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, 1998


                         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
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 19,926,656 as of November 10, 1998.



<PAGE>


                                  VIDAMED, INC.

                                      INDEX

PART I: FINANCIAL INFORMATION
                                                                            Page

Item 1. Condensed consolidated financial statements - unaudited

        Condensed consolidated balance sheets - September 30, 1998
             and December 31, 1997                                            3

        Condensed  consolidated  statements  of  operations  - three months
             ended September 30, 1998 and 1997 and nine months ended
             September 30, 1998 and 1997                                      4

        Condensed consolidated statements of cash flows - nine months
             ended September 30, 1998 and 1997                                5

        Notes to condensed consolidated financial statements                  6

Item 2. Management's discussion and analysis of financial condition
            and results of operations                                         9


PART II: OTHER INFORMATION

Item 1. Legal Proceedings                                                    15

Item 2. Exhibits and Reports on Form 8-K                                     15

        Signatures                                                           16

                                                                    Page 2 of 17

<PAGE>


<TABLE>
                                                    PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

<CAPTION>
                                                                                                  September 30,         December 31,
                                                                                                      1998                   1997
                                                                                                    --------               --------
                                                                                                   (Unaudited)                (*)
<S>                                                                                                 <C>                    <C>     
Assets
Current Assets:
     Cash and cash equivalents                                                                      $ 10,982               $  8,026
     Accounts receivable                                                                                 461                  3,644
     Inventories                                                                                       1,348                  1,512
     Other current assets                                                                              1,885                    930
                                                                                                    --------               --------
           Total current assets                                                                       14,676                 14,112

     Property and equipment, net                                                                       2,350                  2,647
     Other assets, net                                                                                   114                    206
                                                                                                    --------               --------
           Total assets                                                                             $ 17,140               $ 16,965
                                                                                                    ========               ========

Liabilities and stockholders' equity 
Current liabilities:
     Notes payable, current portion                                                                 $    267               $    480
     Accounts payable                                                                                    752                  1,536
     Accrued professional fees                                                                           361                    559
     Accrued clinical trial costs                                                                        603                    372
     Accrued and other liabilities                                                                     2,799                  3,042
     Restructuring Accrual                                                                               277                  1,000
     Current portion of long-term debt and obligations
           under capital leases                                                                           37                    116
     Deferred revenue, current portion                                                                   282                    611
                                                                                                    --------               --------
           Total current liabilities                                                                   5,378                  7,716

     Notes payable and capital leases, long-term portion                                                 943                     22

Stockholders' equity:
     Capital stock                                                                                    95,543                 77,573
     Accumulated deficit                                                                             (84,724)               (68,346)
                                                                                                    --------               --------
           Total stockholders' equity                                                                 10,819                  9,227
                                                                                                    --------               --------
           Total liabilities and stockholders' equity                                               $ 17,140               $ 16,965
                                                                                                    ========               ========


<FN>
* The Balance  Sheet at December 31, 1997 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.
</FN>

                                                                                                                        Page 3 of 17
</TABLE>

<PAGE>


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

<CAPTION>
                                                                        Three Months Ended                  Nine Months Ended
                                                                           September 30,                       September 30,
                                                                     --------------------------          --------------------------
                                                                       1998              1997             1998               1997
                                                                     --------          --------          --------          --------
<S>                                                                  <C>               <C>               <C>               <C>     
Revenues:
     Product sales, net                                              $ (2,138)         $  1,809          $     98          $  7,164
     License fees and grant revenue                                        50               550               389               650
                                                                     --------          --------          --------          --------
     Net revenues                                                      (2,088)            2,359               487             7,814

Cost of Products Sold                                                     954             3,306             2,634             6,354
                                                                     --------          --------          --------          --------
Gross Profit                                                           (3,042)             (947)           (2,147)            1,460

Operating Expenses:
     Research and development                                           1,136             1,218             3,471             4,571
     Selling, general and administrative                                2,802             2,935            10,705            10,159
                                                                     --------          --------          --------          --------
     Total operating expenses                                           3,938             4,153            14,176            14,730
                                                                     --------          --------          --------          --------

     Loss from operations                                              (6,980)           (5,100)          (16,323)          (13,270)

Other income (expense), net                                                80                23               (55)              (86)
                                                                     --------          --------          --------          --------
Net loss                                                             $ (6,900)         $ (5,077)         $(16,378)         $(13,356)
                                                                     ========          ========          ========          ========
Basic and diluted net loss per share                                 $  (0.35)         $  (0.39)         $  (0.93)         $  (1.11)
                                                                     ========          ========          ========          ========
Shares used in computing basic and diluted
         net loss per share                                            19,925            12,901            17,536            11,981
                                                                     ========          ========          ========          ========
<FN>
                                                   See accompanying notes.
</FN>

                                                                                                                        Page 4 of 17
</TABLE>


<PAGE>


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

<CAPTION>
                                                                                                          Nine Months Ended
                                                                                                            September 30,
                                                                                                    -------------------------------
                                                                                                      1998                   1997
                                                                                                    --------               --------
<S>                                                                                                 <C>                    <C>      
Cash flows from operating activities:
     Net loss                                                                                       $(16,378)              $(13,356)
     Adjustments to reconcile net loss to net cash
       used in operating activities:
           Depreciation and amortization                                                                 976                    907
           Changes in assets and liabilities:
               Accounts receivable                                                                     3,183                   (944)
               Inventory                                                                                 164                   (157)
               Other current assets                                                                     (955)                  (356)
               Other assets                                                                               92                    (23)
               Accounts payable                                                                         (784)                   941
               Accrued professional fees                                                                (198)                   203
               Accrued clinical trial costs                                                              231                   (353)
               Accrued restructuring cost                                                               (723)                 2,100
               Accrued and other liabilities                                                            (243)                   138
               Deferred revenue                                                                         (329)                   (52)
                                                                                                    --------               --------
Net cash used in operating activities                                                                (14,964)               (10,952)
                                                                                                    --------               --------

Cash flows from investing activities:
     Expenditures for property and equipment                                                            (679)                (2,045)
     Proceeds from maturities of short-term investments                                                 --                    1,977
                                                                                                    --------               --------
        Net cash used in investing activities                                                           (679)                   (68)

Cash flows from financing activities:
     Principal payments of long-term debt and capital
       leases                                                                                           (101)                  (383)
     Principal payments of notes payable                                                                (770)                  (787)
     Net proceeds from issuance of notes payable                                                       1,500                   --
     Net cash proceeds from issuance of common stock                                                  17,970                 21,828
                                                                                                    --------               --------
Net cash provided by financing activities                                                             18,599                 20,658
                                                                                                    --------               --------

Net increase (decrease) in cash and cash equivalents                                                   2,956                  9,638
Cash and cash equivalents at the beginning
     of the period                                                                                     8,026                  3,879
                                                                                                    --------               --------
Cash and cash equivalents at the end of the period                                                  $ 10,982               $ 13,517
                                                                                                    ========               ========

Supplemental disclosure of cash flows information:
Cash paid for interest                                                                              $    739               $    378
                                                                                                    ========               ========

<FN>
                                                       See accompanying notes.
</FN>

                                                                                                                        Page 5 of 17
</TABLE>

<PAGE>


                                  VIDAMED, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 1998
                                   (Unaudited)

1.       Basis of presentation

The  accompanying  unaudited  condensed  consolidated  financial  statements  of
VidaMed, Inc. (the "Company" or "VidaMed") have been prepared in accordance with
generally accepted accounting  principles for interim financial  information and
with the  instructions  for Form 10-Q and  Article  10 of  Regulation  S-X.  The
balance sheet as of September 30, 1998 and the  statements of operations for the
three and nine months ended  September 30, 1998 and 1997,  and the statements of
cash flows for the nine months ended  September 30, 1998 and 1997, 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.  Although the Company  believes that the disclosures in these financial
statements  are  adequate  to make the  information  presented  not  misleading,
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 thereto included
in the Company's annual report on Form 10-K for the year ended December 31, 1997
filed with the Securities and Exchange Commission.

Results for any interim period are not necessarily indicative of results for any
other interim period or for the entire year.

2.       Net loss per share

Basic and  diluted  net loss per share is computed  using the  weighted  average
number of shares of common  stock  outstanding  during  the  periods  presented.
Common  equivalent  shares  from  options and  warrants  are  excluded  from the
computation,  as their effect is anti-dilutive.  In February 1997, the Financial
Accounting  Standards  Board  issued  Statement  No. 128,  "Earnings  per Share"
(Statement  128).  Statement 128 replaced the  calculation  of primary and fully
diluted  earnings  (loss) per share with basic and diluted  earnings  (loss) per
share. Unlike primary earnings (loss) per share, basic earnings (loss) per share
exclude any dilutive  effects of options,  warrants and convertible  securities.
Diluted earnings (loss) per share are very similar to the previously named fully
diluted  earnings  (loss) per share.  All loss per share amounts for all periods
have been presented, and where appropriate, restated to conform to the Statement
128 requirements.  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.

                                                                    Page 6 of 17

<PAGE>


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,  1998 and
December 31, 1997 consist of the following (in thousands):


                                      September 30,   December 31,
                                          1998           1997
                                         ------         ------
              Raw materials              $  688         $  261
              Work in process               221             90
              Finished goods                439          1,161
                                         ------         ------
                                         $1,348         $1,512
                                         ======         ======


4.       Notes Payable

In January 1998,  the Company  entered into a financing  agreement  with Silicon
Valley Bank,  for a $1,500,000  42-month term loan. As of September 30, 1998, no
funds remained available for borrowing under this loan.

5.        Restructuring Accrual

In September 1997, VidaMed announced a restructuring  program designed to reduce
costs  and  improve  operating   efficiencies  by  closing  the  company's  U.K.
manufacturing  facility.  The  charge  in the  third  quarter  of 1997  was $2.1
million.  The remaining accrual balance as of September 30, 1998 is $277,000 and
consists mainly of a grant repayment due over the next twenty-four months.


6.       Reporting Comprehensive Income (Loss)

As of January 1, 1998,  the Company  adopted  Statement of Financial  Accounting
Standards No.130,  Reporting Comprehensive Income (Statement 130). Statement 130
establishes new rules for the reporting and display of comprehensive  income and
its  components.  Statement  130  requires  unrealized  gains or  losses  on the
Company's   available-for-sale   securities  and  foreign  currency  translation
adjustments,  which prior to adoption were reported in shareholders'  equity, to
be  included in other  comprehensive  income  (loss).  During the three and nine
months ended September 30, 1998 and 1997, the total  comprehensive  loss was not
materially different from the net loss.


7.       Common Stock

In May 1998,  the Company  completed a private sale of common stock with certain
investors.  In this  transaction,  the Company issued 4,340,000 shares of common
stock at a  purchase  price of $4.00  per share  resulting  in net  proceeds  of
$16,743,000  to the Company.  In  connection  with this  financing,  the Company

                                                                    Page 7 of 17

<PAGE>


issued to the  investors  3-year  warrants to purchase an aggregate of 1,085,000
shares of common stock at an exercise price of $5.00 per share for no additional
consideration.

8.       Subsequent Events

Subsequent to the quarter  ended  September  30, 1998,  the Company  finalized a
commitment for $5.5 million in new debt financing 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.  As of the
filing of this  10-Q,  the term loan has  funded in full and  replaced  the open
balance of the $1.5 million  42-month  term loan with  Silicon  Valley Bank (see
Note 4, Notes Payable). The revolving accounts  receivable-based credit line has
an  available  balance of up to $2.7  million as of the filing of this 10-Q.  In
conjunction  with the  financing,  Transamerica  received  a 5-year  warrant  to
purchase 55,000 shares of VidaMed common stock at a price of $0.89 per share.

                                                                    Page 8 of 17

<PAGE>


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

This Management's  Discussion and Analysis of Financial Condition and Results of
Operations  for the three and nine  months  ended  September  30, 1998 and 1997,
should be read in conjunction with the  Management's  Discussion and Analysis of
Financial  Condition and Results of Operations  included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.

This Management's  Discussion and Analysis of Financial Condition and Results of
Operations  contains,  in addition to  historical  information,  forward-looking
statements   that  are  based  on  current   expectations   and  beliefs.   Such
forward-looking  statements  involve a number of risks  and  uncertainties  that
could cause actual results to differ materially.  Some of the factors that could
cause actual results to differ materially include,  among other factors,  market
acceptance of the VidaMed TUNA Procedure, availability and timing of third-party
reimbursement   for   procedures   performed   with  the  VidaMed  TUNA  System,
availability  of cash  resources  sufficient  to fund  operations,  the possible
volatility of the Company's  stock price and other factors  discussed  below and
described  in the  Company's  Securities  and  Exchange  Commission  reports and
filings.

Overview

Since its  inception  in July 1992,  VidaMed  has been  engaged  in the  design,
development,  clinical  testing and  manufacture  of the  VidaMed  TransUrethral
Needle Ablation  (TUNA(R)) System for the treatment of symptoms  associated with
an  enlarged  prostate  or  benign  prostatic  hyperplasia  (BPH).  The  Company
commenced international sales of the VidaMed TUNA System in late 1993 and United
States sales in October 1996.

VidaMed anticipates that a substantial amount of its revenues from product sales
in the future will be from sales in the United States.  The Company received FDA
clearance to market this system for the  treatment of symptoms  associated  with
BPH in the United States on October 8, 1996. The Company applied to the American
Medical Association for a CPT code covering the TUNA Procedure.  CPT code number
53852 relating to the TUNA Procedure has been published in the Federal  Register
and is part of the Medicare  Physician Fee Schedule for calendar  1998.  VidaMed
sells its  products  in the U.S.  to  individual  and group  urology  practices,
surgery  centers  and  hospitals.  The Company  markets the VidaMed  TUNA System
through four VidaMed sales managers, supported by both sales representatives and
independent dealers in the U.S. A network of distributors,  supported by VidaMed
staff, cover other countries in Europe, Asia and South America.

VidaMed does not  anticipate  reaching  profitability  in the near  future.  The
Company  expects its  operating  losses to continue  as it  continues  to commit
substantial  resources to expand marketing and sales  activities,  fund clinical
trials in support of regulatory and reimbursement  approvals,  and fund research
and  development.  The Company's  future  profitability  will be dependent upon,
among other  factors,  market  acceptance  of the  VidaMed  TUNA  Procedure  and
availability of third-party reimbursement for procedures performed with the TUNA
System.

                                                                    Page 9 of 17

<PAGE>


Although the Company has  received  FDA  clearance to market the TUNA System for
treatment of symptoms  associated  with BPH and has  commenced  marketing in the
United  States,  there can be no  assurance  that the TUNA System will be deemed
clinically or cost  effective by health care  providers and payors,  superior to
other  current and emerging  methods for  treating  BPH, or that the TUNA System
will achieve  significant  market acceptance in the United States.  Furthermore,
determinations  of  reimbursement  of the VidaMed TUNA  Procedure by private and
governmental  health payors are made by such payors and their medical  directors
independent of the FDA approval. Accordingly, there can be no assurance that the
TUNA Procedure will be reimbursed at adequate  levels in the United States under
either private or  governmental  healthcare  payment  systems.  Availability  of
Medicare   reimbursement  for  the  TUNA  Procedure  may  be  dependent  on  the
publication of clinical data relating to the  cost-effectiveness and duration of
the  TUNA  therapy.  Inadequate  reimbursement  for  the  TUNA  Procedure  could
adversely  effect  market  acceptance  of the TUNA  System.  Failure of the TUNA
Procedure  to achieve  market  acceptance  in the  United  States as well as the
impact of competitive products and pricing and other risks could have a material
adverse effect on business, financial condition and results of operations of the
Company.

The  Company  does not have a backlog of orders for its  products  in  countries
where the VidaMed TUNA System is sold and  anticipates  that it will continue to
manufacture and ship orders after their receipt.  Accordingly,  the Company does
not anticipate that it will develop a significant backlog in the future.

Results of Operations

As a result of a one-time sales reserve of $2.7 million  established as a result
of delays in Medicare reimbursement in certain key markets, net revenues for the
three months ended  September 30, 1998 were  negative  $2.1  million,  down $4.4
million, or 189% from $2.4 million in the three months ended September 30, 1997.
Excluding the sales reserve,  net revenues for the three months ended  September
30, 1998 were $0.6  million,  down $1.8  million or 73% from $2.4 million in the
three months  ended  September  30,  1997.  After the effect of the $2.7 million
sales reserve is considered,  the decrease in revenue for the three months ended
September  30, 1998  compared to the same period in 1997,  is due to (i) license
fees  and  an  initial  stocking  order  received  in  1997  from  our  Japanese
distributor following Japanese approval of the TUNA System, (ii) domestic office
sales (as opposed to hospital  sales) of the TUNA System in 1997 in anticipation
of the purchase of TUNA Systems being  Medicare  reimbursable as a result of the
Company's  CPT Code  becoming  effective  on  January  1,  1998,  and  (iii) the
difficulties  experienced in 1998  collecting  Medicare  reimbursement  for TUNA
Systems sold and TUNA  Procedures  performed in states which have not yet either
approved  Medicare  coverage for the TUNA System, or have only approved coverage
for  hospital use of the TUNA System.  The sales  reserve is a direct  result of
sales and marketing  efforts in the office-based  and Ambulatory  Surgery Center
(ASC) markets, where VidaMed's TUNA System is uniquely suited, not providing the
anticipated return due to the difficulties of Medicare  reimbursement  discussed
above.  Medicare  coverage  for supplies and devices in the office based and ASC
markets was expected to be effective  January 1, 1999,  providing an opportunity
to shift office based systems into this venue.  Recently  available  information
indicates  Medicare  coverage is now likely to be delayed,  and  accordingly the
Company established a reserve for all office-based and ASC receivables.

For the nine months ended  September 30, 1998 net revenue  decreased 94% to $0.5
million from $7.8 million  during the same period in 1997.  Excluding  the sales
reserve,  net  revenue  for the nine months  ended  September  30, 1998 was $3.2
million,  down 59% from $7.8 million in the same period for 1997. In addition to
the reasons  discussed  above, the decrease in revenue for the nine months ended
September  30, 1998  compared to the same period in 1997,  is due to the reasons
explained  above and an  overall  high sales  volume in 1997 to satisfy  pent-up
demand  following  the late  1996  FDA  approval  of the  VidaMed  TUNA  System,
including a sale of 39 systems to Tenet HealthCare  Systems in the first quarter
of 1997.  The  VidaMed  TUNA  Procedure  has now gained  Medicare  reimbursement
approval in 21 states, including Georgia, Colorado, Massachusetts and Ohio.


                                                                   Page 10 of 17

<PAGE>

Other  states with  significant  Medicare  populations  are moving  forward with
regard  to  Medicare  reimbursement.  For the  Company  to  achieve  significant
increases in sales volume, it will be necessary to obtain Medicare reimbursement
approvals  in  all  50  states,  or at  least  in all  states  with  significant
population  centers,  particularly  since sales agreements with major healthcare
providers  are often on a  national,  or  system-wide,  basis.  The  Company has
several initiatives underway to facilitate the Medicare  reimbursement  approval
process, including working in cooperation with state Medicare Medical Directors.

Current Medicare reimbursement for the TUNA handpiece extends only to procedures
performed in a hospital outpatient  setting. As stated above,  Medicare coverage
for supplies and devices in the  office-based and ASC markets is not expected to
be effective in the near future, which resulted in the Company's increased sales
reserve  balances.  There can be no  assurance  that the  Company  will  receive
additional Medicare reimbursement  approvals in major states in a timely manner,
and the failure to receive such approvals  would have a material  adverse effect
on the business, financial condition and results of operations of the Company.

Cost of product  sold for the three  months  ended  September  30, 1998 was $0.9
million,  a decrease  of 71% or $2.4  million  from $3.3  million  for the three
months ended  September 30, 1997. The period ended September 30, 1997 included a
one-time charge of $2.1 million for the shutdown of the U.K.  facility (see Note
# 5 of Notes to Condensed  Consolidated  Financial  Statements  -  Restructuring
Accrual).  For the nine months ended  September  30, 1998 cost of product  sales
decreased  59% to $2.6  million from $6.4 million in the same period in 1997 and
40% from $4.3  million  in 1997  exclusive  of the  restructuring  accrual.  The
decrease is due to lower product sales,  partially offset by production of fewer
VidaMed TUNA Systems.

Research and  development  (R & D) expenses  decreased 7% to $1.1 million in the
three months  ended  September  30, 1998,  from $1.2 million in the three months
ended  September 30, 1997.  For the nine months ended  September 30, 1998, R & D
expenses  decreased 24% to $3.5 million from $4.6 million in the same period for
1997. The difference is primarily due to the investment in the first nine months
of 1997 in  development  efforts on the VidaMed TUNA System RF generator and VTS
hand piece. Additionally, R & D includes the United States patient enrollment to
support the  clinical  trials in both 1997 and 1998 as well as two new  clinical
trials started in 1998.  The costs  associated  with follow-up  visits for these
clinical trials will continue through 1998 and beyond.

Selling, general and administrative (SG&A) expenses decreased 5% to $2.8 million
in the three months  ended  September  30,  1998,  from $2.9 in the three months
ended  September 30, 1997.  For the nine months ended  September 30, 1998,  SG&A
expenses  increased 5% to $10.7 million from $10.2 million in the same period in
1997.  The increase in 1998 from 1997 was due  primarily to the  transition to a
new chief  executive  officer and a realignment of the Company's  critical sales
positions with the addition of a new executive vice president of worldwide sales
and  marketing.  Spending in SG&A in both periods  included  start-up and launch
costs for the latest product  releases and costs  associated  with the continued
efforts to support domestic and  international  sales and costs to secure global
reimbursement  for the  TUNA  Procedure.  During  the  nine-month  period  ended
September 30, 1998,  costs were incurred to enhance the existing sales and field
reimbursement force. Costs incurred during the nine-month period ended September
30, 1997 for a co-op advertising agreement with

                                                                   Page 11 of 17

<PAGE>


Tenet Health System remain  accrued  (approximately  $300,000) and available for
programs at the individual Tenet hospitals as Medicare reimbursement is approved
in the state where the Tenet hospitals are located.

Operating  expenses  for the three and nine  months  ended  September  30,  1998
include a one-time  charge for a  reduction  in work  force,  taken to help curb
operating spending. The total spending related to the reduction was $232,000 and
consisted of SG&A expenses.

Other income for the three months ended September 30, 1998 was $80,000  compared
to other  income of  $23,000  for the  comparable  period in 1997.  For the nine
months ended September 30, 1998,  other expense was $55,000  compared to $86,000
for the same  period in 1997.  These  changes  were  primarily a function of the
balance  of cash,  cash  equivalents  and debt,  interest  earned  or  incurred,
changing  foreign  exchange rates and  fluctuations in the relative  balances of
these accounts.

Liquidity and Capital Resources

VidaMed has financed  its  operations  primarily  through the public and private
sale of equity securities and, to a lesser extent, through borrowings, equipment
lease financing, product sales, distribution rights fees and government grants.

At September  30,  1998,  the  Company's  cash and cash  equivalents  were $11.0
million  compared to $8.0  million at December  31,  1997.  The  increase is due
primarily  to a private  sale of 4.3 million  shares of common stock in May 1998
(the net  proceeds  from  which  were  approximately  $16.7  million)  offset by
operating expenses.  The cash expenditures were used primarily for the marketing
and  sale of the  VidaMed  TUNA  System,  research  and  development  activities
including  clinical  trials,   increased  SG&A  expenses  to  support  increased
operations,  working capital and payments  related to the U.K.  transition (See,
Restructuring Accrual, below).

In January 1998,  the Company  entered into a financing  agreement  with Silicon
Valley Bank for a  $1,500,000,  42-month  term loan with  principal and interest
payable monthly.  The Company also established a $3,000,000 working capital line
with Silicon Valley Bank. The Company currently has no available funds under the
working line of credit.

Subsequent to the quarter  ended  September  30, 1998,  the Company  finalized a
commitment for $5.5 million in new debt financing 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.  As of the
filing of this  10-Q,  the term loan has  funded in full and  replaced  the open
balance of the $1.5 million  42-month  term loan with Silicon  Valley Bank.  The
revolving accounts  receivable-based  credit line has an available balance of up
to $2.7  million  as of the  filing  of  this  10-Q.  In  conjunction  with  the
financing,  Transamerica  received a 5-year warrant to purchase 55,000 shares of
VidaMed common stock at a price of $0.89 per share.

                                                                   Page 12 of 17

<PAGE>


VidaMed  believes  that the  Transamerica  financing,  combined with its current
capital  resources  and  cash  generated  from  the  sale of  products,  will be
sufficient to enable the Company to meet its operating and capital  requirements
during the next twelve months.  Funds currently  available for operations  could
become insufficient,  however, if the product is not accepted in the marketplace
due to competitive products gaining market share or continued delays of Medicare
coverage  or for other  reasons  which cause the  Company's  sales to fall below
projections,  or if expenses exceed budgeted  amounts.  If this situation should
arise, there can be no assurance that additional  financing will be available on
satisfactory terms or at all. If financing were not available,  management would
need to reevaluate and revise current  operating plans as well as reduce capital
spending in general.  VidaMed's future liquidity and capital  requirements  will
depend on numerous other factors, including progress of clinical trials, actions
related to regulatory and reimbursement matters and the extent to which the TUNA
System gains market acceptance.

Restructuring Accrual

In September 1997, VidaMed announced a restructuring  program designed to reduce
costs  and  improve  operating   efficiencies  by  closing  the  Company's  U.K.
manufacturing  facility.  The Company expects to incur approximately $277,000 in
cash outlays relating to the restructuring over the next twenty-four months. See
also Note 5 of Notes to Condensed Consolidated Financial Statements.


Impact of Year 2000

Many currently  installed  computer  systems and software  products are coded to
accept,  store,  or report  only two digit  year  entries  in date code  fields.
Beginning  in the Year 2000,  these date code  fields  will need to accept  four
digit entries to  distinguish  21st century dates from 20th century  dates.  The
Year 2000  issue is a result of these  programs  being  written  with two digits
instead of four. As a result,  computer  systems and software used by companies,
including VidaMed, Inc. and its vendors and customers,  will need to comply with
the Year 2000  requirements.  The Company presently believes that as a byproduct
of normal  business  system  modifications  and upgrades and the short length of
time the Company has been in  operation,  the Year 2000 issue  should not have a
material  effect on the  Company's  current  financial  position,  liquidity  or
results of operations. However, this does not completely prevent the possibility
of problems  arising  related to the Year 2000 that could have a material impact
on operations of the Company.

The Company is aware of the Year 2000 issue and has been proactive in addressing
the issue  internally and externally.  The Company's  primary software system is
currently Year 2000  compliant.  The Company does not depend on in-house  custom
systems and generally  purchases off the shelf software from  reputable  vendors
who have tested their software for Year 2000 compliance.  The Year 2000 issue is
being  considered  for all  future  software  purchases.  Although  the  Company
believes the Year 2000 issue will not pose material operational problems for its
computer systems,  there can be no assurance that problems arising from the Year
2000 issue will be completely eliminated.

The Company is evaluating  significant  suppliers and large customers systems to
determine  the extent to which the  Company's  interface  with these  systems is
vulnerable  to the Year 2000 issue.  This  process is in progress  and should be
completed by early 1999.

                                                                   Page 13 of 17

<PAGE>


VidaMed's  products are Year 2000  compliant and are able to operate in the Year
2000 and beyond.  The Year 2000 issue is relevant to the  hardware  and software
used  in the  TUNA  System  generator.  There  are  two  processors  used in the
generator.  One  processor  does not have  date  sensitivity  and the other is a
motherboard  assembly  running  Microsoft's  Windows 95 Operating  system.  With
regard to Windows 95 Operating system being Year 2000 compliant, Microsoft wrote
in a letter dated  September  10,  1996,  to the U.S.  House of  Representatives
stating that, "All Microsoft's  operating systems (MS-DOS,  Windows 3.x, Windows
95, and Windows NT) can handle files created up to the year 2108."

The Company has not and does not expect to have material costs  associated  with
the Year 2000.

The Company  believes it has an  effective  program in place to resolve the Year
2000  issue in a timely  manner.  The  Company  also has  contingency  plans for
certain  critical  applications  and is working on such plans for others.  These
contingency plans involve, among other actions,  manual workarounds,  increasing
inventories,  and adjusting staffing  strategies.  In the event that the Company
does not completely  resolve all of the Year 2000 issues, the Company's business
operations could be adversely affected, although the resulting costs and loss of
business cannot be reasonably estimated at this time.

                                                                   Page 14 of 17

<PAGE>


PART II: OTHER INFORMATION

Item 1.           Legal Proceedings

On May 20, 1997, VidaMed filed a complaint against Prosurg,  Inc., in the United
States  District  Court for the Northern  District of  California  alleging that
Prosurg  Inc.  is  infringing  and  inducing  others to infringe  three  VidaMed
Patents,  U.S. Patent Nos.  5,526,240,  5,531,676,  and 5,531,677.  On March 20,
1998, at the request of the parties,  the Court dismissed  without prejudice all
claims relating to U.S. patent Nos.  5,531,676 and 5,531,677.  Accordingly,  the
only remaining claim is related to U.S Patent No. 5,526,240.

On September  10, 1998,  the Company  entered into a settlement  agreement  with
Prosurg  Inc. in which  Prosurg  Inc.  acknowledged  that it had  infringed  and
induced  infringement  of  claim  1  of  VidaMed's  U.S.  Patent  5,526,240  and
acknowledged  the validity of claim 1. In the settlement,  Prosurg agreed not to
use, sell or distribute  Opal, Opal Flex,  BEAP, or any other R.F.  interstitial
therapy  devices in the U.S. for the treatment of BPH. The settlement  agreement
also prevents Prosurg from asking,  encouraging,  aiding, abetting, or otherwise
soliciting others to use its R.F. therapy devices in the treatment of BPH in the
U.S.  As  part of the  settlement,  Prosurg,  with  certain  restrictions,  will
continue to sell R.F. therapy devices in the international market place.


Item 2.           Exhibits and Reports on Form 8-K

                           a) Exhibits

                                    (27.1) Financial Data Schedule

                           b) Reports on Form 8-K.

                                    No reports on Form 8-K were filed during the
                                    quarter ended September 30, 1998.

                                                                   Page 15 of 17

<PAGE>


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 13, 1998                 By: /s/ David J. Illingworth
       ----------------------------             --------------------------------
                                                David J. Ilingworth
                                                Chairman, President, Chief
                                                Executive Officer

Date:     November 13, 1998                 By: /s/ Richard D. Brounstein
       ----------------------------             --------------------------------
                                                Richard D. Brounstein
                                                VP Finance, Chief Financial
                                                Officer (Principal Financial and
                                                Accounting Officer)

                                                                   Page 16 of 17