# 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 June 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 [  ]

The total number of shares of the registrants Common
Stock, $.05 par value, outstanding on August 9, 2002 was 12,061,705

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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
(Unaudited)    June 30, 2002 and December 31, 2001                                                                  | 3-4 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------- | ----
| |                                                                                                                                                           |     
| | Condensed Consolidated Statements of Income (Unaudited)
    For the Three Months and Six Months Ended
    June 30, 2002 and 2001                          | 5   
| |                                                                                                                                                           |     
| | Condensed Consolidated Statements of Cash Flows (Unaudited)
    For the Six Months Ended June 30, 2002 and 2001                                           | 6   
| |                                                                                                                                                           |     
| | Condensed Consolidated Statements of Stockholders Equity
    (Unaudited) For the Year Ended December 31, 2001
    and the Six Months Ended June 30, 2002 | 7   
| |                                                                                                                                                           |     
| | Notes to Condensed Consolidated Financial Statements                                                                                                      | 8-14
| |                                                                                                                                                           |     

| | Item 2. | Management's Discussion and Analysis of Financial Condition
     and Results of Operations | 15-24
| | ------- | ------------------------------------------------------------------------------------------ | -----
| |         |                                                                                            |      
| | Item 3. | Quantitative and Qualitative Disclosures About Market Risk                                 | 24   
| |         |                                                                                            |      

|Part II.   Other
Information | 25
|---------------------------- | --
|                             |   

| | Item 4.    Submission of Matters to a Vote
of Security Holders | 25
| | -------------------------------------------------------------- | --
| |                                                                |   
| | Item 6.    Exhibits and Reports on Form 8-K                    | 25
| |                                                               

|Signatures | 26
|---------- | --

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 Sheets (Unaudited)June 30,
2002 and December 31, 2001

`June 30,    December 31,
Assets                                                    2002          2001
------                                               ------------- -------------
Current assets:
   Cash and cash equivalents                         $ 93,822,304  $  9,785,325
   Marketable securities                                2,292,558     2,151,722
   Receivables:
      Trade accounts, less allowance for
       doubtful accounts of $110,333 in 2002
       and $124,111 in 2001                             8,400,359     6,493,772
      Interest and other                                   58,362       235,594
                                                     ------------- -------------
         Total receivables                              8,458,721     6,729,366
                                                     ------------- -------------

   Inventories:
      Raw materials                                     5,314,974     4,685,586
      Work-in-process                                   2,327,224     1,723,419
      Finished goods                                    3,777,470     3,339,840
                                                     ------------- -------------
         Total inventories                             11,419,668     9,748,845
                                                     ------------- -------------

   Deferred income taxes                                1,047,549     1,726,517
   Current income tax receivable                          866,818       678,341
   Prepaid expenses and other current assets              375,266       685,169
                                                     ------------- -------------
         Total current assets                         118,282,884    31,505,285
                                                     ------------- -------------

Equipment and fixtures:
   Furniture and fixtures                               3,749,678     3,400,909
   Machinery and equipment                              8,885,628     8,550,504
   Leasehold improvements                               1,602,356     1,610,810
                                                     ------------- -------------
                                                       14,237,662    13,562,223
   Less accumulated depreciation and amortization       7,468,049     6,353,920
                                                     ------------- -------------
         Net property, plant and equipment              6,769,613     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
   $1,238,923 in 2002 and $1,045,106 in 2001            5,211,544     5,368,213
Purchased technology from acquisitions, net of
   accumulated amortization of $1,933,333 in 2002
   and $1,800,000 in 2001                               2,066,667     2,200,000
Trademarks, net of accumulated amortization of
   $906,302 in 2002 and $843,736 in 2001                1,602,060     1,656,264
Other assets, net of accumulated amortization of
   $458,948 in 2002 and $392,033 in 2001                  505,564       519,783
                                                     ------------- -------------
                                                     $141,845,569  $ 55,865,085
                                                     ============= =============`

Page 3

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

`June 30,    December 31,
Liabilities and Stockholders' Equity                      2002          2001
------------------------------------                 ------------- -------------
Current liabilities:
   Accounts payable                                  $  1,305,040  $  1,835,037
   Accrued salary and employee benefit costs            1,281,816     1,826,423
   Accrued tax abatement liability                        969,204       969,204
   Customer deposits                                      657,584     1,042,690
   Income taxes payable                                   621,849          ---
   Commissions payable                                    474,364       285,704
   Warranty reserve                                       304,201       383,477
   Other accrued expenses                                 388,820       204,151
   Current maturities of long-term note payable              ---         52,325
                                                     ------------- -------------
         Total current liabilities                      6,002,878     6,599,011
                                                     ------------- -------------

Deferred income taxes                                   2,250,213     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: 12,033,705 shares in 2002 and
    9,071,868 in 2001                                     601,685       453,593
   Additional capital                                 123,010,585    38,670,248
   Retained earnings                                    9,994,707     7,709,290
   Accumulated other comprehensive income (loss),
    net of tax benefit of $7,467
    in 2002 and $10,949 in 2001                           (14,499)      (21,250)
                                                     ------------- -------------

         Total stockholders' equity                   133,592,478    46,811,881



                                                     ------------- -------------
                                                     $141,845,569  $ 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 Six Months Ended June 30, 2002 and 2001

`Three Months Ended        Six Months Ended
                                       June 30,                 June 30,
                                ----------------------- ------------------------
                                    2002       2001        2002         2001
                                ----------- ----------- ----------- ------------
Net revenue                     $13,423,371 $ 9,204,721 $24,896,017 $17,545,531
Cost of revenue                   5,063,427   3,934,655   9,577,587   7,507,444
                                ----------- ----------- ----------- ------------
         Gross profit             8,359,944   5,270,066  15,318,430  10,038,087
                                ----------- ----------- ----------- ------------

Operating expenses:
   Research and development       1,375,520   1,233,282   2,668,223   2,380,812
   Sales and marketing            3,392,474   2,079,851   6,288,364   4,136,829
   Amortization of goodwill            ---      139,151        ---      278,302
   Amortization of intangibles      228,834     242,932     456,630     416,101
   General and administrative     1,278,437   1,043,914   2,581,309   1,962,343
                                ----------- ----------- ----------- ------------
                                  6,275,265   4,739,130  11,994,526   9,174,387
                                ----------- ----------- ----------- ------------
         Income from operations   2,084,679     530,936   3,323,904     863,700
                                ----------- ----------- ----------- ------------

Other income (expenses):
   Acquisition related costs           ---         ---         ---     (483,766)
   Interest expense                  (3,939)     (6,212)     (8,245)    (16,672)
   Interest and other income        147,188     153,979     220,694     302,281
                                ----------- ----------- ----------- ------------
                                    143,249     147,767     212,449    (198,157)
                                ----------- ----------- ----------- ------------

         Income before income
          taxes                   2,227,928     678,703   3,536,353     665,543
Income taxes                        779,487     310,189   1,250,936     303,290
                                ----------- ----------- ----------- ------------
         Net income             $ 1,448,441 $   368,514 $ 2,285,417 $   362,253
                                =========== =========== =========== ============


Net income per share:
                                =========== =========== =========== ============
         Basic                  $      .14  $      .04  $      .24  $      .04
                                =========== =========== =========== ============
         Diluted                $      .13  $      .04  $      .21  $      .04
                                =========== =========== =========== ============

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 Six Months Ended June 30, 2002 and 2001

`Six Months Ended June 30,
                                                     ---------------------------
                                                          2002          2001
                                                     ------------- -------------
Cash flows from operating activities:
   Net income                                        $  2,285,417  $    362,253
   Adjustments to reconcile net income to net
    cash provided by operating activities:
      Depreciation and amortization                     1,570,760     1,629,877
      Deferred income taxes                               608,907      (131,006)
      Changes in operating assets and liabilities:
        Receivables                                    (1,729,355)     (179,199)
        Inventories                                    (1,670,823)   (1,846,149)
        Current income tax receivable                    (188,477)      359,953
        Prepaid expenses and other assets                 279,783       496,696
        Customer deposits                                (385,106)     (262,679)
        Income taxes payable                            1,272,925       201,423
        Accounts payable                                 (529,997)      395,883
        Accrued expenses                                 (250,554)     (225,217)
                                                     ------------- -------------
           Total adjustments                           (1,021,937)      439,582
                                                     ------------- -------------
           Net cash provided by operating activities    1,263,480       801,835
                                                     ------------- -------------

Cash flows from investing activities:
   Proceeds from certificates of deposits with
    maturities over 90 days                                  ---        947,000
   Purchases of marketable securities                  (1,276,240)   (1,686,557)
   Proceeds from sales of marketable securities         1,145,633     1,427,970
   Additions to patents and intangible assets             (68,086)     (459,632)
   Additions to equipment and fixtures                   (675,439)   (1,051,711)
                                                     ------------- -------------
           Net cash used in investing activities         (874,132)     (822,930)
                                                     ------------- -------------

Cash flows from financing activities:
   Payment of long-term obligations                      (189,722)      (23,433)
   Net proceeds from public offering of common stock   83,197,853          ---
   Exercise of stock options                              639,500       237,957
                                                     ------------- -------------
           Net cash provided by financing activities   83,647,631       214,524
                                                     ------------- -------------

Net increase in cash and cash equivalents              84,036,979       193,429
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 June 30                 $ 93,822,304  $  9,049,706
                                                     ============= =============

Supplemental cash flow information is presented
   below:
Income taxes paid (refunded)                         $   (566,057) $    290,000
                                                     ============= =============
Interest paid                                        $      8,245  $     13,531
                                                     ============= =============

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
(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                    ---           ---           ---      2,285,417
   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    83,054,103          ---

   Issuance of shares
     for stock option
     exercises                 86,837         4,342       635,158          ---
   Tax benefit from
     stock option
     exercises                   ---           ---        651,076          ---
                         ------------- ------------- ------------- -------------
Balance at
June 30, 2002              12,033,705  $    601,685  $123,010,585  $  9,994,707
                         ============= ============= ============= =============

(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                    ---           ---      2,285,417
   Adjustment to
     unrealized
     losses on
     marketable
     securities                 6,751          ---          6,751
                                                     -------------
   Comprehensive Income                                 2,292,168
                                                     -------------
   Sale of newly issued
     common stock in a
     public offering,
     net of offering
     costs                       ---           ---     83,197,853
   Issuance of shares
     for stock option
     exercises                   ---           ---        639,500
   Tax benefit from
     stock option
     exercises                   ---           ---        651,076
                         ------------- ------------- -------------
Balance at
June 30, 2002            $    (14,499) $       ---   $133,592,478
                         ============= ============= =============

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 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 six months ended June 30, 2001 was $139,151 and $278,302
respectively. The pro forma impact on net income and net income per share for
the three months and six months ended June 30, 2001, assuming no amortization of
goodwill for these periods, compared to the actual results for the three months
and six months ended June 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       Six Months Ended
                                         June 30,                June 30,
                                 ----------------------  -----------------------
                                    2002        2001        2002        2001
                                 ----------  ----------  ----------  -----------
Reported net income              $1,448,441  $  368,514  $2,285,417  $  362,253
Goodwill amortization                  ---      139,151        ---      278,302
                                 ----------  ----------  ----------  -----------
Adjusted net income              $1,448,441  $  507,665  $2,285,417  $  640,555
                                 ==========  ==========  ==========  ===========
Basic net income per
 share:
    Reported                     $     .14   $     .04   $     .24   $     .04
    Goodwill amortization              ---         .02         ---         .03
                                 ----------  ----------  ----------  -----------
    Adjusted                     $     .14   $     .06   $     .24   $     .07
                                 ==========  ==========  ==========  ===========
Diluted net income per
 share:
    Reported                     $     .13   $     .04   $     .21   $     .04
    Goodwill amortization              ---         .01         ---         .03
                                 ----------  ----------  ----------  -----------
    Adjusted                     $     .13   $     .05   $     .21   $     .07
                                 ==========  ==========  ==========  ===========`

|(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 June 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.                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | 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.

Page 9

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

| | 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 six month period ended June 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 June 30,
2002:                                                                                                                                                 

`Gross       Gross
                                            Unrealized  Unrealized   Estimated
                                   Cost        Gains       Losses    Fair Value
                                ----------  ----------- ----------- ------------
     FNMA and Federal
       Home Loan Bank notes     $  951,134  $      --   $    8,404  $   942,730
     Investment grade
       municipal bonds           1,265,712       1,715      13,149    1,254,278
     Real estate
       investment trust             97,682         --        2,132       95,550
                                ----------  ----------- ----------- ------------
                                $2,314,528  $    1,715  $   23,685  $ 2,292,558
                                ==========  =========== =========== ============`

Page 10

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

|    | 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 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 June 30, 2002, no individual security represented more than 21 percent of
the total portfolio or 1/3 of 1 percent of total assets. The Company did not
have any investments in derivative financial instruments at June 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.                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

Page 11

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

|    | 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 six
months ended June 30, 2002, of $779,487 and $1,250,936, representing overall
effective tax rates of 35.0% and 35.4%, respectively. These effective tax rates
during the 2002 periods are higher than the U.S. statutory rate of 34% for
corporations due to a provision for state taxes. During the three months and six
months ended June 30, 2001, the Company recorded income tax expense of $310,189
and $303,290, representing overall effective tax rates of 45.7% and 45.6%,
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 six month
period ended June 30, 2001 were not deductible for tax purposes, which also
contributed to the higher effective tax rate in 2001.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | 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       Six Months Ended
                                        June 30,                June 30,
                                ----------------------- ------------------------
                                    2002        2001        2002         2001
                                ----------- ----------- ----------- ------------
    Weighted-average shares
     outstanding (basic shares) 10,163,751   8,919,235   9,635,868    8,907,010
    Effect of dilutive
     stock options               1,125,271     917,595   1,155,117      905,878
                                ----------- ----------- ----------- ------------
           Diluted shares       11,289,022   9,836,830  10,790,985    9,812,888
                                =========== =========== =========== ============`

Page 12

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

|     | For the three months and six months ended June 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. Options to purchase 76,000 shares at an
average price of $19.61 were outstanding at June 30, 2001 but were not included
in the computation of diluted income per share for the three months ended June
30, 2001 because the options' exercise prices were greater than the average
market price of the common shares and, therefore, the effect would be
antidilutive. For the three months ended June 30, 2002, 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 for that
three-month period.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(10) | Comprehensive Income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|     | Total comprehensive income for 2001 and for the six months ended June 30,
2002 is reported in the Condensed Consolidated Statements of Stockholders'
Equity. Comprehensive income for the three months and six months ended June 30,
2002 and 2001 is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

`Three Months Ended        Six Months Ended
                                         June 30,                June 30,
                                ----------------------- ------------------------
                                    2002        2001        2002         2001
                                ----------- ----------- ----------- ------------
    Net income                  $1,448,441  $  368,514  $2,285,417  $   362,253
    Other comprehensive income       8,204      31,032       6,751       57,850
    Net loss of Hi-tronics for
     December 2000 (see Note 1)        ---         ---         ---     (347,679)
                                ----------- ----------- ----------- ------------
    Comprehensive income        $1,456,645  $  399,546  $2,292,168  $    72,424
                                ----------- ----------- ----------- ------------`

|(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 June 30, 2002 follows:                                                                                                                                                                                                                                                                                                                                                                                          

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

Page 13

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

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

`Inter-
                             Neuro          HDI         company    Consolidated
                           Products        O.E.M.    Eliminations      Total
                         ------------- ------------- ------------- -------------
 Revenue from external
   customers             $  6,577,624  $  2,627,097  $        ---  $  9,204,721
 Intersegment revenues   $        ---  $    604,555  $   (604,555) $        ---
 Segment income from
   operations            $    138,990  $    391,946  $        ---  $    530,936`

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

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

| | Segment data for the six months ended June 30, 2001 follows:
| | ------------------------------------------------------------

`Inter-
                             Neuro          HDI         company    Consolidated
                           Products        O.E.M.    Eliminations      Total
                         ------------- ------------- ------------- -------------
 Revenue from external
   customers             $ 12,915,927  $  4,629,604  $        ---  $ 17,545,531
 Intersegment revenues   $        ---  $  1,002,547  $ (1,002,547) $        ---
 Segment income from
   operations            $    343,357  $    520,343  $        ---  $    863,700
 Segment assets          $ 47,515,925  $  6,766,794  $ (2,159,368) $ 52,123,351`

Page 14

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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. subsidiary, which we acquired in January 2001. See Note 3.

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.

Page 15



---

Also, on January 2, 2001, we completed the acquisition of Hi-tronics Designs,
Inc. (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 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 June 30, 2002, our O.E.M.
segment generated $2.59 million, or 19.3%, 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 first quarter of 2002 were effectively flat compared to the
prior year quarter, although sales of Renew increased modestly in the
second quarter of 2002 compared to the first quarter of 2002 and the prior year
quarter. Thus, while it is too early to accurately predict future sales trends,
management believes it possible that sales of Renew may plateau or even
decline modestly, at least in the near term.

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 are believed to be 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 16

---

Management believes the following critical accounting policies involve its
more significant judgments and estimates used in preparation of 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 does 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 since reasonably dependable estimates
of revenue and costs applicable to various stages of a development agreement can
be made. If we do not accurately estimate the resources required or the scope of
work to be performed under a development agreement, then future profit margins
and results of operations may be negatively impacted.

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 were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances or write-offs may be required.

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.

Page 17

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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.

Page 18

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Results of Operations

Comparison of the Three Months and Six Months Ended June 30, 2002 and
2001

Net income. We reported net income of $1,448,000, or $.13 per diluted
share, for the three months ended June 30, 2002, compared to net income of
$369,000 or $.04 per diluted share in the same 2001 period. For the six months
ended June 30, 2002, we reported net income of $2,285,000 or $.21 per diluted
share compared to $362,000 or $.04 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 six-month period ended June
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 six month periods in 2001 also
reflect amortization expense for goodwill of $139,151 and $278,302,
respectively. Financial results for the three months and six months ended June
30, 2002, contain no similar expense since we eliminated the amortization of
goodwill on January 1, 2002 when we adopted new accounting standards. If the
amortization expense for goodwill is eliminated from the 2001 periods, pro forma
net income and net income per share would be $508,000 and $.05 per diluted share
for the three months ended June 30, 2001 and $641,000 and $.07 per share for the
six months ended June 30, 2001.

Net revenue. Net revenue increased 45.8% to $13.42 million for the
three months ended June 30, 2002, compared to $9.20 million in the comparable
2001 period. Net revenue of our neuromodulation products increased 64.6% to
$10.83 million in 2002 from $6.58 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 $2.59 million in 2002 from $2.63 million in 2001 as we
continue to focus more of HDI's resources on our own research and development
projects. For the six months ended June 30, 2002, net revenue increased 41.9% to
$24.90 million from $17.55 million for the six-month period in 2001 primarily
due to the launch of our Genesis IPG system. Net revenue of our
neuromodulation products increased 53.4% to $19.82 million for the six-month
period in 2002 from $12.92 million in the same 2001 period. Net revenue from our
O.E.M. business increased 9.7% to $5.08 million for the six-month period in 2002
from $4.63 million in the same 2001 period due to higher third-party development
fees.

Gross profit. Gross profit increased 58.6% to $8.36 million during
the three months ended June 30, 2002 from $5.27 million in 2001, principally due
to the increase in net revenue discussed above. Additionally, gross profit
margin increased to 62.3% in 2002, compared to 57.3% in 2001, due to higher
sales of our neuromodulation products, which contribute higher margins than
O.E.M. product sales, and operational efficiencies gained from higher
manufacturing volumes. For the six months ended June 30, 2002, gross profit
increased to $15.32 million from $10.04 million in the comparable 2001 period,
again principally due to the increase in net revenue discussed above. Gross
profit margin increased to 61.5% in the six-month period in 2002 compared to
57.2% in 2001, due to higher sales of our neuromodulation products, which
contribute higher margins than O.E.M. product sales, and operational
efficiencies gained from higher manufacturing volumes.

Page 19

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Operating expenses. Total operating expenses increased to $6.28
million for the three months ended June 30, 2002 from $4.74 million in the same
period during 2001. However, as a percentage of net revenue, these expenses
decreased to 46.8% in 2002 from 51.5% 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 six months
ended June 30, 2002, total operating expenses increased to $11.99 million from
$9.17 million during the six-month period in 2001. However, as a percentage of
net revenue, these expenses decreased to 48.2% in 2002 from 52.3% in 2001, again
due to the same factors.

Research and development. Research and development expense, as a
percentage of net revenue, decreased to 10.3% during the three months ended June
30, 2002 from 13.4% in the same 2001 period, while the absolute dollar amount
increased to $1.38 million in 2002 from $1.23 million during 2001. For the six
months ended June 30, 2002, research and development expense as a percentage of
net revenue decreased to 10.7% from 13.6% in the same period in 2001, while the
absolute dollar amount increased from $2.38 million during the 2001 period to
$2.67 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 and
higher test material expense. We continue to focus our development efforts on
next-generation IPG stimulation systems, next-generation RF stimulation systems,
an IPG stimulation system for deep brain stimulation to address essential tremor
and Parkinson's Disease, next generation drug pumps, and clinical trials of our
AccuRx. The FDA recently approved our application for a PMA supplement to
market an enhanced version of our IPG. The Genesis XP will offer
substantially more battery capacity than our current Genesis IPG, and
therefore should deliver enhanced longevity and/or increased power to treat more
complex pain. We expect to launch Genesis XP in the fourth quarter of
2002.

Sales and marketing. Sales and marketing expense, as a percentage of
net revenue, increased to 25.3% during the three months ended June 30, 2002 from
22.6% in the same 2001 period, and the absolute dollar amount increased to $3.39
million in 2002 from $2.08 million during 2001. For the six months ended June
30, 2002, sales and marketing expense as a percentage of net revenue increased
to 25.3% from 23.6% in the same period in 2001 and the absolute dollar amount
increased from $4.14 million during the 2001 period to $6.29 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.

General and administrative. General and administrative expense, as a
percentage of net revenue, decreased to 9.5% during the three months ended June
30, 2002 from 11.3% in the same 2001 period, while the absolute dollar amount
increased to $1.28 million in 2002 from $1.04 million during 2001. For the six
months ended June 30, 2002, general and administrative expense, as a percentage
of net revenue, decreased to 10.4% from 11.2% in the same 2001 period, while the
absolute dollar amount increased to $2.58 million in 2002 from $1.96 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.

Page 20

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Amortization of intangibles. No amortization expense of goodwill was
recorded during the three months and six months ended June 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 six months ended June 30, 2001, we recorded $139,000 and $278,000,
respectively, of amortization expense for goodwill.

Amortization of other intangibles decreased to $229,000 during the three
months ended June 30, 2002 from $243,000 in the same period in 2001, as certain
intangible assets were fully amortized. For the six months ended June 30, 2002,
amortization of other intangibles increased to $457,000 from $416,000 in 2001
due to additional patent amortization.

Income from operations. Income from operations increased 292.3% to
$2.08 million during the three months ended June 30, 2002 from $531,000 during
the comparable 2001period. For the six months ended June 30, 2002, income from
operations increased 284.8% to $3.32 million from $864,000 during the comparable
six-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 decreased to $143,000 during the
three months ended June 30, 2002 from $148,000 during the three months ended
June 30, 2001 primarily as a result of lower yields on invested funds due to the
overall decline in interest rates from a year ago. For the six months ended June
30, 2002, other income increased to $212,000 from an expense of $198,000 during
the same period in 2001 primarily due to expenses of $484,000 in 2001 associated
with the acquisition of HDI. With the receipt of the net proceeds of $83.2
million, from our underwritten public offering, we would expect to earn an
additional $270,000 to $300,000 in tax-free interest income quarterly in the
near term (assuming current tax-free interest rates), until these proceeds are
used for different purposes.

Income tax expense. We recorded income tax expense during the three
months and six months ended June 30, 2002, of $779,487 and $1,250,936,
representing overall effective tax rates of 35.0% and 35.4%, respectively. These
effective tax rates during the 2002 periods are higher than the U.S. statutory
rate of 34% for corporations due to a provision for state taxes. During the
three months and six months ended June 30, 2001, we recorded income tax expense
of $310,189 and $303,290, representing overall effective tax rates of 45.7% and
45.6%, 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 six month
period ended June 30, 2001 were not deductible for tax purposes, which also
contributed to the higher effective tax rate in 2001.

Liquidity and Capital Resources

At June 30, 2002 our working capital increased to $112.28 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 19.7:1 at June 30, 2002, compared to 4.77:1 at December
31, 2001. Cash, cash equivalents and marketable securities increased to $96.11
million at June 30, 2002 compared to $11.94 million at December 31, 2001.

Page 21

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We increased our investment in inventories to $11.42 million at June 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, including consignment inventory for additional sales
agents to whom we provide approximately $30,000 in consignment inventory
each.

We spent $675,000 during the six months ended June 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 $1.7 million.

We received $640,000 during the six months ended June 30, 2002 from the
exercise of 86,837 stock options.

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 $1.26 million for the six months
ended June 30, 2002 from $802,000 during the same period in 2001, an increase of
$462,000. Despite an increase in net income to $2.29 million for the same 2002
period from $362,000 in the 2001 first six months period, an increase of $1.92
million year-over-year, net cash provided from operations increased only
$462,000 primarily due to the use of $1.02 million in the 2002 period for
changes in components of working capital. Comparatively in the 2001 period,
changes in components of working capital provided cash of $440,000. The largest
change in a working capital component during 2002 from 2001 was accounts
receivable due to the higher revenue growth in 2002 from the Genesis IPG.

Net cash used in investing activities was $874,000 for the six months ended
June 30, 2002, as compared to $823,000 for the same period in 2001, an increase
of $51,000. During the 2002 six-month period, we used cash of $744,000 for
additions to patents, equipment and fixtures and $131,000 of net cash to
purchase marketable securities. During the 2001 six-month period, we used cash
of $1.51 million for additions to patents, equipment and fixtures but received
net cash of $688,000 from maturing certificates of deposit and net sales of
marketable securities.

Net cash provided by financing activities was $83.65 million for the six
months ended June 30, 2002, as compared to $215,000 for the same period in 2001.
The increase of $83.43 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.

Page 22

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Currency Fluctuations

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

Outlook and Uncertainties

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

- failure of our Genesis 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 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

Page 23

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- 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
- 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 several of our
competitors currently account 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.

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

For the period ended June 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.

Page 24

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PART II

OTHER INFORMATION

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

The Company held its 2002 Annual Meeting of Shareholders ("Annual Meeting")
on June 5, 2002 at the Company's corporate offices in Plano, Texas. At the
Annual Meeting, the shareholders voted on the election of seven directors for a
one-year term, as follows:

| |                           | Votes for Nominee | Votes Abstained and Broker Non-Votes
| | ------------------------- | ----------------- | ------------------------------------
| |                           |                   |                                     
| | Christopher G. Chavez     | 6,550,227         | 1,472,362                           
| | Robert C. Eberhart, Ph.D. | 7,173,374         | 849,215                             
| | Joseph E. Laptewicz       | 7,170,174         | 852,415                             
| | A. Ronald Lerner          | 7,173,065         | 849,524                             
| | Hugh M. Morrison          | 7,170,374         | 852,215                             
| | Richard D. Nikolaev       | 7,173,065         | 849,524                             
| | Michael J. Torma, M.D.    | 7,172,874         | 849,715                             

There were present at the Annual Meeting in person or by proxy, shareholders
holding 8,022,589 shares, or approximately 87.7% of the eligible voting shares.

|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 June 30,
2002.                                                                                                                               

_________________________________

|(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 25

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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: August 14, 2002 | By: /s/ F. Robert Merrill III                                                               
|                      | F. Robert Merrill IIIExecutive Vice President, Finance
Chief Financial Officer and Treasurer

Page 26

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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 June 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 August 14, 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 June 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 August 14, 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.