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SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





(Mark One)


|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------




For the quarterly period ended June 30, 2002





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 0-16752





MEDSTONE INTERNATIONAL, INC.


(Exact
name of registrant as specified in its charter)





DELAWARE

66-0439440(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)100 Columbia, Suite 100, Aliso Viejo, California

92656-4114(Address of principal executive offices)

(Zip Code)





(949) 448-7700


Registrants telephone number, including area code





Not
Applicable


(Former name, former address and former fiscal year, if changed, since last report)





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.  Yes  x  No  ̈





The number of shares of the Common Stock of the registrant outstanding as of August 9, 2002 was 3,810,020.





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MEDSTONE INTERNATIONAL, INC.





INDEX TO FORM 10-Q





PART I.    FINANCIAL INFORMATION





Page No.Item 1.

Financial Statements:Consolidated Balance Sheets June 30, 2002 (Unaudited) and December 31, 2001

3Condensed Consolidated Statements of Income (Unaudited) Three and Six Months Ended June 30, 2002 and 2001

4Consolidated Statement of Stockholders Equity (Unaudited) Six Months Ended June 30, 2002

5Condensed Consolidated Statements of Cash Flows (Unaudited) Six Months ended June 30, 2002 and 2001

6Notes to Unaudited Condensed Consolidated Financial Statements

7Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

11PART II.    OTHER INFORMATIONItem 1.

Legal Proceedings

16Item 2.

Changes in Securities

16Item 3.

Defaults Upon Senior Securities

16Item 4.

Submission of Matters to a Vote of Security Holders

16Item 5.

Other Information

16Item 6.

Exhibits and Reports on Form 8-K

16Signatures

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MEDSTONE INTERNATIONAL, INC.





CONSOLIDATED BALANCE SHEETS





June 30, 2002

December 31, 2001(Unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
1,631,785

$
1,928,731Short-term investments held to maturity


4,623,167


4,570,420Accounts receivable, less allowance for doubtful accounts of $797,084 and $804,646 at June 30, 2002 and December 31,
2001, respectively


3,869,472


4,013,781Inventories, less allowance for inventory obsolescence of $624,417 and $540,417 at June 30, 2002 and December 31, 2001,
respectively


5,812,217


6,296,069Deferred tax assets


2,160,695


2,160,695Prepaid expenses and other current assets


562,629


541,194Total current assets


18,659,965


19,510,890Buildings, property and equipment, at cost:Building


359,324


359,324Lithotripters


13,494,459


13,163,285Equipment


2,346,945


2,048,582Furniture and fixtures


1,001,173


961,776Leasehold improvements


175,032


171,17717,376,933


16,704,144Less accumulated depreciation and amortization


(12,827,449


(12,041,254
)Net property and equipment


4,549,484


4,662,890Goodwill, net


3,193,509


3,205,251Investment in unconsolidated subsidiaries


879,133


909,492Net investment in sale-type lease


263,830


224,731Other assets, net


111,651


117,006$
27,657,572

$
28,630,260LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
1,232,189

$
1,087,594Accrued expenses


268,767


345,075Accrued income taxes





Accrued payroll expenses


395,514


313,472Customer deposits


106,180


364,048Deferred revenue


677,528


783,948Total current liabilities


2,680,178


2,894,137Deferred tax liabilities


562,534


562,534Minority interest


404,177


497,647Deferred rent


88,125


86,425Stockholders equity:


Common stock$.004 par value, 20,000,000 shares authorized, 5,742,670 shares issued at both June 30, 2002 and
December 31, 2001


22,971



22,971Additional paid-in capital


19,646,388



19,646,388Accumulated earnings


16,298,734



16,050,251Accumulated other comprehensive income/(loss)


(12,634
)


32,756Treasury stock, at cost, 1,822,650 and 1,631,450 shares at June 30, 2002 and December 31, 2001,
respectively


(12,032,901
)


(11,162,849
)Total stockholders equity


23,922,558



24,589,517$
27,657,572


$
28,630,260





See accompanying notes.





|
|



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MEDSTONE INTERNATIONAL, INC.





CONDENSED CONSOLIDATED STATEMENTS OF INCOME


(Unaudited)





Three Months Ended June
30,


Six Months Ended June
30,2002

2001


2002

2001Revenues:Procedures, maintenance fees and fee-for service

$
4,312,088

$
4,719,194


$
8,649,523

$
9,229,967Net equipment sales


1,639,249


744,678



3,535,692


1,097,859Interest income


79,521


116,071



161,644


257,957Total revenues


6,030,858


5,579,943



12,346,859


10,585,783Costs and expenses:Costs of procedures and maintenance fees


2,611,460


2,677,076



5,038,409


5,510,106Cost of equipment sales


1,194,027


671,539



2,668,936


1,021,827Research and development


313,971


299,147



574,910


560,104Selling


794,030


713,029



1,606,245


1,243,651General and administrative


833,731


648,276



1,651,221


1,312,305Total costs and operating expenses


5,747,219


5,009,067



11,539,721


9,647,993Operating income


283,639


570,876



807,138


937,790Other expense (income):Gain on sale of investments





(69,497
)





(427,605
)Other expense


4,153


19,033



2,266


52,376Total other expenses (income)


4,153


(50,464
)


2,266


(375,229
)Minority interests:Minority interest in subsidiaries income


160,511


179,564



330,530


334,959Equity in income from unconsolidated subsidiary





(7,656
)


30,359


(37,165
)Total minority interest


160,511


171,908



360,889


297,794Income before provision for income taxes


118,975


449,432



443,983


1,015,225Provision for income taxes


37,700


219,651



195,500


434,651Net income

$
81,275

$
229,781


$
248,483

$
580,574Earnings per share:Basic

$
.02

$
.05


$
.06

$
.14Diluted

$
.02

$
.05


$
.06

$
.14Number of shares used in the computation of earnings per share:Basic


3,923,753


4,198,220



3,939,154


4,235,720Diluted


3,927,685


4,198,609



3,940,437


4,240,728





See accompanying notes.




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MEDSTONE INTERNATIONAL, INC.





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY





Common Stock

Additional paid-in capital

Accumulated earnings

Accumulated Other Comprehensive income (loss)


Treasury Stock


TotalNumber of shares


AmountBalance at December 31, 2001

4,111,220


$
22,971

$
19,646,388

$
16,050,251

$
32,756


$
(11,162,849
)

$
24,589,517Net income











248,483










248,483Other comprehensive income:Unrealized loss on foreign currency translation, net














(45,390
)






(45,390
)Total comprehensive income






















203,093Treasury stock repurchased

(191,200
)















(870,052
)


(870,052
)Balance at June 30, 2002 (Unaudited)

3,920,020


$
22,971

$
19,646,388

$
16,298,734

$
(12,634
)

$
(12,032,901
)

$
23,922,558





See accompanying notes.




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MEDSTONE INTERNATIONAL, INC.





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS





Six months ended June 30, 2002 and 2001


(Unaudited)





2002


2001Cash flows from operating activities:Net income

$
248,483


$
580,574Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


890,172



1,080,129Provision for doubtful accounts


120,000



110,000Provision for inventory obsolescence


84,000



84,000Gain on sale of long-term investments






(427,605
)Minority interest in partnerships


330,530



334,959Minority equity in consolidated subsidiary


30,359



(37,165
)Changes in assets and liabilities:Accounts receivable


103,212



(194,971
)Inventories


240,112



(110,672
)Prepaid expenses and other current assets


28,163



8,078Accounts payable and accrued expenses


72,871



(137,826
)Accrued payroll expenses


82,042



(76,642
)Accrued income taxes






72,028Deferred revenue


(106,420
)


(119,859
)Customer deposits


(257,868
)


308,367Other, net


(26,248
)


(15,308
)Net cash provided by operating activities


1,839,408



1,458,087Cash flows from investing activities:Purchase of short-term investments


(2,328,167
)


(5,602,921
)Proceeds from sales of short-term investments


2,275,420



6,340,681Investment in sales type lease


(7,860
)


Proceeds from sale of long-term investments






427,605Distribution of minority interest


(424,000
)


(348,000
)Purchase of property and equipment, net


(778,811
)


(830,138
)Net cash provided by (used in) investing activities


(1,263,418
)


(12,773
)Cash flows from financing activities:Purchase of treasury stock


(870,052
)


(650,506
)Deferral of rent payments


1,700



5,409Loan payments


(4,584
)


(8,631
)Net cash used in financing activities


(872,936
)


(653,728
)Net increase in cash and equivalents


(296,946
)


791,586Cash and equivalents at beginning of period


1,928,731



945,610Cash and equivalents at end of period

$
1,631,785


$
1,737,196Supplemental cash flow disclosures:Cash paid during the period for:Income taxes

$
37,528


$
396,452





See accompanying notes.




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MEDSTONE INTERNATIONAL, INC.


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





June 30, 2002





A.    Basis of presentation





The accompanying condensed consolidated financial statements include the accounts of Medstone International, Inc. and its subsidiaries (the Company). All significant
intercompany transactions and accounts have been eliminated.





In the opinion of the Companys management, the
accompanying unaudited condensed consolidated financial statements include all adjustments (which consist only of normal recurring adjustments) necessary for a fair presentation of its consolidated financial position at June 30, 2002 and
consolidated results of operations and cash flows for the periods presented. Although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information and
disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These financial statements should be read in conjunction with the Companys audited
financial statements included in the Companys 2001 Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 1, 2002. Results of operations for the three and six months ended June 30, 2002 are not necessarily
indicative of results to be expected for the full year.





The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.





B.    Accumulated Other Comprehensive Loss





The components of other comprehensive loss are as follows:





Currency Translation
AdjustmentBalance at December 31, 2001

$
32,756Foreign currency translation adjustments


(45,390
)Balance at June 30, 2002

$
(12,634
)





The functional currency of the investment in foreign subsidiary is
considered to be the United States dollar.





The earnings associated with the Companys investment in its
foreign subsidiary are




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considered to be permanently invested and no provision for U.S. federal and state income taxes on those
earnings or translation adjustments has been provided.





For the three months ended June 30, 2002 and 2001, total
comprehensive income was $65,602 and $220,482, respectively, For the six months ended June 30, 2002 and 2001, total comprehensive income was $203,093 and $566,752, respectively.





C.    Business Segments





The Company
operates in two business segments, equipment sales and fees for procedures, maintenance and management.





Three months ended


Six months endedJune 30, 2002

June 30, 2001


June 30, 2002


June 30, 2001Revenue:Equipment sales

$
1,639,249

$
744,678


$
3,535,692


$
1,097,859Fees for procedures, maintenance and management


4,312,088


4,719,194



8,649,523



9,229,967$
5,951,337

$
5,463,872


$
12,185,215


$
10,327,826Operating income (loss):Equipment sales

$
109,059

$
(35,918
)

$
(30,885
)

$
(123,691
)Fees for procedures, maintenance and management


174,580


606,794



838,023



1,061,481$
283,639

$
570,876


$
807,138


$
937,790




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D.    Per share information





Basic net income per share is computed by dividing income available to common stockholders by the weighted average number of common shares
outstanding. Diluted net income per share includes the effect of the potential shares outstanding, including dilutive stock options and warrants using the treasury stock method.





The following table sets forth the computation of earnings per share:





Three Months Ended June 30,

Six Months Ended June
30,2002

2001

2002

2001Numerator: Net income

$
81,275

$
229,781

$
248,483

$
580,574Denominator for weighted average shares outstanding


3,923,753


4,198,220


3,939,154


4,235,720Basic earnings per share

$
.02

$
.05

$
.06

$
.14Effect of dilutive securities:Weighted average shares outstanding


3,923,753


4,198,220


3,939,154


4,235,720Stock options


3,932


389


1,283


5,008Denominator for diluted earnings per share


3,927,685


4,198,609


3,940,437


4,240,728Diluted earnings per share

$
.02

$
.05

$
.06

$
.14





Common equivalent shares result from the assumed exercise of
outstanding dilutive securities when applying the treasury stock method. Fully diluted per share information is not presented for periods in which the effect is antidilutive.





E.    Inventories





At June 30, 2002 and
December 31, 2001, inventories consisted of the following:





June 31, 2002

December 31, 2001Raw materials

$
4,382,952

$
4,567,799Work in process


313,930


363,768Finished goods


1,115,335


1,364,502$
5,812,217

$
6,296,069





F.    Contingencies





From time to time, the Company is subject to legal actions and claims for personal injuries or property damage related to patients who use
its products. The Company has obtained a liability insurance policy providing coverage for product liability and other claims. Management does not believe that the resolution of any current proceedings will have a material financial impact on the
Company or the condensed consolidated financial statements.





G.    Stock Repurchase Plan





In the second quarter of 2002 the Company purchased a total of 11,200 shares at an




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aggregate cost of $50,302, under the Companys latest Stock Repurchase Plan. Under all of the
Companys stock repurchase plans a total of 1,822,650 shares have been repurchased at a total cost of $12,032,901.





H.    Subsequent Events





Through August 7, 2002, the Company purchased
110,000 shares of its Common Stock for a cost of $501,600 under its current Stock Repurchase Program.





I.    Goodwill





As required by Financial Accounting Standards Board
pronouncement No. 142, Goodwill and Other Intangible Assets, the Company has performed the first of the required impairment tests for goodwill. Based on the results of that test, the Company has determined that goodwill was not impaired
at January 1, 2002.




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





The following discussion and analysis should be read in conjunction with the Companys audited financial statements and Managements Discussion and Analysis of Financial Condition and Results
of Operations included in the Companys 2001 Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 1, 2002.





In the ordinary course of business, the company has made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of its
financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes that
the following discussion addresses the Companys most critical accounting policies, which are those that are most important to the portrayal of the Companys financial condition and results. The Company constantly re-evaluates these
significant factors and makes adjustments where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the necessary estimates inherent in the preparation of financial statements.
Estimates and assumptions include, but are not limited to, customer receivables, inventories, equity investments, fixed asset lives, contingencies and litigation. The Company has also chosen certain accounting policies when options were available,
including:





| |  |  | The first-in, first-out (FIFO) method to value a majority of our inventories; and
| | - |  | ---------------------------------------------------------------------------------




| |  |  | The intrinsic value method, or APB Opinion No. 25, to account for our common stock incentive awards; and
| | - |  | --------------------------------------------------------------------------------------------------------




| |  |  | We record an allowance for credit losses based on estimates of customers ability to pay. If the financial condition of our customers were to deteriorate,
additional allowances may be required.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




These accounting policies are applied consistently for
all years presented. Our operating results would be affected if other alternatives were used. Information about the impact on our operating results is included in the footnotes to our consolidated financial statements.





Results of Consolidated Operations





General





Medstone manufactures, markets and maintains lithotripters, and continues to
expand its Fee-for-Service Program to supply lithotripsy equipment to providers on a per procedure basis. The lithotripters manufactured by Medstone are approved to treat both kidney stones and gallstones. The Company is also marketing a urology
imaging and treatment table, used for various urological functions, mobile urology and patient handling tables to serve the mobile treatment market and various radiology room equipment, capitalizing on the relationships that the Company has with
radiology equipment manufacturers. To date, the Companys consolidated revenues have come primarily from Medstones lithotripsy business.




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As a manufacturer of medical devices, the Company is vertically integrated by
offering its medical devices directly to providers. It currently offers lithotripsy procedures using 14 mobile systems, one fixed site and 26 transmobile lithotripters located throughout the United States on a per procedure basis. With the ability
to offer quality equipment at reasonable prices, Medstone intends to continue the growth of this manufacturer direct business.





Results of Operations





Three Months ended June 30, 2002 Compared to Three Months Ended
June 30, 2001





The Company recognized total revenue of $6.0 million in the second quarter of 2002 compared to
$5.6 million in the second quarter of 2001, or an 8% increase. Revenues from procedures, maintenance and management fees decreased from $4.7 million in the three months ended June 30, 2001 to $4.3 million in the three months ended June 30, 2002 due
to both lower average per patient charges on the Companys fee-for-service equipment and lower patient count. Also decreasing were spares revenues as there were lower shipments for both domestic and foreign customers in the current year when
compared to the same period of the prior year. Partially offsetting these decreases were the revenues from maintenance contracts as the number of contracts increased due to additional equipment sales and customer selecting factory maintenance
contracts. Equipment revenues increased to $1.64 million in the quarter ending June 30, 2002 from $.74 million in the comparable quarter of the prior year, or a 120% increase. The Company shipped three lithotripsy systems, one urology table and 26
various patient handling tables in the 3 months ended June 30, 2002 compared to one lithotripsy system and 30 various patient handling tables shipped in the same period of 2001.





Interest income decreased by 31% in the second quarter of 2002 when compared to the same period of the prior year due to a significant decline in investment yields and a
slight decline in the average invested balance.





Recurring revenue cost of sales increased to 61% of sales in the
quarter ended June 30, 2002 compared to 57% in the same quarter of the prior year. This is due to slightly lower depreciation and equipment rental expense in the fee-for-service revenue stream offset by a significant decline in the revenue per
patient. Cost of sales on equipment sales decreased to 73% of sales in the three months ended June 30, 2002 compared to 90% of sales in the same period of 2001. This decrease is due to lower costs associated with an increase in volume of system
shipments. Overall cost of sales, as a percentage of revenue (excluding interest), increased to 64% in the second quarter of 2002 compared to 61% in the second quarter of 2001.





Research and development costs increased to $314,000 in the second quarter of 2002 compared to $299,000 in the second quarter of 2001 or an increase of 5% due to additional
consulting expenses for development of new applications for our existing equipment.





Selling costs increased to
$794,000 in the second quarter of 2002 compared to $713,000 in the same period of the prior year, a change of $81,000 or 11% due to higher payroll expenses for added radiology sales staff and increased commission expense on higher sales revenue.




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General and administrative expenses increased by $185,000 or 29% in the three
months ended June 30, 2002 compared to the same period in the prior year due to higher consulting and legal expenses.





Gain on sale of investments decreased to $0 in the quarter ending June 30, 2002 compared to $69,000 in the three months ended June 30, 2001. The Company did not sell any investments in the current year, whereas the Company sold
28,000 shares of Cardiac Science in the same period of 2001.





Total minority interest expense decreased to
$161,000 in the three months ended June 30, 2002 compared to $172,000 in the same period of the prior year due to lower profits in the Northern Nevada and Southern Idaho operations.





Provision for income taxes for the second quarter of 2002 decreased by $182,000 as a result of lower taxable income in the current year when compared to the same period of
2001.





Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001





The Company recorded total revenue of $12.3 million in the first six months of 2002 or a 17% increase compared to $10.6 million in the
corresponding period of 2001. Revenues from procedures, maintenance and management fees decreased by $580,000, or 6%, due to lower average reimbursement per patient even as total patient count increased by 6% in the current year, to over 14,650
patients. Spares revenue also decreased in the current year compared to the same period in the prior year. Equipment revenue increased by $2,437,000, or 222%, as unit shipments increased significantly in the six months ended June 30, 2002 compared
to the same period of 2001. Six lithotripsy systems were shipped in the current year compared to one unit in the prior year. Four urology systems were shipped in the six months ended June 30, 2002 with no comparable revenue in the prior year.
Offsetting some of the increase in unit shipments is a slight decline in the Companys imaging tables, as the Company has shipped 42 various types of tables in 2002 compared to 47 units sold in the corresponding period of 2001.





Interest income decreased by 37% for the first six months of 2002 when compared to the same period of the prior year as
significantly lower interest yields were earned on a slightly lower average invested balance.





Procedure,
maintenance and management fee cost of sales decreased to 58% in the six months ended June 30, 2002 compared to 60% in the same period of the prior year as costs decreased in the fee-for-service program due to lower depreciation and equipment rental
costs. Cost of sales on equipment sales decreased to 75% of revenue in the first six months of 2002 compared to 93% of revenue in the first six months of 2001 due to a higher number of lithotripsy units sold, which have higher profit margins
compared to imaging tables. Overall cost of sales, as a percentage of revenue (excluding interest), remained constant at 63% in both the first six months of 2002 and the same period of 2001.





Research and development costs increased by $15,000, or 3% in the first six months of 2002 when compared to the same period of 2001 as the Company is developing new project
applications.




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Selling costs increased by 29%, or $363,000, in the first six months of 2002
compared to the same period of 2001 due to higher payroll for expanded imaging sales efforts, increased commission expense on higher revenues and services related to the biliary marketing efforts.





General and administrative expenses increased by 26%, or $339,000, in the six months ended June 30, 2002 compared to the first six months
of 2001 due to higher consulting and legal expenses.





Gain on sale of investments was $428,000 in the six months
ended June 30,2001 with no comparable amount in the six months ended June 30, 2002. The Company did not sell any investments in the current year, whereas the Company sold 101,000 shares of Cardiac Science in the same period of the prior year.





Minority interest increased by 21% in the six months ended June 30, 2002 when compared to the same period of the
prior year due to recognition of the Companys portion of the losses of Arcoma AB in the current year compared to recognition of equity earnings from Medicredit.com, Inc. in the six months ended June 30, 2001.





Provision for income taxes decreased to $196,000 in the first six months of 2002 compared to $435,000 for the same period of 2001 as a
result of lower taxable income in the current year.





Liquidity and Capital Resources





At June 30, 2002, the Company had cash and short-term investments of approximately $6.3 million. These funds were generated
from continuing operating activities and from the Companys initial public offering in June 1988.





The
Companys long-term capital expenditure requirements will depend on numerous factors, including the progress of the Companys research and development programs, the time required to obtain regulatory approvals, the resources that the
Company devotes to the development of self-funded products, proprietary manufacturing methods and advanced technologies, the costs of acquisitions and/or new revenue opportunities, the ability of the Company to obtain additional licensing
arrangements and to manufacture products under those arrangements, and the demand for its products if and when approved and possible acquisitions of products, technologies and companies.





The Company believes that its existing working capital and funds anticipated to be generated from operations will be sufficient to meet the cash needs for continuation of
its present operations during 2002.





Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995





Forward-looking statements in this report, including without limitation, statements relating to the
Companys plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such
forward-looking statements involve risks and uncertainties including without limitation the following: (i) the Companys plans, strategies, objections,




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expectations and intentions are subject to change at any time at the discretion of the Company, (ii) the Companys plans and results
of operations will be affected by the Companys ability to manage its growth; (iii) the Companys businesses are highly competitive and the entrance of new competitors into or the expansion of the operations by existing competitors in
the Companys markets and other changes could adversely affect the Companys plans and results of operations; and (iv) other risks and uncertainties indicated from time to time in the Companys filings with the Securities and
Exchange Commission.




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##### Table of Contents




MEDSTONE INTERNATIONAL, INC.





PART II.    OTHER INFORMATION





Item 1.    Legal Proceedings





Previously reported.





Item 2.    Changes in Securities





None





Item 3.    Defaults upon Senior Securities





None





Item 4.    Submission of Matters to a Vote of Security Holders





| | (a) |  | The annual meeting of stockholders of the Company was held on June 28, 2002.
| | --- |  | ----------------------------------------------------------------------------




| | (b) |  | The election of five board of directors of the Company was held. The number of shares cast for each of the individuals listed below to serve until the next
Annual Meeting of stockholders and until their successors are elected and have qualified was as follows:
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Name

For

WithheldDavid V. Radlinski

2,291,968

761,359Frank R. Pope

2,304,768

748,559Jack Olshansky

2,297,437

755,890Michael C. Tibbitts

2,306,622

746,359David A. Reed

2,306,968

746,705





The ratification of the appointment of Moss Adams
LLP as independent accountants of the Company for the year ending December 31, 2002.





For

2,454,726Against

259,409Abstain

339,192





Item 5.    Other Information





None





Item 6.    Exhibits and Reports on Form 8-K





| | (a) |  | The following exhibits are included herein:
| | --- |  | -------------------------------------------




99.1

Certification of the Chairman and Chief Executive Officer of the Company pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.99.2

Certification of the Chief Financial Officer of the Company pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.





| | (b) |  | Reports on Form 8-K.
| | --- |  | --------------------




None




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SIGNATURES





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 hereunto duly authorized.





MEDSTONE INTERNATIONAL, INC. A Delaware corporationDate: August 13, 2002



By:

/s/    MARK
SELAWSKIMark Selawski Chief Financial
Officer (Principal financial and accounting officer)




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INDEX TO EXHIBITS





Exhibit No.

Document Description99.1

Certification of Chairman and Chief Executive Officer99.2

Certification of Chief Financial Officer




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