# SECURITIES AND EXCHANGE COMMISSION

# Washington, D.C. 20549

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# FORM 10-Q

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# [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30,
2002

OR

# [  ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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Commission file number 0-10521

# ADVANCED NEUROMODULATION SYSTEMS, INC.

Incorporated pursuant to the Laws of the State of
Texas

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Internal Revenue Service  Employer
Identification No. 75-1646002

6501 Windcrest Drive, Plano, Texas 75024

(972) 309-8000

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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X]     No [  ]

Indicated by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [  ]     No [X]

The total number of shares of the registrants Common
Stock, $.05 par value, outstanding on November 8, 2002 was 12,178,289.

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Advanced Neuromodulation Systems, Inc. and
Subsidiaries

Table of Contents

|Part I.    Financial
Information | 2
|-------------------------------- | -
|                                 |  

| | Item 1. | Financial Statements | 
| | ------- | -------------------- | 
| |         |                      | 

| | Condensed Consolidated Balance Sheets
    September 30, 2002 (Unaudited)   
and December 31, 2001 (Audited)                                                               | 3-4 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----
| |                                                                                                                                                                           |     
| | Condensed Consolidated Statements of Income (Unaudited)
    For the Three Months and Nine Months Ended
    September 30, 2002 and 2001                                    | 5   
| |                                                                                                                                                                           |     
| | Condensed Consolidated Statements of Cash Flows (Unaudited)
    For the Nine Months Ended September 30, 2002 and 2001                                                     | 6   
| |                                                                                                                                                                           |     
| | Condensed Consolidated Statements of Stockholders Equity
    For the Year Ended December 31, 2001 (Audited)
    and the Nine Months Ended September 30, 2002
(Unaudited) | 7   
| |                                                                                                                                                                           |     
| | Notes to Condensed Consolidated Financial Statements                                                                                                                      | 8-15
| |                                                                                                                                                                           |     

| | Item 2. | Management's Discussion and Analysis of Financial Condition
     and Results of Operations | 16-26
| | ------- | ------------------------------------------------------------------------------------------ | -----
| |         |                                                                                            |      
| | Item 3. | Quantitative and Qualitative Disclosures About Market Risk                                 | 27   
| |         |                                                                                            |      
| | Item 4. | Controls and Procedures                                                                    | 27   
| |         |                                                                                            |      

|Part II.   Other
Information | 28
|---------------------------- | --
|                             |   

| | Item 6.    Exhibits and Reports on Form 8-K | 28
| | ------------------------------------------- | --
| |                                            

|Signatures | 29
|---------- | --
|           |   

| | §302 Certification of Chief Executive Officer | 30
| | --------------------------------------------- | --
| |                                              
| | §302 Certification of Chief Financial Officer | 31

Page 1

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PART I

FINANCIAL INFORMATION

Page 2

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|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------

Advanced Neuromodulation Systems, Inc. and
SubsidiariesCondensed Consolidated Balance SheetsSeptember
30, 2002 (Unaudited) and December 31, 2001 (Audited)

`September 30, December 31,
Assets                                                    2002          2001
------                                               ------------- -------------

Current assets:
   Cash and cash equivalents                         $  5,756,174  $  9,785,325
   Marketable securities                               92,783,736     2,151,722
   Receivables:
      Trade accounts, less allowance for doubtful
       accounts of $108,264 in 2002
       and $124,111 in 2001                             9,095,487     6,493,772
      Interest and other                                  236,574       235,594
                                                     ------------- -------------
         Total receivables                              9,332,061     6,729,366
                                                     ------------- -------------

   Inventories:
      Raw materials                                     5,747,845     4,685,586
      Work-in-process                                   2,766,062     1,723,419
      Finished goods                                    3,844,400     3,339,840
                                                     ------------- --------------
         Total inventories                             12,358,307     9,748,845
                                                     ------------- --------------

   Deferred income taxes                                1,201,063     1,726,517
   Current income tax receivable                          503,111       678,341
   Prepaid expenses and other current assets              872,248       685,169
                                                     ------------- --------------
         Total current assets                         122,806,700    31,505,285
                                                     ------------- --------------

Equipment and fixtures:
   Furniture and fixtures                               3,882,576     3,400,909
   Machinery and equipment                              9,547,994     8,550,504
   Leasehold improvements                               1,668,421     1,610,810
                                                     ------------- -------------
                                                       15,098,991    13,562,223
   Less accumulated depreciation and amortization       8,050,343     6,353,920
                                                     ------------- -------------
         Net property, plant and equipment              7,048,648     7,208,303
                                                     ------------- -------------

Goodwill, net of accumulated amortization
   of $3,404,427 in 2002 and $3,404,427 in 2001         7,407,237     7,407,237
Patents, net of accumulated amortization
   of $1,336,441 in 2002 and $1,045,106 in 2001         5,213,185     5,368,213
Purchased technology from acquisitions, net
   of accumulated amortization of $2,000,000
   in 2002 and $1,800,000 in 2001                       2,000,000     2,200,000
Trademarks, net of accumulated amortization
   of $937,663 in 2002 and $843,736 in 2001             1,579,564     1,656,264
Other assets, net of accumulated amortization
   of $492,865 in 2002 and $392,033 in 2001               486,908       519,783
                                                     ------------- -------------
                                                     $146,542,242  $ 55,865,085
                                                     ============= =============`

Page 3

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Advanced Neuromodulation Systems, Inc. and
SubsidiariesCondensed Consolidated Balance SheetsSeptember 30, 2002
(Unaudited) and December 31, 2001 (Audited)

`September 30,  December 31,
Liabilities and Stockholders' Equity                      2002          2001
------------------------------------                 ------------- -------------

Current liabilities:
   Accounts payable                                  $  1,633,882  $  1,835,037
   Accrued salary and employee benefit costs            1,983,650     1,826,423
   Accrued tax abatement liability                        969,204       969,204
   Customer deposits                                      457,633     1,042,690
   Deferred revenue                                       530,358           ---
   Commissions payable                                    557,703       285,704
   Warranty reserve                                       364,647       383,477
   Other accrued expenses                                 441,230       204,151
   Current maturities of long-term note payable               ---        52,325
                                                     ------------- -------------
         Total current liabilities                      6,938,307     6,599,011
                                                     ------------- -------------

Deferred income taxes                                   2,216,921     2,316,796
Long-term note payable                                        ---       137,397

Commitments and contingencies:

Stockholders' equity:
   Common stock of $.05 par value. Authorized
      25,000,000 shares; issued and outstanding:
      12,151,913 shares in 2002
      and 9,071,868 in 2001                               607,595       453,593
   Additional capital                                 124,863,730    38,670,248
   Retained earnings                                   11,937,010     7,709,290
   Accumulated other comprehensive income (loss),
      net of tax benefit of $10,986
      in 2002 and $10,949 in 2001                         (21,321)      (21,250)
                                                     ------------- -------------

         Total stockholders' equity                   137,387,014    46,811,881



                                                     ------------- -------------
                                                     $146,542,242  $ 55,865,085
                                                     ============= =============

See accompanying notes to condensed consolidated financial statements.`

Page 4

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Advanced Neuromodulation Systems, Inc. and
SubsidiariesCondensed Consolidated Statements of Income (Unaudited)
For the Three Months and Nine Months Ended September 30, 2002 and 2001

`Three Months Ended       Nine Months Ended
                                     September 30,           September 30,
                                ----------------------- ------------------------
                                    2002        2001        2002        2001
                                ----------- ----------- ----------- ------------
Net revenue                     $14,327,505 $ 9,899,973 $39,223,522 $27,445,504
Cost of revenue                   4,853,409   4,069,017  14,430,996  11,576,461
                                ----------- ----------- ----------- ------------
         Gross profit             9,474,096   5,830,956  24,792,526  15,869,043
                                ----------- ----------- ----------- ------------

Operating expenses:
   Research and development       1,518,610   1,268,681   4,186,833   3,649,493
   Sales and marketing            3,802,840   2,409,820  10,091,204   6,546,649
   Amortization of goodwill             ---     139,151         ---     417,452
   Amortization of intangibles      229,464     243,612     686,094     659,714
   General and administrative     1,390,308     986,371   3,971,617   2,948,714
                               ------------ ----------- ----------- ------------
                                  6,941,222   5,047,635  18,935,748  14,222,022
                                ----------- ----------- ----------- ------------
         Income from operations   2,532,874     783,321   5,856,778   1,647,021
                                ----------- ----------- ----------- ------------

Other income (expenses):
   Acquisition related costs            ---         ---         ---    (483,766)
   Interest expense                  (2,514)     (5,739)    (10,759)    (22,411)
   Interest and other income        374,991      85,797     595,685     388,078
                                ----------- ----------- ----------- ------------
                                    372,477      80,058     584,926    (118,099)
                                ----------- ----------- ----------- ------------

         Income before income
           taxes                  2,905,351     863,379   6,441,704   1,528,922
Income taxes                        963,048     388,135   2,213,984     691,425
                                ----------- ----------- ----------- ------------
         Net income             $ 1,942,303 $   475,244 $ 4,227,720 $   837,497
                                =========== =========== =========== ============


Net income per share:
                                =========== =========== =========== ============
         Basic                  $      .16  $      .05  $      .40  $      .09
                                =========== =========== =========== ============
         Diluted                $      .15  $      .05  $      .36  $      .08
                                =========== =========== =========== ============

See accompanying notes to condensed consolidated financial statements.`

Page 5

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Advanced Neuromodulation Systems, Inc. and
SubsidiariesCondensed Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2002 and 2001

`Nine Months Ended
                                                            September 30,
                                                     ---------------------------
                                                          2002          2001
                                                     ------------- -------------
Cash flows from operating activities:
   Net income                                        $  4,227,720  $    837,497
   Adjustments to reconcile net income to
    net cash provided by operating activities:
      Depreciation and amortization                     2,382,517     2,489,150
      Increase in inventory reserve                        51,403           ---
      Deferred income taxes                               425,615      (176,131)
      Changes in operating assets and liabilities:
        Receivables                                    (2,602,695)     (249,162)
        Inventories                                    (2,660,865)   (2,111,674)
        Current income tax receivable                     175,230       359,953
        Prepaid expenses and other assets                (231,573)      334,242
        Customer deposits                                (585,057)     (732,335)
        Deferred revenue                                  530,358           ---
        Income taxes payable                            1,674,689       359,632
        Accounts payable                                 (201,155)      186,952
        Accrued expenses                                  647,475        98,070
                                                     ------------- -------------
           Total adjustments                             (394,058)      558,697
                                                     ------------- -------------
           Net cash provided by operating
             activities                                 3,833,662     1,396,194
                                                     ------------- -------------

Cash flows from investing activities:
   Proceeds from certificates of deposits
    with maturities over 90 days                              ---     1,139,000
   Purchases of marketable securities                (110,425,666)   (2,497,518)
   Proceeds from sales of marketable securities        19,793,545     1,903,092
   Additions to patents and intangible assets            (176,997)     (459,632)
   Additions to equipment and fixtures                 (1,536,768)   (1,757,640)
                                                     ------------- -------------
           Net cash used in investing activities      (92,345,886)   (1,672,698)
                                                     ------------- -------------

Cash flows from financing activities:
   Payment of long-term obligations                      (189,722)      (35,442)
   Net proceeds from public offering of common stock   83,175,353           ---
   Exercise of stock options                            1,497,442       271,441
                                                     ------------- -------------
           Net cash provided by financing activities    84,483,073      235,999
                                                     ------------- -------------

Net increase (decrease) in cash and cash equivalents   (4,029,151)      (40,505)
Net cash used by Hi-tronics in December 2000
   (see Note 3)                                               ---      (672,444)
Cash and cash equivalents at beginning of year          9,785,325     9,528,721
                                                     ------------- -------------
Cash and cash equivalents at September 30            $  5,756,174  $  8,815,772
                                                     ============= =============

Supplemental cash flow information is
   presented below:
Income taxes paid                                    $    33,943        690,000
                                                     ============= =============
Interest paid                                        $    10,759         19,270
                                                     ============= =============

Non-cash activity:
Stock issued for patents and intangible assets       $        ---     2,426,662
                                                     ============= =============

See accompanying notes to condensed consolidated financial statements.`

Page 6

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Advanced Neuromodulation Systems, Inc. and
SubsidiariesCondensed Consolidated Statements of Stockholders Equity
For the Year Ended December 31, 2001 (Audited) andthe Nine Months Ended
September 30, 2002 (Unaudited)

`(Wide table - columns continue on following page)

                                 Common Stock         Additional     Retained
                         ---------------------------
                             Shares        Amount       Capital      Earnings
                         ------------- ------------- ------------- -------------
Balance at
December 31, 2000           8,883,059  $    444,153  $ 34,469,471  $  6,539,223
   Net income                     ---           ---           ---     1,517,746
   Net loss of
     Hi-tronics for
     December 2000
    (see Note 3)                  ---           ---           ---      (347,679)
   Adjustment to
     unrealized
     losses on
     marketable
     securities                   ---           ---           ---           ---

   Comprehensive Income

   Compensation expense
     resulting from
     changes to
     Hi-tronics stock
     options
     in December 2000             ---           ---        37,029           ---
   Issuance of shares for
     stock option
     exercises                188,809         9,440       995,474           ---
   Tax benefit from
     employee stock
     option exercise              ---           ---     1,669,405           ---
   Issuance of 119,100
     shares from
     treasury for
     acquisition                  ---           ---     1,498,869           ---
                         ------------- ------------- ------------- -------------
Balance at
December 31, 2001           9,071,868       453,593    38,670,248     7,709,290
   Net income                     ---           ---           ---     4,227,720
   Adjustment to
     unrealized
     losses on
     marketable
     securities                   ---           ---           ---           ---

   Comprehensive Income

   Sale of newly issued
     common stock in
     a public offering,
     net of offering
     costs                  2,875,000       143,750    83,031,603           ---
   Issuance of shares
     for stock option
     exercises                205,045        10,252     1,487,190           ---
   Tax benefit from
     stock option
     exercises                    ---           ---     1,674,689           ---
                         ------------- ------------- ------------- -------------
Balance at
September 30, 2002         12,151,913  $    607,595  $124,863,730  $ 11,937,010
                         ============= ============= ============= =============


(Table continued)


                             Other                      Total
                         Comprehensive   Treasury    Stockholders'
                         Income (Loss)     Stock        Equity
                         ------------- ------------- -------------
Balance at
December 31, 2000        $    (83,241) $   (927,793) $ 40,441,813
   Net income                     ---           ---     1,517,746
   Net loss of
     Hi-tronics for
     December 2000
    (see Note 3)                  ---           ---      (347,679)
   Adjustment to
     unrealized
     losses on
     marketable
     securities                61,991           ---        61,991
                                                     -------------
   Comprehensive Income                                 1,232,058
                                                     -------------
   Compensation expense
     resulting from
     changes to
     Hi-tronics stock
     options
     in December 2000             ---           ---        37,029
   Issuance of shares for
     stock option
     exercises                    ---           ---     1,004,914
   Tax benefit from
     employee stock
     option exercise              ---           ---     1,669,405
   Issuance of 119,100
     shares from
     treasury for
     acquisition                  ---       927,793     2,426,662
                         ------------- ------------- -------------
Balance at
December 31, 2001             (21,250)          ---    46,811,881
   Net income                     ---           ---     4,227,720
   Adjustment to
     unrealized
     losses on
     marketable
     securities                   (71)          ---           (71)
                                                     -------------
   Comprehensive Income                                 4,227,649
                                                     -------------
   Sale of newly issued
     common stock in
     a public offering,
     net of offering
     costs                        ---           ---    83,175,353
   Issuance of shares
     for stock option
     exercises                    ---           ---     1,497,442
   Tax benefit from
     stock option
     exercises                    ---           ---     1,674,689
                         ------------- ------------- -------------
Balance at
September 30, 2002       $    (21,321) $        ---  $137,387,014
                         ============= ============= =============

See accompanying notes to condensed consolidated financial statements.`

Page 7

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

|(1) | Business/New Accounting Standards                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | Advanced Neuromodulation Systems, Inc. (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. See Note 3. ANS neuromodulation
revenues are derived primarily from sales throughout the United States, Europe
and Australia while HDI revenues are derived from sales within the United
States.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | 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 and other
users who then bill various third party payers including Medicare, Medicaid,
private insurance companies and managed care organizations. These third party
payers reimburse fixed amounts for services based on a specific diagnosis. The
impact of changes in third party payer 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations" and
Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and
Other Intangible Assets." SFAS 141 and SFAS 142 are effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the statements. Other
intangible assets will continue to be amortized over their useful lives. The
Company adopted SFAS 141 and SFAS 142 on January 1, 2002 and eliminated
amortization of goodwill as of such date. Amortization expense for goodwill for
the three months and nine months ended September 30, 2001 was $139,151 and
$417,452 respectively. The pro forma impact on net income and net income per
share for the three months and nine months ended September 30, 2001, assuming no
amortization of goodwill for these periods, compared to the actual results for
the three months and nine months ended September 30, 2002 is as follows:

Page 8

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

`Three Months Ended       Nine Months Ended
                                      September 30,           September 30,
                                 ----------------------  -----------------------
                                     2002        2001        2002        2001
                                 ----------  ----------  ----------  -----------
 Reported net income             $1,942,303  $  475,244  $4,227,720  $  837,497
 Goodwill amortization                  ---     139,151         ---     417,452
                                 ----------  ----------  ----------  -----------
 Adjusted net income             $1,942,303  $  614,395  $4,227,720  $1,254,949
                                 ==========  ==========  ==========  ===========

 Basic net income per share:
    Reported                     $     .16   $     .05   $     .40   $     .09
    Goodwill amortization              ---         .02         ---         .05
                                 ----------  ----------  ----------  -----------
    Adjusted                     $     .16   $     .07   $     .40   $     .14
                                 ==========  ==========  ==========  ===========
 Diluted net income per share:
    Reported                     $     .15   $     .05   $     .36   $     .08
    Goodwill amortization              ---         .01         ---         .05
                                 ----------  ----------  ----------  -----------
    Adjusted                     $     .15   $     .06   $     .36   $     .13
                                 ==========  ==========  ==========  ===========`

|(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.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | 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, 2001 Annual Report on Form 10-K. The results of
operations for the period ended September 30, 2002 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 January 2, 2001, the Company acquired the assets of Implantable Devices
Limited Partnership (IDP) and ESOX Technology Holdings, LLC (ESOX), two
privately held Minnesota companies, for 119,100 shares of the Company's common
stock. Based on the closing price of ANS common stock on December 29, 2000, the
value of the stock issued to acquire the assets was $2.43 million. The assets
purchased consisted primarily of intellectual property and technology for the
fully implantable constant-rate infusion pump that ANS has developed. Prior to
the acquisition, the Company had licensed rights to the technology only for pain
and cancer therapy applications.                                          

Page 9

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

| | Also on January 2, 2001, the Company completed the acquisition of
Hi-tronics Designs, Inc. (HDI), a privately held contract developer and original
equipment manufacturer (O.E.M.) of electro-mechanical devices with headquarters
in Budd Lake, New Jersey. The Company acquired all of HDI's outstanding stock
through a merger in exchange for 1,104,725 shares of ANS common stock. The
transaction was accounted for on a pooling of interests basis. HDI developed and
manufactured the Company's totally implantable pulse generator (IPG) used in the
treatment of chronic intractable pain and was also the O.E.M. manufacturer of
the transmitter used with the Company's Renew radio-frequency spinal cord
stimulation system.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Prior to the Company's acquisition of HDI, HDI's fiscal year ended on
November 30. Beginning in 2001, the fiscal year-ends have been conformed to
December 31. As a result, the results of operations of HDI for the one-month
period ending December 31, 2000 have been recorded directly to retained earnings
in the Consolidated Statement of Stockholders' Equity for the period ended
December 31, 2001 and are not reflected in the Consolidated Statements of Income
for the nine-month period ended September 30, 2001.                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Summary operating results of HDI for this one-month period ending December
31, 2000, were as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

| | Net revenue                    | $  119,481 
| | ------------------------------ | -----------
| | Loss before income tax benefit | $ (591,600)
| | Net loss                       | $ (347,679)
| |                               

| | For the one-month period ended December 31, 2000, cash flows
for HDI were as follows:
| | -------------------------------------------------------------------------------------
| |                                                                                      

| | Net cash used by operating activities | $ (647,210) 
| | ------------------------------------- | ------------
| | Net cash used by investing activities | $ (  14,516)
| | Net cash used by financing activities | $ (  10,718)
| | Net decrease in
cash                  | $ (672,444) 
| |                                      

|(4) | Note Payable                                                                                                                                                                                                                  
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                               
|    | In connection with the acquisition of HDI (see Note 3), the Company assumed
responsibility for a note payable with a principal balance of $189,722 at
December 31, 2001. The note was repaid in its entirety during June 2002.
|    |                                                                                                                                                                                                                               
|(5) | Marketable Securities                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                               
|    | The following is a summary of available-for-sale securities at September 30,
2002:                                                                                                                                            

Page 10

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`Gross       Gross
                                             Unrealized  Unrealized  Estimated
                                   Cost        Gains       Losses    Fair Value
                               ------------ ----------- ----------- ------------
     FNMA and Federal
       Home Loan Bank notes    $   889,719  $      ---  $   17,553  $   872,166
     Investment grade
       municipal bonds           1,054,195       1,660       7,342    1,048,513
     7 day and 35 day
       AAA municipal
       bond floaters            90,774,447         485         ---   90,774,932
     Real estate
       investment trust             97,682         ---       9,557       88,125
                               ------------ ----------- ----------- ------------
                               $92,816,043  $    2,145  $   34,452  $92,783,736
                               ============ =========== =========== ============`

|    | Estimated fair value for the real estate investment trust is
determined by the closing price as reported on the New York Stock Exchange at
each financial reporting period. In the case of the investment grade municipal
bonds, 7-day and 35-day municipal floaters and FNMA and Federal Home Loan Bank
notes, the brokerage firms holding such bonds and notes provide the values at
each reporting period by utilizing a standard pricing service.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | At September 30, 2002, no individual security represented more than 6
percent of the total portfolio or 4 percent of total assets. The Company did not
have any investments in derivative financial instruments at September 30, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(6) | Public Offering                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | On June 3, 2002, the Company completed an underwritten public offering of
2,875,000 shares of common stock managed by U.S. Bancorp Piper Jaffray, CIBC
World Markets and Gerard Klauer Mattison as underwriters. The Company received
net proceeds from the offering of $83.2 million. The Company intends to use the
proceeds from the offering for general corporate purposes, including expanding
its worldwide sales and marketing resources, funding product development,
pursuing regulatory approvals and pursuing strategic acquisitions of product
lines, businesses, companies, services or technologies that complement its
current business through mergers, acquisitions, joint ventures or otherwise.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(7) | Commitments and Contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The Company entered into a sixty-three month lease agreement on its 40,000
square foot corporate headquarters and manufacturing facility in Plano, Texas
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 base monthly rental rate is $48,308, subject to certain annual
increases as provided for in the lease agreement. The monthly rate was increased
to $50,951 in January 2002. The monthly rental rate includes certain operating
expenses such as property taxes on the facility, insurance, landscape and
maintenance and janitorial services. The Company also has the first right of
refusal to acquire the facility. In September 2002, the Company amended its
lease agreement to reflect the addition of approximately 9,700 square feet of
office space located in 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 rate on the additional
9,700 square feet of office space is $11,485.

Page 11

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|    | 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 8,800 square feet of office space that is used for administration,
design engineering, drafting, documentation and regulatory affairs. The lease
expires on May 31, 2003 and has a monthly rental rate of $10,891. The Company
also leases 15,000 square feet of space in Hackettstown, New Jersey used for the
O.E.M. manufacturing operations. The Hackettstown lease, which expires on
December 31, 2002, has a monthly rental rate of $9,636 and is renewable for two
additional one-year periods. In addition, during January 2001, the Company
leased 2,200 square feet of additional space in the Hackettstown facility
adjacent to the 15,000 square feet of manufacturing space until June 30, 2002 at
a monthly rental rate of $2,269 and is currently leasing the space on a
month-to-month basis at the same rate.                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | The Company leases transportation equipment under various
non-cancelable operating leases that expire in April, May and October of 2005.
The monthly expense under the operating leases is $3,133.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | The Company leases office equipment under non-cancelable operating leases
expiring through 2004. Monthly payments on the office equipment leases are
$3,600.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | The Company is a party to product liability claims related to ANS
neurostimulation devices. Product liability insurers have assumed responsibility
for defending the Company against these claims. While historically product
liability claims for ANS neurostimulation devices have not resulted in
significant monetary liability for the Company beyond its insurance coverage,
there can be no assurances that the Company will not incur significant monetary
liability to the claimants if such insurance is inadequate, and there can be no
assurance that the Company's neurostimulation business and future ANS product
lines will not be adversely affected by these product liability claims.                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | Except for such product liability claims, the Company is not currently a
party to any other pending legal proceeding. The Company maintains general
liability insurance against risks arising out of the normal course of business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(8) | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | The Company recorded income tax expense during the three months and nine
months ended September 30, 2002, of $963,048 and $2,213,984, representing
overall effective tax rates of 33.2% and 34.4%, respectively. These effective
tax rates during the 2002 periods include a provision for state taxes and also
reflect tax-free investment income. During the three months and nine months
ended September 30, 2001, the Company recorded income tax expense of $388,135
and $691,425, representing overall effective tax rates of 45.0% and 45.2%,
respectively. In the 2001 periods, the Company's expense for goodwill was not
deductible for tax purposes, and, when combined with a provision for state
taxes, resulted in the higher effective tax rates compared to the U.S. statutory
rate for corporations of 34 percent. In addition, approximately $234,000 of the
$484,000 of costs incurred in the acquisition of HDI recorded in the nine month
period ended September 30, 2001 were not deductible for tax purposes, which also
contributed to the higher effective tax rate in 2001.

Page 12

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|    | As of December 31, 2001, the Company had a net operating loss
carryforward of approximately $1.8 million, which expires in annual amounts
through 2022. As a result of the enactment of certain tax law changes during the
first quarter, the Company will carry back approximately $1.6 million of net
operating losses resulting in a carryforward that consists primarily of net
operating losses acquired from HDI. This net operating loss carryforward may be
subject to Section 382 of the Internal Revenue Code or other provisions, which
may limit the use of the net operating loss carryforward in any tax
year.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(9) | Net Income Per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | Basic income per share is computed based only on the weighted average number
of common shares outstanding during the period. Diluted income per share is
computed using 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:                                                                                                                                                                                                

`Three Months Ended       Nine Months Ended
                                       September 30,           September 30,
                                 ----------------------- -----------------------
                                     2002       2001         2002        2001
                                 ----------- ----------- ----------- -----------
  Weighted-average shares
    outstanding (basic shares)    12,093,394  8,932,417   10,455,043   8,915,479
  Effect of dilutive stock
    options                        1,082,705  1,064,141    1,130,980     958,632
                                 ----------- ----------- ----------- -----------
         Diluted shares           13,176,099  9,996,558   11,586,023   9,874,111
                                 =========== =========== =========== ===========`

|     | For the three months and nine months ended September 30, 2002 and
2001, the incremental shares used for dilutive income per share relate to stock
options whose exercise price was less than the average market price in the
underlying quarterly computations. For the three months ended September 30, 2002
and 2001, all stock options were included in the computation of diluted income
per share because all exercise prices were less than the average market price of
the common shares in each of the respective three-month periods.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(10) | Comprehensive Income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     | Total comprehensive income for 2001 and for the nine months ended September
30, 2002 is reported in the Condensed Consolidated Statements of Stockholders'
Equity. Comprehensive income for the three months and nine months ended
September 30, 2002 and 2001 is as follows:                                                                                                                                                                                                                                                                 

Page 13

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`Three Months Ended       Nine Months Ended
                                      September 30,           September 30,
                                ----------------------- ------------------------
                                    2002        2001        2002         2001
                                ----------- ----------- ----------- ------------
    Net income                  $1,942,303  $  475,244  $4,227,720  $   837,497
    Other comprehensive income
     (loss)                         (6,822)     20,346         (71)      78,196
    Net loss of Hi-tronics for
     December 2000 (see Note 3)
                                       ---         ---         ---     (347,679)
                                ----------- ----------- ----------- ------------
    Comprehensive income        $1,935,481  $  495,590  $4,227,649  $   568,014
                                ----------- ----------- ----------- ------------`

|(11) | 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.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|     | Segment data for the three months ended September 30, 2002
follows:                                                                                                                                                                                                                                                                                                                                                                                     

`Neuro          HDI      Intercompany  Consolidated
                            Products       O.E.M.    Eliminations     Total
                         ------------- ------------- ------------- -------------
 Revenue from external
   customers             $ 11,604,437  $  2,723,068  $        ---  $ 14,327,505
 Intersegment revenues   $        ---  $  1,483,118  $ (1,483,118) $        ---
 Segment income from
   operations            $  1,897,556  $    635,318  $        ---  $  2,532,874`

| | Segment data for the three months ended September 30, 2001 follows:
| | -------------------------------------------------------------------

`Neuro          HDI      Intercompany  Consolidated
                            Products       O.E.M.    Eliminations     Total
                         ------------- ------------- ------------- -------------
 Revenue from external
   customers             $  7,047,020  $  2,852,953  $        ---  $  9,899,973
 Intersegment revenues   $        ---  $    797,670  $   (797,670) $        ---
 Segment income from
   operations            $    299,606  $    483,715  $        ---  $    783,321`

Page 14

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| | Segment data for the nine months ended September 30, 2002 follows:
| | ------------------------------------------------------------------

`Neuro          HDI      Intercompany  Consolidated
                            Products       O.E.M.    Eliminations     Total
                         ------------- ------------- ------------- -------------
 Revenue from external
   customers             $ 31,422,384  $  7,801,138  $        ---  $ 39,223,522
 Intersegment revenues   $        ---  $  3,953,856  $ (3,953,856) $        ---
 Segment income from
   operations            $  4,299,023  $  1,557,755  $        ---  $  5,856,778
 Segment assets          $142,400,508  $  8,151,841  $ (3,963,807) $146,588,542`

| | Segment data for the nine months ended September 30, 2001 follows:
| | ------------------------------------------------------------------

`Neuro          HDI      Intercompany  Consolidated
                            Products       O.E.M.    Eliminations     Total
                         ------------- ------------- ------------- -------------
 Revenue from external
   customers             $ 19,962,947  $  7,482,557  $        ---  $ 27,445,504
 Intersegment revenues   $        ---  $  1,800,217  $ (1,800,217) $        ---
 Segment income from
   operations            $    642,963  $  1,004,058  $        ---  $  1,647,021
 Segment assets          $ 47,922,799  $  6,833,753  $ (2,346,520) $ 52,410,032`

|(12) | Subsequent Event                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     | On November 5, 2002, the Company announced it had agreed to acquire Micronet
Medical, Inc. (Micronet), a developer of medical devices based on proprietary
micro-lead technology. Under the terms of the transaction, which will be
structured as a merger, ANS will acquire only Micronet's proprietary technology
and certain associated tangible assets. Micronet's operations, other tangible
assets, certain liabilities and certain employees will become part of a separate
unaffiliated company. ANS will assume no material debt, liabilities, or overhead
in the transaction. Upon closing, which is subject to Micronet shareholder
approval and other customary conditions, ANS will pay Micronet shareholders
$500,000 in cash and a number of shares of ANS Common Stock with a value of
$5,233,000, based on the average trading price for the 30 days preceding
closing. In addition, if certain product, regulatory approval and sales
milestones are met, ANS could pay Micronet shareholders an additional number of
shares of ANS Common Stock with an aggregate value of up to $9 million.
Important milestone deadlines occur six, twelve and eighteen months following
the closing for product milestone purposes, while other milestones depend on the
receipt of regulatory approvals and meeting an aggregate sales milestone. All
milestones must be met within the next four to five years, depending on the
milestone. The transaction is expected to close by the end of 2002.

Page 15

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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 Consolidated Financial
Statements of the Company and the related Notes.

Overview

We design, develop, manufacture and market neuromodulation devices that
improve the quality of life for people suffering from chronic pain.
Neuromodulation devices include implantable neurostimulation devices, which
deliver electric current directly to targeted nerves, and implantable drug
pumps, which deliver small, precisely controlled doses of drugs directly to
targeted sites within the body. 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. See Note 3 to the
Condensed Consolidated Financial Statements.

The use of neuromodulation devices is growing rapidly. According to an
independent industry study, the worldwide market for neuromodulation products
was approximately $525 million in 2001, up 21% from the previous year. This
study estimates that the market will grow to approximately $1.1 billion
worldwide by 2005, based solely on currently approved treatment indications in
the U.S. for neuromodulation devices.

Our principal product in 2001 was Renew®, our latest generation
radio-frequency (RF) spinal cord stimulation device. We have sold Renew
in the U.S. since June 1999 for treatment of chronic pain of the trunk and
limbs.

On November 21, 2001, the U.S. Food and Drug Administration (FDA)
approved our Genesis totally implantable pulse generator (IPG)
spinal cord stimulation device. We began selling Genesis in Europe in the
first quarter of 2001 and in the U.S. and Australia in January 2002 for the
treatment of chronic pain of the trunk and limbs. Until our launch of the
Genesis IPG, only one other company marketed an approved IPG device in
the United States.

In 2000, we completed development of AccuRx®, our constant rate
implantable drug pump, in part using proprietary technology we licensed from
Implantable Devices Limited Partnership (IDP). We initiated clinical trials of
AccuRx under an Investigational Device Exemption (IDE) in the first
quarter of 2001, and began selling AccuRx in certain international
markets in the second quarter of 2001. On January 2, 2001, we strengthened our
position in the neuromodulation market by acquiring the assets of IDP and ESOX
Technology Holdings, LLC (ESOX) for 119,100 shares of our common stock valued at
approximately $2.43 million. This acquisition provided us with intellectual
property surrounding implantable drug pump technologies in all applications,
including pain and cancer therapy.

Also, on January 2, 2001, we completed the acquisition of HDI, a
privately-held O.E.M. developer and manufacturer, for approximately 1.1 million
shares of our common stock. We accounted for this acquisition using the pooling
method and, accordingly, the financial information for all periods prior to the
acquisition has been restated. Prior to the acquisition, HDI developed and
manufactured our Genesis IPG, as well as the transmitter for our
Renew system. Acquiring HDI provided us with additional in-house
expertise in the design and manufacture of highly sophisticated
electromechanical devices. Combined with our capabilities in the design and

Page 16

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manufacture of implantable leads, electronic device control and communication
systems and implantable drug pumps, we believe HDI's expertise will allow us to
develop more sophisticated products in less time. Additionally, HDI continues to
provide contract development and manufacturing services to third parties, which
we report as a separate segment for financial reporting purposes (the O.E.M.
segment). In the quarter ended September 30, 2002, our O.E.M. segment generated
$2.72 million, or 19%, of our total revenue. We expect our O.E.M. segment
revenue to decrease as a percentage of our total revenue in the future, as we
grow revenue from our proprietary neurostimulation systems and drug pumps and
increasingly utilize HDI's research and development capabilities for our own
internal product development.

Our current neuromodulation product line includes our Genesis IPG
system, Renew RF system and AccuRx constant rate drug pump. With
the launch of Genesis, we now compete in 100% of the implantable
neurostimulation market to treat chronic pain of the trunk and limbs.
Renew is targeted toward the treatment of complex, changing or
multi-extremity pain patterns that require higher power levels for treatment,
while Genesis is primarily intended to address simpler, more localized
pain patterns. Although Renew and Genesis are targeted toward
treatment of different chronic pain conditions, the rate of sales growth of
Renew has slowed since the launch of Genesis. As pain specialists
selected our newer, fully-implantable Genesis system, sales of
Renew in the third quarter of 2002 were effectively flat compared to the
prior year quarter, and through the nine months ended September 30, 2002, sales
of Renew increased modestly compared to the same nine-month period in
2001. Thus, while it is too early to accurately predict future sales trends,
management believes it possible that sales of Renew may continue to
plateau or even decline modestly, at least in the near term.

In October 2002, we announced that the FDA has approved our PMA supplement to
market an enhanced version of Genesis. The Genesis XP will
offer substantially more battery capacity than our current Genesis IPG,
resulting in enhanced longevity and/or additional power to treat more complex
pain. We expect to launch Genesis XP during the fourth quarter of
2002.

On June 3, 2002, we announced completion of our underwritten public offering
of 2,875,000 shares of common stock managed by U.S. Bancorp Piper Jaffray, CIBC
World Markets and Gerard Klauer Mattison as underwriters. We received net
proceeds from the offering of approximately $83.2 million. We intend to use the
proceeds from the offering for general corporate purposes, including expanding
our worldwide sales and marketing resources, funding product development,
pursuing regulatory approvals and pursuing strategic acquisitions of product
lines, businesses, companies, services or technologies that complement our
current business through mergers, acquisitions, joint ventures or otherwise.

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 U.S.
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 revenues 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 it believes are reasonable under the
circumstances, the results of 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.

Page 17

---

Management believes the following critical accounting policies involve its
more significant judgments and estimates used to prepare its consolidated
financial statements.

Revenue Recognition

Revenue from the sale of our neuromodulation products and custom manufactured
O.E.M. products is recognized when the goods are shipped to our customers. We
record, as a reduction in revenue, a provision for estimated sales returns and
allowances 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. If the historical data we use to
calculate these estimates do not properly reflect future returns, revenue
could be overstated.

We also design and develop products under fixed price development agreements
with third parties. Each development agreement reflects the terms and conditions
of the project, including project objectives, product specifications,
responsibilities for tasks, licenses and fields of use of intellectual
properties, manufacturing rights and compensation, among other terms and
conditions. A typical development project will take one to two years to complete
and is undertaken in accordance with the FDA's Quality System Regulations, which
address design controls and methods, facilities and quality assurance controls
used in manufacturing medical devices, and similar international standards. We
recognize revenue and profit under the development agreements using the
percentage-of-completion method, which relies on estimates of total expected
revenue and costs. We follow this method because we can make reasonably
dependable estimates of revenue and costs applicable to various stages of a
development agreement. Our failure to accurately estimate the resources required
or the scope of work to be performed under a development agreement, could
negatively impact future profit margins and results of operations.

In certain cases, we will undertake a development project on a cost plus
basis. In these cases, we invoice the customer for actual time and material
expended on the project at predetermined hourly billing rates and mark-ups.

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

Page 18

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Inventory

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

Goodwill associated with the excess purchase price over the fair value of
assets acquired was amortized using the straight-line method through December
31, 2001 over the estimated life of 20 years.

On January 1, 2002, we adopted Statement of Financial Accounting Standards
No. 141, "Business Combinations" and Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets". Under the new accounting rules,
goodwill and intangible assets deemed to have indefinite lives are no longer
amortized but will be subject to annual impairment tests in accordance with the
statements. We determined that our goodwill at December 31, 2001 was unimpaired
and eliminated amortization of the goodwill effective January 1, 2002. Prior to
adoption of these statements, our amortization expense for goodwill was $139,151
per quarter, or $556,604 on an annual basis.

Other identifiable intangible assets, such as patents, purchased technology,
trademarks and covenants not to compete, are currently amortized on the
straight-line method over their estimated 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 not previously recorded.

Warranty Obligations

Our products are generally covered by a one-year warranty. We accrue a
warranty reserve for estimated costs to provide warranty services. Our estimate
of costs to service our warranty obligations is based on historical experience
and expectation of future conditions. To the extent we experience increased
warranty claim activity or increased costs associated with servicing those
claims, our warranty accrual will increase resulting in decreased gross profit
and net income.

Contingencies

We are subject to proceedings, lawsuits and other claims related to our
products and business. We are 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 is made after careful 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 are the only litigation to which we are a
party. While historically our product liability claims have not resulted in
significant monetary liability beyond our insurance coverage, an adverse
judgment beyond our insurance coverage could have a material adverse impact on
our results of operations and financial condition.

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Results of Operations

Comparison of the Three Months and Nine Months Ended September 30, 2002
and 2001

Net income. We reported net income of $1,942,000, or $.15 per diluted
share for the three months ended September 30, 2002, compared to net income of
$475,000 or $.05 per diluted share in the same 2001 period. For the nine months
ended September 30, 2002, we reported net income of $4,228,000, or $.36 per
diluted share compared to $837,000 or $.08 per diluted share in the same 2001
period. Financial results for both periods in 2002 reflect the January 2002 U.S.
launch of our Genesis IPG system. Results for the nine-month period ended
September 30, 2001 reflect an expense of $484,000 for costs associated with our
acquisition of HDI in January 2001. We expensed these costs instead of
capitalizing them because the acquisition is accounted for under the pooling of
interests method. Results for the three-month and nine-month periods in 2001
also reflect amortization expense for goodwill of $139,151 and $417,453,
respectively. Financial results for the three months and nine months ended
September 30, 2002 contain no similar expense since we eliminated the
amortization of goodwill on January 1, 2002 when we adopted the new accounting
standards for intangible assets described above. If the amortization expense for
goodwill is eliminated from the 2001 periods, pro forma net income and net
income per share would be $614,000 and $.06 per diluted share for the three
months ended September 30, 2001 and $1,255,000 and $.13 per share for the nine
months ended September 30, 2001.

Net revenue. Net revenue increased 44.7% to $14.33 million for the
three months ended September 30, 2002, compared to $9.90 million in the
comparable 2001 period. Net revenue of our neuromodulation products increased
64.7% to $11.60 million in 2002 from $7.05 million in 2001 due to the U.S.
launch of our Genesis IPG system in January 2002. Net revenue from our
O.E.M. business decreased marginally to $2.72 million in 2002 from $2.85 million
in 2001 as we continue to focus more of HDI's resources on our own research and
development projects. For the nine months ended September 30, 2002, net revenue
increased 42.9% to $39.22 million from $27.45 million for the nine-month period
in 2001 primarily due to the launch of our Genesis IPG system. Net
revenue of our neuromodulation products increased 57.4% to $31.42 million for
the nine-month period in 2002 from $19.96 million in the same 2001 period. Net
revenue from our O.E.M. business increased 4.3% to $7.80 million for the
nine-month period in 2002 from $7.48 million in the same 2001 period due to
higher third-party development fees.

Gross profit. Gross profit increased 62.5% to $9.47 million during the
three months ended September 30, 2002 from $5.83 million in 2001, principally
due to the increase in net revenue discussed above. Additionally, gross profit
margin increased to 66.1% in 2002, compared to 58.9% in 2001, 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 sales agents, which contribute higher margins than distributor
sales, and operational efficiencies gained from higher manufacturing volumes.
For the nine months ended September 30, 2002, gross profit increased 56.2% to
$24.79 million from $15.87 million in the comparable 2001 period, again
principally due to the increase in net revenue discussed above. Gross profit
margin increased to 63.2% in the nine-month period in 2002 compared to 57.8% in
2001 again due to the same factors. The rate of reimbursement by Medicare,
Medicaid, private insurance companies, managed care organizations, and worker's
compensation affects our gross profit margins. We recently announced that we
were pleased with the final ruling issued in late October 2002 by the Center for
Medicare & Medicaid Services (CMS) for the Medicare outpatient prospective
payment system (OPPS). We believe that the 2003 reimbursement rates for Medicare
hospital outpatient procedures that implant our devices are adequate to cover
both the cost of our device and the hospital procedure. While Medicare OPPS
reimbursement levels for permanent implants of spinal cord stimulation devices
declined modestly, the rates in the final CMS ruling are significantly higher
than in the initial CMS proposal and will continue to provide adequate
reimbursement for outpatient procedures. Currently, approximately 15% of our
revenues are derived from Medicare OPPS procedures. Consequently, we do not
anticipate a material adverse effect on our gross profit margins as a result of
the 2003 reimbursement rates announced by CMS.

Page 20

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Operating expenses. Total operating expenses increased to $6.94
million for the three months ended September 30, 2002 from $5.05 million in the
same period during 2001. However, as a percentage of net revenue, these expenses
decreased to 48.5% in 2002 from 51.0% in 2001 due to leveraging of research and
development expense, leveraging of general and administrative expense and to a
lesser extent eliminating amortization expense for goodwill. For the nine months
ended September 30, 2002, total operating expenses increased to $18.94 million
from $14.22 million during the nine-month period in 2001. However, as a
percentage of net revenue, these expenses decreased to 48.3% in 2002 from 51.8%
in 2001, again due to the same factors.

Research and development. Research and development expense, as a
percentage of net revenue, decreased to 10.6% during the three months ended
September 30, 2002 from 12.8% in the same 2001 period, while the absolute dollar
amount increased to $1.52 million in 2002 from $1.27 million during 2001. For
the nine months ended September 30, 2002, research and development expense as a
percentage of net revenue decreased to 10.7% from 13.3% in the same period in
2001, while the absolute dollar amount increased from $3.65 million during the
2001 period to $4.19 million during the 2002 period. This increase in the
absolute dollar amount during both 2002 periods compared to the same periods in
2001 was principally attributable to higher salary expense from staffing
additions and annual salary increases, higher benefit expense from staffing
additions, higher test material expense and higher expense associated with our
clinical trials of AccuRx. We continue to focus our development efforts
on further broadening and strengthening our product technology platforms and
clinical trials of our AccuRx. As noted above, the FDA recently approved
our application for a PMA supplement to market an enhanced version of our IPG
called Genesis XP, which will offer substantially more battery
capacity than our current Genesis IPG.

Sales and marketing. Sales and marketing expense, as a percentage of
net revenue, increased to 26.5% during the three months ended September 30, 2002
from 24.3% in the same 2001 period, and the absolute dollar amount increased to
$3.80 million in 2002 from $2.41 million during 2001. For the nine months ended
September 30, 2002, sales and marketing expense as a percentage of net revenue
increased to 25.7% from 23.9% in the same period in 2001 and the absolute dollar
amount increased from $6.55 million during the 2001 period to $10.09 million
during the 2002 period. This increase in the absolute dollar amount during both
2002 periods compared to the same periods in 2001 was principally attributable
to higher salary and benefit expense from staffing additions in direct sales,
reimbursement and sales support positions, annual salary increases, higher
commission expense from increased product sales, and higher sample and
promotional expense in support of the Genesis IPG launch.

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General and administrative. General and administrative expense, as a
percentage of net revenue, decreased to 9.7% during the three months ended
September 30, 2002 from 10.0% in the same 2001 period, while the absolute dollar
amount increased to $1.39 million in 2002 from $986,000 during 2001. For the
nine months ended September 30, 2002, general and administrative expense, as a
percentage of net revenue, decreased to 10.1% from 10.7% in the same 2001
period, while the absolute dollar amount increased to $3.97 million in 2002 from
$2.95 million during 2001. The increase in the absolute dollar amount during
both periods in 2002 compared to 2001 was principally attributable to higher
salary expense from staffing additions and annual salary increases, higher
employee benefit costs, higher property tax expense and increased legal costs.

Amortization of intangibles. No amortization expense of goodwill was
recorded during the three months and nine months ended September 30, 2002 due to
the adoption of Statement of Financial Accounting Standards No. 141 and
Statement of Financial Accounting Standards No. 142 on January 1, 2002. For the
three months and nine months ended September 30, 2001, we recorded $139,000 and
$417,000, respectively, of amortization expense for goodwill.

Amortization of other intangibles decreased to $229,000 during the three
months ended September 30, 2002 from $244,000 in the same period in 2001, as
certain intangible assets were fully amortized. For the nine months ended
September 30, 2002, amortization of other intangibles increased to $686,000 from
$660,000 in 2001 due to additional patent amortization.

Income from operations. Income from operations increased 223.4% to
$2.53 million during the three months ended September 30, 2002 from $783,000
during the comparable 2001 period. For the nine months ended September 30, 2002,
income from operations increased 255.6% to $5.86 million from $1.65 million
during the comparable nine-month period in 2001. These enhanced operating
results during the 2002 periods compared to 2001 reflect the revenue growth
principally attributable to the U.S. launch of the Genesis IPG in January
2002, increased gross profit from the resulting sales growth and gross margin
improvements and leveraging of operating expenses discussed above.

Other income (expense). Other income increased to $372,000 during the
three months ended September 30, 2002 from $80,000 during the three months ended
September 30, 2001 primarily as a result of higher interest income due to higher
invested funds from $83.2 million of net proceeds received in May 2002 from an
underwritten public offering. The funds for the most part are invested in
short-term (7 day to 35 day) tax-free bonds with AAA ratings. For the nine
months ended September 30, 2002, other income increased to $585,000 from an
expense of $118,000 during the same period in 2001 primarily due to expenses of
$484,000 in 2001 associated with the acquisition of HDI and a $207,000 increase
in interest income due to higher invested funds from the public offering
proceeds of $83.2 million received in May 2002.

Income tax expense. We recorded income tax expense during the three
months and nine months ended September 30, 2002, of $963,000 and $2,214,000,
representing overall effective tax rates of 33.2% and 34.4%, respectively. The
effective tax rates during the 2002 periods reflect a provision for state taxes
and also reflect tax-free investment income. During the three months and nine
months ended September 30, 2001, we recorded income tax expense of $388,000 and
$691,000, representing overall effective tax rates of 45.0% and 45.2%,
respectively. In both periods during 2001, our expense for goodwill was not
deductible for tax purposes, and, when combined with a provision for state
taxes, resulted in the higher effective tax rates compared to the U.S. statutory
rate for corporations of 34 percent. In addition, approximately $234,000 of the
$484,000 of costs incurred in the acquisition of HDI recorded in the nine-month
period ended September 30, 2001 were not deductible for tax purposes, which also
contributed to the higher effective tax rate in 2001.

Page 22

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Liquidity and Capital Resources

At September 30, 2002 our working capital increased to $115.87 million from
$24.91 million at December 31, 2001, primarily due to net proceeds of $83.2
million raised in our recently completed public offering. The ratio of current
assets to current liabilities was 17.5:1 at September 30, 2002, compared to
4.77:1 at December 31, 2001. Cash, cash equivalents and marketable securities
increased to $98.54 million at September 30, 2002 compared to $11.94 million at
December 31, 2001.

We increased our investment in inventories to $12.36 million at September 30,
2002, from $9.75 million at December 31, 2001. This increase from year-end 2001
was primarily attributable to additional inventory to support our market launch
of the Genesis IPG, additional inventory of Genesis XP in
preparation for its market launch in the fourth quarter of 2002 and additional
consignment inventory for sales agents added in 2002.

We spent $1,537,000 during the nine months ended September 30, 2002 for
capital expenditures for additional equipment and fixtures. These expenditures
consisted primarily of additional tooling, molds and test equipment for new
parts and products we developed, and furniture and data processing equipment for
new personnel we have hired. We expect capital expenditures for the remainder of
fiscal 2002 to approximate $850,000.

We received $1,497,000 during the nine months ended September 30, 2002 from
the exercise of 205,045 stock options.

Our current lease on our 40,000 square foot corporate headquarters facility
located in Plano, Texas expires in August 2004. In planning for our future needs
after our current lease expires, we recently entered into an agreement to
acquire approximately 10 acres of land located in Plano, Texas. The aggregate
purchase price of the land is approximately $3.18 million and the closing on the
property is scheduled for December 2002. We anticipate that a new corporate
headquarters facility will be constructed on the land and that the Company would
relocate its headquarters to the new facility upon the expiration of its lease
in August 2004. While we have not yet determined the method by which we will
finance the land purchase and the subsequent construction of the facility, we
believe our cash position and overall balance sheet position provides us with
various financing alternatives including financing the land and facility costs
from our current cash, financing through a debt vehicle such as a mortgage or
other form of note, or a sale-and-leaseback transaction.

On November 5, 2002, we announced we had agreed to acquire Micronet Medical,
Inc. (Micronet), a developer of medical devices based on proprietary micro-lead
technology. Under the terms of the transaction, which will be structured as a
merger, we will acquire only Micronet's proprietary technology and certain
associated tangible assets. Micronet's operations, other tangible assets,
certain liabilities and certain employees will become part of a separate
unaffiliated company. We will assume no material debt, liabilities, or overhead
in the transaction. Upon closing, which is subject to Micronet shareholder
approval and other customary conditions, we will pay Micronet shareholders
$500,000 in cash and a number of shares of our Common Stock with a value of
$5,233,000, based on the average trading price for the 30 days preceding
closing. In addition, if certain product, regulatory approval and sales
milestones are met, we could pay Micronet shareholders an additional number of
shares of Common Stock with an aggregate value of up to $9 million. Important
milestone deadlines occur six, twelve and eighteen months following the closing
for product milestone purposes, while other milestones depend on the receipt of
regulatory approvals and meeting an aggregate sales milestone. All milestones
must be met within the next four to five years, depending on the milestone. The
transaction is expected to close by the end of 2002. Because the merger
consideration principally consists of ANS common stock, the acquisition will not
require a material amount of cash to complete.

Page 23

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We believe our current cash, cash equivalents, marketable securities and cash
generated from operations will be sufficient to fund our current 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 to $3.83 million for the nine
months ended September 30, 2002 from $1.40 million during the same period in
2001, an increase of $2.43 million, principally due to increased net income in
the 2002 period. During the nine-month period in 2002, we used $3.25 million for
changes in components of working capital principally for increased accounts
receivable, due to higher revenue growth in 2002 from the Genesis IPG,
and increased inventory investment to support the Genesis IPG market
launch and in preparation for the market launch of Genesis XP in the
fourth quarter of 2002. Comparatively in the 2001 period, we used $1.75 million
for changes in components of working capital principally due to $2.1 million
used for additional investment in inventories.

Net cash used in investing activities was $92.35 million for the nine months
ended September 30, 2002, as compared to $1.67 million for the same period in
2001, an increase of $90.68 million. Substantially all of the increase was the
result of $90.63 million of net cash used during the nine-month period in 2002
to purchase marketable securities.

Net cash provided by financing activities was $84.48 million for the nine
months ended September 30, 2002, as compared to $236,000 for the same period in
2001. The increase of $84.24 million was due, for the most part, to the receipt
of $83.2 million in net proceeds from the public offering in the second quarter
of 2002. In addition, we received $1.5 million upon the exercise of stock
options during the nine-month period in 2002 compared to $271,000 during the
same period in 2001.

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.

Page 24

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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 IPG and Genesis XP IPG to continue to
gain 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 Genesis and Genesis XP and other market factors
could impede growth in or reduce sales of Renew, which would adversely
affect our overall revenue and profitability growth
- 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
- 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 claims and we may not have the
insurance or other resources to cover the cost of any successful claim

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- 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
- two distributors currently account for a significant percentage of our
revenue from our neuromodulation products segment, and one of our
competitors 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 them into our operations 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
- general economic risks
- other risks detailed from time to time in our SEC public filings

Consequently, if our assumptions prove to be incorrect or such risks or
uncertainties materialize, anticipated results could differ materially from
those forecasted in forward-looking statements.

Page 26

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|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|------- | ----------------------------------------------------------

For the period ended September 30, 2002, 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
for the year ended December 31, 2001.

|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | Evaluation of disclosure controls and procedures. Based on
their most recent review, which was completed within 90 days of the filing of
this quarterly report, the Company's Disclosure Committee, which is comprised of
our Chief Executive Officer, Christopher G. Chavez, Chief Financial Officer, F.
Robert Merrill III and General Counsel, Kenneth G. Hawari concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in the reports that it files
or submits under the Securities Exchange Act of 1934, as amended, is accumulated
and communicated to such officers as is appropriate to allow timely decisions
regarding required disclosure, and that these controls and procedures are
effective to ensure that such information is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and
forms.
| | (b) | Changes in internal controls. Since the date of the evaluation
described above, there have not been any significant changes in the Company's
internal accounting controls or in other factors (including any corrective
actions with regard to significant deficiencies or material weaknesses) that
could significantly affect those controls.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

Page 27

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PART II

OTHER INFORMATION

|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 (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 99.1- Certification of the Chief Executive Officer (4)                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                           
| |     | Exhibit 99.2- Certification of the Chief Financial Officer (4)                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                           
| | (b) | No reports on Form 8-K on were filed during the three months ended September
30, 2002. A Form 8-K was filed on November 5, 2002 reporting that the Company
signed a merger agreement on November 4, 2002 to acquire Micronet Medical, Inc.

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

|(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.                                                                                                                          

Page 28

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Signatures

In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

|                        | ADVANCED NEUROMODULATION SYSTEMS, INC.                                                      
|----------------------- | --------------------------------------------------------------------------------------------
|                        |                                                                                             
|                        |                                                                                             
|Date: November 11, 2002 | By: /s/ F. Robert Merrill III                                                               
|                        | F. Robert Merrill IIIExecutive Vice President, Finance
Chief Financial Officer and Treasurer

Page 29

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§302 Certification of Chief Executive Officer

I, Christopher G. Chavez, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Advanced
Neuromodulation Systems, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                        |                                                           
|----------------------- | ----------------------------------------------------------
|                        |                                                           
|                        |                                                           
|Date: November 11, 2002 | /s/ Christopher G. Chavez                                 
|                        | Name: Christopher G. Chavez
Totel: Chief Executive Officer

Page 30

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§302 Certification of Chief Executive Officer

I, F. Robert Merrill III, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Advanced
Neuromodulation Systems, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                        |                                                           
|----------------------- | ----------------------------------------------------------
|                        |                                                           
|                        |                                                           
|Date: November 11, 2002 | /s/ F. Robert Merrill III                                 
|                        | Name: F. Robert Merrill III
Totel: Chief Financial Officer

Page 31

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EXHIBIT INDEX

|Exhibit 3.1  | Articles of Incorporation, as amended and restated (1)                                                                                                                                            
|------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|             |                                                                                                                                                                                                   
|Exhibit 3.2  | Bylaws (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 99.1 | Certification of the Chief Executive Officer (4)                                                                                                                                                  
|             |                                                                                                                                                                                                   
|Exhibit 99.2 | Certification of the Chief Financial Officer (4)                                                                                                                                                  

_______________________________

|(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                                                                                                                           

---

Exhibit 99.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350(AS
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)

In connection with the Quarterly Report of
Advanced Neuromodulation Systems, Inc. (the "Company") on Form 10-Q for the
period ending September 30, 2002 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Christopher G. Chavez, Chief
Executive Officer of the Company, certify to the best of my knowledge and in my
capacity as an officer of the Company, pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.
     The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.
     The information contained in the Report fairly
presents, in all material respects, the financial condition and results of
operations of the Company as of the dates and for the periods expressed in the
Report.

IN WITNESS WHEREOF, the undersigned has
executed this Certificate, effective as of November 11, 2002.



| | /s/Christopher G. ChavezName: Christopher G. Chavez
Title: Chief Executive Officer
| | ----------------------------------------------------------------------------------

Note: The foregoing certification is being
furnished solely pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, and is not being filed as part of the
Form 10-Q or as a separate disclosure document.

---

Exhibit 99.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
(AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)

In connection with the Quarterly Report of
Advanced Neuromodulation Systems, Inc. (the "Company") on Form 10-Q for the
period ending September 30, 2002 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, F. Robert Merrill III, Chief
Financial Officer of the Company, certify to the best of my knowledge and in my
capacity as an officer of the Company, pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.
     The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.
     The information contained in the Report fairly
presents, in all material respects, the financial condition and results of
operations of the Company as of the dates and for the periods expressed in the
Report.

IN WITNESS WHEREOF, the undersigned has
executed this Certificate, effective as of November 11, 2002.



| | /s/F. Robert Merrill IIIName: F. Robert Merrill III
Title: Chief Financial Officer
| | ----------------------------------------------------------------------------------

Note: The foregoing certification is being
furnished solely pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, and is not being filed as part of the
Form 10-Q or as a separate disclosure document.

---