<PAGE>

                       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                 March 31, 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                     (I.R.S. Employer
 incorporation or organization)                    Identification No.)

   100 Columbia, Suite 100, Aliso Viejo, California                92656
--------------------------------------------------------------------------------
           (Address of principal executive offices)             (Zip code)

Registrant's telephone number, including area code:         (949)  448-7700
                                                    ----------------------------

                                 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 May
1, 2002 was 3,931,220.

<PAGE>


                          MEDSTONE INTERNATIONAL, INC.

                               INDEX TO FORM 10-Q

                          PART I. FINANCIAL INFORMATION
                          -----------------------------
                                                                        Page No.
                                                                        --------
Item 1.   Financial Statements:

          Consolidated Balance Sheets
            March 31, 2002 (Unaudited) and
            December 31, 2001                                               3

          Consolidated Statements of Income
            Three Months Ended March 31, 2002 and 2001 (Unaudited)          4

          Consolidated Statement of Stockholders' Equity
            Three Months Ended March 31, 2002 (Unaudited)                   5

          Consolidated Statements of Cash Flows
            Three Months Ended March 31, 2002 and 2001 (Unaudited)          6

          Notes to Unaudited Consolidated Financial Statements              7


Item 2.   Management's Discussion and Analysis of Financial Condition
            and Results of Operations                                      11


                           PART II. OTHER INFORMATION
                           --------------------------

Item 1.   Legal Proceedings                                                15

Item 2.   Changes in Securities                                            15

Item 3.   Defaults Upon Senior Securities                                  15

Item 4.   Submission of Matters to a Vote of Security Holders              15

Item 5.   Other Information                                                15

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

Signatures                                                                 16


                                       -2-

<PAGE>


                          MEDSTONE INTERNATIONAL, INC.
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                            March 31,               December 31,
                                                                              2001                      2001
                                                                         ---------------          ----------------
<S>                                                                      <C>                      <C>
                                                                          (Unaudited)
                                                       ASSETS
                                                       ------
Current assets:
     Cash and cash equivalents                                          $      1,465,085          $      1,928,731
     Short-term investments held to maturity                                   4,600,383                 4,570,420
     Accounts receivable, less allowance for doubtful accounts of
         $737,084 and $477,180 at March 31, 2002 and
         December 31, 2001, respectively                                       3,865,087                 4,013,781
     Inventories, less allowance for inventory obsolescence
         of $582,417 and $457,088 at March 31, 2002 and
         December 31, 2001, respectively                                       5,426,721                 6,296,069
     Deferred tax assets                                                       2,160,695                 2,160,695
     Prepaid expenses and other current assets                                   628,513                   541,194
                                                                         ---------------          ----------------
     Total current assets                                                     18,146,484                19,510,890

Buildings, property and equipment, at cost:

     Building                                                                    359,324                   359,324
     Lithotripters                                                            13,500,987                13,163,285
     Equipment                                                                 2,303,530                 2,048,582
     Furniture and fixtures                                                      965,231                   961,776
     Leasehold improvements                                                      175,032                   171,177
                                                                         ---------------          ----------------
                                                                              17,304,104                16,704,144
     Less accumulated depreciation and amortization                          (12,433,361)              (12,041,254)
                                                                         ---------------           ---------------
     Net property and equipment                                                4,870,743                 4,662,890
                                                                         ---------------          ----------------

Goodwill, net                                                                  3,201,545                 3,205,251
Investment in unconsolidated subsidiaries                                        879,133                   909,492
Net investment in sale-type lease                                                308,432                   224,731
Other assets, net                                                                114,501                   117,006
                                                                         ---------------          ----------------
                                                                         $    27,520,838          $     28,630,260
                                                                         ===============          ================


                                            LIABILITIES AND STOCKHOLDERS' EQUITY
                                            ------------------------------------
Current liabilities:
     Accounts payable                                                    $       888,959          $      1,087,594
     Accrued expenses                                                            384,088                   345,075
     Accrued income taxes                                                            ---                       ---
     Accrued payroll expenses                                                    288,901                   313,472
     Customer deposits                                                            27,100                   364,048
     Deferred revenue                                                            895,057                   783,948
                                                                         ---------------          ----------------
         Total current liabilities                                             2,484,105                 2,894,137

Deferred tax liabilities                                                         562,534                   562,534
Minority interest                                                                479,666                   497,647
Deferred rent                                                                     87,275                    86,425
Stockholders' equity:
     Common stock - $.004 par value, 20,000,000 shares authorized, 5,742,670
         shares issued at both
     March 31, 2002 and December 31, 2001                                         22,971                    22,971
     Additional paid-in capital                                               19,646,388                19,646,388
     Accumulated earnings                                                     16,217,459                16,050,251
     Accumulated other comprehensive income                                        3,039                    32,756
     Treasury stock,  at cost, 1,811,450 and 1,631,450 shares at
         March 31, 2002 and December 31, 2001, respectively                  (11,982,599)              (11,162,849)
                                                                         ---------------          ----------------

         Total stockholders' equity                                           23,907,258                24,589,517
                                                                         ---------------          ----------------
                                                                         $    27,520,838          $     28,630,260
                                                                         ===============          ================

                                                      See accompanying notes
</TABLE>



                                       -3-

<PAGE>

                          MEDSTONE INTERNATIONAL, INC.

                        CONSOLIDATED STATEMENTS OF INCOME
                   Three months ended March 31, 2002 and 2001
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                                   2002                 2001
                                                                              ---------------     --------------
<S>                                                                           <C>                 <C>
Revenues:

Procedures, maintenance fees and fee-for-service .......................      $     4,337,435     $    4,510,773
  Net equipment sales ..................................................            1,896,443            353,181
  Interest income ......................................................               82,123            141,886
                                                                              ---------------     --------------
    Total revenues .....................................................            6,316,001          5,005,840
Costs and operating expenses:
  Cost of procedures and maintenance fees ..............................            2,426,949          2,833,030
  Cost of equipment sales ..............................................            1,474,909            350,288
  Research and development .............................................              260,939            260,957
  Selling ..............................................................              812,215            530,622
  General and administrative ...........................................              817,490            664,029
                                                                              ---------------     --------------
    Total costs and operating expenses .................................            5,792,502          4,638,926
                                                                              ---------------     --------------

Operating income .......................................................              523,499            366,914
Other expense (income):
  Gain on sale of investments ..........................................                  ---           (358,108)
  Other expense (income) ...............................................               (1,887)            33,343
                                                                              ---------------     --------------
    Total other expenses (income) ......................................               (1,887)          (324,765)
                                                                              ---------------     --------------
Minority interests:
  Minority interest in subsidiaries income .............................              170,019            155,395
  Equity in loss (income) from unconsolidated subsidiary ...............               30,359            (29,509)
                                                                              ---------------     --------------
    Total minority interest ............................................              200,378            125,886
                                                                              ---------------     --------------
Income before provision for income taxes ...............................              325,008            565,793
Provision for income taxes .............................................              157,800            215,000
                                                                              ---------------     --------------
Net income .............................................................      $       167,208     $      350,793
                                                                              ===============     ==============
Net income per share:

    Basic ..............................................................      $           .04     $          .08
                                                                              ===============     ==============
    Diluted ............................................................      $           .04     $          .08
                                                                              ===============     ==============

Number of shares used in the computation of
     earnings per share:

    Basic ..............................................................            3,954,553          4,273,220
                                                                              ===============     ==============
    Diluted ............................................................            3,954,553          4,281,932
                                                                              ===============     ==============
</TABLE>

                             See accompanying notes.


                                       -4-

<PAGE>



                          MEDSTONE INTERNATIONAL, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>


                                    Common Stock                                 Accumulated
                                 -------------------- Additional                    Other
                                  Number of            paid-in    Accumulated   Comprehensive     Treasury
                                   shares     Amount   capital     earnings      income (loss)     Stock             Total
                                 ----------  -------- ----------- -----------  --------------- ---------------  ----------------
<S>                             <C>         <C>      <C>         <C>          <C>             <C>              <C>

Balance at December 31, 2001      4,111,220  $ 22,971 $19,646,388 $16,050,251  $        32,756 $   (11,162,849) $     24,589,517

Net income                              ---       ---         ---     167,208              ---             ---           167,208

Other comprehensive income:
    Unrealized loss on foreign
    currency translation, net           ---       ---         ---         ---          (29,717)            ---           (29,717)
                                                                                                                ----------------

Total comprehensive income                                                                                               137,491
                                                                                                                ----------------

Treasury stock repurchased         (180,000)      ---         ---         ---              ---        (819,750)         (819,750)
                                 ----------  -------- ----------- -----------  --------------- ---------------  ----------------

Balance at March 31, 2002
(Unaudited)                       3,931,220  $ 22.971 $19,646,388 $16,217,459  $         3,039 $   (11,982,599)  $    23,907,258
                                 ==========  ======== =========== ===========  =============== ===============  ================

</TABLE>

                             See accompanying notes.


                                       -5-

<PAGE>

                          MEDSTONE INTERNATIONAL, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                   Three months ended March 31, 2002 and 2001
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                       2002                 2001
                                                                ------------------    ------------------
<S>                                                            <C>                   <C>

Cash flows from operating activities:

   Net income ................................................. $          167,208    $          350,793
  Adjustments to reconcile net income to net
   cash provided by operating activities:
        Depreciation and amortization .........................            433,876               554,900
        Provision for doubtful accounts .......................             60,000                30,000
        Provision for inventory obsolescence ..................             42,000                42,000
        Gain on sale of long-term investments .................                ---              (358,108)
        Minority interest in partnerships .....................            170,019               155,395
        Minority loss (equity) in unconsolidated subsidiary ...             30,359               (29,509)
        Changes in assets and liabilities:
           Accounts receivable ................................            122,995               (59,496)
           Inventories ........................................            667,608              (120,582)
           Prepaid expenses and other current assets ..........            (37,721)              154,198
           Accounts payable and accrued expenses ..............           (155,637)              176,290
           Accrued payroll expenses ...........................            (24,571)              (53,971)
           Accrued income taxes ...............................                ---               168,674
           Deferred revenue ...................................            111,109               (57,993)
           Customer deposits ..................................           (336,948)              285,267
           Other, net .........................................            (29,721)               18,602
                                                                ------------------    ------------------

           Net cash provided by operating activities ..........          1,220,576             1,256,460
                                                                ------------------    ------------------

Cash flows from investing activities:
   Purchase of short-term investments .........................         (1,169,251)           (3,333,231)
   Proceeds from sales of short-term investments ..............          1,139,288             4,150,973
   Proceeds from sale of long-term investments ................                ---               358,108
   Investment in sales type lease .............................             (7,860)                  ---
   Distribution of minority interest ..........................           (188,000)             (180,000)
   Purchase of property and equipment, net ....................           (635,514)             (646,191)
                                                                ------------------    ------------------

           Net cash provided by investing activities ..........           (861,337)              349,659
                                                                ------------------    ------------------

Cash flows from financing activities:
   Purchase of treasury stock .................................           (819,750)             (506,037)
   Deferral of rent payments ..................................                850                 2,705
   Loan payments ..............................................             (3,985)               (6,726)
                                                                ------------------    ------------------

           Net cash used in financing activities ..............           (822,885)             (510,058)
                                                                ------------------    ------------------

Net increase (decrease) in cash and cash equivalents ..........           (463,646)            1,096,061
Cash and equivalents at beginning of period ...................          1,928,731               945,610
                                                                ------------------    ------------------
Cash and equivalents at end of period ......................... $        1,465,085   $         2,041,671
                                                                ==================   ===================

Supplemental cash flow disclosures:
           Cash paid during the period for:
           Income taxes ....................................... $            6,288   $            59,847
                                                                ==================   ===================


</TABLE>

                             See accompanying notes.


                                       -6-

<PAGE>


                          MEDSTONE INTERNATIONAL, INC.

              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 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 March 31, 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 months ended March 31, 2002 are not
necessarily indicative of results to be expected for the full year.

         The preparation of financial statements in accordance with accounting
principles generally accepted in the United States 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)/Income:

The components of accumulated other comprehensive (loss)/income are as follows:

                                                           Currency
                                                          Translation
                                                           Adjustment
                                                        ----------------
             Balance at December 31, 2001               $         32,756
             Foreign currency translation adjustments            (29,717)
                                                        ----------------
             Balance at March 31, 2002                  $          3,039
                                                        ================


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


                                       -7-

<PAGE>

     The earnings associated with the Company's investment in its foreign
subsidiary are 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 March 31, 2002, total comprehensive income was
$137,491. For the three months ended March 31, 2001, total comprehensive income
was $346,270.

C.   Business Segments

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

                                               Three Months Ended
                                      March 31, 2002          March 31, 2001
                                    -----------------       -----------------
                                      (Unaudited)              (Unaudited)
     Revenue:
       Equipment sales              $       1,896,443       $         353,181
       Fees for procedures,
        maintenance fees and
        fee-for-service                     4,337,435               4,510,773
                                    -----------------       -----------------
                                    $       6,233,878       $       4,863,954
                                    =================       =================

     Operating income (loss):
       Equipment sales              $        (139,942)      $           9,366
       Fees for procedures,
        maintenance fees and
        fee-for-service                       663,441                 357,548
                                    -----------------       -----------------
                                    $         523,499       $         366,914
                                    =================       =================

D.   Per share information

     The Company has adopted SFAS No. 128 "Earnings Per Share," and applied this
pronouncement to all periods presented. This statement requires the presentation
of both basic and diluted net income per share for financial statement purposes.
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.


                                      -8-

<PAGE>

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

                                                 Three Months Ended
                                           March 31,              March 31,
                                             2002                   2001
                                         ---------------     ----------------
                                           (Unaudited)          (Unaudited)

Numerator: Net income                   $      167,208          $     350,793
                                        ==============          =============
Denominator for weighted
   average shares outstanding                3,954,553              4,273,220
                                        --------------          -------------
Basic earnings per share                $          .04          $         .08
                                        ==============          =============
Effect of dilutive securities:
   Weighted average shares
     outstanding                             3,954,553              4,273,220
Stock options                                      ---                  8,712
                                        --------------          -------------
Denominator for diluted earnings
   per share                                 3,954,553              4,281,932
                                        ==============          =============
Diluted earnings per share              $          .04          $         .08
                                        ==============          =============


     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

     Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of the following:

                                            March 31,        December 31,
                                              2002              2001
                                      ----------------    ----------------
                                         (Unaudited)

               Raw materials          $      3,852,940    $      3,888,640
               Work in process                 520,823             231,175
               Finished goods                1,052,957           1,983,236
                                      ----------------    ----------------
                                      $      5,426,721    $      6,103,051
                                      ================    ================
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 consolidated financial statements.


                                       -9-

<PAGE>


G.        Stock Repurchase Plan

         In the first quarter of 2002 the Company purchased a total of 180,000
shares at an aggregate cost of $819,750 under the Company's current Stock
Repurchase Plan. To date under all of the Company's stock repurchase plans a
total of 1,811,450 shares have been repurchased at a total cost of $11,982,599.


                                       -10-

<PAGE>


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 periods
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 is 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 pain management table 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.


                                       -11-

<PAGE>

         As a manufacturer of medical devices, the Company has been vertically
integrating by offering its medical devices directly to providers. It currently
offers lithotripsy procedures using 15 mobile systems, two fixed sites and 22
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.

Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
-------------------------------------------------------------------------------

         The Company recognized total revenue of $6.3 million in the first
quarter of 2002 compared to $5.0 million in the first quarter of 2001, or a 26%
increase. Revenues from procedures, maintenance and management fees decreased
from $4.5 million in the three months ended March 31, 2001 to $4.3 million in
the three months ended March 31, 2002 due to lower average per patient charges
on the Company's fee-for-service equipment on a lower patient count. Also
decreasing were the spares revenues as a lower number of shipments occurred in
the current year compared to the same period of the prior year. Partially
offsetting these decreases were increased maintenance revenues as the number of
site under maintenance contracts increased in the current year when compared to
the same period of the prior year. Equipment revenues increased to $1.9 million
in the quarter ending March 31, 2002 from $.353 million in the comparable
quarter of the prior year, or a 437% increase. The Company shipped three
lithotripsy systems in the quarter ending March 31, 2002 compared to no systems
in the each same period in the prior year. The Company also realized revenue on
three UroPro urology systems in the current year with no comparable activity in
the prior period due to the introduction of this product line in late 2001. The
number of patient handling tables shipped in each period remained constant at 16
units, but the product mix changed and resulted in slightly lower revenue in the
current year when compared to the prior year. Interest income decreased by 42%
in the first quarter of 2002 when compared to the same period of the prior year
due to a significant decline in investment yields and no significant change
in the average invested balance.

         Recurring revenue cost of sales decreased to 56% of sales in the
quarter ended March 31, 2002 compared to 62% in the same quarter of the prior
year. This is due to lower depreciation and equipment rental expenses as the
fee-for-service revenue stream incorporates more fixed site fee-for-service
units and older mobile vans are fully depreciated. Cost of sales on equipment
sales decreased to 78% of sales in the three months ended March 31, 2002
compared to 99% of sales in the same period of 2001. This decrease is due to a
significantly higher equipment sales activity with a negligible increase in
costs of production. Overall cost of sales, as a percentage of revenue
(excluding interest), decreased to 63% in the first quarter of 2002 compared to
65% in the first quarter of 2001.

         Research and development costs remained constant at $261,000 in the
first quarter of 2001 when compared to the first quarter of 2001 due to
decreased development costs for the UroPro offset by higher consulting expenses
for the ultrasound application for the lithotripsy equipment.

         Selling costs increased to $812,000 in the first quarter of 2002
compared to $531,000 in the same period of the prior year, a change of $282,000
or 53% due to higher payroll expenses for added sales staff, increased bad debt
expense and higher commission expenses.


                                       -12-

<PAGE>

         General and administrative expenses increased by $153,000 or 23% in the
three months ended March 31, 2002 compared to the same period in the prior year
due to higher legal and consulting expenses.

         Gain on sale of investments was $0 in the quarter ending March 31, 2002
compared to $350,000 in the three months ended March 31, 2001. The Company had
no further sales of Cardiac Science, Inc. common stock in the current year,
whereas the Company sold 73,000 shares of Cardiac Science in the same period of
2001. The net book value of the shares was $0.

         Total minority interest increased to $200,000 in the three months ended
March 31, 2002 compared to $126,000 in the same period of the prior year due to
lower profits in the Northern Nevada and Southern Idaho operations and
recognition of the Company's portion of operating losses in Arcoma AB operations
in 2002 compared to income from operations for Medicredit.com, Inc. in 2001.

         Provision for income taxes for the first quarter of 2002 decreased by
$57,000 as a result of lower taxable income in the current year when compared to
the same period of 2001.

Liquidity and Capital Resources
-------------------------------

         At March 31, 2002, the Company had cash and short-term investments of
approximately $6.1 million. These funds were generated from continuing operating
activities.

         As of March 31, 2002, the Company held 95,000 shares of Genstar
Therapeutics Corp. common stock. The Company will continue to liquidate its
holdings in these companies as markets allow.

         As of May 1, 2002, the Company's holdings of Genstar Therapeutics Corp.
(95,000 shares) has an approximate market value of $74,000.

         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


                                       -13-

<PAGE>


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, 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.


                                       -14-

<PAGE>

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

                None

 Item 5.        Other Information
                -----------------

                None

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

                (a)     The following exhibits are included herein:

                        None.

                (b)     Reports on Form 8-K.

                        None.


                                       -15-

<PAGE>

                                   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 corporation


     Date: May 14, 2002
                                       /s/ Mark Selawski
                                       --------------------------
                                       Mark Selawski
                                       Chief Financial Officer
                                       (Principal financial and
                                       accounting officer)



                                       -16-