(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, 2003

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 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

(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)

Yes   x

No   o

Yes   o

No   x

Page No.

PART I.     FINANCIAL INFORMATION

Item 1.

Financial Statements:

Consolidated Balance Sheets March 31, 2003 (Unaudited) and December 31, 2002

3

Consolidated Statements of Income Three Months Ended March 31, 2003 and 2002 (Unaudited)

4

Consolidated Statement of Stockholders’ Equity Three Months Ended March 31, 2003 (Unaudited)

5

Consolidated Statements of Cash Flows Three Months Ended March 31, 2003 and 2002 (Unaudited)

6

Notes to Unaudited Consolidated Financial Statements

7

Item 2.

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

11

 Item 4.

Controls and Procedures

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

Certifications

March 31,
2003

December 31,
2002

(Unaudited)

ASSETS

Current assets:

Cash and cash equivalents

$

1,940,332

$

2,050,466

Short-term investments held to maturity

4,341,831

4,323,491

Accounts receivable, less allowance for doubtful accounts of $931,769 and $871,769 at March 31, 2003 and December 31, 2002, respectively

3,289,013

3,720,410

Income taxes receivable

589,375

589,375

Inventories, less allowance for inventory obsolescence of $716,700 and $642,712 at March 31, 2003 and December 31, 2002, respectively

6,405,923

6,440,304

Deferred tax assets

955,877

955,877

Prepaid expenses and other current assets

1,007,585

647,169

Total current assets

18,529,936

18,727,092

Buildings, property and equipment, at cost:

Building

359,324

359,324

Lithotripters

13,750,702

13,524,440

Equipment, furniture and fixtures

3,387,807

3,368,431

Leasehold improvements

177,318

177,318

17,675,151

17,429,513

Less accumulated depreciation and amortization

(13,989,559

)

(13,602,049

)

Net property and equipment

3,685,592

3,827,464

Goodwill, net

2,929,897

2,929,897

Investment in unconsolidated subsidiaries

794,744

734,083

Net investment in sale-type lease

119,514

169,428

Other assets, net

86,964

93,243

$

26,146,647

$

26,481,207

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$

715,166

$

900,295

Accrued expenses

311,168

267,229

Accrued payroll expenses

344,302

366,855

Customer deposits

120,187

75,175

Deferred revenue

469,581

494,704

Total current liabilities

1,960,404

2,104,258

Deferred tax liabilities

639,224

639,224

Minority interest

395,606

423,224

Deferred rent

79,135

82,613

Commitments and contingencies (Notes 7 and 8)

—  

—  

Stockholders’ equity:

Common stock - $.004 par value, 20,000,000 shares authorized, 5,742,670 shares issued at both March 31, 2003 and December 31, 2002

22,971

22,971

Additional paid-in capital

19,646,388

19,646,388

Accumulated earnings

16,228,627

16,350,292

Accumulated other comprehensive loss

(59,999

)

(22,054

)

Treasury stock,  at cost, 1,984,450 at both March 31, 2003 and December 31, 2002, respectively

(12,765,709

)

(12,765,709

)

Total stockholders’ equity

23,072,278

23,231,888

$

26,146,647

$

26,481,207

2003

2002

Revenues:

Procedures, maintenance fees and fee-for-service

$

4,068,423

$

4,337,435

Net equipment sales

719,127

1,896,443

Interest income

40,501

82,123

Total revenues

4,828,051

6,316,001

Costs and operating expenses:

Cost of procedures and maintenance fees

2,231,259

2,426,949

Cost of equipment sales

795,404

1,474,909

Research and development

409,061

260,939

Selling

617,033

812,215

General and administrative

802,119

817,490

Total costs and operating expenses

4,854,876

5,792,502

Operating income (loss)

(26,825

)

523,499

Other expense (income)

23,820

(1,887

)

Minority interests:

Minority interest in subsidiaries income

170,381

170,019

Equity in loss (income) from unconsolidated subsidiary

(69,161

)

30,359

Total minority interest

101,220

200,378

Income (loss) before provision for income taxes

(151,865

)

325,008

Provision for (benefit from) income taxes

(30,200

)

157,800

Net income (loss)

$

(121,665

)

$

167,208

Net income (loss) per share:

Basic

$

(.03

)

$

.04

Diluted

N/A

$

.04

Number of shares used in the computation of earnings (loss) per share:

Basic

3,758,220

3,954,553

Diluted

N/A

3,954,553

Common Stock

Additional
paid-in
capital

Accumulated
earnings

Accumulated
Other
Comprehensive
loss

Treasury
Stock

Total

Number of
shares

Amount

Balance at December 31, 2002

3,758,220

$

22,971

$

19,646,388

$

16,350,292

$

(22,054

)

$

(12,765,709

)

$

23,231,888

Net loss

—  

—  

—  

(121,665

)

—  

—  

(121,665

)

Other comprehensive income:

Unrealized loss on foreign currency translation, net

—  

—  

—  

—  

(37,945

)

—  

(37,945

)

Total comprehensive loss