<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 September 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, including zip code)

                                 (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 36,049,926 as of September 30, 2001.

                                                                    Page 1 of 14

<PAGE>

                                  VIDAMED, INC.

                                      INDEX

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

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

          Condensed consolidated statements of operations - three months
               ended September 30, 2001 and 2000 and nine months ended
               September 30, 2001 and 2000                                        4

          Condensed consolidated statements of cash flows - nine months
               ended September 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                                       14


Signatures                                                                       14
</TABLE>

                                                                    Page 2 of 14

<PAGE>

ITEM 1: FINANCIAL
STATEMENTS


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

<TABLE>
<CAPTION>
                                                     September 30, 2001        December 31, 2000
                                                    --------------------      -------------------
                                                        (Unaudited)                   (*)

<S>                                                 <C>                       <C>
Assets
Current Assets:
     Cash and cash equivalents                             $       6,094             $      6,491
     Short-term investments                                        1,173                    9,060
     Accounts receivable, net                                      2,639                      800
     Inventories                                                   2,157                      649
     Other current assets                                            583                      389
                                                    --------------------      -------------------
      Total current assets                                        12,646                   17,389


     Property and equipment, net                                   1,553                    1,898
     Other assets, net                                                97                       99
                                                    --------------------      -------------------
      Total assets                                         $      14,296             $     19,386
                                                    ====================      ===================


Liabilities and stockholders' equity
Current liabilities:
     Notes payable, current                                $       1,572             $      1,776
     Accounts payable                                              1,009                      283
     Accrued liabilities                                           2,972                    2,821
                                                    --------------------      -------------------
      Total current liabilities                                    5,553                    4,880

Stockholders' equity:
    Capital stock                                                126,504                  124,063
     Accumulated deficit                                        (117,761)                (109,557)
                                                    --------------------      -------------------
      Total stockholders' equity                                   8,743                   14,506
                                                    --------------------      -------------------
       Total liabilities and stockholders' equity          $      14,296             $     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 14

<PAGE>


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

<TABLE>
<CAPTION>
                                            Three Months Ended          Nine Months Ended
                                               September 30,              September 30,
                                             2001          2000          2001          2000
                                           --------      --------      --------      --------
<S>                                        <C>           <C>           <C>           <C>
Revenues                                   $  3,779      $  1,681      $  9,024      $  6,625

Cost of Products Sold                         1,454           785         3,732         2,445
                                           --------      --------      --------      --------
      Gross Profit                            2,325           896         5,292         4,180


Operating Expenses:
Research and development                        799           875         2,469         2,481
Selling, general and administrative           3,525         2,903        10,451         9,147
                                           --------      --------      --------      --------
      Total operating expenses                4,324         3,778        12,920        11,628

                                           --------      --------      --------      --------
      Loss from operations                   (1,999)       (2,882)       (7,628)       (7,448)


Other income (expense), net                       2           (16)          469           185
                                           --------      --------      --------      --------
Net loss                                   $ (1,997)     $ (2,898)     $ (7,159)     $ (7,263)
                                           ========      ========      ========      ========
Basic and diluted net loss per share       $  (0.06)     $  (0.10)     $  (0.20)     $  (0.24)
                                           ========      ========      ========      ========
Shares used in computing basic and
     diluted net loss per share              36,037        30,213        35,532        29,782
                                           ========      ========      ========      ========
</TABLE>

                             See accompanying notes.

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

                                                                    Page 4 of 14

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                          Nine Months Ended
                                                                                             September 30,
                                                                                    2001                    2000
                                                                            ---------------------   --------------------
<S>                                                                         <C>                     <C>
Cash flows from operating activities:
      Net loss                                                                  $          (7,159)     $          (7,263)
      Adjustments to reconcile net loss to net cash
      used in operating activities:
        Depreciation and amortization                                                         845                  1,351
        Amortization of deferred compensation                                                  95                    129
        Issuance of warrants for renewal of loan                                               --                     87
        Gain realized on sales of short-term investments                                     (413)                    --
        Changes in current assets and liabilities:
          Accounts receivable                                                              (1,839)                   277
          Inventory                                                                        (1,359)                   (45)
          Other current assets                                                               (194)                    67
          Other assets                                                                          2                     64
          Accounts payable                                                                    726                    297
          Accrued liabilities                                                                 151                   (234)
          Deferred revenue                                                                     --                   (164)
                                                                            ---------------------   --------------------
Net cash used in operating activities                                                      (9,145)                (5,434)
                                                                            ---------------------   --------------------
Cash flows from investing activities:
      Expenditures for property and equipment                                                (649)                (1,536)
      Proceeds from the sale of short-term investments                                      7,255                     --
                                                                            ---------------------   --------------------
Net cash provided by (used in) investing activities                                         6,606                 (1,536)
                                                                            ---------------------   --------------------

Cash flows from financing activities:
      Principal payments of notes payable                                                    (204)                  (521)
      Net cash proceeds from issuance of common stock                                       2,346                 12,947
                                                                            ---------------------   --------------------
Net cash provided by financing activities                                                   2,142                 12,426
                                                                            ---------------------   --------------------

Net increase (decrease) in cash and cash equivalents                                         (397)                 5,456
Cash and equivalents at the beginning of the period                                         6,491                  2,748
                                                                            ---------------------   --------------------
Cash and equivalents at the end of the period                                   $           6,094      $           8,204
                                                                            =====================   ====================


Supplemental disclosure of cash flows information:
Cash paid for interest                                                          $             214      $             394
                                                                            =====================   ====================

Supplemental disclosure of non-cash information:
Unrealized loss on investments                                                  $            (633)     $              --
                                                                            =====================   ====================
</TABLE>

                             See accompanying notes.


                                                                    Page 5 of 14

<PAGE>


                                  VIDAMED, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               September 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 September 30, 2001, the statements of operations
for three months and nine months ended September 30, 2001 and 2000 and the
statements of cash flows for the nine months ended September 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 nine months ended September 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 September 30, 2001,
we had 4,961,576 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 September 30, 2001 and
December 31, 2000 consist of the following (in thousands):

                                          September 30,         December 31,
                                              2001                  2000
                                       -----------------       -------------
                  Raw materials         $          1,155       $         120
                  Work in process                      -                   5
                  Finished goods                   1,002                 524
                                       -----------------       -------------
                                        $          2,157       $         649
                                       =================       =============


                                                                    Page 6 of 14

<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 September 30, 2001, approximately
$283,000 was outstanding on our term loan and we had borrowed approximately
$1,289,000 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 nine months ended September 30, 2000, the total
comprehensive loss was not materially different from the net loss. Total
comprehensive loss for the quarter ended September 30, 2001 was $2,119,000,
compared to a net loss of $1,997,000. For the nine months ended September 30,
2001, total comprehensive loss was $7,791,000 compared to a net loss of
$7,159,000. These differences were the result of a decrease of $122,000 in the
fair market value of the short-term investments for the three months ended
September 30, 2001 and a decrease in their fair market value of $633,000 for the
nine months ended September 30, 2001.

6.     Common Stock

During the nine months ended September 30, 2001, we issued 891,302 shares of
common stock upon the exercise of outstanding warrants, 151,441 shares under our
equity compensation plans and 174,146 shares under our employee stock purchase
plan.

7.     Recently Issued Accounting Standards

In September 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 September 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 14

<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.

In October 2001, the FASB issued Statement of Financial Accounting Standard
No.144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS
144"), which is effective for fiscal periods beginning after December 15, 2001
and supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of. SFAS 144 provides a single model for
accounting and reporting the impairment and disposal of long-lived assets. The
statement also sets new criteria for the classification of assets held-for-sale
and changes the reporting of discontinued operations. We do not believe that the
adoption of SFAS 144 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 nine months ended
September 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 VidaMed's Condensed Consolidated Financial
Statements and Related Notes in Item 1 of this Quarterly Report on Form 10-Q and
VidaMed's Annual Report on Form 10-K for the year ended December 31, 2000, which
VidaMed has filed with the Securities and Exchange Commission. You may obtain a
copy of VidaMed's Form 10-K from VidaMed 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

We design, develop, and market a minimally invasive treatment for the urological
condition, benign prostatic hyperplasia, which is commonly referred to as BPH or
enlarged prostate. Over one-half of the 37 million men age 50 and older in the
United States suffer from symptomatic BPH, which if left untreated, can lead to
other adverse medical conditions, including incontinence. Our patented
transurethral needle ablation (TUNA) procedure is designed to provide a safe,
cost effective and minimally invasive treatment for BPH and an alternative to
drug therapy and major surgery. Our TUNA procedure delivers low-level radio
frequency energy directly into the prostate, resulting in tissue shrinkage and
subsequent alleviation of symptoms associated with BPH, with minimal patient
discomfort or sensation of heat and allowing a patient to return quickly to a
normal life style.

Our latest generation TUNA system, the Precision system, which was designed
specifically for the physician office environment, was cleared for marketing by
the FDA in February 2001. Our Precision system offers a significantly faster
average treatment time of only 20 minutes for a typical-sized prostate, compared
with approximately 30 to 60 minutes for most other minimally invasive therapies.
In addition, our Precision system has an intuitive user interface


                                                                    Page 8 of 14

<PAGE>

that monitors intra-prostatic temperature 50 times each second, and provides
essential real-time feedback to the physician ensuring a safe and successful
treatment.

The principal components of our TUNA system are the radio frequency generator, a
reusable hand piece and telescope, and a single-use disposable catheter needed
for each procedure. We outsource all of our manufacturing, except for the
assembly of the reusable handle.

We distribute the TUNA system in the United States through a network of direct
sales and marketing representatives and account specialists, and internationally
directly to customers and through a number of strategic distributors. We offer
customers the option either to purchase the radio frequency generators and
related accessories outright or to acquire them pursuant to a fee per use
agreement whereby the customer contractually commits to purchase a minimum
number of disposable catheters per year or other time period.

All of our revenue is derived from the sale of our disposable catheters and
radio frequency (RF) generators, hand pieces and telescopes. Revenue from
product sales is recognized at the time of shipment, net of allowances for
discounts and estimated returns which are also provided for at the time of
shipment. Placement of RF generators in hospitals and physicians' offices is
necessary for customers to use our disposable catheters. We continue to focus
our sales and marketing efforts on expanding the base of our customer accounts
and increasing the usage of our disposable products at our current accounts. We
expect that revenue from the sale of our disposable cartridges will increase as
a percentage of our revenue as the installed base of our RF generators continues
to grow.

Our ability to successfully commercialize our TUNA system depends in part on the
extent to which the users of our products obtain appropriate reimbursement for
the cost of the TUNA procedure. The majority of patients who receive treatment
for BPH in the United States are eligible for Medicare coverage. Before August
1, 2000, the U.S. Health Care Financing Administration, recently renamed Centers
for Medicare and Medicaid Services, or CMS, which administers Medicare
reimbursement, only made reimbursement available for TUNA procedures performed
in hospital-based settings, on a reasonable cost or cost plus basis. On August
1, 2000, the reimbursement was changed to a fixed rate or "prospective payments
system" for procedures performed in hospitals. On January 1, 2001, Medicare
reimbursement became available under the prospective payment system for TUNA
procedures performed in physicians' offices.

Results of Operations

Net revenues for the three months ended September 30, 2001 was $3,779,000. This
represents an increase of $2,098,000, or 125%, from $1,681,000 in the three
months ended September 30, 2000. Net revenues for the nine months ended
September 30, 2001 increased 36% to $9,024,000, from $6,625,000 in the same
period of 2000. These increases were primarily due to a 176% increase in U.S.
procedure volume for the three months ended September 30, 2001 compared to the
three months ended September 30, 2000, and a 105% increase in U.S. procedure
volume for the nine months ended September 30, 2001 compared to the nine months
ended September 30, 2000. These increases, however, were offset by the reduction
of our average selling prices for each procedure resulting from the
implementation of the CMS prospective payment system, which became effective for
procedures performed in hospitals on August 1, 2000. For the three months ended
September 30, 2001, net revenues increased sequentially by 27%, or $802,000,
from $2,977,000 for the three months ended June 30, 2001. This sequential
quarter growth was primarily attributable to the growth in the physician's
office market and a related 24% sequential quarter increase in U.S. procedure
volume and a sequential increase of 233% increase in U.S. RF generator system
sales to 30 systems.

Cost of goods sold increased $669,000 and $1,287,000 for the three and
nine-month periods ended September 30, 2001, respectively from $785,000 and
$2,445,000 during the same periods in the prior year. The increases are
attributed to higher product sales. Gross margin expressed as a percentage of
sales in the three months ended September 30, 2001 was 62%, up from 53% for the
three months ended September 30, 2000. Gross margin expressed as a percentage of
sales for the nine months ended September 30, 2001 was 59%, down from 63% for
the nine months ended September 30, 2000. The increase in gross margin as a
percentage of sales for the three months ended


                                                                    Page 9 of 14

<PAGE>

September 30, 2001 is primarily due to increased manufacturing expense
absorption at higher procedure volumes. The decrease in gross margin as a
percentage of sales for the nine months ended September 30, 2001 is primarily
attributed to the reduction of our average selling price, resulting from the
implementation of the prospective payment system for the hospital out patient.

Research and development expenses, which include expenditures for regulatory
compliance and clinical trials, were $799,000 for the three months ended
September 30, 2001 which was slightly declined from $875,000 for the same period
in 2000. Research and development expenses for the nine months ended September
30, 2001 of $2,469,000 remained relatively unchanged from $2,481,000 for nine
months ended September 30, 2000, as we sustained the level of our product
improvement and cost reduction efforts.

Selling, general and administrative expenses increased to $3,525,000 and
$10,451,000 from $2,903,000 and $9,147,000 for the three and nine-months periods
ended September 30, 2001 and 2000, respectively. 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.

Other income (expense) 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 September 30, 2001 increased to $2,000 compared to other
income (expense) of $(16,000) for the comparable period in 2000. The increase
was primarily attributable to increased interest income resulting from a higher
average invested balance of cash and investments. For the nine months ended
September 30, 2001, other income/expense, net was $469,000, an increase of 154%
from other income/expense, net of $185,000, for the nine months ended September
30, 2000. This change was primarily a result of a gain of $413,000 realized on
sales of short-term investments during the nine months ended September 30, 2001.

Our net loss for the three months ended September 30, 2001 was $2.0 million
compared to $2.9 million for the three months ended September 30, 2000. Our net
loss for the nine months ended September 30, 2001 was $7.2 million compared to
$7.3 million for the nine months ended September 30, 2000.

Liquidity and Capital Resources

Since our inception, we have financed our operations principally through the
sale of equity securities and to a lesser extent, through debt financing and
loans. At September 30, 2001, our cash and cash equivalents and short-term
investments were $7.3 million. For the quarter ended September 30, 2001, our
cash and cash equivalents decreased by $0.5 million to $6.1 million. This
decrease was due to $2.5 million used in operating activities, $0.1 million used
for purchases of property and equipment, $1.9 million realized from the sale of
short-term investments and $0.2 million realized from the issuance of common
stock. For the nine months ended September 30, 2001, our cash and cash
equivalents decreased $0.4 million compared to $6.5 million at December 31,
2000. This decrease was due to $7.2 million in proceeds from the sale of
short-term investments, $2.3 million realized from the issuance of common stock,
less $9.1 million used in operating activities, $0.6 million used for the
purchase of property and equipment and a $0.2 million reduction in notes
payable.

Short-term investments at September 30, 2001 consisted of corporate commercial
paper and bonds with a fair market value of $1.0 million and investments in
equity securities 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 and the last monthly payment required to be made in December 2001.
As of September 30, 2001, we owed $283,000 on this equipment term loan. As of
September 30, 2001, we had borrowed approximately $1,289,000 against the
revolving accounts receivable-based line at a rate of 10.50% per year, which
will be required to be repaid in December 2001 if this credit line is not
renewed. The revolving credit line has a


                                                                   Page 10 of 14

<PAGE>

minimum interest payment of $96,000 per year. We are in the process of
negotiating with banks the terms of a new credit facility to replace our
Transamerica facility.

Management believes that our current cash balances, short term investments,
available debt financing and projected cash flows from operations will be
sufficient to meet our current operating and capital requirements through the
end of September 2002. We have based this estimate, however, on assumptions that
may prove to be wrong. As a result, we may need or elect 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
will be available on terms attractive to us, or at all. Furthermore,
any additional equity financing may be dilutive to our stockholders, and debt
financing, if available, may involve restrictive covenants that could limit the
operations of our business.


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 $2.0 million for the three months ended
September 30, 2001, and have incurred substantial losses since our inception
from costs relating to the development and commercialization of our TUNA system.
As of September 30, 2001, we had an accumulated deficit of approximately $117.8
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;


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     .    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 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

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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.

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

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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.

PART II:  OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

     On August 23, 2001, VidaMed filed a Current Report on Form 8-K reporting in
Item 5, Other Events, the adoption by Randy D. Lindholm, VidaMed's Chairman,
President and Chief Executive Officer, of a written trading plan pursuant to
Rule 10b5-1 that allows him to systematically sell VidaMed common stock.


                                    SIGNATURE

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:  November 12, 2001               By: /s/ Randy D. Lindholm
       -------------------                --------------------------------------
                                          Randy D. Lindholm
                                          Chairman, President and Chief
                                          Executive Officer
                                          (Principal Executive Officer)

Date:   November 12, 2001              By: /s/ John F. Howe
       --------------------               --------------------------------------
                                          John F. Howe
                                          VP Finance and Chief Financial
                                          Officer (Principal Financial Officer)

Date:  November 12, 2001               By: /s/ L. Phillip Brooks
       --------------------               --------------------------------------
                                          L. Phillip Brooks
                                          Controller
                                         (Principal Accounting Officer)

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