##### Table of Contents



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 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003


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

FOR THE TRANSITION PERIOD FROM _________ TO _________


Commission file number 0-10521

ADVANCED NEUROMODULATION SYSTEMS, INC.




(Exact Name of Registrant as Specified in Its Charter)


|                             |  |                    
|---------------------------- |  | -------------------
|Texas                        |  | 75-1646002         
|                             |  |                    
|(State or Other Jurisdiction |  | (I.R.S. Employer   
|of Incorporation or          |  | Identification No.)
|Organization)                |  |                    

6501 Windcrest Drive, Plano, Texas 75024




(Address of Principal Executive Offices) (Zip Code)


(972) 309-8000




(Registrants Telephone Number, Including Area Code)


Indicate by check ü 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 þ  NO o

Indicate by check ü whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES
þ  NO o

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date.

|                             |  |                                
|---------------------------- |  | -------------------------------
|                             |  | Number of Shares Outstanding at
|Title of Each Class          |  | July 31, 2003                  
|                             |  |                                
|Common stock, $.05 Par Value |  | 19,326,811                     





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TABLE OF CONTENTS



|                                                 |                                                                                               |                                                           |  |  |  |  |  | 
|------------------------------------------------ | --------------------------------------------------------------------------------------------- | --------------------------------------------------------- |  |  |  |  |  | 
|PART I FINANCIAL INFORMATION                    
|                                                 | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                                                 |                                                                                               | Condensed Consolidated Balance Sheets                    
|                                                 |                                                                                               | Condensed Consolidated Statements of Income              
|                                                 |                                                                                               | Condensed Consolidated Statements of Cash Flows          
|                                                 |                                                                                               | Condensed Consolidated Statements of Stockholders Equity
|                                                 |                                                                                               | Notes to Condensed Consolidated Financial Statements     
|                                                 | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                 | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                                                 | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II OTHER INFORMATION                       
|                                                 | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                                                 | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|Signatures                                      
|EXHIBIT INDEX                                   
|EX-31.1 Certification of Chief Executive Officer
|EX-31.2 Certification of Chief Financial Officer
|EX-32.1 Certification of Chief Executive Officer
|EX-32.2 Certification of Chief Financial Officer



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##### Table of Contents



Advanced Neuromodulation Systems, Inc. and Subsidiaries

Table of Contents

|                              |                                                                                               |                                                                                                                                                   |    |       |      | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------- | -- | ----- | ---- | 
|PART I. Financial Information |                                                                                               |                                                                                                                                                   | 2  |      
|                              | Item 1. Financial Statements                                                                  |                                                                                                                                                   |    |       |     
|                              |                                                                                               | Condensed Consolidated Balance Sheets
June 30, 2003 (Unaudited) and December 31, 2002                                                             |    |       | 3-4  | 
|                              |                                                                                               | Condensed Consolidated Statements of Income (Unaudited)
For the Three Months and Six Months Ended June 30, 2003 and 2002                          |    |       | 5    | 
|                              |                                                                                               | Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2003 and 2002                                       |    |       | 6    | 
|                              |                                                                                               | Condensed Consolidated Statements of Stockholders Equity
For the Year Ended December 31, 2002 and the
Six Months Ended June 30, 2003 (Unaudited) |    |       | 7    | 
|                              |                                                                                               | Notes to Condensed Consolidated Financial Statements                                                                                              |    |       | 8-15 | 
|                              | Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations |                                                                                                                                                   |    | 16-25 |     
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |                                                                                                                                                   |    | 25    |     
|                              | Item 4. Controls and Procedures                                                               |                                                                                                                                                   |    | 25    |     
|PART II. Other Information    |                                                                                               |                                                                                                                                                   | 26 |      
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                   |                                                                                                                                                   |    | 26    |     
|                              | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                                                   |    | 26-27 |     
|Signatures                    |                                                                                               |                                                                                                                                                   | 28 |      

1



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PART I

FINANCIAL INFORMATION

2



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##### Table of Contents






ITEM 1.   FINANCIAL STATEMENTS

Advanced Neuromodulation Systems, Inc. and Subsidiaries




Condensed Consolidated Balance Sheets
June 30, 2003 (Unaudited) and December 31, 2002


|                                                                                                                     |                                                |                                                                                               |                                   |            |            |             |              |            |            |             | 
|-------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------- | ---------- | ---------- | ----------- | ------------ | ---------- | ---------- | ----------- | 
|                                                                                                                     |                                                |                                                                                               |                                   |            | June 30,   |             | December 31,
|                                                                                                                     |                                                |                                                                                               |                                   |            | 2003       |             | 2002        
|                                                                                                                     |                                                |                                                                                               |                                   |            |            |             |             
|Assets                                                                                                               |                                                |                                                                                               |                                   |            |            |             |              |           
|Current assets:                                                                                                      |                                                |                                                                                               |                                   |            |            |             |              |           
|                                                                                                                     | Cash and cash equivalents                      |                                                                                               | $                                 | 5,855,374  |            |             | $            | 10,972,974 |           
|                                                                                                                     | Marketable securities                          |                                                                                               |                                   | 88,502,862 |            |             |              | 85,796,944 |           
|                                                                                                                     | Receivables:                                   |                                                                                               |                                   |            |            |             |              |            |           
|                                                                                                                     |                                                | Trade accounts, less allowance for
doubtful accounts of $315,219 in 2003 and
$295,391 in 2002 |                                   |            | 15,575,968 |             |              |            | 10,847,237 |            
|                                                                                                                     |                                                | Interest and other                                                                            |                                   |            | 297,589    |             |              |            | 189,017    |            
|                                                                                                                     |                                                |                                                                                               |                                   |            |            |             |              |            |           
|                                                                                                                     |                                                |                                                                                               | Total receivables                 |            |            | 15,873,557  |              |            |            | 11,036,254  | 
|                                                                                                                     |                                                |                                                                                               |                                   |            |            |             |              |           
|                                                                                                                     | Inventories:                                   |                                                                                               |                                   |            |            |             |              |            |           
|                                                                                                                     |                                                | Raw materials                                                                                 |                                   |            | 8,695,858  |             |              |            | 7,141,338  |            
|                                                                                                                     |                                                | Work-in-process                                                                               |                                   |            | 2,964,322  |             |              |            | 2,364,386  |            
|                                                                                                                     |                                                | Finished goods                                                                                |                                   |            | 6,160,946  |             |              |            | 4,217,222  |            
|                                                                                                                     |                                                |                                                                                               |                                   |            |            |             |              |            |           
|                                                                                                                     |                                                |                                                                                               | Total inventories                 |            |            | 17,821,126  |              |            |            | 13,722,946  | 
|                                                                                                                     |                                                |                                                                                               |                                   |            |            |             |              |           
|                                                                                                                     | Deferred income taxes                          |                                                                                               |                                   | 2,820,810  |            |             |              | 1,122,617  |           
|                                                                                                                     | Prepaid expenses and other current assets      |                                                                                               |                                   | 837,052    |            |             |              | 1,032,883  |           
|                                                                                                                     |                                                |                                                                                               |                                   |            |            |             |              |            |           
|                                                                                                                     |                                                |                                                                                               | Total current assets              |            |            | 131,710,781 |              |            |            | 123,684,618 | 
|                                                                                                                     |                                                |                                                                                               |                                   |            |            |             |              |           
|Equipment and fixtures:                                                                                              |                                                |                                                                                               |                                   |            |            |             |              |           
|                                                                                                                     | Land                                           |                                                                                               |                                   | 3,191,427  |            |             |              | 3,191,427  |           
|                                                                                                                     | New facility construction in progress          |                                                                                               |                                   | 1,167,516  |            |             |              |           |           
|                                                                                                                     | Furniture and fixtures                         |                                                                                               |                                   | 4,000,036  |            |             |              | 4,022,901  |           
|                                                                                                                     | Machinery and equipment                        |                                                                                               |                                   | 11,780,568 |            |             |              | 10,343,953 |           
|                                                                                                                     | Leasehold improvements                         |                                                                                               |                                   | 1,758,254  |            |             |              | 1,702,965  |           
|                                                                                                                     |                                                |                                                                                               |                                   |            |            |             |              |           
|                                                                                                                     |                                                |                                                                                               | 21,897,801                        |            |            |             | 19,261,246   |           
|                                                                                                                     | Less accumulated depreciation and amortization |                                                                                               |                                   | 9,291,988  |            |             |              | 8,653,255  |           
|                                                                                                                     |                                                |                                                                                               |                                   |            |            |             |              |            |           
|                                                                                                                     |                                                |                                                                                               | Net property, plant and equipment |            |            | 12,605,813  |              |            |            | 10,607,991  | 
|                                                                                                                     |                                                |                                                                                               |                                   |            |            |             |              |           
|Minority equity investments in preferred stock                                                                       |                                                |                                                                                               | 1,104,000                         |            |            |             |             |           
|Goodwill, net                                                                                                        |                                                |                                                                                               | 9,553,168                         |            |            |             | 7,407,237    |           
|Patents, net of accumulated amortization of
$1,637,982 in 2003 and $1,435,835 in 2002                                |                                                |                                                                                               | 5,184,503                         |            |            |             | 5,323,417    |           
|Purchased technology from acquisitions, net of
accumulated amortization of $2,477,364 in 2003
and $2,098,200 in 2002 |                                                |                                                                                               | 10,147,583                        |            |            |             | 9,033,472    |           
|Trademarks, net of accumulated amortization of
$1,039,225 in 2003 and $969,952 in 2002                               |                                                |                                                                                               | 1,720,793                         |            |            |             | 1,701,154    |           
|Customer and supplier relations, net of
accumulated amortization of $51,786 in 2003                                  |                                                |                                                                                               | 1,248,214                         |            |            |             |             |           
|Other assets, net of accumulated amortization of
$632,002 in 2003 and $529,102 in 2002                               |                                                |                                                                                               | 1,066,994                         |            |            |             | 586,238      |           
|                                                                                                                     |                                                |                                                                                               |                                   |            |            |             |              |            |           
|                                                                                                                     |                                                | $                                                                                             | 174,341,849                       |            |            | $           | 158,344,127  |           
|                                                                                                                     |                                                |                                                                                               |                                   |            |            |             |              |           

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Advanced Neuromodulation Systems, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
June 30, 2003 (Unaudited) and December 31, 2002

|                                     |                                                                                                                                        |                            |             |             |             |              |             |             |             | 
|------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ----------- | ----------- | ----------- | ------------ | ----------- | ----------- | ----------- | 
|                                     |                                                                                                                                        |                            |             | June 30,    |             | December 31,
|                                     |                                                                                                                                        |                            |             | 2003        |             | 2002        
|                                     |                                                                                                                                        |                            |             |             |             |             
|Liabilities and Stockholders Equity |                                                                                                                                        |                            |             |             |             |              |             |            
|Current liabilities:                 |                                                                                                                                        |                            |             |             |             |              |             |            
|                                     | Accounts payable                                                                                                                       |                            | $           | 3,032,220   |             |              | $           | 2,392,579   |            
|                                     | Accrued salary and employee benefit costs                                                                                              |                            |             | 2,014,879   |             |              |             | 3,077,603   |            
|                                     | Deferred revenue                                                                                                                       |                            |             | 811,267     |             |              |             | 646,577     |            
|                                     | Accrued commissions                                                                                                                    |                            |             | 1,132,802   |             |              |             | 794,521     |            
|                                     | Accrued tax abatement liability                                                                                                        |                            |             | 969,204     |             |              |             | 969,204     |            
|                                     | Income taxes payable                                                                                                                   |                            |             |            |             |              |             | 822,228     |            
|                                     | Warranty reserve                                                                                                                       |                            |             | 365,159     |             |              |             | 402,259     |            
|                                     | Other accrued expenses                                                                                                                 |                            |             | 623,593     |             |              |             | 299,905     |            
|                                     |                                                                                                                                        |                            |             |             |             |              |             |             |            
|                                     |                                                                                                                                        | Total current liabilities  |             |             | 8,949,124   |              |             |             | 9,404,876   | 
|                                     |                                                                                                                                        |                            |             |             |             |              |             |            
|Deferred income taxes                |                                                                                                                                        |                            | 4,214,657   |             |             |              | 3,731,939   |            
|Non-current deferred revenue         |                                                                                                                                        |                            | 966,973     |             |             |              | 162,504     |            
|Commitments and contingencies        |                                                                                                                                        |                            |             |             |             |              |             |            
|Stockholders equity:                |                                                                                                                                        |                            |             |             |             |              |             |            
|                                     | Common stock of $.05 par value. Authorized
25,000,000 shares; issued and outstanding: 19,268,255 shares in 2003 and 18,526,014
in 2002 |                            |             | 963,413     |             |              |             | 926,301     |            
|                                     | Additional capital                                                                                                                     |                            |             | 139,330,279 |             |              |             | 129,738,644 |            
|                                     | Retained earnings                                                                                                                      |                            |             | 19,936,677  |             |              |             | 14,393,748  |            
|                                     | Accumulated other comprehensive income
(loss), net of tax benefit of $9,931 in
2003 and $7,155 in 2002                                 |                            |             | (19,274     | )           |              |             | (13,885     | )          
|                                     |                                                                                                                                        |                            |             |             |             |              |             |             |            
|                                     |                                                                                                                                        | Total stockholders equity |             |             | 160,211,095 |              |             |             | 145,044,808 | 
|                                     |                                                                                                                                        |                            |             |             |             |              |             |             |            
|                                     |                                                                                                                                        | $                          | 174,341,849 |             |             | $            | 158,344,127 |            
|                                     |                                                                                                                                        |                            |             |             |             |              |             |            

See accompanying notes to condensed consolidated financial statements.

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Advanced Neuromodulation Systems, Inc. and Subsidiaries




Condensed Consolidated Statements of Income (Unaudited)
For the Three Months and Six Months Ended June 30, 2003 and 2002


|                        |                             |   |                            |           |                    |            |                  |           |      |           |            |            |   |            |            |           |   |            | 
|----------------------- | --------------------------- | - | -------------------------- | --------- | ------------------ | ---------- | ---------------- | --------- | ---- | --------- | ---------- | ---------- | - | ---------- | ---------- | --------- | - | ---------- | 
|                        |                             |   |                            |           | Three Months Ended |            | Six Months Ended
|                        |                             |   |                            |           | June 30,           |            | June 30,        
|                        |                             |   |                            |           |                    |            |                 
|                        |                             |   |                            |           | 2003               |            | 2002             |           | 2003 |           | 2002      
|                        |                             |   |                            |           |                    |            |                  |           |      |           |           
|Net revenue             |                             | $ | 22,324,461                 |           |                    | $          | 13,423,371       |           |      | $         | 41,995,052 |            |   | $          | 24,896,017 |          
|Cost of revenue         |                             |   | 7,051,279                  |           |                    |            | 5,063,427        |           |      |           | 13,932,970 |            |   |            | 9,577,587  |          
|                        |                             |   |                            |           |                    |            |                  |           |      |           |            |            |   |            |            |          
|                        |                             |   | Gross profit               |           |                    | 15,273,182 |                  |           |      | 8,359,944 |            |            |   | 28,062,082 |            |           |   | 15,318,430 | 
|                        |                             |   |                            |           |                    |            |                  |           |      |           |            |            |   |            |            |          
|Operating expenses:     |                             |   |                            |           |                    |            |                  |           |      |           |            |            |   |            |            |          
|                        | Research and development    |   |                            | 2,352,468 |                    |            |                  | 1,375,520 |      |           |            | 4,044,899  |   |            |            | 2,668,223 |  
|                        | Sales and marketing         |   |                            | 6,330,144 |                    |            |                  | 3,392,474 |      |           |            | 11,490,052 |   |            |            | 6,288,364 |  
|                        | Amortization of intangibles |   |                            | 450,338   |                    |            |                  | 228,834   |      |           |            | 805,272    |   |            |            | 456,630   |  
|                        | General and administrative  |   |                            | 1,866,333 |                    |            |                  | 1,278,437 |      |           |            | 3,632,251  |   |            |            | 2,581,309 |  
|                        |                             |   |                            |           |                    |            |                  |           |      |           |            |            |   |            |            |          
|                        |                             |   | 10,999,283                 |           |                    |            | 6,275,265        |           |      |           | 19,972,474 |            |   |            | 11,994,526 |          
|                        |                             |   |                            |           |                    |            |                  |           |      |           |            |            |   |            |            |          
|                        |                             |   | Income from operations     |           |                    | 4,273,899  |                  |           |      | 2,084,679 |            |            |   | 8,089,608  |            |           |   | 3,323,904  | 
|                        |                             |   |                            |           |                    |            |                  |           |      |           |            |            |   |            |            |          
|Other income (expense): |                             |   |                            |           |                    |            |                  |           |      |           |            |            |   |            |            |          
|                        | Interest expense            |   |                            |          |                    |            |                  | (3,939    | )    |           |            |           |   |            |            | (8,245    | )
|                        | Interest and other income   |   |                            | 294,472   |                    |            |                  | 147,188   |      |           |            | 576,127    |   |            |            | 220,694   |  
|                        |                             |   |                            |           |                    |            |                  |           |      |           |            |            |   |            |            |          
|                        |                             |   | 294,472                    |           |                    |            | 143,249          |           |      |           | 576,127    |            |   |            | 212,449    |          
|                        |                             |   |                            |           |                    |            |                  |           |      |           |            |            |   |            |            |          
|                        |                             |   | Income before income taxes |           |                    | 4,568,371  |                  |           |      | 2,227,928 |            |            |   | 8,665,735  |            |           |   | 3,536,353  | 
|Income taxes            |                             |   | 1,645,256                  |           |                    |            | 779,487          |           |      |           | 3,122,806  |            |   |            | 1,250,936  |          
|                        |                             |   |                            |           |                    |            |                  |           |      |           |            |            |   |            |            |          
|                        |                             |   | Net income                 |           | $                  | 2,923,115  |                  |           | $    | 1,448,441 |            |            | $ | 5,542,929  |            |           | $ | 2,285,417  | 
|                        |                             |   |                            |           |                    |            |                  |           |      |           |            |            |   |            |            |          
|Net income per share:   |                             |   |                            |           |                    |            |                  |           |      |           |            |            |   |            |            |          
|                        |                             |   | Basic                      |           | $                  | .15        |                  |           | $    | .10       |            |            | $ | .29        |            |           | $ | .16        | 
|                        |                             |   |                            |           |                    |            |                  |           |      |           |            |            |   |            |            |          
|                        |                             |   | Diluted                    |           | $                  | .14        |                  |           | $    | .09       |            |            | $ | .27        |            |           | $ | .14        | 
|                        |                             |   |                            |           |                    |            |                  |           |      |           |            |            |   |            |            |          

See accompanying notes to condensed consolidated financial statements.

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Advanced Neuromodulation Systems, Inc. and Subsidiaries




Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2003 and 2002


|                                                       |                                                                  |                                                                                   |                                                                  |                                           |           |                           |             |            |           |           |            |  
|------------------------------------------------------ | ---------------------------------------------------------------- | --------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ----------------------------------------- | --------- | ------------------------- | ----------- | ---------- | --------- | --------- | ---------- | -
|                                                       |                                                                  |                                                                                   |                                                                  |                                           |           | Six Months Ended June 30,
|                                                       |                                                                  |                                                                                   |                                                                  |                                           |           |                          
|                                                       |                                                                  |                                                                                   |                                                                  |                                           |           | 2003                      |             | 2002      
|                                                       |                                                                  |                                                                                   |                                                                  |                                           |           |                           |             |           
|Cash flows from operating activities:                  |                                                                  |                                                                                   |                                                                  |                                           |           |                           |             |           
|                                                       |                                                                  | Net income                                                                        |                                                                  | $                                         | 5,542,929 |                           |             | $          | 2,285,417 |          
|                                                       |                                                                  | Adjustments to reconcile net income to net cash provided by operating
activities: |                                                                  |                                           |           |                           |             |            |           |          
|                                                       |                                                                  |                                                                                   | Depreciation and amortization                                    |                                           |           | 2,085,171                 |             |            |           | 1,570,760 |           
|                                                       |                                                                  |                                                                                   | Deferred income taxes                                            |                                           |           | (1,719,914                | )           |            |           | 608,907   |           
|                                                       |                                                                  |                                                                                   | Stock-based compensation                                         |                                           |           | 240,485                   |             |            |           |          |           
|                                                       |                                                                  |                                                                                   | Changes in operating assets and liabilities, net of acquisition: |                                           |           |                           |             |            |           |           |           
|                                                       |                                                                  |                                                                                   |                                                                  | Receivables                               |           |                           | (4,837,303  | )          |           |           | (1,729,355 | )
|                                                       |                                                                  |                                                                                   |                                                                  | Inventories                               |           |                           | (3,086,920  | )          |           |           | (1,670,823 | )
|                                                       |                                                                  |                                                                                   |                                                                  | Current income tax receivable             |           |                           |            |            |           |           | (188,477   | )
|                                                       |                                                                  |                                                                                   |                                                                  | Prepaid expenses and other assets         |           |                           | 174,498     |            |           |           | 279,783    |  
|                                                       |                                                                  |                                                                                   |                                                                  | Deferred revenue                          |           |                           | 969,159     |            |           |           | (385,106   | )
|                                                       |                                                                  |                                                                                   |                                                                  | Income taxes payable                      |           |                           | (822,228    | )          |           |           | 621,849    |  
|                                                       |                                                                  |                                                                                   |                                                                  | Tax benefit from stock option exercises   |           |                           | 4,756,798   |            |           |           | 651,076    |  
|                                                       |                                                                  |                                                                                   |                                                                  | Accounts payable                          |           |                           | 639,640     |            |           |           | (529,997   | )
|                                                       |                                                                  |                                                                                   |                                                                  | Accrued expenses                          |           |                           | (437,854    | )          |           |           | (250,554   | )
|                                                       |                                                                  |                                                                                   |                                                                  |                                           |           |                           |             |            |           |          
|                                                       |                                                                  |                                                                                   |                                                                  | Total adjustments                         |           |                           | (2,038,468  | )          |           |           | (1,021,937 | )
|                                                       |                                                                  |                                                                                   |                                                                  |                                           |           |                           |             |           
|                                                       |                                                                  |                                                                                   |                                                                  | Net cash provided by operating activities |           |                           | 3,504,461   |            |           |           | 1,263,480  |  
|                                                       |                                                                  |                                                                                   |                                                                  |                                           |           |                           |             |           
|Cash flows from investing activities:                  |                                                                  |                                                                                   |                                                                  |                                           |           |                           |             |           
|                                                       | Purchases of marketable securities                               |                                                                                   |                                                                  | (234,133,936                              | )         |                           |             | (1,276,240 | )        
|                                                       | Proceeds from sales of marketable securities                     |                                                                                   |                                                                  | 231,419,854                               |           |                           |             | 1,145,633  |          
|                                                       | Acquisition of Sun Medical pain business                         |                                                                                   |                                                                  | (4,857,192                                | )         |                           |             |           |          
|                                                       | Minority equity investments in preferred stock                   |                                                                                   |                                                                  | (1,104,000                                | )         |                           |             |           |          
|                                                       | New facility construction in progress                            |                                                                                   |                                                                  | (1,167,516                                | )         |                           |             |           |          
|                                                       | Additions to property, equipment, fixtures and intangible assets |                                                                                   |                                                                  | (2,390,676                                | )         |                           |             | (743,525   | )        
|                                                       |                                                                  |                                                                                   |                                                                  |                                           |           |                           |             |            |           |          
|                                                       |                                                                  |                                                                                   |                                                                  | Net cash used in investing activities     |           |                           | (12,233,466 | )          |           |           | (874,132   | )
|                                                       |                                                                  |                                                                                   |                                                                  |                                           |           |                           |             |           
|Cash flows from financing activities:                  |                                                                  |                                                                                   |                                                                  |                                           |           |                           |             |           
|                                                       | Payment of long-term obligations                                 |                                                                                   |                                                                  |                                          |           |                           |             | (189,722   | )        
|                                                       | Net proceeds from public offering of common stock                |                                                                                   |                                                                  |                                          |           |                           |             | 83,197,853 |          
|                                                       | Exercise of stock options                                        |                                                                                   |                                                                  | 3,611,405                                 |           |                           |             | 639,500    |          
|                                                       |                                                                  |                                                                                   |                                                                  |                                           |           |                           |             |           
|                                                       |                                                                  |                                                                                   |                                                                  | Net cash provided by financing activities |           |                           | 3,611,405   |            |           |           | 83,647,631 |  
|                                                       |                                                                  |                                                                                   |                                                                  |                                           |           |                           |             |           
|Net increase (decrease) in cash and cash equivalents   |                                                                  |                                                                                   | (5,117,600                                                       | )                                         |           |                           | 84,036,979  |           
|Cash and cash equivalents at beginning of year         |                                                                  |                                                                                   | 10,972,974                                                       |                                           |           |                           | 9,785,325   |           
|                                                       |                                                                  |                                                                                   |                                                                  |                                           |           |                           |             |            |           |          
|Cash and cash equivalents at June 30                   |                                                                  | $                                                                                 | 5,855,374                                                        |                                           |           | $                         | 93,822,304  |           
|                                                       |                                                                  |                                                                                   |                                                                  |                                           |           |                           |             |           
|Supplemental cash flow information is presented below: |                                                                  |                                                                                   |                                                                  |                                           |           |                           |             |           
|                                                       |                                                                  | Income taxes paid (refunded)                                                      |                                                                  | $                                         | 950,090   |                           |             | $          | (566,057  | )        
|                                                       |                                                                  |                                                                                   |                                                                  |                                           |           |                           |             |           
|                                                       |                                                                  | Interest paid                                                                     |                                                                  | $                                         |          |                           |             | $          | 8,245     |          
|                                                       |                                                                  |                                                                                   |                                                                  |                                           |           |                           |             |           
|Non-cash activity:                                     |                                                                  |                                                                                   |                                                                  |                                           |           |                           |             |           
|                                                       |                                                                  | Stock issued for intangible assets                                                |                                                                  | $                                         | 1,020,059 |                           |             | $          |          |          
|                                                       |                                                                  |                                                                                   |                                                                  |                                           |           |                           |             |           

See accompanying notes to condensed consolidated financial statements.

6



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##### Table of Contents



Advanced Neuromodulation Systems, Inc. and Subsidiaries




Condensed Consolidated Statements of Stockholders Equity (Unaudited)


|                                                                |                                                                               |  |              |           |            |   |          |         |               |   |               |            |        |   |            |           |  |   |         |        |       |   |             |            |  
|--------------------------------------------------------------- | ----------------------------------------------------------------------------- |  | ------------ | --------- | ---------- | - | -------- | ------- | ------------- | - | ------------- | ---------- | ------ | - | ---------- | --------- |  | - | ------- | ------ | ----- | - | ----------- | ---------- | -
|                                                                |                                                                               |  |              |           |            |   |          |         |               |   |               |            |        |   |            |           |  |   | Other   |        | Total
|                                                                |                                                                               |  | Common Stock |           | Additional |   | Retained |         | Comprehensive |   | Stockholders
|                                                                |                                                                               |  | Shares       |           | Amount     |   | Capital  |         | Earnings      |   | Income (Loss) |            | Equity
|                                                                |                                                                               |  |              |           |            |   |          |         |               |   |               |            |       
|Balance at December 31, 2001
(restated for 3
for 2 stock
split) |                                                                               |  | 13,607,802   |           |            | $ | 680,390  |         |               | $ | 38,443,451    |            |        | $ | 7,709,290  |           |  | $ | (21,250 | )      |       | $ | 46,811,881  |           
|                                                                | Net income                                                                    |  |              |          |            |   |          |        |               |   |               |           |        |   |            | 6,684,458 |  |   |         |       |       |   |             | 6,684,458  |  
|                                                                | Adjustment to
unrealized
losses on
marketable
securities                      |  |              |          |            |   |          |        |               |   |               |           |        |   |            |          |  |   |         | 7,365  |       |   |             | 7,365      |  
|                                                                |                                                                               |  |              |           |            |   |          |         |               |   |               |            |        |   |            |           |  |   |         |        |       |   |             |           
|                                                                | Comprehensive
Income                                                          |  |              |           |            |   |          |         |               |   |               |            |        |   |            |           |  |   |         |        |       |   |             | 6,691,823  |  
|                                                                |                                                                               |  |              |           |            |   |          |         |               |   |               |            |        |   |            |           |  |   |         |        |       |   |             |           
|                                                                | Sale of newly
issued common
stock in a
public offering,
net of offering
costs |  |              | 4,312,500 |            |   |          | 215,625 |               |   |               | 82,959,728 |        |   |            |          |  |   |         |       |       |   |             | 83,175,353 |  
|                                                                | Issuance of
shares for stock
option exercises                                 |  |              | 371,259   |            |   |          | 18,563  |               |   |               | 1,851,329  |        |   |            |          |  |   |         |       |       |   |             | 1,869,892  |  
|                                                                | Issuance of
common stock for
acquisition                                      |  |              | 234,453   |            |   |          | 11,723  |               |   |               | 4,636,698  |        |   |            |          |  |   |         |       |       |   |             | 4,648,421  |  
|                                                                | Tax benefit from
stock option
exercises                                       |  |              |          |            |   |          |        |               |   |               | 1,847,438  |        |   |            |          |  |   |         |       |       |   |             | 1,847,438  |  
|                                                                |                                                                               |  |              |           |            |   |          |         |               |   |               |            |        |   |            |           |  |   |         |        |       |   |             |           
|Balance at December
31, 2002                                    |                                                                               |  | 18,526,014   |           |            |   | 926,301  |         |               |   | 129,738,644   |            |        |   | 14,393,748 |           |  |   | (13,885 | )      |       |   | 145,044,808 |           
|                                                                | Net income                                                                    |  |              |          |            |   |          |        |               |   |               |           |        |   |            | 5,542,929 |  |   |         |       |       |   |             | 5,542,929  |  
|                                                                | Adjustment to
unrealized
losses on
marketable
securities                      |  |              |          |            |   |          |        |               |   |               |           |        |   |            |          |  |   |         | (5,389 | )     |   |             | (5,389     | )
|                                                                |                                                                               |  |              |           |            |   |          |         |               |   |               |            |        |   |            |           |  |   |         |        |       |   |             |           
|                                                                | Comprehensive
Income                                                          |  |              |           |            |   |          |         |               |   |               |            |        |   |            |           |  |   |         |        |       |   |             | 5,537,540  |  
|                                                                |                                                                               |  |              |           |            |   |          |         |               |   |               |            |        |   |            |           |  |   |         |        |       |   |             |           
|                                                                | Issuance of
shares for stock
option exercises                                 |  |              | 699,722   |            |   |          | 34,986  |               |   |               | 3,576,419  |        |   |            |          |  |   |         |       |       |   |             | 3,611,405  |  
|                                                                | Stock-based
compensation                                                      |  |              |          |            |   |          |        |               |   |               | 240,485    |        |   |            |          |  |   |         |       |       |   |             | 240,485    |  
|                                                                | Issuance of
earn-out shares
for acquisition                                   |  |              | 42,519    |            |   |          | 2,126   |               |   |               | 1,017,933  |        |   |            |          |  |   |         |       |       |   |             | 1,020,059  |  
|                                                                | Tax benefit from
stock option
exercises                                       |  |              |          |            |   |          |        |               |   |               | 4,756,798  |        |   |            |          |  |   |         |       |       |   |             | 4,756,798  |  
|                                                                |                                                                               |  |              |           |            |   |          |         |               |   |               |            |        |   |            |           |  |   |         |        |       |   |             |           
|Balance at
June 30, 2003                                        |                                                                               |  | 19,268,255   |           |            | $ | 963,413  |         |               | $ | 139,330,279   |            |        | $ | 19,936,677 |           |  | $ | (19,274 | )      |       | $ | 160,211,095 |           
|                                                                |                                                                               |  |              |           |            |   |          |         |               |   |               |            |        |   |            |           |  |   |         |        |       |   |             |           

See accompanying notes to condensed consolidated financial statements.

7



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##### Table of Contents



Advanced Neuromodulation Systems, Inc. and Subsidiaries




Notes to Condensed Consolidated Financial Statements




|(1) |  | Business                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Advanced Neuromodulation Systems, Inc. (we, the Company or ANS)
designs, develops, manufactures and markets implantable neuromodulation
devices used to manage chronic intractable pain and other disorders of
the central nervous system. We also provide contract development and
custom manufacturing for other medical device companies through our
Hi-tronics Designs, Inc. (HDI) subsidiary, which we acquired in January
2001. ANS neuromodulation revenues are derived primarily from sales
throughout the United States, Europe and Australia while HDI revenues are
derived within the United States.                                                                                                 
|   
|    |  | On July 11, 2003, we effected a 3-for-2 stock split in the form of a 50%
stock dividend (one share of common stock paid for every two shares
held), paid to shareholders of record on June 20, 2003. All prior period
shares and income per share figures have been restated to reflect the
split.                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|    |  | In November 2002, the Company acquired MicroNet Medical, Inc., a
privately-held developer of medical devices based on proprietary
micro-lead technology based in St. Paul, Minnesota. See Note 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  | In March 2003, the Company acquired the pain management business of Sun
Medical, Inc., the Companys largest distributor of its Neuro Products.
See Note 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | The research and development, manufacture, sale and distribution of
medical devices are subject to extensive regulation by various public
agencies, principally the Food and
Drug Administration and corresponding state, local and foreign agencies.
Product approvals and clearances can be delayed or withdrawn for failure
to comply with regulatory requirements or the occurrence of unforeseen
problems following initial marketing.                                                                                                                                                                                                                                                                             
|   
|    |  | In addition, ANS products are purchased primarily by hospitals,
ambulatory surgery centers and other users who then bill various third
party payors including Medicare, Medicaid, Workmens Compensation,
private insurance companies and managed care organizations. These third
party payors reimburse fixed amounts for services based on a specific
diagnosis. The impact of changes in third party payor reimbursement
policies and any amendments to existing reimbursement rules and
regulations that restrict or terminate the eligibility of ANS products
could have an adverse impact on the Companys financial condition and
results of operations.                                                         
|   
|(2) |  | Condensed Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|    |  | The unaudited consolidated financial information contained in this report
reflects all adjustments (consisting of normal recurring accruals)
considered necessary, in the opinion of management, for a fair
presentation of results for the interim periods presented. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.

8



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##### Table of Contents



Advanced Neuromodulation Systems, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements



|    |  | Certain information and footnote 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 financial statements
and notes thereto included in the Companys December 31, 2002
Annual Report on Form 10-K/A. The results of operations for the period
ended June 30, 2003 are not necessarily indicative of operations for the
full year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The consolidated financial statements include the accounts of Advanced
Neuromodulation Systems, Inc. and its subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(3) |  | Acquisitions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|    |  | On March 27, 2003, the Company completed the acquisition of the pain
management business of Sun Medical, Inc. for approximately $4,857,192
(including acquisition related expenses of approximately $45,931). The
acquisition expands the Companys direct sales force. Sun Medical was the
largest distributor of the Companys Neuro Products and accounted for
$6.33 million, or 13.5% of revenue of the Neuro Products segment during
the twelve months ended December 31, 2002. As part of the acquisition,
the Company hired substantially all of the salespersons and clinical
support specialists who worked for Sun Medicals pain management
business. Assets acquired consisted primarily of customer lists,
non-competes, inventory, contracts, equipment and other tangible assets
but excluded cash and accounts receivable as of the closing date. The
allocation of the purchase price as of June 30, 2003 is approximately as
follows: goodwill-$2,145,931, customer relations-$1,100,000,
inventory-$1,011,261, other non-compete agreements-$300,000, supplier
relations-$200,000, and employee non-compete agreements- $100,000.
Amortization periods for the identifiable intangible assets are as
follows: customer relations-7 years, other non-compete agreements-5
years, supplier relations-4 years and employee non-compete agreements-1
year.                                                                                                                                                                                                                                                                                                       
|   
|    |  | On November 25, 2002, we completed the acquisition of MicroNet Medical,
Inc., a privately-held developer of medical devices based on proprietary
micro-lead technology. MicroNet developed a line of very thin and
steerable spinal cord stimulation leads called Axxessleads. These leads
are the smallest diameter neurostimulation leads on the market, and
because of their size, we believe they offer advantages in certain
applications. Under the terms of the transaction, which we structured as
a merger, we acquired only MicroNets proprietary technology and certain
associated tangible assets. The MicroNet assets are a part of our Neuro
Products segment. MicroNets operations, other tangible assets, certain
liabilities and certain employees became part of a separate unaffiliated
company. We assumed no material debt, liabilities, or overhead in the
transaction. At closing, we paid the former MicroNet shareholders
$500,000 in cash and 234,453 shares of our common stock with a value at
the time of issuance of $4,648,421. In addition, we incurred expenses of
$859,460, including an investment-banking fee of $600,000. We also agreed
to pay the former MicroNet shareholders additional shares of our common
stock if certain product, regulatory approval and sales milestones are
met. These milestones consist of three principal product milestones and a
sales milestone. Each of the product milestones has three to four
sub-milestones that relate to the delivery of specific products,
including four 4-electrode leads (Milestone I), two 8-electrode leads
(Milestone II) and a 4-electrode lead and an 8-electrode lead

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##### Table of Contents



Advanced Neuromodulation Systems, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements



|    |  | designed for use in specific applications (Milestone III). The product
sub-milestones are met if and when we are able to submit, and if and when
we receive, regulatory approvals for products that have been adapted for
use directly with our electrical stimulation devices. The sales milestone
will be met if and when we and our subsidiaries generate $5 million in
cumulative net sales of MicroNet lead products during the four years
following the closing of the MicroNet transaction.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The aggregate value of the additional potential milestone earnout
payments payable in shares of our common stock was $9 million as measured
at the time the transaction was completed. Of this $9 million in
additional shares, we issued a fixed number of shares totaling 134,409
with an aggregate value at closing of $3 million into an escrow account.
If and when the product and regulatory milestones are achieved, we will
release a specified and fixed number of shares of our common stock from
escrow to the former MicroNet shareholders (which for purchase price
accounting will be valued at the time of release from escrow). In
addition, if and when those same product and regulatory milestones are
achieved, we will also issue at that time a number of shares of our
common stock with an aggregate value of up to $3 million. Finally, if and
when we generate $5 million in cumulative net sales of MicroNet lead
products during the four years following the closing, we will issue at
that time a number of shares of our common stock with an aggregate value
of $3 million. In March 2003, two parts of the first major product
milestones were satisfied, and we issued the former MicroNet shareholders
an aggregate of 42,519 shares of our common stock (of which 22,401 shares
were from escrow) with a value at the time of issuance and release from
escrow of $1,020,059, which was allocated to certain identifiable
intangible assets in accordance with the original purchase price
allocation, resulting in additional purchased technology of $978,237,
tradenames of $23,461, and non-compete agreements of $18,361. Important
additional product milestone deadlines occur in November 2003 and May
2004, while other milestones depend on the receipt of regulatory
approvals and meeting the aggregate sales milestone referred to above.
All milestones must be met by November 2006 or November 2007, depending
on the milestone.
|   
|(4) |  | Stock Based Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | The Company accounts for its stock-based compensation plans in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25) and related interpretations. Under APB 25,
no compensation expense is recognized for stock option grants if the
exercise price of the Companys stock option grants is at or above fair
market value of the underlying stock on the date of grant. The Company
has adopted the pro forma disclosure features of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123), as amended by Statement of Financial Accounting Standards No.
148, Accounting for Stock-Based Compensation-Transition and Disclosure.
The following table illustrates the effect on net income and net income
per share amounts if the Company had applied the fair value recognition
provisions of SFAS 123 to stock-based employee compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  | 10                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



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##### Table of Contents



Advanced Neuromodulation Systems, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements

|                         |  |                             |            |                           |  |      |            |      |  |   |            |  |  |   |            | 
|------------------------ |  | --------------------------- | ---------- | ------------------------- |  | ---- | ---------- | ---- |  | - | ---------- |  |  | - | ---------- | 
|                         |  | Three Months Ended June 30, |            | Six Months Ended June 30,
|                         |  | 2003                        |            | 2002                      |  | 2003 |            | 2002
|                         |  |                             |            |                           |  |      |            |     
|Net income as reported   |  | $                           | 2,923,115  |                           |  | $    | 1,448,441  |      |  | $ | 5,542,929  |  |  | $ | 2,285,417  | 
|Stock-based
compensation |  |                             | 1,045,865  |                           |  |      | 513,149    |      |  |   | 1,992,842  |  |  |   | 944,512    | 
|                         |  |                             |            |                           |  |      |            |      |  |   |            |  |  |   |            | 
|Pro forma net income     |  | $                           | 1,877,250  |                           |  | $    | 935,292    |      |  | $ | 3,550,087  |  |  | $ | 1,340,905  | 
|                         |  |                             |            |                           |  |      |            |      |  |   |            |  |  |   |            | 
|Basic shares             |  |                             | 19,118,414 |                           |  |      | 15,245,627 |      |  |   | 18,868,663 |  |  |   | 14,453,802 | 
|Diluted shares           |  |                             | 20,471,865 |                           |  |      | 16,933,533 |      |  |   | 20,232,006 |  |  |   | 16,186,478 | 
|                         |  |                             |            |                           |  |      |            |      |  |   |            |  |  |   |            | 
|Pro forma Basic EPS      |  | $                           | .10        |                           |  | $    | .06        |      |  | $ | .19        |  |  | $ | .09        | 
|                         |  |                             |            |                           |  |      |            |      |  |   |            |  |  |   |            | 
|Pro forma Diluted EPS    |  | $                           | .09        |                           |  | $    | .06        |      |  | $ | .18        |  |  | $ | .08        | 
|                         |  |                             |            |                           |  |      |            |      |  |   |            |  |  |   |            | 



|(5) |  | Commitments and Contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In January 1998, the Company sold its cardiovascular operations to Atrion
Corporation, and granted Atrion a nine-month option to acquire the
Companys principal office and manufacturing facility in Allen, Texas for
$6.5 million. During October 1998, Atrion exercised its option to acquire
the facility. When the facility was built in 1993, the Company entered a
ten-year agreement with the City of Allen granting tax abatements to the
Company if a minimum job base and personal property base were maintained
in the City of Allen. The agreement provided for the repayment of abated
taxes if the Company defaulted under the agreement. During 1998, the
Company recorded a pretax expense of $969,204 in connection with the
abated taxes. In April 1999, the Company was successful in petitioning
the City of Allen to assign the abatement agreement to Atrion. In July
1999, the Company, Atrion and the City of Allen executed an assignment
agreement under which Atrion (as successor in interest to the Company)
must continue to meet the conditions of the original tax abatement
agreement until August 2003. The City preserved its rights to collect
previously abated taxes if Atrion fails to comply with its obligations
any time prior to August 2003. The Company retains monetary liability for
the amount of abated taxes, even after assignment, because pursuant to
the purchase and sale agreement with Atrion, the Company indemnified
Atrion from any tax abatement liabilities that accrued to the City of
Allen prior to the sale of the cardiovascular operations in January 1998.
Atrion met the minimum requirements under the agreement in August 2003,
and accordingly no payment will be required. Thus, the Company will
reverse the potential obligation of $969,204 in September 2003, which
will result in the reporting of other income in this amount in the
Consolidated Statement of Income.
|   
|    |  | The Company entered into a sixty-three month lease agreement on 40,000
square feet of space located in the North Dallas area during February
1999. The Company relocated its operations to the leased facility in May
1999 and the rental period under the lease commenced on June 1, 1999.
Under the terms of the lease agreement, the Company received three months
free rent, and the monthly rental rate for the remaining term of the
lease is $48,308, subject to certain annual adjustments for increases in
expenses for common area maintenance and property taxes. The monthly
rental rate was increased to $52,647 in January 2003. In September 2002,
the Company amended its lease agreement to add approximately 9,700 square
feet of office space located in                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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Advanced Neuromodulation Systems, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements



| |  | the same complex as its 40,000 square foot corporate headquarters. The
lease on the additional space expires during August 2004, the same as the
corporate headquarters facility. The monthly rental rate on the 9,700
square feet of office space is $11,485. In July 2003, the Company entered
into a sublease to add approximately 9,800 square feet of office space
located in the same complex as its 40,000 square foot corporate
headquarters. The sublease on the additional space expires on July 31,
2004 and has a monthly rental rate of $10,655.                                                                                                                                                                                                                                                                 
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company also leases facilities in New Jersey as a result of the
January 2001 acquisition of HDI. One of the facilities, located in Budd
Lake, New Jersey, is 10,348 square feet of office space that is used for
administration, design engineering, drafting, documentation and
regulatory affairs. The lease expires on February 28, 2004 and has a
monthly rental rate of $9,615. The Company also leases 18,582 square feet
of space in Hackettstown, New Jersey used for the O.E.M. manufacturing
operations. The Hackettstown lease, which expires on December 31, 2005,
has a monthly rental rate of $9,517 and is renewable for one additional
three-year period.                                                                                                                                                 
|
| |  | The Company leases transportation equipment under non-cancelable
operating leases with expirations ranging from March 2005 until October
2006 at a monthly rate of $2,907.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | The Company leases office equipment under non-cancelable operating leases
expiring through 2004. Monthly payments on the office equipment leases
are $2,412.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | The Company is subject to proceedings, lawsuits and other claims related
to its products and business. The Company is required to assess the
likelihood of any adverse judgments or outcomes to these matters as well
as potential ranges of probable losses. A determination of the amount of
reserves required, if any, for these contingencies are made after
analysis of each individual issue. The required reserves may change in
the future due to new developments in each matter or changes in approach,
such as a change in settlement strategy, in dealing with these matters.                                                                                                                                                                                                                                     
|
| |  | Currently, product liability claims and other ordinary routine litigation
incidental to the Companys business are the only litigation to which it
is a party. While historically the Companys product liability claims
have not resulted in significant monetary liability beyond its insurance
coverage, an adverse judgment beyond its insurance coverage could have a
material adverse impact on its results of operations and financial
condition.                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Certain of the Companys distributor sales agreements contain an early
termination provision that permits the Company to terminate the agreement
without cause by paying an early termination fee equal to 25% of the
prior 12 month sales to the distributor. The termination fee for the
Companys two existing distributors would range from $528,487 to
$1,536,206. In addition, under the Companys sales agreements with its
independent sales agents, the Company can terminate those agreements
without cause by paying an early termination fee equal to 100% of the
commissions that would otherwise be payable on sales in the territory for
the 90 days after termination and 50% of the commission that would
otherwise be payable on sales in the territory for the 90 day period
after the first 90 day period.
|
| |  | In addition, under its distributor agreements, sales agent agreements and
certain other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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Advanced Neuromodulation Systems, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements



|    |  | ordinary course commercial contracts with third parties, the Company
typically agrees to indemnify the other contracting party from damages
and costs that may arise from product liability claims. The terms of the
agreements and contracts vary, and the potential exposure under these
indemnities cannot reasonably be estimated or determined. Historically,
product liability claims for our neurostimulation devices have not
resulted in significant monetary liability beyond our insurance coverage.
We seek to maintain appropriate levels of product liability insurance
with coverage that we believe is comparable to that maintained by
companies similar in size and serving similar markets.                                                                                                                                                                                                                                                                                                                                      
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Financial Accounting Standards Board Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (Interpretation 45) requires
disclosures in interim and annual financial statements about obligations
under certain guarantees issued by the Company. Furthermore, it requires
recognition at the beginning of a guarantee of a liability for the fair
value of the obligation undertaken in issuing the guarantee, with limited
exceptions including: 1) a parents guarantee of a subsidiarys debt to a
third party, and 2) a subsidiarys guarantee of the debt owed to a third
party by either its parent or another subsidiary of that parent. The
initial recognition and initial measurement provisions are only
applicable on a prospective basis for guarantees issued or modified after
December 31, 2002. This interpretation has had no impact on the Companys
consolidated statement of operations or condensed consolidated balance
sheets.
|   
|(6) |  | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|    |  | The Company recorded income tax expense during the three months and six
months ended June 30, 2003 of $1,645,256 and $3,122,806, representing
overall effective tax rates of 36.01% and 36.04%, respectively. These
effective tax rates during the 2003 periods are higher than the U.S.
statutory rate of 35% for corporations due to a provision for state
taxes, offset by tax-exempt interest income. During the three months and
six months ended June 30, 2002, the Company recorded income tax expense
of $779,487 and $1,250,936, representing overall effective tax rates of
35% and 35.37%, respectively. These effective tax rates during the 2002
periods are higher than the U.S. statutory rate of 34% for corporations
due to a provision for state taxes, offset by tax-exempt interest income.                                                                                                                                                                                                                                     
|   
|(7) |  | Stock Split and Net Income Per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|    |  | On July 11, 2003, we effected a 3-for-2 stock split in the form of a 50%
stock dividend (one share of common stock paid for every two shares
held), paid to shareholders of record on June 20, 2003. All prior
period shares and income per share figures have been restated to reflect
the split.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|    |  | Basic net income per share is computed based only on the weighted average
number of common shares outstanding during the period. Diluted net income
per share is computed to reflect the additional dilutive effect, if any,
of stock options and warrants using the treasury stock method based on
the average market price of the stock during the period. The following
table presents the reconciliation of basic and diluted shares:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|    |  | 13                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  



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Advanced Neuromodulation Systems, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements

|                                                   |                |  |                    |            |                  |  |            |            |      |  |            |            |  |  |            |            | 
|-------------------------------------------------- | -------------- |  | ------------------ | ---------- | ---------------- |  | ---------- | ---------- | ---- |  | ---------- | ---------- |  |  | ---------- | ---------- | 
|                                                   |                |  | Three Months Ended |            | Six Months Ended
|                                                   |                |  | June 30,           |            | June 30,        
|                                                   |                |  |                    |            |                 
|                                                   |                |  | 2003               |            | 2002             |  | 2003       |            | 2002
|                                                   |                |  |                    |            |                  |  |            |            |     
|Weighted-average shares
outstanding (basic shares) |                |  | 19,118,414         |            |                  |  | 15,245,627 |            |      |  | 18,868,663 |            |  |  | 14,453,802 |           
|Effect of dilutive stock options                   |                |  | 1,353,451          |            |                  |  | 1,687,906  |            |      |  | 1,363,343  |            |  |  | 1,732,676  |           
|                                                   |                |  |                    |            |                  |  |            |            |      |  |            |            |  |  |            |           
|                                                   | Diluted shares |  |                    | 20,471,865 |                  |  |            | 16,933,533 |      |  |            | 20,232,006 |  |  |            | 16,186,478 | 
|                                                   |                |  |                    |            |                  |  |            |            |      |  |            |            |  |  |            |           



|    |  | For the three months and six months ended June 30, 2003 and 2002, the
incremental shares used for dilutive income per share relate to stock
options whose exercise prices were less than the average market price in
the underlying quarterly computations. For the three months ended June
30, 2003, all stock options outstanding, with the exception of options to
purchase 73,875 shares at an average price of $32.05 per share, were
included in the computation of diluted income per share because the
options exercise prices were less than the average market price of the
common shares for that three month period. The options to purchase
73,875 shares were excluded because including them would have been
antidilutive. For the three months ended June 30, 2002, all stock options
were included in the computation of diluted income per share since all
exercise prices were less than the average market price of the common
shares for that three-month period.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(8) |  | Comprehensive Income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|    |  | Total comprehensive income for 2002 and for the six months ended June 30,
2003 is reported in the Condensed Consolidated Statements of
Stockholders Equity. Other comprehensive income (loss) is due to
unrealized gains and losses on marketable securities. Comprehensive
income (loss) for the three months and six months ended June 30, 2003 and
2002 is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|                                  |  |                    |           |                  |  |      |           |      |  |   |           |   |  |   |           | 
|--------------------------------- |  | ------------------ | --------- | ---------------- |  | ---- | --------- | ---- |  | - | --------- | - |  | - | --------- | 
|                                  |  | Three Months Ended |           | Six Months Ended
|                                  |  | June 30,           |           | June 30,        
|                                  |  |                    |           |                 
|                                  |  | 2003               |           | 2002             |  | 2003 |           | 2002
|                                  |  |                    |           |                  |  |      |           |     
|Net income                        |  | $                  | 2,923,115 |                  |  | $    | 1,448,441 |      |  | $ | 5,542,929 |   |  | $ | 2,285,417 | 
|Other comprehensive
Income (loss) |  |                    | 5,960     |                  |  |      | 8,204     |      |  |   | (5,389    | ) |  |   | 6,751     | 
|                                  |  |                    |           |                  |  |      |           |      |  |   |           |   |  |   |           | 
|Comprehensive income              |  | $                  | 2,929,075 |                  |  | $    | 1,456,645 |      |  | $ | 5,537,540 |   |  | $ | 2,292,168 | 
|                                  |  |                    |           |                  |  |      |           |      |  |   |           |   |  |   |           | 



|(9) |  | Segment Information                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Company operates in two business segments. The Neuro Products segment
designs, develops, manufactures and markets implantable medical devices
that are used to manage chronic intractable pain and other disorders of
the central nervous system through the delivery of electrical current or
drugs directly to targeted nerve fibers. The HDI O.E.M. segment provides
contract development and O.E.M. manufacturing of electro-mechanical
devices.
|   
|    |  | Intersegment revenue from HDI is billed at cost with no intercompany
mark-up.                                                                                                                                                                                                                                                                                                                                                                           

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Advanced Neuromodulation Systems, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements



| |  | Segment data for the three months ended June 30, 2003 is as follows:
| |  | --------------------------------------------------------------------

|                                |  |          |            |        |  |              |           |              |  |   |            |   |  |   |            | 
|------------------------------- |  | -------- | ---------- | ------ |  | ------------ | --------- | ------------ |  | - | ---------- | - |  | - | ---------- | 
|                                |  | Neuro    |            | HDI    |  | Intercompany |           | Consolidated
|                                |  | Products |            | O.E.M. |  | Eliminations |           | Total       
|                                |  |          |            |        |  |              |           |             
|Revenue from
external customers |  | $        | 19,347,907 |        |  | $            | 2,976,554 |              |  | $ |           |   |  | $ | 22,324,461 | 
|Intersegment revenues           |  | $        |           |        |  | $            | 2,049,514 |              |  | $ | (2,049,514 | ) |  | $ |           | 
|Segment income from
operations  |  | $        | 3,732,812  |        |  | $            | 541,087   |              |  | $ |           |   |  | $ | 4,273,899  | 



| |  | Segment data for the three months ended June 30, 2002 is as follows:
| |  | --------------------------------------------------------------------

|                                |  |          |            |        |  |              |           |              |  |   |            |   |  |   |            | 
|------------------------------- |  | -------- | ---------- | ------ |  | ------------ | --------- | ------------ |  | - | ---------- | - |  | - | ---------- | 
|                                |  | Neuro    |            | HDI    |  | Intercompany |           | Consolidated
|                                |  | Products |            | O.E.M. |  | Eliminations |           | Total       
|                                |  |          |            |        |  |              |           |             
|Revenue from
external customers |  | $        | 10,829,528 |        |  | $            | 2,593,843 |              |  | $ |           |   |  | $ | 13,423,371 | 
|Intersegment revenues           |  | $        |           |        |  | $            | 1,335,378 |              |  | $ | (1,335,378 | ) |  | $ |           | 
|Segment income from
operations  |  | $        | 1,643,750  |        |  | $            | 440,929   |              |  | $ |           |   |  | $ | 2,084,679  | 



| |  | Segment data for the six months ended June 30, 2003 follows:
| |  | ------------------------------------------------------------

|                                |  |          |             |        |  |              |            |              |  |   |            |   |  |   |             | 
|------------------------------- |  | -------- | ----------- | ------ |  | ------------ | ---------- | ------------ |  | - | ---------- | - |  | - | ----------- | 
|                                |  | Neuro    |             | HDI    |  | Intercompany |            | Consolidated
|                                |  | Products |             | O.E.M. |  | Eliminations |            | Total       
|                                |  |          |             |        |  |              |            |             
|Revenue from
external customers |  | $        | 35,975,353  |        |  | $            | 6,019,699  |              |  | $ |           |   |  | $ | 41,995,052  | 
|Intersegment revenues           |  | $        |            |        |  | $            | 3,481,246  |              |  | $ | (3,481,246 | ) |  | $ |            | 
|Segment income from
operations  |  | $        | 7,184,060   |        |  | $            | 905,548    |              |  | $ |           |   |  | $ | 8,089,608   | 
|Segment assets                  |  | $        | 171,073,544 |        |  | $            | 10,012,968 |              |  | $ | (6,744,663 | ) |  | $ | 174,341,849 | 



| |  | Segment data for the six months ended June 30, 2002 follows:
| |  | ------------------------------------------------------------

|                                |  |          |             |        |  |              |           |              |  |   |            |   |  |   |             | 
|------------------------------- |  | -------- | ----------- | ------ |  | ------------ | --------- | ------------ |  | - | ---------- | - |  | - | ----------- | 
|                                |  | Neuro    |             | HDI    |  | Intercompany |           | Consolidated
|                                |  | Products |             | O.E.M. |  | Eliminations |           | Total       
|                                |  |          |             |        |  |              |           |             
|Revenue from
external customers |  | $        | 19,817,947  |        |  | $            | 5,078,070 |              |  | $ |           |   |  | $ | 24,896,017  | 
|Intersegment revenues           |  | $        |            |        |  | $            | 2,470,738 |              |  | $ | (2,470,738 | ) |  | $ |            | 
|Segment income from
operations  |  | $        | 2,401,467   |        |  | $            | 922,437   |              |  | $ |           |   |  | $ | 3,323,904   | 
|Segment assets                  |  | $        | 138,575,393 |        |  | $            | 7,024,169 |              |  | $ | (3,753,993 | ) |  | $ | 141,845,569 | 



|(10) |  | Minority Investment in Preferred Stock                                                                                                                                                                                                                                                                                                                                                                               
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|     |  | In January 2003, the Company invested $1 million in cash to purchase
preferred stock for a minority equity position in Innovative Spine
Technologies, Inc., a start-up company that develops spine technologies,
products and services through intellectual property development and
contract research. This investment is accounted for under the cost method
of accounting due to our minimal ownership percentage.

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

The following discussion of the financial condition and results of operations
of the Company should be read in conjunction with the Condensed Consolidated
Financial Statements of the Company and the related Notes.

On June 6, 2003, we announced that our Board of Directors had approved a
3-for-2 stock split to be effected in the form of a 50% stock dividend (one
share of common stock payable for every two shares held). The dividend was
paid on July 11, 2003 to shareholders of record on June 20, 2003. We have
restated all share data and net income per share data to reflect the split.

Recent Developments

On November 25, 2002, we completed the acquisition of MicroNet Medical, Inc., a
privately-held developer of medical devices based on proprietary micro-lead
technology. MicroNet developed a line of very thin and steerable spinal cord
stimulation leads called Axxessleads.These leads are the smallest diameter
neurostimulation leads on the market, and because of their size, we believe
they offer advantages in certain applications. Under the terms of the
transaction, which we structured as a merger, we acquired only MicroNets
proprietary technology and certain associated tangible assets. The MicroNet
assets are a part of our Neuro Products segment. MicroNets operations, other
tangible assets, certain liabilities and certain employees became part of a
separate unaffiliated company. We assumed no material debt, liabilities, or
overhead in the transaction. At closing, we paid the former MicroNet
shareholders $500,000 in cash and 234,453 shares of our common stock with a
value at the time of issuance of $4,648,421. In addition, we incurred expenses
of $859,460, including an investment-banking fee of $600,000. We also agreed to
pay the former MicroNet shareholders additional shares of our common stock if
certain product, regulatory approval and sales milestones are met. These
milestones consist of three principal product milestones and a sales milestone.
Each of the product milestones has three to four sub-milestones that relate to
the delivery of specific products, including four 4-electrode leads (Milestone
I), two 8-electrode leads (Milestone II) and a 4-electrode lead and an
8-electrode lead designed for use in specific applications (Milestone III). The
product sub-milestones are met if and when we are able to submit, and if and
when we receive, regulatory approvals for products that have been adapted for
use directly with our electrical stimulation devices. The sales milestone will
be met if and when we and our subsidiaries generate $5 million in cumulative
net sales of MicroNet lead products during the four years following the closing
of the MicroNet transaction.

The aggregate value of the additional potential milestone earnout payments
payable in shares of our common stock was $9 million as measured at the time
the transaction was completed. Of this $9 million in additional shares, we
issued a fixed number of shares totaling 134,409 with an aggregate value at
closing of $3 million into an escrow account. If and when the product and
regulatory milestones are achieved, we will release a specified and fixed
number of shares of our common stock from escrow to the former MicroNet
shareholders (which for purchase price accounting will be valued at the time of
release from escrow). In addition, if and when those same product and
regulatory milestones are achieved, we will also issue at that time a number of
shares of our common stock with an aggregate value of up to $3 million.
Finally, if and when we generate $5 million in cumulative net sales of MicroNet
lead products during the four years following the closing, we will issue at
that time a number of shares of our common stock with an

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aggregate value of $3 million. In March 2003, two parts of the first major
product milestone were satisfied, and we issued the former MicroNet
shareholders an aggregate of 42,519 shares of our common stock (of which 22,401
shares were from escrow) with a value at the time of issuance and release from
escrow of $1,020,059, which was allocated to certain identifiable intangible
assets in accordance with the original purchase price allocation, resulting in
additional purchased technology of $978,237, tradenames of $23,461, and
non-compete agreements of $18,361. Important additional product milestone
deadlines occur in November 2003 and May 2004, while other milestones depend on
the receipt of regulatory approvals and meeting the aggregate sales milestone
referred to above. All milestones must be met by November 2006 or November
2007, depending on the milestone.

On March 27, 2003, we completed the acquisition of the pain management business
of Sun Medical, Inc. for $4,857,192 (including acquisition related expenses of
$45,931). Sun Medical was the largest distributor of our Neuro Products and
accounted for $6.33 million, or 13.5% of revenue of the Neuro Products segment
during the twelve months ended December 31, 2002 and $2.87 million, or 14.5% of
revenue of the Neuro Products segment during the six month period ended June
30, 2002. As part of the acquisition, we hired substantially all of the
salespersons and clinical support specialists who worked for Sun Medicals pain
management business. Assets acquired consisted primarily of customer lists,
non-competes, inventory, contracts, equipment and other tangible assets, but
excluded cash and accounts receivable as of the closing date. The allocation of
the purchase price as of March 31, 2003 is as follows: goodwill-$2,145,931,
customer relations-$1,100,000, inventory-$1,011,261, other non-compete
agreements-$300,000, supplier relations-$200,000, and employee non-compete
agreements- $100,000. Amortization periods for the identifiable intangible
assets are as follows: customer relations-7 years, other non-compete
agreements-5 years, supplier relations-4 years and employee non-compete
agreements-1 year.

Our current neuromodulation product line includes our Genesis®IPG system,
GenesisXPIPG system, Renew®RF system and AccuRx®constant rate drug pump.
With the launch of our Genesisand GenesisXPIPG systems,we now compete in
100% of the implantable neurostimulation market to treat chronic pain of the
trunk and limbs. The launch of the GenesisIPG and GenesisXPIPG in 2002 slowed
our growth rate in sales of Renewsystems from an average annual percentage
growth rate in the mid-teens over the past several years to single-digit annual
growth in 2002. Management believes this trend may continue in 2003 and has
assumed similar single-digit growth in Renewsales during 2003.

Critical Accounting Policies and Estimates

General

Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities and related disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. On an on-going basis, management
evaluates its estimates and judgments, including those related to product
returns, bad debts, inventories, intangible assets, warranty obligations and
contingencies and litigation. Management bases its estimates on historical
experience and on various other factors that are believed to be reasonable
under the circumstances, the results of

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which form the basis for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.

Management believes the following critical accounting policies affect its more
significant judgments and estimates used in preparation of its consolidated
financial statements.

Revenue Recognition

We generate revenues from product sales to end customers, product sales to
distributors, and development contracts.

We recognize revenue on product sales to end customers and distributors upon
shipment, provided an arrangement with the customer or distributor exists, the
fee is fixed and determinable, and collectibility is reasonably assured. Our
shipping terms are FOB shipping point. We do not have any continuing obligation
to our customers for installation or training, and there are no acceptance
clauses in our customer arrangements. The only continuing obligation is a
standard warranty that is offered to all customers. We accrue the estimated
cost of providing that warranty at the point of sale based on our historical
experience in fulfilling warranty obligations. We have not experienced warranty
claims that exceeded our expectations.

End customers and distributors are granted rights of return for 60 days
following the point of sale. We record, as a reduction in revenue, a provision
for estimated sales returns and adjustments on these product sales in the same
period as the related revenue is recorded. These estimates are based on
historical sales returns, analysis of credit memo data, and other known
factors. We typically sell our products to distributors at a price equal to 75%
to 78% of list price, and recognize the net amount as revenue when all the
revenue recognition criteria detailed above are met.

We recognize revenue on development contracts at HDI using either the
percentage of completion method for fixed price development contracts, or as
the services are performed for development contracts that are completed on a
time and materials basis. We recognize revenue using the percentage of
completion method for the fixed price development agreements as the contract
term can vary from 9 to 24 months, our right to receive payment depends on our
performance in accordance with the agreement, and we can reasonably estimate
the costs applicable to various stages of the development arrangement. Revenue
is recognized based on the ratio of costs incurred in relation to the estimated
costs for the total project. If we do not accurately estimate the resources
required or the scope of work to be performed under a fixed price development
agreement, then future profit margins and results of operations may be
negatively impacted.

Payment received in advance of revenue recognition requirements are recorded as
deferred revenue on the consolidated balance sheet.

Bad Debt

We are required to estimate the collectibility of our trade receivables. A
considerable amount of judgment is required in assessing the ultimate
realization of the receivables, including the current credit-worthiness of each
customer, the aging of receivables and our historical

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experience. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances or write-offs may be required.

Inventory Reserve

Our reserve for excess and obsolete inventory is based upon forecasted demand
for our products. If the demand for our products is less favorable than those
projected by management, additional inventory write-downs or write-offs may be
required.

Intangible Assets

Identifiable definite-lived intangible assets, such as patents, purchased
technology, trademarks and covenants not to compete, are amortized using the
straight-line method over their useful lives.

In assessing the recoverability of our intangible assets, we must make
assumptions regarding estimated future cash flows and other factors to
determine the fair value of the respective assets. If these estimates or their
related assumptions change in the future, we may be required to record
impairment charges for these assets.

Contingencies

See Note 5 to the Consolidated Financial Statements for a discussion of the
contingencies of proceedings, lawsuits and other claims related to our products
and business.

Results of Operations

Comparison of the Three Months and Six Months Ended June 30, 2003 and 2002

Results for the second quarter and first half of 2003 continue to reflect the
positive impact of revenue growth from increased unit sales of our Genesis and
GenesisXP IPG systems, which we launched in the United States in January 2002
and December 2002, respectively. Based on our sales experience over the last
few quarters, we increased our earnings guidance for 2003 in a press release
dated July 28, 2003. We now expect net income per diluted share in a range of
$.59 to $.61 for the full year, up from our previous guidance of net income per
diluted share of $.54 to $.57.

Net revenue of our neuromodulation products increased 78.7% to $19.35 million
in 2003 from $10.83 million in 2002 primarily due to increased sales of our
Genesis and GenesisXP IPG systems. Revenue from our Renew RF system grew
modestly during the quarter compared to the prior year quarter. Net revenue
from our O.E.M. business increased 14.8% to $2.98 million in 2003 from $2.59
million in 2002 primarily due to higher volume of O.E.M. product sales. Net
revenue of our neuromodulation products increased 81.5% to $35.98 million in
2003 year-to-date from $19.82 million in the same six-month period in 2002,
again primarily due to increased sales of our Genesis and GenesisXP IPG
systems. Net revenue from our O.E.M. business increased 18.5% to $6.02 million
in 2003 from $5.08 million in 2002 due to higher volume of O.E.M. product
sales. We now expect net revenue in a range of $84 to $87 million for the full
year, up from our previous guidance of $77 to $80 million.

19



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Gross profit margins increased during the quarter and the six months due to
higher sales of our neuromodulation products, which contribute higher margins
than O.E.M. product sales, higher neuromodulation product sales from direct
sales and commissioned agents, which contribute higher margins than distributor
sales, and operational efficiencies gained from higher manufacturing volumes.

Total operating expenses increased due to increased investments in our sales
and marketing capabilities, including the additional sales personnel acquired
in the March 2003 acquisition of Sun Medicals pain management business.
However, as a percentage of net revenue, these expenses decreased to 47.6% for
the first six months in 2003 from 48.2% for the same period in 2002 due to
leveraging of research and development expense and general and administrative
expense.

Research and development expense increased in absolute dollar amounts during
both periods in 2003 compared to 2002 due to higher salary and benefit expense
from staffing additions and annual salary increases, higher stock based
compensation expense and higher prototype tooling and test materials for new
products under development. We also accelerated certain research and
development projects during the second quarter, although we expect annual
expenditures to be consistent with budgeted amounts. Our development efforts
continue to focus on next-generation IPG stimulation systems, next-generation
RF stimulation systems, an IPG stimulation system for deep brain stimulation
and next generation drug pumps.

Sales and marketing expense increased during both the quarter and the six-month
period principally due to higher commission expense from increased Neuro
Product sales, higher salary expense from annual salary increases and staffing
additions in reimbursement, direct sales and clinical support specialists,
higher employee benefit costs from staffing additions, higher travel expense
due to increased direct sales activities and higher expense for education and
training of new implanters of Neuro Products.

Amortization expense increased during both periods due to amortization expense
for intangible assets we acquired in the MicroNet Medical, Inc. acquisition
consummated in November 2002 and the Sun Medical, Inc. acquisition consummated
on March 27, 2003.

General and administrative expense increased in absolute dollar amounts during
both 2003 periods compared to the same periods in 2002 principally as a result
of higher salary expense from annual salary increases and staffing additions,
higher employee benefit costs, higher recruiting fee expense and higher
depreciation expense.

Other income increased during both 2003 periods primarily as a result of
higher interest income due to higher funds available for investment.

Income tax expense increased due to an increase in pretax income. The effective
tax rate was 36.01% during the second quarter of 2003 compared to 35.0% during
the 2002 second quarter. During the 2003 period, we used a 35% federal income
tax rate due to higher projected income while during 2002 we used a federal
income tax rate of 34%. The effective tax rate was 36.04% during the 2003 six
month period compared to 35.4% during the 2002 six month period. During the
2003 period, we used a 35% federal income tax rate due to higher projected
income while during 2002, we used a federal income tax rate of 34%. These
effective tax rates in both 2003 and 2002 are higher than the U.S. statutory
rate for corporations due to a provision for state taxes, offset by tax-exempt
interest income.

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Liquidity and Capital Resources

At June 30, 2003, our working capital increased to $122.8 million from $114.3
million at December 31, 2002. The ratio of current assets to current
liabilities was 14.72:1 at June 30, 2003, compared to 13.15:1 at December 31,
2002. Cash, cash equivalents, certificates of deposit and marketable securities
totaled $94.36 million at June 30, 2003 compared to $96.77 million at December
31, 2002.

In March 2003, we acquired Sun Medicals pain management business, which will
expand our direct domestic salesforce, for approximately $4,857,000 in cash,
including approximately $46,000 in acquisition costs. See Note 3 to the Notes
to Condensed Consolidated Financial Statements.

In January 2003, we invested $1 million in cash to purchase preferred stock for
a minority equity position in Innovative Spinal Technologies, Inc., a start-up
company that develops spine technologies, products and services through
intellectual property development and contract research.

We have increased our investment in inventories in anticipation of continuing
sales growth.

Our investment in trade accounts receivable increased due to increased sales
and an increase in our days sales outstanding (DSOs) from 55 days at year-end
2002 to 64 days at June 30, 2003. Two factors accounted for the increase in
DSOs. First, we acquired the pain management business of Sun Medical on March
27, 2003. Prior to our acquisition, Sun Medical would pay us within 10 days to
take advantage of a payment discount. As such, our outstanding accounts
receivable from Sun Medical at any point in time was relatively small. After
this acquisition, we are now billing hospitals and insurance companies
directly, and these customers tend to pay on a slower cycle than did Sun.
Second, we experienced slower collections during the first half of 2003 from
insurance companies because a larger portion of our neuro segment business
revenues were derived from direct billing to insurance companies compared to
the prior periods.

We spent $2.39 million during the six months ended June 30, 2003, for capital
expenditures primarily for new office furniture and equipment for personnel we
hired and additional manufacturing tooling and equipment to provide increased
capacity to support our current products. We have budgeted $3.3 million in
capital expenditures (excluding the facility discussed below) in fiscal 2003,
and expect to spend approximately that amount.

Because we expect our business to continue to grow at rates that will demand
added office and facility space, we acquired approximately 10 acres of land in
December 2002 for approximately $3.19 million. The land is located in Plano,
Texas, near our current corporate headquarters. Our current lease on our 50,000
square foot corporate headquarters expires in August 2004. We intend to build a
new corporate headquarters facility on the land and relocate to the new
facility upon the expiration of our lease in August 2004. We are designing the
new facility to accommodate planned growth within a five-year horizon and
anticipate that the facility will contain 140,000 to 150,000 square feet and
cost between $16 million and $17 million. While we have not yet determined the
method by which we will finance the facility, we believe our cash position and
overall balance sheet position provides us with various financing alternatives,
including financing the facility from our current cash, financing through a
debt vehicle such as a mortgage or other form of note, or a sale-and-leaseback
transaction. In the interim, we are

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funding the construction from our cash reserves. During the second quarter of
2003, we began construction of the facility and used $1.17 million to fund the
interim construction.

We received $3.61 million of cash during the six months ended June 30, 2003
from the exercise of employee and director stock options to purchase 699,722
shares of our common stock.

Liquidity may also be enhanced based on our ability to utilize all or part of a
net operating loss of $3.4 million to offset future taxable income. We acquired
the net operating loss in connection with the MicroNet Medical acquisition and
its utilization may be subject to a limitation under Section 382 of the
Internal Revenue Code. The rules of Section 382 of the Internal Revenue Code
generally apply to limit a corporations ability to utilize acquired net
operating loss carryforwards to reduce its federal taxable income in the
periods after an acquisition. The Companys ability to use the net operating
loss carryforwards acquired in the MicroNet Medical acquisition to reduce its
federal taxable income is subject to these rules. Provided the Company
generates sufficient taxable income in future years, the Section 382 limitation
will have the effect of deferring the utilization of the net operating loss
carryforwards over several years. Without this limitation, the Company would be
able to use all of the net operating loss carryforwards to reduce taxable
income in the tax periods immediately following the acquisition. The total
amount of net operating loss carryforwards that the Company may use to reduce
taxable income in any taxable year after the acquisition is determined with
reference to its purchase price of MicroNet Medical. Based on current estimates
and assumptions, we expect to utilize at least approximately $700,000 in net
operating loss carryforwards per full tax year over the next five years,
assuming we generate sufficient taxable income in any given year to utilize
such amount.

Additionally, liquidity may be enhanced to the extent we realize tax benefits
from employee stock option exercises. Exercises of nonqualified stock options,
and exercises of incentive stock options followed by disqualifying
dispositions of the underlying common stock within one year following exercise
generate compensation expense for tax purposes in the year of exercise or
disposition, as the case may be. During the six months ended June 30, 2003, we
generated a $4.76 million tax benefit related to nonqualified stock option
exercises and disqualifying dispositions of common stock acquired on exercise
of incentive stock options.

We believe our current cash, cash equivalents, marketable securities and cash
generated from operations will be sufficient to fund our current levels of
operating needs and capital expenditures for the foreseeable future. We
currently have no credit facilities in place. If we decide to acquire
complementary businesses, product lines or technologies, or enter into joint
ventures or strategic alliances that require substantial capital, we intend to
finance those activities by the most attractive alternative available, which
could include utilizing our current cash, bank borrowings, or the issuance of
debt or equity securities.

Cash Flows

Net cash provided by operations increased for the first six months of 2003 due
to an increase in net income of $3.26 million. Major uses of cash for working
capital components during the 2003 period were for increased accounts
receivable from record sales levels and for increased investments in
inventories in anticipation of continued sales growth. We also received the
tax benefits from the exercise of stock options described above, and $1.2
million in cash from our

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distribution agreement with Boston Scientific Corporation, which is included in
deferred revenue as an asset.

Net cash used in investing activities increased substantially during the
period, principally due to the acquisition of Sun Medicals pain management
business, $1.1 million used to purchase minority investments in preferred
stock, mostly related to a $1.0 million investment in Innovative Spinal
Technologies, Inc., $1.17 million used to fund interim construction on our new
facility, a $1.65 million increase in funds used for capital expenditures and
an increase of $2.58 million for net purchases of marketable securities.

Net cash provided by financing activities decreased substantially because the
prior year period reflects the $83.20 million raised in a public offering
during the 2002 period. Exercise of stock options provided $3.61 million during
the six months ended June 30, 2003 compared to $640,000 during the same period
a year ago.

Currency Fluctuations

Substantially all of our international sales are denominated in U.S. dollars.
Fluctuations in currency exchange rates in other countries could reduce the
demand for our products by increasing the price of our products in the currency
of the countries in which the products are sold, although we do not believe
currency fluctuations have had a material effect on the Companys results of
operations to date.

Outlook and Uncertainties

The following is a safe harbor statement under the Private Securities
Litigation Reform Act of 1995: The matters discussed in this Quarterly Report
on Form 10-Q contain statements that constitute forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. The words expect, estimate, anticipate, predict, believe,
plan, will, should, intend, potential, new market, potential
market applications and similar expressions and variations thereof are
intended to identify forward-looking statements. Such statements appear in a
number of places in this Quarterly Report on Form 10-Q and include statements
regarding our intent, belief or current expectations with respect to, among
other things: (i) trends affecting our financial condition or results of
operations; (ii) our financing plans; and (iii) our business growth strategies.
We caution our readers that any forward-looking statements are not guarantees
of future performance and involve risks and uncertainties. Actual results may
differ materially from those projected in the forward-looking statements as a
result of various factors. These risks and uncertainties include the following:



| |  | failure of our Genesis
andGenesisXP IPG systems to gain and maintain market acceptance would adversely affect our revenue
growth and profitability                                       
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | because our main competitor has significantly greater resources than we do and new competitors may enter the neuromodulation
market, it may be difficult for us to compete in this market
| 
| |  | if pain management specialists do not recommend and endorse our products, our sales could be negatively impacted and we may
be unable to increase our revenues and profitability         
| 
| |  | the launch of Genesisand GenesisXPand other market factors could impede growth in or reduce sales of Renew, which would
adversely affect our revenues and profitability                  

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| |  | if patients choose less invasive or less expensive alternatives to our products, our sales could be negatively impacted                                                                                                                                                                
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | any adverse changes in coverage or reimbursement amounts by Medicare and Medicaid, private insurance companies and managed
care organizations, or workers compensation programs could limit our ability to market and sell our products                                               
| 
| |  | if we fail to protect our intellectual property rights, our competitors may take advantage of our ideas and compete directly
against us                                                                                                                                                
| 
| |  | other parties may sue us for infringing their intellectual property rights, or we may have to sue them to protect our
intellectual property rights                                                                                                                                     
| 
| |  | failure to obtain necessary government approvals for new products or for new applications for existing products would mean we
could not sell those new products, or sell our existing products for those new applications                                                              
| 
| |  | modification of any marketed device could require a new 510(k) clearance or PMA or require us to cease marketing or recall
the modified device until we obtain this clearance or approval                                                                                              
| 
| |  | we will be unable to sell our products if we fail to comply with manufacturing regulations                                                                                                                                                                                             
| 
| |  | our products are subject to product recalls even after receiving FDA clearance or approval, which would negatively affect our
financial performance and could harm our reputation                                                                                                      
| 
| |  | we are subject to potential product liability and other claims and we may not have the insurance or other resources to cover
the cost of any successful claim                                                                                                                          
| 
| |  | we are subject to substantial government regulation and our failure to comply with all applicable government regulations
could subject us to numerous penalties, any of which could adversely affect our business                                                                      
| 
| |  | our reliance on single suppliers for critical components used in our main products could adversely affect our ability to
deliver products on time                                                                                                                                      
| 
| |  | our major competitor in the neuromodulation market currently accounts for a significant percentage of our revenue from our
O.E.M. segment                                                                                                                                              
| 
| |  | we are dependent upon the success of neuromodulation technology; our inability to continue to develop innovative
neuromodulation products, or the failure of the neuromodulation market to develop as we anticipate, would adversely affect
our business                               
| 
| |  | our success will depend on our ability to attract and retain key personnel and scientific staff                                                                                                                                                                                        
| 
| |  | if we choose to acquire complementary businesses, products or technologies instead of developing them ourselves, we may be
unable to complete these acquisitions or to successfully integrate an acquired business, product or technology in a
cost-effective and non-disruptive manner
| 
| |  | we are subject to additional risks associated with international operations                                                                                                                                                                                                            
| 
| |  | our operations are conducted at three locations, and a disaster at any of these facilities could result in a prolonged
interruption of our business                                                                                                                                    
| 
| |  | our shareholders rights plan and Texas law may inhibit a takeover that our shareholders consider favorable                                                                                                                                                                            
| 
| |  | we may be obligated to issue shares of our common stock in the future to the former shareholders of MicroNet Medical and the
number of shares could increase if our stock price decreases                                                                                              
| 
| |  | general economic risks                                                                                                                                                                                                                                                                 
| 
| |  | other risks detailed from time to time in our SEC public filings                                                                                                                                                                                                                       

The foregoing risks are described in more detail in our Form 10-K/A for the
year ended December 31, 2002. If our assumptions prove to be incorrect or such
risks or uncertainties

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materialize, anticipated results could differ materially from those forecasted
in forward-looking statements.




ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For the period ended June 30, 2003, the Company did not experience material
changes in market risk exposures that affect the quantitative and qualitative
disclosures presented in the Companys Annual Report on Form 10-K/A for the
year ended December 31, 2002.




ITEM 4.   CONTROLS AND PROCEDURES

As of the end of the period covered by this report, an evaluation was carried
out by our management, with the participation of our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of our disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act
of 1934). Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that these disclosure controls and procedures were
effective.

There were no changes in the Companys internal control over financial
reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of
1934) that occurred during the Companys most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.

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PART II

OTHER INFORMATION




ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company held its 2003 Annual Meeting of Shareholders on June 4, 2003 at the
Companys corporate offices in Plano, Texas. At the Annual Meeting, the
shareholders voted on the election of eight directors for a one-year term (with
the exception of A. Ronald Lerner, who plans to serve until January 2004), as
follows:

|                          |  |           |            |                  |  |                 |           | 
|------------------------- |  | --------- | ---------- | ---------------- |  | --------------- | --------- | 
|                          |  |           |            |                  |  | Votes Abstained
|                          |  | Votes For |            | and             
|                          |  | Nominee   |            | Broker Non-Votes
|                          |  |           |            |                 
|Christopher G. Chavez     |  |           | 8,328,856  |                  |  |                 | 3,133,942 | 
|Robert C. Eberhart, Ph.D. |  |           | 11,076,004 |                  |  |                 | 386,794   | 
|Joseph E. Laptewicz       |  |           | 11,182,885 |                  |  |                 | 279,913   | 
|A. Ronald Lerner          |  |           | 11,253,532 |                  |  |                 | 209,266   | 
|J. Philip McCormick       |  |           | 11,183,312 |                  |  |                 | 279,486   | 
|Hugh M. Morrison          |  |           | 11,075,096 |                  |  |                 | 387,702   | 
|Richard D. Nikolaev       |  |           | 11,186,496 |                  |  |                 | 276,302   | 
|Michael J. Torma, M.D.    |  |           | 11,072,596 |                  |  |                 | 390,202   | 

There were present at the Annual Meeting in person or by proxy, shareholders
holding 11,462,798 shares on a pre-split basis, or approximately 89.76% of the
eligible voting shares. The votes listed above reflect pre-split shares of
common stock.




ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | Exhibit 3.1- Articles of Incorporation, as amended and
restated (1)                                                                                                                                             
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Exhibit 3.2- Bylaws, as amended and restated (1)                                                                                                                                                                
|
| |     |  | Exhibit 4.1- Rights Agreement dated as of August 30, 1996, between
Quest Medical, Inc. and KeyCorp Shareholder Services, Inc. as
Rights Agent (2)                                                               
|
| |     |  | Exhibit 4.2- Amendment to Rights Agreement dated as of January 25,
2002, between Advanced Neuromodulation Systems, Inc and
Computershare Investor Services LLC (formerly KeyCorp Shareholder
Services, Inc.) (3)
|
| |     |  | Exhibit 31.1 - Certification of the Chief Executive Officer
Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(4)            

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| |     |  | Exhibit 31.2 - Certification of the Chief Financial Officer
Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(4)                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Exhibit 32.1 - Certification of the Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (5)                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |     |  | Exhibit 32.2 - Certification of the Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (5)                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | (b) |  | The Company furnished a report on Form 8-K on May 7, 2003,
providing under Item 9. Regulation FD Disclosure, a press release
issued by the Company on April 24, 2003 disclosing information
regarding our results of operations and financial condition for the
first quarter of 2003, our financial outlook for 2003, and the
completion of the acquisition of Sun Medicals pain management
business. The Company also furnished a copy of the transcript of a
conference call held on April 24, 2003 discussing our results of
operations and financial condition for the first quarter of 2003 and
our financial outlook for 2003.
|
| |     |  | The Company furnished a report on Form 8-K on June 6, 2003,
reporting under Item 9. Regulation FD Disclosure, that our Board of
Directors declared a 3-for-2 split of our common stock payable on
July 11, 2003 to shareholders of record on June 20, 2003.                                                                                                                                                                                                                                                                                                                                                                           



---

|(1) |  | Filed as an Exhibit to the report of the Company on Form 10-K for the
year ended December 31, 2000, and incorporated herein by reference.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Filed as an Exhibit to the report of the Company on Form 8-K dated
September 3, 1996, and incorporated herein by reference.              
|   
|(3) |  | Filed as an Exhibit to the report of the Company on Form 8-K dated
January 30, 2002, and incorporated herein by reference.               
|   
|(4) |  | Filed herewith.                                                                                                                          
|   
|(5) |  | Furnished herewith.                                                                                                                      

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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, thereunto duly authorized.

|                      |  |                                       
|--------------------- |  | --------------------------------------
|                      |  | ADVANCED NEUROMODULATION SYSTEMS, INC.
|                      |  |                                       
|Date: August 12, 2003 |  | By:   /s/ F. Robert Merrill III       
|                      |  |                                       
|                      |  | F. Robert Merrill III                 
|                      |  | Executive Vice President, Finance     
|                      |  | Chief Financial Officer and Treasurer 

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EXHIBIT INDEX

|             |  |                                                                                                                                                                                                   
|------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 3.1  |  | Articles of Incorporation, as amended and restated (1)                                                                                                                                            
|             |  |                                                                                                                                                                                                   
|Exhibit 3.2  |  | Bylaws, as amended and restated (1)                                                                                                                                                               
|             |  |                                                                                                                                                                                                   
|Exhibit 4.1  |  | Rights Agreement dated as of August 30, 1996, between Quest
Medical, Inc. and KeyCorp Shareholder Services, Inc. as Rights
Agent (2)                                                              
|             |  |                                                                                                                                                                                                   
|Exhibit 4.2  |  | Amendment to Rights Agreement dated as of January 25, 2002
between Advanced Neuromodulation Systems, Inc and Computershare
Investor Services LLC (formerly KeyCorp Shareholder Services,
Inc.) (3)
|             |  |                                                                                                                                                                                                   
|Exhibit 31.1 |  | Certification of the Chief Executive Officer Pursuant to Rule
13a-14 of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (4)             
|             |  |                                                                                                                                                                                                   
|Exhibit 31.2 |  | Certification of the Chief Financial Officer Pursuant to Rule
13a-14 of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (4)             
|             |  |                                                                                                                                                                                                   
|Exhibit 32.1 |  | Certification of the Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (5)                                         
|             |  |                                                                                                                                                                                                   
|Exhibit 32.2 |  | Certification of the Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (5)                                         



---

|(1) |  | Filed as an Exhibit to the report of the Company on Form 10-K for the
year ended December 31, 2000, and incorporated herein by reference.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Filed as an Exhibit to the report of the Company on Form 8-K dated
September 3, 1996, and incorporated herein by reference.              
|   
|(3) |  | Filed as an Exhibit to the report of the Company on Form 8-K dated
January 30, 2002, and incorporated herein by reference.               
|   
|(4) |  | Filed herewith.                                                                                                                          
|   
|(5) |  | Furnished herewith.