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UNITED STATES
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

o	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 000-49755

QUINTON CARDIOLOGY SYSTEMS, INC.

3303 Monte Villa Parkway
Bothell, Washington 98021
(Address of principal executive offices)

(425) 402-2000
(Registrant’s telephone number)

Indicated by check üwhether 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     þ               No     [   ]

As of August 12, 2002, 11,947,568 shares of the issuer’s common stock were outstanding.

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TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION				3
	Item 1. Unaudited Financial Statements			3
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			10
	Item 3. Quantitative and Qualitative Disclosures About Market Risk			18
PART II — OTHER INFORMATION				19
	Item 1. Legal Proceedings			19
	Item 2. Changes in Securities and Use of Proceeds			19
	Item 6. Exhibits and Reports on Form 8-K			20
SIGNATURE				21

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PART I — FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

QUINTON CARDIOLOGY SYSTEMS, INC.
AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)

					December 31,				June 30,
					2001				2002
ASSETS
Current Assets:
	Cash and cash equivalents				$	218			$	24,265
	Accounts receivable, net of allowance for doubtful accounts					6,123				6,171
	Inventories					6,161				5,406
	Prepaid expenses and other current assets					626				715
			Total current assets			13,128				36,557
Machinery and equipment, net of accumulated depreciation						3,165				3,032
Patents, net of accumulated amortization						173				112
Investment in unconsolidated entity						1,000				1,000
			Total assets		$	17,466			$	40,701
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
	Line of credit				$	4,471			$	—
	Accounts payable					4,029				4,940
	Accrued liabilities					2,548				3,124
	Warranty liability					1,269				1,097
	Deferred revenue					3,556				3,839
	Putable warrants					705				572
			Total current liabilities			16,578				13,572
Sublease liability, net of current portion						831				415
			Total liabilities			17,409				13,987
Shareholders’ Equity:
	Preferred stock (50,000,000 shares authorized):
		Series A convertible preferred stock				12,230				—
		Series B convertible preferred stock				865				—
	Common stock (100,000,000 shares authorized), no par value, 677,275 and 11,945,681 shares issued and outstanding at December 31, 2001 and June 30, 2002, respectively					3,490				44,841
	Deferred stock-based compensation					(287	)			(217	)
	Accumulated deficit					(16,241	)			(17,910	)
			Total shareholders’ equity			57				26,714
			Total liabilities and shareholders’ equity		$	17,466			$	40,701

The accompanying notes are an integral part of these unaudited condensed consolidated balance sheets.

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QUINTON CARDIOLOGY SYSTEMS, INC.
AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)

					Three Months Ended June 30,								Six Months Ended June 30,
					2001				2002				2001				2002
Revenues:
		Systems			$	9,250			$	9,063			$	16,953			$	17,229
		Service				2,233				2,196				4,608				4,419
			Total revenues			11,483				11,259				21,561				21,648
Cost of Revenues:
		Systems				5,960				5,697				10,901				10,742
		Service				1,323				1,185				2,634				2,376
			Total cost of revenues			7,283				6,882				13,535				13,118
			Gross profit			4,200				4,377				8,026				8,530
Operating Expenses:
		Research and development				1,512				1,334				3,006				2,687
		Sales and marketing				2,518				2,466				4,764				4,919
		General and administrative, excluding stock-based compensation expense				1,213				1,106				2,497				2,589
		Stock-based compensation				312				35				451				70
			Total operating expenses			5,555				4,941				10,718				10,265
			Operating loss			(1,355	)			(564	)			(2,692	)			(1,735	)
Other Income (Expense):
		Interest income				—				46				—				46
		Interest expense				(95	)			(29	)			(183	)			(102	)
		Non-cash interest income (expense), Putable warrants				(62	)			133				(62	)			133
		Other income, net				30				—				24				3
			Total other income (expense)			(127	)			150				(221	)			80
Loss before income taxes						(1,482	)			(414	)			(2,913	)			(1,655	)
	Income tax benefit (provision)					(14	)			(4	)			197				(14	)
		Net loss			$	(1,496	)		$	(418	)		$	(2,716	)		$	(1,669	)
Basic and diluted net loss per share					$	(2.41	)		$	(0.06	)		$	(4.43	)		$	(0.44	)
Weighted average shares used to compute basic and diluted net loss per share						620,430				6,812,713				612,986				3,751,667

The accompanying notes are an integral part of these unaudited condensed consolidated statements.

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QUINTON CARDIOLOGY SYSTEMS, INC.
AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

						Six Months Ended June 30,
						2001				2002
Operating Activities:
	Net loss					$	(2,716	)		$	(1,669	)
	Adjustments to reconcile net loss to net cash from operating activities —
		Depreciation and amortization					578				583
		Loss on sale of equipment					42				9
		Amortization of deferred stock compensation					451				70
		Non-cash interest expense (income), putable warrants					62				(133	)
		Changes in operating assets and liabilities:
			Accounts receivable				853				(48	)
			Inventories				423				755
			Prepaid expenses and other assets				(200	)			(89	)
			Income taxes receivable				1,209				—
			Accounts payable				306				137
			Accrued liabilities and sublease liability				225				160
			Warranty liability				(246	)			(172	)
			Deferred revenue				(246	)			283
				Net cash flows from operating activities			741				(114	)
Investing Activities:
	Purchases of machinery and equipment						(171	)			(398	)
				Net cash flows from investing activities			(171	)			(398	)
Financing Activities:
	Repayments of borrowings on the bank line of credit, net						(602	)			(4,471	)
	Proceeds from issuance of common stock, net of issuance costs of $3,209						—				28,991
	Proceeds from exercise of stock options						5				39
	Repurchase of shares in connection with termination						(94	)			—
				Net cash flows from financing activities			(691	)			24,559
Net change in cash and cash equivalents							(121	)			24,047
Cash and cash equivalents, beginning of period							423				218
Cash and cash equivalents, end of period						$	302			$	24,265
Supplemental disclosure of cash flow information:
	Cash paid for interest					$	217			$	131

The accompanying notes are an integral part of these unaudited condensed consolidated statements.

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QUINTON CARDIOLOGY SYSTEMS, INC.
AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Description of Business

     Quinton Cardiology Systems, Inc. (“Quinton”) is a California corporation. Quinton and its subsidiaries are referred to herein as the Company. The Company develops, manufactures, markets and services a family of diagnostic cardiology systems used in the diagnosis, treatment and rehabilitation of patients with heart disease.

2. Summary of Significant Accounting Policies

     Basis of Presentation

     The condensed financial statements present the Company on a consolidated basis. All significant intercompany accounts and transactions have been eliminated. The condensed balance sheet dated June 30, 2002, the condensed statements of operations for the three and six months ended June 30, 2001 and 2002 and the condensed statements of cash flows for the six months ended June 30, 2001 and 2002 have been prepared by the Company and are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The notes to the audited consolidated financial statements included in the Company’s registration statement dated February 22, 2002, as amended, on Form S-1 under the Securities Act of 1933 (Registration No. 333-83272) for the fiscal year ended December 31, 2001 provide a summary of significant accounting policies and additional financial information that should be read in conjunction with this report. These condensed financial statements should be read in conjunction with the audited financial statements dated December 31, 2001 and the notes thereto. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company for the interim periods, have been made. The results of operations for such interim periods are not necessarily indicative of the results for the full year or any future period. All share information in these financial statements gives effect to a 1 for 2.2 reverse stock split, which was effected in April 2002.

     Initial Public Offering

     In May 2002, the Company consummated a public offering of its common stock as more fully described in its registration statement dated May 6, 2002 filed with the Securities and Exchange Commission. In the offering, the Company sold 4,000,000 shares of common stock at a price of $7.00 per share. In June 2002, the underwriters of the offering exercised their over-allotment option to purchase an additional 600,000 shares at $7.00 per share. Proceeds from the offering, including the over-allotment shares, were approximately $28.2 million, net of underwriting discounts and offering expenses. As a result of the consummation of the offering, all of the convertible preferred stock outstanding prior to the closing was automatically converted into an aggregate of 6,639,347 shares of common stock.

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     Weighted Average Common Shares

     The following table sets forth the computation of basic and diluted weighted average common shares outstanding for the three and six-month periods ended June 30, 2001 and 2002:

     As of June 30, 2001 and 2002, 7,959,886 and 1,566,414, respectively, shares of common stock subject to repurchase, stock options, warrants, and common stock issuable upon conversion of outstanding preferred stock were excluded from the computation of diluted loss per share, as their impact was antidilutive.

     Use of Estimates

     The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the periods reported. These estimates include those affecting revenues, assessing the collectability of accounts receivable, the saleability and recoverability of inventory, the adequacy of warranty liabilities, the realizability of investments, the realization of deferred tax assets, the fair value of putable warrants and useful lives of tangible and intangible assets, among others. The market for the Company’s products is characterized by intense competition, rapid technological development and frequent new product introductions, all of which could affect the future realizability of the Company’s assets. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Actual results could differ from these estimates.

     Recent Accounting Pronouncements

     In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which provides the accounting requirements for retirement obligations associated with tangible long-lived assets. SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. SFAS 143 is effective for the Company’s 2003 fiscal year, and early adoption is permitted. The adoption of SFAS 143 is not expected to have a material impact on the Company’s consolidated results of operations, financial position or cash flows.

     In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” Among other things, this statement rescinds FASB Statements No. 4, “Reporting Gains and Losses from Extinguishment of Debt” which required all gains and losses from the early extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. As a result, the criteria in APB Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”, will now be used to classify those gains and losses. The statement was effective upon issuance in April 2002 for

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prospective transactions. The adoption of this statement is not expected to have a material impact on the Company’s financial position or results of operations.

     In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” This statement requires that a liability for a cost associated with an exit or disposal activity should be recognized at fair value when the liability is incurred. SFAS 146 is effective for the Company’s 2003 fiscal year, and early adoption is permitted. The adoption of SFAS 146 is not expected to have a material impact on the Company’s consolidated results of operations, financial position or cash flows.

3. Inventories

     Inventories are stated at the lower of weighted-average cost or market and are comprised of the following as of December 31, 2001 and June 30, 2002 (amounts in thousands):