following:

1.  Election of Directors.  The election of directors was conducted and the
following nominees were elected, with the following vote count:

<TABLE>
<CAPTION>
                                                            Votes                    Votes
         Name                                                For                    Withheld
         --------------------                       -------------------       --------------------
         <S>                                        <C>                       <C>
         Randy D. Lindholm                                   21,062,355                    590,383
         Robert J. Erra                                      21,622,706                     30,032
         Elizabeth H. Davila                                 21,624,076                     28,662
         Paulita M. LaPlante                                 21,624,076                     28,662
         Kurt C. Wheeler                                     16,291,662                  5,361,076
         Michael D. Ellwein                                  21,622,626                     30,112
</TABLE>

2. Ratification of Independent Auditors. The stockholders ratified Ernst & Young
LLP as our independent auditors for the fiscal year ending December 31, 2001.
There were 21,580,225 votes for and 7,275 against ratification, with 65,238
abstentions.

Item 6.  Exhibits and Reports on Form 8-K

         No reports on Form 8-K were filed during the quarter ended June 30,
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:    August 9, 2001                        By:   /s/   Randy D. Lindholm
      ----------------------                       ---------------------------
                                                    Randy D. Lindholm
                                                    Chairman, President and
                                                    Chief Executive Officer
                                                    (Principal Executive
                                                    Officer)

Date:    August 9, 2001                       By:    /s/   John F. Howe
      ----------------------                       ---------------------------
                                                    John F. Howe
                                                    VP Finance and Chief
                                                    Financial Officer (Principal
                                                    Financial Officer)

Date:   August 9,  2001                       By:  /s/ L. Phillip Brooks
      ----------------------                       ---------------------------
                                                   Controller
                                                   (Principal Accounting
                                                   Officer)

                                                                   Page 15 of 15