edX - TXT1x Data
-----BEGIN PRIVACY-ENHANCED MESSAGE-----1Proc-Type: 2001,MIC-CLEAR2Originator-Name: [email protected]3Originator-Key-Asymmetric:4MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen5TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB6MIC-Info: RSA-MD5,RSA,7TJCfC0YGa8zlPvPeg58e2OPLYJE7+hHo7r17g6REVgJp9u9WKKW0Lb+5t9gbdeGm8METlkqvthyZt/d2pcWIkoQ==910<SEC-DOCUMENT>0000351721-01-000014.txt : 2001040911<SEC-HEADER>0000351721-01-000014.hdr.sgml : 2001040912ACCESSION NUMBER: 0000351721-01-00001413CONFORMED SUBMISSION TYPE: 10-K14PUBLIC DOCUMENT COUNT: 215CONFORMED PERIOD OF REPORT: 2000123116FILED AS OF DATE: 200104021718FILER:1920COMPANY DATA:21COMPANY CONFORMED NAME: ADVANCED NEUROMODULATION SYSTEMS INC22CENTRAL INDEX KEY: 000035172123STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841]24IRS NUMBER: 75164600225STATE OF INCORPORATION: TX26FISCAL YEAR END: 12312728FILING VALUES:29FORM TYPE: 10-K30SEC ACT:31SEC FILE NUMBER: 000-1052132FILM NUMBER: 15917683334BUSINESS ADDRESS:35STREET 1: 6501 WINDCREST DRIVE SUITE 10036CITY: PLANO37STATE: TX38ZIP: 7502439BUSINESS PHONE: 97230980004041MAIL ADDRESS:42STREET 1: 6501 WINDCREST DRIVE SUITE 10043CITY: PLANO44STATE: TX45ZIP: 750244647FORMER COMPANY:48FORMER CONFORMED NAME: QUEST MEDICAL INC49DATE OF NAME CHANGE: 1992070350</SEC-HEADER>51<DOCUMENT>52<TYPE>10-K53<SEQUENCE>154<FILENAME>0001.htm55<DESCRIPTION>FORM 10-K FOR YEAR ENDED DECEMBER 31, 200056<TEXT>575859<HTML>60<HEAD>61<TITLE>Form 10-K for Year Ended December 31, 2000</TITLE>62</HEAD>63<BODY>6465<H1 ALIGN=CENTER><FONT SIZE=3>SECURITIES AND EXCHANGE COMMISSION</FONT></H1>66<H1 ALIGN=CENTER><FONT SIZE=3>Washington, D.C. 20549</FONT></H1>67<HR SIZE=1 WIDTH=15% ALIGN=CENTER>68<H1 ALIGN=CENTER><FONT SIZE=4>FORM 10-K</FONT></H1>69<HR SIZE=1 WIDTH=15% ALIGN=CENTER>70<H1 ALIGN=CENTER><FONT SIZE=3>[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR7115(d) OF THE<BR>SECURITIES EXCHANGE ACT OF 1934</FONT></H1>72<P ALIGN=CENTER><FONT SIZE=3>For the Fiscal Year Ended December 31,732000</FONT></P>74<P ALIGN=CENTER><FONT SIZE=3>OR</FONT></P>75<H1 ALIGN=CENTER><FONT SIZE=3>[ ] TRANSITION REPORT PURSUANT TO76SECTION 13 OR 15(d) OF THE<BR> SECURITIES EXCHANGE ACT OF 1934</FONT></H1>77<HR SIZE=1 WIDTH=15% ALIGN=CENTER>78<P ALIGN=CENTER><FONT SIZE=3>Commission file number 0-10521</FONT></P>79<H1 ALIGN=CENTER><FONT SIZE=4>ADVANCED NEUROMODULATION SYSTEMS, INC.</FONT></H1>80<P ALIGN=CENTER><FONT SIZE=3>Incorporated pursuant to the Laws of the State of81Texas</FONT></P>82<HR SIZE=1 WIDTH=15% ALIGN=CENTER>83<P ALIGN=CENTER><FONT SIZE=3>Internal Revenue Service — Employer84Identification No. 75-1646002</FONT></P>85<P ALIGN=CENTER><FONT SIZE=3>6501 Windcrest Drive, Plano, Texas 75024</FONT></P>86<P ALIGN=CENTER><FONT SIZE=3>(972) 309-8000</FONT></P>87<HR SIZE=1 WIDTH=15% ALIGN=CENTER>88<P><FONT SIZE=2>Indicate by check mark whether the registrant (1) has filed all89reports required to be filed by Section 13 or 15(d) of the Securities Exchange90Act of 1934 during the preceding 12 months (or for such shorter period that the91registrant was required to file such reports) and (2) has been subject to such92filing requirements for the past 90 days.93Yes [X] No [ ] </FONT></P>94<P><FONT SIZE=2>Indicate by check mark if disclosure of delinquent filers95pursuant to Item 405 of the S-K is not contained herein, and will not be96contained, to the best of registrant's knowledge, in definitive proxy or97information statements incorporated by reference in Part III of this Form 10-K98or any amendment to this Form 10-K. [ ]</FONT></P>99<P><FONT SIZE=2>Aggregate market value of the registrant’s Common100Stock held by non-affiliates of the registrant as of March 16, 2001:101$104,494,166</FONT></P>102<P><FONT SIZE=2>Number of shares outstanding of the registrant’s Common103Stock as of March 16, 2001: 8,913,359</FONT></P>104<P ALIGN=CENTER><FONT SIZE=2><B>DOCUMENTS INCORPORATED BY REFERENCE</B></FONT>105</P>106<P><FONT SIZE=2>Portions of the registrant’s definitive Proxy Statement107for the registrant's Annual Meeting of Stockholders to be held on May 23, 2001,108are incorporated by reference into Part III.</FONT></P>109110<HR SIZE=5>111112113<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc.</B></P>114<P ALIGN=CENTER><B>Annual Report</B></P>115<P ALIGN=CENTER><B>Form 10-K</B></P>116<P ALIGN=CENTER><B>Year Ended December 31, 2000</B></P>117<P ALIGN=CENTER><B>PART I</B></P>118<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>119<TR>120<TD WIDTH=15%><B>ITEM 1.</B></TD>121<TD WIDTH=85%><B>BUSINESS</B></TD></TR></TABLE>122<P ALIGN=CENTER><B><U>General</U></B></P>123<P>Advanced Neuromodulation Systems, Inc. designs, develops, manufactures and124markets advanced implantable neuromodulation devices that improve the quality of125life for people with disabling chronic pain or nervous system disorders.126Neuromodulation is the electrical or chemical modulation of the central nervous127system to significantly reduce chronic pain or improve neurological128function.</P>129<P>Because neuromodulation devices have gained acceptance as a viable,130efficacious and cost-effective treatment alternative for relieving chronic131intractable pain and improving neurological function, we are continuing efforts132to expand our product offerings in the high growth market of neuromodulation. In1332000, we were the market share and technology leader in the $45 million134radio-frequency stimulation segment of the neuromodulation market. In 2000, we135continued our aggressive investment in development projects to position us to136participate in the other larger and more rapidly growing segments of the137neuromodulation market. Excluding vagus nerve stimulation for treating epilepsy,138which we do not currently anticipate addressing, industry analysts expect the139neuromodulation market to grow from $425 million in 2000 to nearly $800 million140by 2003 solely on current FDA approved indications.</P>141<P ALIGN=CENTER><B><U>Recent Developments</U></B></P>142<P>On January 2, 2001, we acquired the assets (primarily intellectual property143consisting of patents and know-how) of Implantable Devices Limited Partnership144(IDP) and ESOX Technology Holdings, LLC (ESOX), two privately held Minnesota145companies, for 119,100 shares of ANS common stock. Based on the closing price of146ANS common stock on December 29, 2000, the value of the stock issued to acquire147the assets was $2.43 million. IDP was formed in 1986 to commercialize certain148implantable infusion technologies developed at the University of Minnesota. We149entered a license agreement with IDP in 1995 to license rights to implantable150infusion pump technologies developed by IDP and ESOX for applications in pain151and cancer therapy. Under the license agreement, we were obligated to pay IDP152royalties on worldwide sales of implantable infusion pumps using IDP technology.153The January 2, 2001 acquisition canceled the license agreement, thereby154eliminating our future royalty obligations, and expanded our rights to use the155pump technologies in all applications through our acquisition of the156intellectual property. We completed development of our AccuRx™ fully157implantable constant rate infusion pump in late 2000 using technology we158licensed from IDP. We received CE mark approval to distribute the pump159internationally, with international sales expected to commence in the second160quarter of fiscal 2001. We also received an Investigational Device Exemption161(IDE) from the FDA to initiate clinical trials in the United States. The162clinical trials will include 109 patients and will be conducted in twelve sites.163The trials commenced in the first quarter of 2001. The data gathered during the164trials will be used to support a Pre-Market Approval (PMA) application.</P>165<P ALIGN=CENTER>Page 1</P>166<HR>167<P>Also on January 2, 2001, we completed the acquisition of Hi-tronics Designs,168Inc. (HDI or Hi-tronics), a privately-held contract developer and original169equipment manufacturer (OEM) of electro-mechanical devices headquartered in Budd170Lake, New Jersey. We acquired HDI through a stock-for-stock merger in which we171issued 1,104,725 shares of ANS common stock. The transaction will be accounted172for on a pooling of interests basis. HDI developed and is the manufacturer of173our Genesis™ totally implantable pulse generator (IPG) used in the174treatment of chronic intractable pain and is also the OEM manufacturer of the175transmitter used with our Renew® radio-frequency spinal cord stimulation176system. HDI was founded in 1987 and has developed more than thirty medical177devices for some of the leading medical device companies. The core strength of178HDI is in developing highly sophisticated electronic circuits with very low179power requirements, utilizing both discreet and highly integrated technology. We180believe this competency, when combined with our own strengths in lead design and181packaging, will allow us to develop more sophisticated products in compressed,182development-cycle timetables. In addition, the merger will result in vertical183integration benefits in manufacturing that should enhance margins on our current184and future products. HDI’s revenues for its fiscal 2000, which ended185November 30, 2000, were approximately $10.4 million, including approximately186$1.6 million of revenue associated with sales to ANS.</P>187<P>In September 1999, the Neurological Devices Panel of the Medical Devices188Advisory Committee recommended that the FDA reclassify Totally Implanted Spinal189Cord Stimulators (IPGs) for treatment of pain of the trunk and/or limbs from a190Class III device to a Class II device. Class III devices typically require a191PMA, supplemented with clinical trials to prove the safety and effectiveness of192the device. Class II devices typically require a Pre-Market Notification193(510(k)) to demonstrate substantial equivalence to an existing legally marketed194device prior to receiving market clearance by the FDA. According to the195FDA’s 2000 ODE Annual Report, the average time for a PMA clearance was 11.9196months (excluding the one-year typically required for clinical trials, or197approximately 24 months total), while the average elapsed time for a 510(k)198approval was 3.4 months in 2000.</P>199<P>On September 6, 2000, the FDA published a Notice of Panel Recommendation in200the Federal Register to tentatively accept the September 1999 Medical Devices201Neurological Advisory Panel recommendation to reclassify the IPG device and202established a 30-day public comment period regarding the reclassification. The203FDA extended the comment period by 28 days until November 3, 2000 at the request204of Medtronic, Inc. On February 26, 2001, the FDA notified ANS that the agency205had denied ANS' petition to reclassify Totally Implanted Spinal Cord Stimulators206(IPGs) for treatment of pain of the trunk and/or limbs from a Class III device207to a Class II device. The FDA’s denial was surprising and disappointing208principally because at a presubmission meeting with the FDA, the agency itself209had recommended that ANS submit a reclassification petition instead of the PMA210process as a "least burdensome path to market." Furthermore, the FDA Advisory211Panel recommended the reclassification and the agency itself had supported the212recommendation as late as September 6, 2000. We are currently requesting an213internal review of the administrative record to appeal the decision, while214simultaneously pursuing the PMA application to gain approval to market the IPG215in the United States. We are already marketing the IPG product in Europe.216Industry analysts estimate that the IPG market for spinal cord stimulation to217treat pain of the trunk and/or limbs will approach $175 million in 2001, and218that the market is growing at a 25% to 30% annual rate. Currently Medtronic,219Inc. is the sole provider of IPGs in the United States.<P>220<P ALIGN=CENTER><B><U>The Neuromodulation Market</U></B></P>221<P>The neuromodulation market is comprised of implantable electrical stimulation222systems and fully implantable infusion pumps that modulate the central nervous223system by delivering precise doses of either electricity or pharmaceuticals224directly to targeted nerve sites.</P>225<P ALIGN=CENTER>page 2</P>226<HR>227<P>Four product technology platforms address the chronic intractable pain228segment of the neuromodulation market. These platforms are: (1) radio-frequency229stimulation systems for spinal cord stimulation, (2) implantable pulse generator230stimulation systems for spinal cord and deep brain stimulation, (3) fully231implantable constant rate infusion pumps and (4) fully implantable programmable232rate infusion pumps. Industry analysts estimate the market for these233neuromodulation devices at $425 million in 2000 and growing to nearly $800234million by 2003 solely on current FDA approved indications. The growth in the235market for stimulation systems and fully implantable infusion pumps is being236driven by a number of factors, including:</P>237<UL>238<LI>New technology is increasing the capability of these devices239<LI>New clinical applications for stimulation systems and fully implantable240infusion pumps are being discovered and tested241<LI>Improved outcomes are being driven by technology, patient selection and242improved techniques243<LI>Stimulation and fully implantable infusion pump devices are generally low244risk and cost effective and the therapies are reversible245<LI>Patient awareness and advocacy is generally high246<LI>The base of pain specialists and centers of excellence is growing</UL>247<P>Listed below is the estimated revenue by market segment in 2000 and 2003 for248all manufacturers of such products. These estimates do not consider the use of249neuromodulation technology platforms for applications such as epilepsy,250depression, peripheral nerve stimulation, chronic intractable angina, chronic251headaches, functional stimulation, tens stimulation, peripheral vascular disease252and deep brain applications for disorders other than Parkinson's Disease253and Essential Tremor.</P>254<P><I>Estimated, for all product manufacturers, by market segment:</I></P>255<P></P>256<PRE>2572000 2003258----------- -----------259$(000's) $(000's)260----------- -----------261Radio-frequency stimulation systems for spinal262cord stimulation $ 45,000 $ 70,000263Implantable pulse generator stimulation systems264for spinal cord stimulation 142,000 275,000265Implantable pulse generator stimulation systems266for deep brain stimulation for Parkinson's Disease267and Essential Tremor 40,000 85,000268Implantable pulse generator stimulation systems269for sacral nerve stimulation for incontinence 15,000 55,000270Fully implantable constant rate infusion pumps 24,000 41,000271Fully implantable programmable rate infusion pumps 159,000 264,000272----------- -----------273Total $ 425,000 $ 790,000274----------- -----------275</PRE>276<P>According to industry analysts, there are millions of patients who could277benefit from the use of stimulation or fully implantable infusion pump devices.278Thus, we believe the market is under-served and under-penetrated. In 2000, only279approximately 60,000 patients benefited from neuromodulation devices.</P>280<P ALIGN=CENTER>Page 3</P>281<HR>282<P>Our growth strategy is to develop and license proprietary product platforms283to expand from our participation in only the radio-frequency stimulation segment284during 2000 into the other major market segments of the neuromodulation market.285Since most pain practitioners implant all four of the product platforms286(radio-frequency stimulation systems, implantable pulse generator stimulation287systems, fully implantable constant-rate infusion pumps and fully implantable288programmable infusion pumps), we believe we are in a unique position to leverage289our distribution capabilities.</P>290<P ALIGN=CENTER><B><U>Products</U></B></P>291<P><B>Stimulation Systems</B></P>292<P>Stimulation devices electrically stimulate nerve fibers along the spinal cord293to reduce chronic severe neuropathic pain by “masking” the pain294signals sent to the brain. Neuropathic pain usually arises from nerve damage.295Stimulation device implantation manages the pain associated with failed back296surgery syndrome (FBSS), peripheral neuropathy, phantom limb or stump pain,297ischemic pain and reflex sympathetic dystrophy (RSD), also known as complex298regional pain syndrome (CRPS). Stimulation device implantation in the brain is299being used to relieve the effects of various neurological disorders, such as300Parkinson’s Disease and Essential Tremor by delivering small electrical301impulses to targeted structures in the brain.</P>302<P>The market for stimulation systems is currently divided between303radio-frequency stimulation systems, which use an external power source, and304stimulation systems that utilize implantable battery driven systems known as305implantable pulse generators (IPGs). According to industry analysts, lPG devices306account for around 80 percent of the number of spinal cord stimulation307procedures performed, with radio-frequency devices accounting for the remainder.308We currently design, develop, manufacture and market radio-frequency stimulation309devices and in 2000 we completed the development of our first generation IPG310device. The primary advantage of the radio-frequency device revolves around the311benefits of the system’s external battery. An external battery system312allows the patient to recharge the device by simply changing a special nine-volt313battery. The IPG requires surgical intervention, revision and replacement after314two to four years. Due to its inexpensive power system, the radio-frequency315device can be programmed with a wide range of amplitude, frequency and pulse316width settings for a variety of programs controlled by the patient. These317features make the radio-frequency devices the most cost efficient for long-term318stimulation treatment. On the other hand, IPG devices provide the convenience of319a completely internalized system, although they involve added long-term cost320when repeat surgeries are required to replace the IPG power source. Both321radio-frequency systems and IPG systems are useful to the pain physician.322Radio-frequency systems are most often prescribed for patients who have complex323bilateral pain syndromes or widespread pain that require higher power levels.324IPGs are most often prescribed for patients with simple unilateral and single325extremity pain complaints or indications with lower power requirements.</P>326<P>Our radio-frequency stimulation systems consist of four primary components:327leads, a receiver, a transmitter and programmer. The leads are most commonly328placed percutaneously through the skin into the epidural space of the spinal329column. This procedure for lead placement is similar to that employed by330anesthesiologists in routine epidural procedures. Typically, one or two leads331are inserted, each of which has multiple electrodes that can be used to332stimulate the targeted nerve roots of the spinal cord. Laminotomy style (paddle)333leads are also available for neurosurgeons or orthopedic surgeons who prefer to334insert leads in an open surgical procedure approach. The leads are then335connected to a passive receiver, which is implanted under the skin on the side336of the abdomen. The receiver contains electronics that receive radio-frequency337energy and data from a source (the transmitter) outside the body, and delivers338the prescribed electrical pulses to the leads. The transmitter is approximately339the size of a pager, and is typically worn on a belt. Since it is external to340the body, the transmitter can be easily programmed and serviced as needed, and341its battery can be simply recharged or replaced.</P>342<P ALIGN=CENTER>Page 4</P>343<HR>344<P>Our CompuStim™ systems include four, seven, eight and sixteen electrodes345on one, two or more leads; simple and complex receivers; and an external346battery-powered transmitter. We believe that the CompuStim product line’s347multi-electrode leads and advanced multiprogrammable technology have changed the348manner in which neuromodulation is performed worldwide. For example, our349“Dual Octrode” device, a system of dual leads with eight electrodes on350each lead introduced in 1995, creates a targeted current density that appears to351be especially effective in relieving complex and multi-extremity pain patterns.352Previously, quadrapolar stimulation systems only relieved the leg pain353associated with FBSS. Many experts support the view that the Dual Octrode device354provides improved pain relief to both the legs and the back. Dual Octrode355systems are enjoying increasing acceptance from the physician community and, in356our judgment, are the technological leaders in the stimulation field. We believe357that the long-term results of stimulation in the treatment of pain have improved358as a result of the technological superiority of ANS products. Moreover, the ease359of use of the system has expanded the potential market for these products.</P>360<P>In early 1999, we completed the development of our enhanced radio-frequency361stimulation system, the Renew System, and introduced the products in the United362States during June 1999. These products include enhancements that simplify the363procedure for implanters while providing improved function. We introduced the364Renew System in international markets during 2000.</P>365<P>In 1998, we licensed the rights to method patents for sacral nerve root366stimulation aimed at relieving the effects of chronic pelvic pain, including367interstitial cystitis. Interstitial cystitis is an extremely painful bladder368disease that afflicts approximately 450,000 people in the United States alone.369We believe our advanced radio-frequency stimulation devices can be effective in370treating pelvic pain indications including interstitial cystitis. In February3711999, we received conditional approval from the FDA to initiate a pilot study to372evaluate the use of our advanced radio-frequency stimulation systems to treat373interstitial cystitis. The pilot study is continuing and if successful, we will374seek approval from the FDA to initiate further clinical studies in the process375to receive a PMA approval to begin marketing in the United States.</P>376<P>We believe our radio-frequency stimulation devices represent a strong base377for penetration of the broader neuromodulation market. During 2000, we completed378development of our first generation IPG, Genesis™, to better serve the379broad needs of the pain management market. The IPG stimulation system will allow380us to participate in the largest segment of the stimulation market for spinal381cord stimulation and leverage our sales and marketing capabilities. In late3822000, we received the CE mark approval for our Genesis IPG and commenced our383selling efforts in international markets during January 2001. In the United384States, we are seeking a PMA approval due to the February 26, 2001 decision by385the FDA denying our petition to reclassify the IPG device to a Class II device386from a Class III device. See Item 1. “Business-Recent Developments.”387</P>388<P>Our IPG platform also provides us with the opportunity to address a number389of new indications such as chronic intractable angina, occipital headaches,390urinary urge incontinence, peripheral nerve stimulation and Deep Brain391Stimulation (DBS) for Essential Tremor and tremor associated with392Parkinson’s Disease. During the fourth quarter of 2000, we received an393Investigational Device Exemption (IDE) approval from the FDA to initiate a pilot394clinical study to evaluate the efficacy of our Genesis IPG stimulation system395for the treatment of occipital headaches (chronic severe headaches). The pilot396clinical study of 10 patients at 2 sites in the U.S. began in January 2001. Data397from the pilot study will be used to determine the parameters for a larger398pivotal clinical study to support a PMA application for our Genesis IPG to treat399occipital headaches.</P>400<P ALIGN=CENTER>Page 5</P>401<HR>402<P><B>PainDoc®</B></P>403<P>In early 1997 we began marketing PainDoc, a pen-based computer system that is404designed to assist physicians and their patients in optimizing the performance405of our stimulation devices both pre- and post-operatively. PainDoc interfaces406with our CompuStim and Renew transmitters to optimize stimulation therapy and407document treatment outcomes. PainDoc allows the physician to interact with the408patient to map the location and intensity of the patient’s pain. The409resulting “pain map” is then used to assess and select the most410effective stimulation sets, or combination of multi-electrode stimulation411arrays, to treat the pain. The idea is to generate pain coverage that overlaps412the patient’s pain map. The selected arrays (programs) are uploaded into413the patient’s CompuStim or Renew transmitter. The physician can visually414compare the patient’s pain map against a stimulation map and optimize the415patient’s stimulator setting to address the patient’s needs and assess416whether desired levels of pain relief have been obtained and whether excess417stimulation has been delivered.</P>418<P>PainDoc enables the physician to program up to 24 different stimulation sets419delivering electrical stimulation every 50 milliseconds to expand pain area420coverage and relief. We believe that PainDoc should also allow physicians to421create a broad-based database tool that, by using a standardized methodology,422will enable physicians to share and compare outcome data, which can then be used423to deliver more efficacious pain relief to individual patients. We believe that424PainDoc and ANS transmitter devices used in tandem significantly enhance the425effectiveness, flexibility and precision of managing chronic neuropathic pain.426We expect PainDoc to promote the selection of our devices for stimulation427procedures, especially as stimulation devices become more sophisticated and the428pain management process becomes more refined.</P>429<P>We continue to make improvements to PainDoc and will continue to develop430systems that are easier to use and offer more capability.</P>431<P><B>Implantable Infusion Systems</B></P>432<P>Fully implantable infusion pumps are designed to deliver drugs directly to433targeted sites of action within the body. This contrasts to oral or intravenous434drug delivery, where a drug is distributed systemically throughout the entire435body. When the drug is being delivered directly to the site of action, a better436therapeutic effect often can be achieved with much lower quantities of drug,437with fewer side effects. Today, implantable infusion pumps are used for the438intraspinal delivery of morphine and baclofen for the treatment of pain and439spasticity, and for the intra-arterial delivery of various drugs for440chemotherapy.</P>441<P>Implantable infusion systems consist of an implantable pump and a delivery442catheter. The pump and the catheter work together as a system to deliver small,443precisely controlled doses of drug directly to the targeted delivery site. The444pump consists of a reservoir that holds a several-week supply of drug, a pumping445mechanism to push the drug along the catheter, and a port for refilling the pump446with drug as necessary. The pump is implanted under the skin generally in the447abdominal area and is connected to the delivery catheter. The delivery catheter448is a spaghetti-sized tube that runs between the pump and the targeted delivery449site. The pump is refilled as necessary using a needle inserted through the skin450into the pump’s refill port. The refill procedure is generally performed on451an outpatient basis by a physician or under the direct supervision of a452physician.</P>453<P>In 2000, industry analysts estimated the market for implantable infusion454systems was $183 million and they expect the market to grow to $305 million by455the year 2003. There are two types of implantable pumps: constant flow pumps and456programmable pumps. According to industry analysts, programmable pumps hold an45781 percent unit share of worldwide intraspinal pump procedures, with constant458flow pumps accounting for the balance. Currently, Medtronic, Inc. is the sole459worldwide provider of a programmable pump for intraspinal applications.</P>460<P ALIGN=CENTER>Page 6</P>461<HR>462<P>The programmable pump is the most versatile type of implantable pump since it463allows the fluid (drug) flow rate to be changed non-invasively to meet varying464patients’ needs. Medtronic’s programmable pump contains a battery,465control and telemetry circuitry, and motor. The battery delivers pulses of466energy to the motor, which pushes the drug from the pump into the delivery467catheter and to the targeted delivery site. The programmability feature allows468for time-modified delivery of the drug. For example, it can be non-invasively469programmed to deliver more medication at night and less during the day. Since470the pump is powered with a battery, the entire pump typically needs to be471replaced every five to seven years.</P>472<P>Constant flow pumps are designed to provide drug infusion at a constant473factory-set flow rate. Once implanted, the medication flow rates remain the474same. The physician adjusts dose by adjusting the concentration of the drug in475the pump reservoir. Constant flow pumps are smaller, lighter, less expensive,476and because they have no battery, typically have a significantly longer service477life than programmable pumps.</P>478<P>Management believes that the implantable infusion pump market offers479significant opportunity. In August 1998, we completed an agreement with Tricumed480Medizintechnik GmbH, a German corporation, granting ANS rights to distribute481Tricumed’s implantable pump products in various international markets.482During 2000, ANS and Tricumed mutually agreed to terminate this483relationship.</P>484<P>In 2000, we completed development of our proprietary constant flow485implantable infusion pump, AccuRx™, utilizing technology licensed from the486University of Minnesota. We received CE mark approval to distribute the pump487internationally, with international sales expected to commence in the second488quarter of fiscal 2001. We also received an Investigational Device Exemption489(IDE) from the FDA to initiate clinical trials in the United States. The490clinical trials will include 109 patients and will be conducted in twelve sites.491The trials commenced in the first quarter of 2001. The data gathered during the492trials will be used to support a PMA application.</P>493<P>On January 2, 2001, we acquired the intellectual property rights to our494AccuRx constant flow implantable infusion pump for 119,100 shares of our common495stock valued at $2.43 million. Prior to purchasing these rights, we licensed496rights from the University of Minnesota for pain and cancer therapy497applications. By purchasing the intellectual property rights, we eliminated498future royalty obligations to the University of Minnesota and expanded our499rights to use the AccuRx pump for any application.</P>500<P>Management believes that the market for constant flow implantable infusion501pumps will continue to expand, and that our proprietary pump products offer502unique features and benefits that will enable us to capture a meaningful share503of this market segment after the appropriate regulatory approvals are504secured.</P>505<P ALIGN=CENTER><B><U>Other Business Matters</U></B></P>506<P><B>Marketing and Major Customers</B></P>507<P>Domestically, we utilize independent specialty distributors and commissioned508sales agents who are focused on the chronic pain market to sell our stimulation509systems. Domestically, we have six distributor territories, which employ a total510of thirty-seven pain specialists who devote the majority of their selling511efforts to ANS products. In addition, we have seventeen sales agent territories512that employ thirty-three sales agents who are focused on the pain market and513depend upon ANS products as their flagship product line. We employ four regional514sales managers who personally interact with our customers and oversee the515distributors and sales agents. We also employ a Vice President of North American516Sales who coordinates the sales efforts of our distribution network in North517America.</P>518<P ALIGN=CENTER>Page 7</P>519<HR>520<P>Internationally, we sell ANS product to sixteen specialty pain distributors521who represent ANS in nineteen countries. Additionally, we employ one sales agent522and two direct sales representatives in two countries. All international523distribution reports to our Director of International Operations who is524headquartered in the United Kingdom.</P>525<P>The primary medical specialists we target in our marketing efforts are526anesthesiologists, neurosurgeons and orthopedic surgeons. Although neurosurgeons527were the first practitioners to use stimulation systems, anesthesiologists528(specializing in pain medicine) now account for a greater percentage of sales,529as the relative number of these practitioners has grown and as the understanding530and acceptance of stimulation treatment for chronic pain conditions has531increased. We derive 93 percent of net revenues from product sales of our532stimulation systems from domestic sales and approximately 7 percent from export533sales.</P>534<P>During 2000 and 1998, we had one major customer that accounted for 10 percent535or more of our net revenue from product sales. Sun Medical, Inc., a specialty536distributor of ANS products, accounted for $3.2 million, or 14 percent of our537net revenue from product sales for the year ended December 31, 2000 and $3.4538million, or 20 percent of our net revenue from product sales for the year ended539December 31, 1998. While we believe our relations with Sun Medical are good, the540loss of this customer could have a material adverse effect on our business,541financial condition and results of operations. During 1999, we had two major542customers that accounted for 10 percent or more of our net revenue from product543sales. Sun Medical, Inc. and Primesource Surgical, Inc., each a specialty544distributor of ANS products, accounted for $3.0 million and $2.3 million,545respectively, or 15 percent and 11 percent, respectively, of our net revenue546from product sales for the year ended December 31, 1999.</P>547<P><B>Research and Development</B></P>548<P>In 2000, we focused our research and development efforts on the continued549development of our enhanced radio-frequency stimulation systems and ongoing550research and development of new products for the neuromodulation market, such as551our Genesis IPG stimulation system for spinal cord stimulation, an implantable552pulse generator stimulation system for DBS and our proprietary AccuRx constant553rate infusion pump. We expended $3.56 million (15.4 percent of net revenue) on554our research and development activities in 2000, compared to $3.77 million (18.3555percent of net revenue from product sales) in 1999. We expect to increase our556investment in research and development and clinical trials during 2000 and557expect expenditures of approximately $5.0 million. These expenditures will be558directed toward next-generation infusion pumps, next-generation implantable559pulse generator stimulation systems for spinal cord stimulation, next generation560radio-frequency stimulation systems and our implantable pulse generator561stimulation system for DBS. These expenditures also include expenses for562clinical trials that we expect to initiate on several of our new products upon563approval from the FDA. The clinical trials are a necessary process to receive564approval from the FDA to begin marketing the products in the United States. As565of March 15, 2001, we had an in-house research and development staff of 38566personnel as compared to 29 in March 2000. The March 2001 total includes 12567development personnel employed by Hi-tronics Designs, Inc., which we acquired on568January 2, 2001.</P>569<P ALIGN=CENTER>Page 8</P>570<HR>571<P>We may seek strategic partners for DBS to replace our terminated agreement572with Sofamor Danek that could partially fund research and development573expenditures during 2001. In addition to DBS, we believe our implantable pulse574generator stimulation platform has market opportunities outside our focus of575chronic pain, including applications such as epilepsy, urinary incontinence,576angina, peripheral nerve stimulation and peripheral vascular disease. Any such577market expansion, however, would require PMA approvals from the FDA. We may also578seek strategic partners with established distribution systems to develop these579market opportunities outside the chronic pain market area, although there is no580assurance that we will be successful in negotiating and consummating agreements581with strategic partners.</P>582<P><B>Manufacturing</B></P>583<P>We manufacture and package our stimulation systems at our manufacturing584facility in Plano, Texas. This facility was re-certified to ISO 9001/EN 46001/585iso 13485 in January 2001. Hi-tronics Designs, Inc. is also ISO 9001 certified586and was re-certified in May 2000. See Item 1. "Business-Other Business587Matters-Government Regulations."</P>588<P>Our manufacturing processes consist of the assembly of standard and custom589component parts and the testing of completed products. We subcontract with590various suppliers to provide us with the quantity of component parts necessary591to assemble our products. Almost all of these components are available from a592number of different suppliers, although certain components are purchased from593single sources. For example, we currently rely on a single supplier for a594computer chip used in the receiver of our stimulation systems. The supplier of595this computer chip has indicated its desire to cease manufacturing and supplying596the computer chip in the future, but to date has not determined when this will597occur. The supplier has agreed to notify us once a date has been determined and598allow us to place a final one-time purchase order for the computer chip. In the599interim, we are maintaining a higher than normal inventory of the computer chip.600In addition, we are developing a new receiver design at Hi-tronics that does not601use any custom computer chips. A sudden disruption in supply from the computer602chip supplier or another single-source supplier could adversely affect our603ability to deliver finished products on time.</P>604<P>We devote significant attention to quality assurance. Our quality assurance605measures begin at the manufacturing level where components are assembled in a606“clean room” environment designed and maintained to reduce product607exposure to particulate matter. Products are tested throughout the manufacturing608process for adherence to specifications. Finished components are shipped to609outside processors for ethylene oxide gas sterilization.</P>610<P>Skills of assembly workers required for the manufacture of medical products611are similar to those required in typical assembly operations. We believe that612workers with these skills are readily available in the Dallas and New Jersey613geographical areas.</P>614<P><B>Competition</B></P>615<P>In marketing our stimulation systems, we compete with one other significant616supplier, Medtronic, Inc. Medtronic has substantially greater financial617resources and engages in substantially greater research and development and618marketing efforts. Medtronic holds a substantial majority share of the619stimulation market and sells both radio-frequency stimulation systems and620implantable pulse generator stimulation systems. Medtronic is the sole provider621of implantable pulse generators in the United States. Medtronic also holds the622substantial majority share of the market for fully implantable infusion pumps623and is the sole marketer worldwide of fully implantable programmable infusion624pumps.</P>625<P ALIGN=CENTER>Page 9</P>626<HR>627<P>We believe that the principal competitive factors in the neuromodulation628market are cost-effectiveness, impact on patient outcomes, product performance,629quality, ease of use, technical innovation and customer service. We intend to630continue to compete on the basis of our high-performance products, innovative631technologies, manufacturing capabilities, close customer relations and support,632and our strategy to increase our offerings of products within the633neuromodulation market.</P>634<P><B>Patents, Trademarks and Proprietary Information</B></P>635<P>We currently own twenty-two United States patents and three foreign patents.636In management’s view, these patents offer reasonable coverage of our637stimulation devices’ electrode, receiver, transmitter and programmer638technology, our advanced PainDoc computer system technology, and our fully639implantable infusion pump technology. These patents, in part, cover both640radio-frequency stimulation systems and implantable pulse generator stimulation641systems for a wide range of current and future applications. We currently have642seven pending U.S patent applications and four foreign patent applications.643Among other things, these pending patent applications cover new stimulation644lead technology, implant accessories, improved connector mechanisms and645implantable drug delivery technology.</P>646<P>Additionally, we are exclusively licensing a patent directed to advanced647placement techniques and a patent directed to methods to facilitate relieving648the effects of chronic pelvic pain such as interstitial cystitis.</P>649<P>The validity of any patents issued to us may be challenged by others and we650could encounter legal and financial difficulties in enforcing our patent rights651against infringers. In addition, there can be no assurance that other652technologies cannot or will not be developed or that patents will not be653obtained by others which would render our patents obsolete. The loss of any one654patent would not have a material adverse effect on our current revenue base.655Although we do not believe that patents are the sole determinant of the656commercial success of our products, the loss of a significant percentage of our657patents could have a material adverse effect on our business, financial658condition and results of operations.</P>659<P>We have developed technical knowledge which, although non-patentable, we660consider as significant in enabling us to compete. However, the proprietary661nature of such knowledge may be difficult to protect. We have entered into an662agreement with each key employee prohibiting such employee from disclosing any663confidential information or trade secrets of the Company and prohibiting that664employee from engaging in any competitive business while the employee is working665for the Company and for a period of one year thereafter. In addition, these666agreements also provide that any inventions or discoveries by these individuals667relating to the business of the Company will be assigned to the Company and668become the Company’s sole property.</P>669<P>Claims by competitors and other third parties that our products allegedly670infringe the patent rights of others could have a material adverse effect on the671Company. The interventional pain management market is characterized by extensive672patent and other intellectual property claims, which can create greater673potential than in less developed markets for possible allegations of674infringement, particularly with respect to newly developed technology.675Intellectual property litigation is complex and expensive and its outcome is676difficult to predict. Any future litigation, regardless of outcome, could result677in substantial expense to the Company and significant diversion of the efforts678of the Company’s technical and management personnel. An adverse679determination in any such proceeding could subject the Company to significant680liabilities to third parties, or require the Company to seek licenses from third681parties or pay royalties that may be substantial. Furthermore, there can be no682assurance that necessary licenses would be available to the Company on683satisfactory terms or at all. Accordingly, an adverse determination in a684judicial or administrative proceeding or failure to obtain necessary licenses685could prevent the Company from manufacturing or selling certain of its products,686which could have a material adverse effect on the Company’s business,687financial condition and results of operations.</P>688<P ALIGN=CENTER>Page 10</P>689<HR>690<P>Renew®, Multistim®, Paindoc®, Octrode®, ANS® and Advanced691Neuromodulation Systems® are among our registered trademarks. Registration692applications are pending for various trademarks, which we believe, have value in693the marketplace, including Compustim™, Genesis™ and AccuRx™.</P>694<P><B>Government Regulation</B></P>695<P>The manufacture and sale of our products are subject to regulation by696numerous governmental authorities, principally the FDA and corresponding foreign697agencies. The research and development, manufacturing, promotion, marketing and698distribution of our products in the United States are governed by the Federal699Food, Drug and Cosmetic Act and the regulations promulgated thereunder (the700“FDC Act and Regulations”). We are subject to inspection by the FDA701for compliance with such regulations and procedures.</P>702<P>The FDA has traditionally pursued a rigorous enforcement program to ensure703that regulated entities such as the Company comply with the FDC Act and704Regulations. A company not in compliance may face a variety of regulatory705actions, including warning letters, product detentions, device alerts, mandatory706recalls or field corrections, product seizures, recession of marketing permits,707injunctive actions or civil penalties and criminal prosecutions of the Company708or responsible employees, officers and directors. Our Texas facility was last709inspected in the summer of 1996, and no major non-conformance was found. In710September 2000, the FDA inspected Hi-tronics' New Jersey facility, and no major711non-conformance was found.</P>712<P>Under the FDA’s requirements, a new medical device cannot be released713for commercial use until a pre-market approval application (a “PMA”)714has been filed with the FDA and the FDA has approved the device’s release.715If a manufacturer can establish that a newly developed device is716“substantially equivalent” to a legally marketed device, the717manufacturer may seek marketing clearance from the FDA to market the device by718filing a 510(k) premarket notification with the FDA, which usually takes less719time than a PMA. The process of obtaining FDA clearance can be lengthy,720expensive and uncertain. Both a 510(k) and a PMA, if granted, may include721significant limitations on the indicated uses for which a product may be722marketed. FDA enforcement policy strictly prohibits the promotion of approved723medical devices for unapproved uses. In addition, product approvals can be724withdrawn for failure to comply with regulatory requirements or the occurrence725of unforeseen problems following initial marketing. Although all of our726currently marketed products have been the subject of successful 510(k)727submissions, we believe that because the products we are currently developing728are more innovative, some of these products will require the PMA submission729process, which is lengthier and more costly than the 510(k) process.</P>730<P>We are also subject to regulation in each of the foreign countries in which731we sell our products with regard to product standards, packaging requirements,732labeling requirements, import restrictions, tariff regulations, duties and tax733requirements. Many of the regulations applicable to our products in such734countries are similar to those of the FDA. The national health or social735security organizations of certain countries require our products to be qualified736before they can be marketed in those countries. To date, we have not experienced737significant difficulty in complying with these regulations.</P>738<P>To position ourselves for access to European and other international markets,739we have maintained certification under the ISO 9000 Series of Standards. ISO7409000 is a set of integrated requirements, which when implemented, form the741foundation and framework for an effective quality management system. These742standards were developed and published by the ISO, a worldwide federation of743national standard bodies, founded in Geneva, Switzerland in 1946. ISO has over74492 member countries. ISO certification is essential to enter European Community745markets.</P>746<P ALIGN=CENTER>Page 11</P>747<HR>748<P>In January 2001, our quality system was re-certified to ISO 9001/EN 46001/ISO74913485 certification. The ISO 9001 registration is the most stringent standard in750the ISO series. The German notified body TUV Product Services issued the751re-certification certificates. The ISO 9001 standard covers design, production,752installation and servicing of products. EN 46001 and ISO 13485 cover the same753elements as the ISO 9001 standard; however, the focus is on quality systems for754medical device manufacturing. In addition, we are certified to the Active755Implantable Medical Device Directive allowing us to market devices throughout756the European Community. We are subject to an annual audit by the notified body757to maintain our registrations.</P>758<P>The financial arrangements through which we market, sell and distribute our759products may be subject to certain federal and state laws and regulations in the760United States with respect to the provision of services or products to patients761who are Medicare or Medicaid beneficiaries. The “fraud and abuse” laws762and regulations prohibit the knowing and willful offer, payment or receipt of763anything of value to induce the referral of Medicare or Medicaid patients for764services or goods. In addition, the physician anti-referral laws prohibit the765referral of Medicare or Medicaid patients for certain “Designated Health766Services” to entities in which the referring physician has an ownership or767compensation interest. Violations of these laws and regulations may result in768civil and criminal penalties, including substantial fines and imprisonment. In a769number of states, the scope of fraud and abuse or physician anti-referral laws770and regulations, or both, have been extended to include the provision of771services or products to all patients, regardless of the source of payment,772although there is variation from state to state as to the exact provisions of773such laws or regulations. In other states, and on a national level, several774health care reform initiatives have been proposed which would have a similar775impact. We believe that our operations and our marketing, sales and distribution776practices currently comply in all respects with all current fraud and abuse and777physician anti-referral laws and regulations, to the extent they are applicable.778Although we do not believe that we will need to undertake any significant779expense or modification to our operations or our marketing, sales and780distribution practices to comply with federal and state fraud and abuse and781physician anti-referral regulations currently in effect or proposed, financial782arrangements between manufacturers of medical devices and other health care783providers may be subject to increasing regulation in the future. Compliance with784such regulation could adversely affect our marketing, sales and distribution785practices, and may affect us in other respects not presently foreseeable, but786which could have an adverse impact on our business, financial condition and787results of operations.</P>788<P><B>Third-Party Reimbursement and Cost Containment</B></P>789<P>Our products are purchased primarily by hospitals and ambulatory surgery790centers, which then bill various third-party payors for the services provided to791the patients. These payors, which include Medicare, Medicaid, private insurance792companies, managed care and worker’s compensation organizations, reimburse793part or all of the costs and fees associated with the procedures performed with794these devices.</P>795<P>Medicare and Medicaid reimbursement for hospitals is based on a fixed amount796for admitting a patient with a specific diagnosis. Because of this fixed797reimbursement method, hospitals have incentives to use less costly methods in798treating Medicare and Medicaid patients, and will frequently make capital799expenditures to take advantage of less costly treatment technologies.800Frequently, reimbursement is reduced to reflect the availability of a new801procedure or technique, and as a result hospitals are generally willing to802implement new cost-saving technologies before these downward adjustments take803effect. Likewise, because the rate of reimbursement for certain physicians who804perform certain procedures has been and may in the future be reduced in the805event of further changes in the resource-based relative value scale method of806payment calculation, physicians may seek greater cost efficiency in treatment to807minimize any negative impact of reduced reimbursement. Any amendments to808existing reimbursement rules and regulations which restrict or terminate the809reimbursement eligibility (or the extent or amount of coverage) of medical810procedures using our products or the eligibility (or the extent or amount of811coverage) of our products could have an adverse impact on our business,812financial condition and results of operations. Third-party payors are813increasingly challenging the prices charged for medical products and services814and may deny reimbursement if they determine that a device was not used in815accordance with cost-effective treatment methods as determined by the payor, was816experimental or was used for an unapproved application.</P>817<P ALIGN=CENTER>Page 12</P>818<HR>819<P>Our stimulation systems, while cost-effective compared to repeat back820surgeries, have encountered some resistance to third party reimbursement.821Although Medicare, Medicaid and many private insurers reimburse for the822stimulation systems and procedure, especially after repeat back surgeries have823failed to relieve chronic pain, some managed care and private payors824occasionally refuse to reimburse for stimulation systems or restrict825reimbursement. There can be no assurance that in the future, third-party payors826will continue to reimburse for our products, or that their reimbursement levels827will not adversely affect the profitability of our products. In addition, health828care costs have risen significantly over the past decade, and there have been829and will continue to be proposals by legislators and regulators to curb these830costs. Legislative action limiting reimbursement for certain procedures could831have a material adverse effect on our business, financial condition and results832of operations.</P>833<P>In response to the focus of national attention on rising health care costs, a834number of changes to reduce costs have been proposed or have begun to emerge. In835addition to legislative and regulatory initiatives, there has also been a836significant increase in the number of Americans enrolling in some form of837managed care plan. It has become a typical practice for hospitals to affiliate838themselves with as many managed care plans as possible. Higher managed care839penetration typically drives down the prices of health care procedures, which in840turn places pressure on medical supply prices. This causes hospitals to841implement tighter vendor selection and certification processes, by reducing the842number of vendors used, purchasing more products from fewer vendors and trading843discounts on price for guaranteed higher volumes to vendors. Hospitals have also844sought to control and reduce costs over the last decade by joining group845purchasing organizations or purchasing alliances. We cannot predict what846continuing or future impact existing or proposed legislation, regulation or such847third-party payor measures may have on our future business, financial condition848or results of operations.</P>849<P>Changes in reimbursement policies and practices of third-party payors could850have a substantial and material impact on sales of our products. The development851or increased use of more cost-effective treatments could cause such payors to852decrease or deny reimbursement to favor these other treatments.</P>853<P><B>Employees</B></P>854<P>As of March 15, 2001, we employed 198 full-time employees, 38 in research and855development, 27 in sales and marketing, 116 in manufacturing and related856operations, and the remainder in executive and administrative positions. This857total includes 93 full-time employees at Hi-tronics Designs, Inc., which we858acquired on January 2, 2001. None of our employees is represented by a labor859union and we consider our employee relations to be good.</P>860<P ALIGN=CENTER>Page 13</P>861<HR>862<P><B>Advisory Board</B></P>863<P>We have established the Advanced Neuromodulation Systems Advisory Board,864which is comprised of individuals with substantial expertise in neuromodulation865and pain management. Members of our management and scientific and technical866staff consult closely with members of the Advisory Board to identify specific867areas where techniques are changing and where existing products do not868adequately fulfill the needs of the pain physician. The Advisory Board helps869management evaluate new product ideas and concepts and once a product is870approved for development, its subsequent design and development. The Advisory871Board may also participate in the clinical testing of products developed.</P>872<P>Certain members of the Advisory Board are employed by academic institutions873and may have commitments to or consulting or advisory agreements with other874entities that may limit their availability to us. The members of the Advisory875Board may also serve as consultants to other medical device companies. No876members of the Advisory Board are expected to devote more than a small portion877of their time to the Company.</P>878<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>879<TR>880<TD WIDTH=15%><B>ITEM 2.</B></TD>881<TD WIDTH=85%><B>PROPERTIES</B></TD></TR></TABLE>882<P>In connection with the January 1998 sale of our cardiovascular products883division, we granted Atrion a nine-month option to acquire our principal office884and manufacturing facility in Allen, Texas for $6.5 million. Atrion exercised885the option to acquire the facility during October 1998 and the transaction886closed on February 1, 1999. We repaid the outstanding mortgage debt on the887facility of $3.6 million at closing and received net proceeds of $2.7 million888after paying expenses related to the transaction. See Note 9- “Sale of CVS889Operations/Discontinued Operations” of the Notes to Consolidated Financial890Statements. No material gain or loss was realized on the sale of the facility.891We leased space, furniture and equipment from Atrion until May 1999 at the892monthly rate of $48,125 and paid Atrion fifty percent of certain operating893expenses including utilities, janitorial services, landscaping services,894insurance and property taxes. At that time we moved our operations to a 40,000895square foot leased facility in Plano, Texas, a northeast suburb of Dallas.</P>896<P>We entered a sixty-three month lease agreement in February 1999 for the Plano897facility. Under the terms of the lease agreement, which became effective on June8981, 1999, we received three months of free rent and the monthly rental rate for899the remaining term of the lease is $48,308. The monthly rental rate includes900certain operating expenses such as property taxes on the facility, insurance,901landscape and maintenance and janitorial services. We also have a right of first902refusal to acquire the facility.</P>903<P>We also lease facilities in New Jersey as a result of our acquisition of904Hi-tronics Designs, Inc. on January 2, 2001. One of the facilities, located in905Budd Lake, New Jersey, is 8,800 square feet of office space that is used for906administration, design engineering, drafting, documentation and regulatory907affairs. The lease is on a month-to month basis at a monthly rental rate of908$10,891. We have agreed to provide the landlord with six months notice in the909event that we wish to relocate. We also lease 15,000 square feet of space in910Hackettstown, New Jersey used for our OEM manufacturing operations. The911Hackettstown lease, which expires on December 31, 2001, has a monthly rental912rate of $9,636 and is renewable for three additional one-year periods. In913addition, on January 1, 2001, Hi-tronics entered an agreement to lease an914additional 2,200 square feet of additional space in the Hackettstown facility915adjacent to the 15,000 square feet of manufacturing space. The lease expires on916June 30, 2002 and has a monthly rental rate of $2,269. All of the monthly rental917rates include certain operating expenses such as property taxes, insurance,918utilities, landscape and maintenance and janitorial services.</P>919<P ALIGN=CENTER>Page 14</P>920<HR>921<P></P>922<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>923<TR>924<TD WIDTH=15%><B>ITEM 3.</B></TD>925<TD WIDTH=85%><B>LEGAL PROCEEDINGS</B></TD></TR></TABLE>926<P>We are a party to product liability claims related to ANS’ stimulation927systems. Product liability insurers have assumed responsibility for defending us928against these claims, subject to reservation of rights in certain cases. While929historically product liability claims for our stimulation systems have not930resulted in significant monetary liability beyond our insurance coverage, there931can be no assurances that we will not incur significant monetary liability to932the claimants if such insurance is unavailable or inadequate for any reason, or933that our current stimulation business and future neuromodulation products will934not be adversely affected by these product liability claims. While we seek to935maintain appropriate levels of product liability insurance with coverage that we936believe is comparable to that maintained by companies similar in size and937serving similar markets, there can be no assurance that we will avoid938significant future product liability claims relating to our stimulation systems.939</P>940<P>We are involved in a contractual dispute with a former customer of941Hi-tronics, Cyberonics, Inc. (“Cyberonics”), relating to the942development and manufacture of components for the Cyberonics NCP System.943Hi-tronics and Cyberonics agree that the contractual relationship has been944terminated, but the companies dispute who was first to terminate and the945ramifications of termination. Pursuant to the terms of the contract, the dispute946has been submitted for binding arbitration and is now pending before the947American Arbitration Association. We have asserted a claim for breach of948contract by Cyberonics and we seek as our remedy the contractual termination fee949of approximately $800,000 plus the payment of outstanding accounts receivable950and purchase of inventory related to the model 101 NCP stimulator. We also seek951a declaration of our rights that survive termination of the contract, such as952our access to intellectual property under the contract. The loss of our right to953maintain the existing intellectual property sublicenses could have an adverse954impact on our business.</P>955<P>In response, Cyberonics has asserted a counterclaim of breach against us and956is seeking monetary remedies in excess of the contractual provisions. We believe957we have valid claims against Cyberonics and valid defenses to their958counterclaims. We intend to vigorously prosecute our claims and to vigorously959contest Cyberonics’ claims in the arbitration.</P>960<P>In light of the preliminary state of the dispute and the inherent961uncertainties involved in the arbitration with Cyberonics, we are not able to962assess at this time the likelihood of a favorable or unfavorable outcome or963range of any possible gain or loss.</P>964<P>Except for the product liability claims and the arbitration with Cyberonics,965we are not currently a party to any other pending legal proceeding. We maintain966general liability insurance against risks arising out of the normal course of967business.</P>968<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>969<TR>970<TD WIDTH=15%><B>ITEM 4.</B></TD>971<TD WIDTH=85%><B>SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS</B></TD>972</TR></TABLE>973<P>Inapplicable.</P>974<P ALIGN=CENTER>Page 15</P>975<HR>976<P ALIGN=CENTER><B>PART II</B></P>977<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>978<TR>979<TD WIDTH=15% VALIGN=TOP><B>ITEM 5.</B></TD>980<TD WIDTH=85%><B>MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED981STOCKHOLDER MATTERS</B></TD></TR></TABLE>982<P>Our common stock is currently quoted on the Nasdaq National Market under the983symbol "ANSI." On March 16, 2001, there were approximately 640 holders984of record of our common stock. The following table sets forth the quarterly high985and low closing sales prices for our common stock. These prices do not include986adjustments for retail mark-ups, markdowns or commissions.</P>987<P></P>988<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>989<TR>990<TD WIDTH=15%> </TD>991<TD WIDTH=30%><U>1999:</U></TD>992<TD WIDTH=15%><U> High </U></TD>993<TD WIDTH=15%><U> Low </U></TD>994<TD WIDTH=25%> </TD></TR>995<TR>996<TD> </TD>997<TD>First Quarter</TD>998<TD>$ 8.19</TD>999<TD>$ 6.19</TD>1000<TD></TD></TR>1001<TR>1002<TD> </TD>1003<TD>Second Quarter</TD>1004<TD>$ 9.56</TD>1005<TD>$ 6.50</TD>1006<TD></TD></TR>1007<TR>1008<TD> </TD>1009<TD>Third Quarter</TD>1010<TD>$11.44</TD>1011<TD>$ 7.69</TD>1012<TD></TD></TR>1013<TR>1014<TD> </TD>1015<TD>Fourth Quarter</TD>1016<TD>$ 9.38</TD>1017<TD>$ 7.00</TD>1018<TD></TD></TR>1019</TABLE>1020<P></P>1021<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>1022<TR>1023<TD WIDTH=15%> </TD>1024<TD WIDTH=30%><U>2000:</U></TD>1025<TD WIDTH=15%><U> High </U></TD>1026<TD WIDTH=15%><U> Low </U></TD>1027<TD WIDTH=25%> </TD></TR>1028<TR>1029<TD> </TD>1030<TD>First Quarter</TD>1031<TD>$19.38</TD>1032<TD>$ 9.94</TD>1033<TD></TD></TR>1034<TR>1035<TD> </TD>1036<TD>Second Quarter</TD>1037<TD>$18.38</TD>1038<TD>$12.25</TD>1039<TD></TD></TR>1040<TR>1041<TD> </TD>1042<TD>Third Quarter</TD>1043<TD>$21.50</TD>1044<TD>$14.25</TD>1045<TD></TD></TR>1046<TR>1047<TD> </TD>1048<TD>Fourth Quarter</TD>1049<TD>$23.19</TD>1050<TD>$19.25</TD>1051<TD></TD></TR>1052</TABLE>1053<P></P>1054<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>1055<TR>1056<TD WIDTH=15%> </TD>1057<TD WIDTH=30%><U>2001:</U></TD>1058<TD WIDTH=15%><U> High </U></TD>1059<TD WIDTH=15%><U> Low </U></TD>1060<TD WIDTH=25%> </TD></TR>1061<TR>1062<TD> </TD>1063<TD>First Quarter</TD>1064<TD>$26.88</TD>1065<TD>$12.63</TD>1066<TD></TD></TR>1067<TR>1068<TD> </TD>1069<TD>(through March 16, 2001)</TD>1070<TD></TD>1071<TD></TD>1072<TD></TD></TR>1073</TABLE>1074<P>To date, we have not declared or paid any cash dividends on our common stock1075and the Board of Directors does not anticipate paying cash dividends on our1076common stock in the foreseeable future.</P>1077<P>On various occasions in 1998 and 1999, the Board of Directors approved stock1078repurchases of up to an aggregate of 1,750,000 shares of our common stock.1079During the year ended December 31, 1998, we repurchased 1,258,625 shares of our1080common stock at an aggregate cost of $9,411,055, or an average of $7.48 per1081share. During the year ended December 31, 1999, we repurchased 404,875 shares1082of our common stock at an aggregate cost of $2,952,311, or an average of $7.291083per share. We made no repurchases during the year ended December 31, 2000. In1084the aggregate, we purchased 1,663,500 shares under the authorized repurchase1085programs. In November 2000 in connection with our signing an agreement to1086acquire Hi-tronics designs, Inc., the Board of Directors rescinded the share1087repurchase program under which 86,500 shares of common stock remained authorized1088for repurchase. During the years ended December 31, 2000, 1999 and 1998, we1089issued 267,425, 162,068 and 184,874 shares respectively, from the treasury upon1090the exercise of stock options and a warrant.</P>1091<P>At December 31, 2000, 1,049,133 shares remained in the treasury. We issued1092119,100 of these treasury shares on January 2, 2001 in connection with our1093acquisition of the assets of Implantable Devices Limited Partnership and ESOX1094Technology Holdings, LLC. On January 2, 2001, we also issued the remaining1095930,033 treasury shares (plus an additional 174,692 newly issued shares) in1096connection with our acquisition of Hi-tronics Designs, Inc. Both issuances of1097common stock were exempt under Rule 506 of Regulation D under the Securities1098Act of 1933, as amended.</P>1099<P ALIGN=CENTER>Page 16</P>1100<HR>1101<P></P>1102<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>1103<TR>1104<TD WIDTH=15%><B>ITEM 6.</B></TD>1105<TD WIDTH=85%><B>SELECTED FINANCIAL DATA</B></TD></TR></TABLE>1106<PRE>1107--------------------------------------------------------------------------1108Years Ended December 31,1109--------------------------------------------------------------------------11102000 1999 1998 1997 19961111-------------- -------------- -------------- -------------- --------------1112(in thousands, except per share data)1113Statement of Operations Data:(1)1114Net revenue-product sales $ 23,082 $ 20,578 $ 17,006 $ 14,718 $ 11,4031115Total net revenue 23,082 29,478 20,106 14,718 11,4031116Gross profit-product sales 15,593 13,949 12,021 9,878 8,0881117Research and development1118expense 3,562 3,773 2,801 977 1,3161119Marketing, general and1120administrative and1121amortization expenses 10,922 10,235 8,486 6,815 6,2571122Earnings from operations 1,109 8,842 3,833 2,086 5151123Net earnings from continuing1124operations 954 6,003 2,586 818 1151125Loss from discontinued1126operations -- -- (212) (93) (527)1127Gain on the sale of assets of1128discontinued operations -- -- 4,585 -- --1129Net earnings (loss) from1130discontinued operations -- -- 4,373 (93) (527)1131Net earnings (loss) $ 954 $ 6,003 $ 6,959 $ 724 $ (412)11321133Diluted earnings (loss) per1134share:1135Continuing operations $ .11 $ .75 $ .30 $ .09 $ .011136Discontinued operations $ -- $ -- $ .51 $ (.01) $ (.06)1137Net earnings (loss) $ .11 $ .75 $ .81 $ .08 $ (.05)11381139- --------------------------1140(1) On January 30, 1998, the Company sold its cardiovascular and intravenous1141fluid delivery product lines (CVS Operations). The CVS Operations have been1142accounted for as discontinued operations. See Note 9 of the Notes to1143Consolidated Financial Statements.1144</PRE>1145<PRE>1146--------------------------------------------------------------------------1147Years Ended December 31,1148--------------------------------------------------------------------------11492000 1999 1998 1997 19961150-------------- -------------- -------------- -------------- --------------1151(in thousands)1152Balance Sheet Data:11531154Cash, cash equivalents,1155certificates of deposit and1156marketable securities $ 9,576 $ 8,752 $ 12,263 $ 2,204 $ 2,2061157Working capital 19,088 16,178 16,426 14,128 11,0881158Total assets 45,372 43,555 45,485 48,982 47,1881159Short-term notes payable and1160current maturities of1161long-term notes payable -- -- 3,633 8,257 2,0841162Notes payable, excluding1163current maturities -- -- -- 3,635 11,9121164Stockholders' equity $ 40,160 $ 37,038 $ 33,304 $ 33,906 $ 30,9931165</PRE>1166<P ALIGN=CENTER>Page 17</P>1167<HR>1168<P></P>1169<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>1170<TR>1171<TD WIDTH=15% VALIGN=TOP><B>ITEM 7.</B></TD>1172<TD WIDTH=85%><B>MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION1173AND RESULTS OF OPERATIONS</B></TD></TR></TABLE>1174<P>The following discussion of the financial condition and results of operations1175of the Company should be read in conjunction with the Consolidated Financial1176Statements of the Company and the related Notes.</P>1177<P><B>Overview</B></P>1178<P>In June 1998, we completed an agreement under which we would develop and1179manufacture products and systems for use in Deep Brain Stimulation ("DBS") for1180Sofamor Danek. See Note 10 – "Product Development Agreement" of the Notes to1181Consolidated Financial Statements. We received a payment of $4 million upon1182execution of the agreement that was being recognized into income as revenue1183based upon the estimated completion of the development project. During the year1184ended December 31, 1998, we recognized $3.1 million into income as revenue. The1185remaining $900,000 was recognized into income as revenue during January 1999 due1186to the termination of the agreement with Sofamor Danek as a result of the merger1187of Sofamor Danek and Medtronic, Inc. In connection with the termination, we also1188received an additional payment of $8 million from Sofamor Danek, which was1189recognized into income as revenue during January 1999.</P>1190<P>The former agreement with Sofamor Danek fit with our strategy to strengthen1191and broaden our neuromodulation technology platforms and to ally ourselves with1192strategic partners who can help us leverage ANS' core technology into other1193significant market segments beyond our focus on the chronic pain segment of the1194neuromodulation market. We cannot assure you, however, that we will be1195successful in negotiating and consummating research and development agreements1196with other strategic partners.</P>1197<P>Subsequent to the end of the fiscal year, on January 2, 2001, we completed1198the acquisition of the assets of Implantable Devices Limited Partnership and1199ESOX Technology Holdings, LLC and the acquisition by merger of Hi-tronics1200Designs, Inc. See Note 11 of the Notes to Consolidated Financial Statements.1201Because these acquisitions were completed subsequent to the 2000 fiscal year,1202their results of operations and balance sheet data are not included in the1203Company's 2000 financial information but will be reflected in the results of the1204Company for the three months ended March 31, 2001.</P>1205<P>Also subsequent to the end of the fiscal year, on February 26, 2001, the FDA1206notified us that it had denied our petition to reclassify Totally Implanted1207Spinal Cord Stimulators (IPGs) for treatment of pain of the trunk and/or limbs1208from a Class III device to a Class II device. The FDA’s denial was1209surprising and disappointing principally because at a presubmission meeting with1210the FDA, the agency itself had recommended that ANS submit a reclassification1211petition instead of the Pre-Market Approval (PMA) process as a "least burdensome1212path to market". An FDA Advisory Panel also recommended the reclassification and1213the agency itself had supported the panel recommendation as late as September 6,12142000. We are currently requesting an appeal of the decision, while1215simultaneously pursuing the PMA process to gain approval to market the IPG in1216the United States. We are marketing the IPG product in Europe. Industry analysts1217estimate that the IPG market for spinal cord stimulation to treat pain of the1218trunk and/or limbs will approach $175 million in 2001, and that the market is1219growing at a 25% to 30% annual rate. Currently in the United States, Medtronic,1220Inc. is the sole provider of IPGs.</P>1221<P ALIGN=CENTER>Page 18</P>1222<HR>1223<P><B>Results of Operations</B></P>1224<P><I>Comparison of the Years Ended December 31, 2000 and 1999</I></P>1225<P>We reported net earnings of $954,000 or $.11 per diluted share in 20001226compared to $6.00 million or $.75 per diluted share in 1999. Net earnings for1227the 1999 period benefited from $8.9 million of revenue recorded in connection1228with our former development agreement with Sofamor Danek.</P>1229<P>Total net revenue of $23.08 million for the year ended December 31, 2000, was1230$6.40 million below the comparable 1999 level of $29.48 million due to $8.91231million of net revenue in the 1999 period associated with our former development1232agreement with Sofamor Danek. Excluding the development agreement revenue, net1233revenue from ANS product sales increased 12.2 percent to $23.08 million during12342000 compared to $20.58 million in 1999. This increase in net revenue from1235product sales was the result of higher unit sales volume, primarily in the1236United States, of ANS' radio-frequency stimulation systems used to treat complex1237pain patterns.</P>1238<P>Because neuromodulation devices have gained acceptance as a viable,1239efficacious and cost-effective treatment alternative for relieving chronic1240intractable pain and improving neurological function, we are continuing our1241efforts to expand our product offerings in the high-growth market of1242neuromodulation. Today, ANS is a market share and technology leader in the $451243million radio-frequency stimulation segment of the neuromodulation market.1244During 1999 and 2000, to position ourselves to participate in the other larger1245and more rapidly growing segments of the neuromodulation market, we continued to1246aggressively invest in development projects, including our IPG for spinal cord1247stimulation, IPG for deep brain stimulation and a fully implantable1248constant-rate infusion pump. We plan to continue these efforts in 2001.</P>1249<P>Gross profit from product sales increased to $15.59 million in 2000 from1250$13.95 million in 1999 due to the increase in net revenue from product sales1251discussed above. Gross profit margin from product sales remained approximately1252the same at 67.6 percent in the 2000 period compared to 67.8 percent in the 19991253period.<P>1254<P>Total operating expenses (the aggregate of research and development,1255marketing, amortization of intangibles and administrative expenses) increased to1256$14.48 million in 2000 compared to $14.01 million in 1999, while as a percentage1257of net revenue from product sales, decreased to 62.8 percent in 2000 from 68.11258percent in 1999.</P>1259<P>Research and development expense decreased to $3.56 million in 2000, or 15.41260percent of 2000 net revenue from product sales, from $3.77 million during 1999,1261or 18.3 percent of 1999 net revenue from product sales. This decrease in the1262absolute dollar amount in 2000 compared to1999 was the result of lower1263consulting expense. During 2000, these expenditures were directed toward1264development of our IPG stimulation system for spinal cord stimulation, our next1265generation radio-frequency stimulation systems, our proprietary fully1266implantable constant-rate infusion pump and an IPG stimulation system for Deep1267Brain Stimulation.</P>1268<P>We received CE mark approval for our IPG stimulation system and began our1269market launch into the European markets in the first quarter of 2001. We also1270received CE mark approval on our proprietary fully implantable constant-rate1271infusion pump and expect to launch it in the European market during the second1272quarter of 2001. In the United States, we have received the necessary clearance1273from the FDA to initiate clinical trials for our fully implantable constant-rate1274infusion pump and initiated the trials during the first quarter of 2001. We are1275currently preparing our PMA submission for the FDA following the February 26,12762001 denial of our petition for reclassification of this IPG.</P>1277<P ALIGN=CENTER>Page 19</P>1278<HR>1279<P>Marketing expense, as a percentage of net revenue from product sales,1280decreased from 30.6 percent in 1999 to 29.7 percent in 2000, while the absolute1281dollar amount increased from $6.29 million during 1999 to $6.85 million in 2000.1282This dollar increase during 2000 was attributable to higher commission expense1283from increased product sales and a change from distributors to commissioned1284sales agents in certain United States territories, higher expense for education1285and training of new implanters and higher convention expense.</P>1286<P>General and administrative expense increased to $2.84 million during 20001287from $2.76 million in 1999 while as a percentage of net revenue from product1288sales, decreased to 12.3 percent in 2000 from 13.4 percent during 1999. The1289increase of $81,000 in absolute dollar expense during 2000 was principally the1290result of higher property tax and investor relation expenses.</P>1291<P>Amortization of ANS intangibles increased slightly to $1.23 million in 20001292from $1.19 million during 1999 due to expense for additional patents we have1293licensed.</P>1294<P>Other income decreased to $579,000 in 2000 compared to $706,000 in 19991295primarily as a result of a lower interest income due to lower funds available1296for investment.</P>1297<P>Income tax expense from continuing operations decreased to $734,000 in 20001298from $3.55 million in 1999 due to lower earnings from ANS operations as the 19991299period included the $8.0 million termination payment from our former development1300agreement with Sofamor Danek. This represents effective tax rates of 43.51301percent in 2000 and 37.1 percent in 1999. Our expense for amortization of costs1302in excess of net assets acquired (goodwill) is not deductible for tax purposes,1303and, when combined with a provision for state taxes, results in the higher1304effective tax rate during both 2000 and 1999 compared to the U.S. statutory rate1305for corporations of 34 percent.</P>1306<P><I>Comparison of the Years Ended December 31, 1999 and 1998</I></P>1307<P>We reported net earnings of $6 million or $.75 per diluted share in 19991308compared to $6.96 million or $.81 per diluted share in 1998. The 1998 results1309included net earnings of $4.4 million from the discontinued CVS Operations or1310$.51 per diluted share primarily due to an after-tax gain of $4.6 million on the1311sale of the discontinued operations. Net earnings from continuing operations1312increased to $6 million or $.75 per diluted share in 1999 compared to $2.591313million or $.30 per diluted share in 1998. Net earnings from continuing1314operations in 1999 and 1998 benefited from $8.9 million and $3.1 million,1315respectively, of revenue recorded in connection with our former development1316agreement with Sofamor Danek.</P>1317<P>Total net revenue from continuing ANS operations of $29.48 million for the1318year ended December 31, 1999, was $9.37 million, or 46.6 percent, above the1319comparable 1998 level of $20.11 million. The 1999 period included $8.9 million1320of net revenue and the 1998 period included $3.1 million of net revenue1321associated with our former development agreement with Sofamor Danek. Net revenue1322from ANS product sales increased 21 percent to $20.58 million during 19991323compared to $17.01 million in 1998. This increase in net revenue from product1324sales was the result of higher unit sales volume of ANS' radio-frequency1325stimulation systems used to treat complex pain patterns. All of the $3.571326million increase in 1999 was the result of higher sales in the United States.1327During June 1999, we launched our enhanced radio-frequency stimulation system,1328the Renew® System, in the United States.</P>1329<P>Gross profit from product sales increased to $13.95 million in 1999 from1330$12.02 million in 1998 due to the increase in net revenue from product sales1331discussed above. Gross profit margin from product sales decreased to 67.81332percent in 1999 compared to 70.7 percent in 1998 due to (1) approximately1333$350,000 of additional costs we incurred from product transition and unexpected1334lower manufacturing yields related to the Renew System during the third quarter1335of 1999, (2) higher component costs for the Renew System, and (3) production1336downtime associated with our move to our new leased facility in May 1999.</P>1337<P ALIGN=CENTER>Page 20</P>1338<HR>1339<P>Total operating expenses (the aggregate of research and development,1340marketing, amortization of intangibles and administrative expenses) increased to1341$14.01 million in 1999 compared to $11.29 million in 1998 and as a percentage of1342net revenue from product sales increased to 68.1 percent in 1999 from 66.41343percent in 1998.</P>1344<P>Research and development expense increased to $3.77 million in 1999, or 18.31345percent of 1999 net revenue from product sales, from $2.80 million during 1998,1346or 16.5 percent of 1998 net revenue from product sales, reflecting our1347stepped-up commitment to develop products that will expand our presence into1348other rapidly growing segments of the neuromodulation market. This increase1349during 1999 compared to 1998 was the result of higher salary and benefit expense1350from staffing additions, increased consulting expense, and higher test material1351expense. These expenditures during 1999 were directed toward development of our1352Renew System, which we launched in the United States during June 1999, a1353fully implantable constant–rate infusion pump, an IPG stimulation system1354for spinal cord stimulation and an IPG stimulation system for Deep Brain1355Stimulation.</P>1356<P>Marketing expense, as a percentage of net revenue from product sales,1357increased to 30.6 percent in 1999 from 27.5 percent in 1998, and the absolute1358dollar amount increased from $4.68 million during 1998 to $6.29 million in 1999.1359This dollar increase during 1999 was attributable to higher commission expense1360from increased product sales and a change from distributors to commissioned1361sales agents in certain United States territories, higher salary and benefit1362expense from staffing additions, higher expense for education and training of1363new implanters and expense related to the launch of our Renew System.</P>1364<P>General and administrative expense increased from $2.63 million during 19981365to $2.76 million in 1999 while as a percentage of net revenue from product1366sales, decreased to 13.4 percent in 1999 from 15.5 percent during 1998. The1367increase of $124,000 in absolute dollar expense during 1999 was principally the1368result of higher salary and benefit expense from staffing additions, higher1369expense related to investor relations and higher patent legal expense.</P>1370<P>Amortization of ANS intangibles increased from $1.17 million in 1998 to $1.191371million during 1999 due to expense for additional patents we have licensed.</P>1372<P>Other income increased to $706,000 in 1999 compared to $499,000 in 19981373primarily as a result of a $287,000 reduction in interest expense due to the1374repayment of our mortgage debt in February 1999 when we sold our facility to1375Atrion Corporation.</P>1376<P>Income tax expense from continuing operations increased to $3.55 million in13771999 from $1.75 million in 1998 due to higher earnings from ANS operations. This1378represents effective tax rates of 37.1 percent in 1999 and 40.3 percent in 1998.1379Our expense for amortization of costs in excess of net assets acquired1380(goodwill) was not deductible for tax purposes, and, when combined with a1381provision for state taxes, resulted in the higher effective tax rate during both13821999 and 1998 compared to the U.S. statutory rate for corporations of 341383percent.</P>1384<P><B>Liquidity and Capital Resources</B></P>1385<P>At December 31, 2000 our working capital increased to $19.09 million from1386$16.18 million at year-end 1999. The ratio of current assets to current1387liabilities was 7.56:1 at December 31, 2000, compared to 4.86:1 at December 31,13881999. Cash, cash equivalents, certificates of deposit and marketable securities1389totaled $9.58 million at December 31, 2000 compared to $8.75 million at December139031, 1999.</P>1391<P ALIGN=CENTER>Page 21</P>1392<HR>1393<P>In 1998 and 1999, the Board of Directors authorized stock repurchases of up1394to 1,750,000 shares. During 1998 and 1999, we repurchased 1,663,500 shares under1395the authorized repurchase programs at an aggregate cost of $12.36 million. We1396made no repurchases during 2000. In November 2000, in connection with signing1397the agreement to acquire Hi-tronics Designs, Inc. in a stock-for-stock merger,1398the Board of Directors rescinded the share repurchase program under which 86,5001399shares of common stock remained authorized for repurchase. During the three1400years ended December 31, 2000, we issued 267,425; 162,068 and 184,874 shares1401respectively, from our treasury upon the exercise of stock options and a1402warrant. At December 31, 2000, 1,049,133 shares remained in the treasury. On1403January 2, 2001, we issued 119,100 shares from the treasury for the purchase of1404the assets of ESOX Corporation and issued the remaining 930,033 shares from the1405treasury as part of the 1,104,725 shares we issued to acquire Hi-tronics1406Designs, Inc.</P>1407<P>We decreased our investment in inventories to $5.65 million at December 31,14082000, from $6 million at December 31, 1999. We estimate that our investment1409in inventory will also decrease by year-end 2001 by approximately $500,000 to a1410level of $5.15 million.</P>1411<P>We spent $1.24 million during 2000 for capital expenditures and license fees1412for additional patents and intellectual property we are licensing. Of such1413expenditures, approximately $805,000 was spent for manufacturing tooling and1414equipment primarily for the new products we developed including our IPG system1415for spinal cord stimulation and our fully implantable constant-rate infusion1416pump. We also spent $435,000 during 2000 to license additional patents and1417intellectual property.</P>1418<P>We believe our current cash, cash equivalents, certificates of deposit and1419marketable securities and cash generated from operations will be sufficient to1420fund all of our operating needs and capital expenditures for the foreseeable1421future.</P>1422<P><B>Cash Flows</B></P>1423<P>Net cash provided by continuing operations was $1.92 million in 2000, $2.221424million in 1999 and $6.93 million in 1998. This decrease of approximately1425$300,000 in 2000 compared to 1999 related to the decrease in net earnings from1426$6 million in 1999 to $954,000 in 2000 due to including the $8 million1427termination payment from our former development agreement with Sofamor Danek in1428the 1999 results. In 2000, we used $2.05 million of cash to increase our1429investment in assets such as accounts receivable and prepaid expenses and to1430reduce our accounts payable and income taxes payable. Although net earnings from1431continuing operations increased to $6 million in 1999 from $2.59 million in14321998, net cash provided from continuing operations decreased by $4.71 million1433primarily due to changes in components of working capital. During 1999, we used1434cash to increase our investment in assets such as inventories, account1435receivable and prepaid expenses and other assets and to reduce our income taxes1436payable.</P>1437<P>Net cash used in investing activities was $2.67 million in 2000 while1438investing activities provided cash of $447,000 in 1999 and $20.81 million in14391998. During 2000, we used $1.24 million for capital expenditures related to1440additional manufacturing tooling and equipment for new products we developed and1441licensing fees for patents. We also used in the 2000 period a net of $1.441442million for the purchase of investments in certificates of deposit with1443maturities over 90 days and investment-grade municipal bonds with maturities1444less than one year from the date we purchased them. The 1999 period reflects1445$6.35 million of net proceeds we received when we sold our facility to Atrion1446Corporation. We utilized $5.91 million in 1999 for capital expenditures for1447leasehold improvements, furnishings and equipment for our new leased facility,1448manufacturing tooling and equipment for our Renew System and new products we are1449developing, and licensing fees for patents. The 1998 period reflects net1450proceeds of $21.8 million from the sale of discontinued operations. We utilized1451$1.68 million in 1998 for capital expenditures, primarily for manufacturing1452tooling and equipment for the new products we are developing, and license fees1453for patents we licensed.</P>1454<P ALIGN=CENTER>Page 22</P>1455<HR>1456<P>Net cash used in financing activities was $94,600 in 2000, $6.01 million in14571999 and $16.85 million in 1998. During 2000, we received net cash of $1.411458million from the exercise of stock options and a warrant, while $1.50 million1459was used for a loan to a third party. During 1999, we received net cash of1460$573,000 from the exercise of stock options while $2.95 million was used for1461share repurchases and $3.63 million was used for the repayment of our mortgage1462debt. During 1998, we received net cash of $818,000 from the exercise of stock1463options while $9.41 million was used for share repurchases and $8.26 million was1464used to reduce debt.</P>1465<P><B>Outlook and Uncertainties</B></P>1466<P><I>The following is a "safe harbor" statement under the Private Securities1467Litigation Reform Act of 1995: The matters discussed in this Annual Report on1468Form 10-K contain statements that constitute forward-looking statements within1469the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.1470The words "expect," "estimate," "anticipate," "predict," "believe," "plan,"1471"will," "should," "intend" and similar expressions and variations thereof are1472intended to identify forward-looking statements. Such statements appear in a1473number of places in this Annual Report on Form 10-K and include statements1474regarding our intent, belief or current expectations with respect to, among1475other things: (i) trends affecting our financial condition or results of1476operations; (ii) our financing plans; and (iii) our business growth strategies.1477We caution our readers that any forward-looking statements are not guarantees of1478future performance and involve risks and uncertainties. Actual results may1479differ materially from those projected in the forward-looking statements as a1480result of various factors. These risks and uncertainties include the1481following:</I></P>1482<P><I>Product Development and Market Acceptance.</I> Our growth depends in part1483on our ability to develop and gain market acceptance of new products, including1484next-generation ANS products. We cannot assure you that we will continue to1485develop successful products, that we will not experience delays in product1486introduction, or that once such products are introduced, the market will accept1487them.</P>1488<P><I>Government Regulation.</I> Our business is subject to extensive government1489regulation, principally by the FDA. The regulatory process, especially as it1490relates to product approvals, can be lengthy, expensive and uncertain and may1491involve the satisfactory completion of clinical trials and market tests prior to1492the introduction of new products. Failure to obtain government approval of our1493products on a timely and cost-efficient basis, including the approval of our IPG1494stimulation system for spinal cord stimulation, could have a material adverse1495effect on our business, financial condition and results of operations. See Item14961-"Business-Government Regulation".</P>1497<P><I>Component Supply.</I> We depend on various suppliers for certain1498components used to manufacture our products, and our business depends in part on1499the adequacy, acceptability and timeliness of component supply. In addition, we1500rely on a single supplier for the computer chip used in the receiver of our1501stimulation systems. The supplier of this computer chip has indicated its desire1502to cease manufacturing and supplying the computer chip in the future, but to1503date has not determined when this will occur. The supplier has agreed to notify1504us when a date has been determined and allow us to place a final one-time1505purchase order for the computer chip. In the interim, we are maintaining a1506higher than normal inventory of the computer chip and are developing a new1507receiver design that does not use a custom computer chip. A sudden disruption in1508supply from the computer chip supplier or another single-source supplier could1509adversely affect our ability to deliver finished products on time.</P>1510<P ALIGN=CENTER>Page 23</P>1511<HR>1512<P><I>Competition and Technological Change.</I> The medical device market is1513highly competitive. We compete with larger companies that have access to greater1514capital, research and development, marketing, distribution and other resources1515than we do. In addition, our market is characterized by extensive research1516efforts and rapid product development and technological change, which could1517render our products obsolete or noncompetitive. One large supplier, Medtronic,1518Inc, dominates the market for electrical stimulation systems and fully1519implantable infusion pumps.</P>1520<P><I>Intellectual Property Rights.</I> We rely in part on patents, trade1521secrets and proprietary technology to remain competitive. It may be necessary to1522defend these rights or to defend against claims that we are infringing on the1523rights of others. Intellectual property litigation and controversies are1524disruptive and expensive.</P>1525<P><I>Cost Pressures on Medical Technology.</I> The overall escalating cost of1526medical products and healthcare results in significant cost pressure.1527Third-party payors, such as insurance companies and HMO's, are under intense1528pressure to challenge the prices charged for medical products and services. We1529rely heavily on Medicare and Medicaid reimbursement. Any amendments to existing1530reimbursement rules and regulations that restrict or terminate the reimbursement1531eligibility (or the extent or amount of coverage) of medical procedures using1532our products or the eligibility (or the extent or amount of coverage) of our1533products could adversely impact our business, financial condition and results of1534operations.</P>1535<P><I>Potential Product Liability.</I> The testing, manufacturing, marketing and1536sale of medical devices entail substantial risks of liability claims or product1537recalls.</P>1538<P><I>Reliance on Major Customer/Distributor.</I> During 2000, we had one major1539customer that accounted for 10 percent or more of our net revenue. Sun Medical,1540Inc., a specialty distributor of ANS products, accounted for $3.2 million, or 141541percent of ANS' net revenue from product sales for the year ended December 31,15422000. While we believe our relations with Sun Medical are good, the loss of this1543customer could have a material adverse effect on our business, financial1544condition and results of operations.</P>1545<P><I>Year 2000 Compliance.</I> Although our Year 2000 readiness efforts were1546successful and we have not experienced any Year 2000 issues to date, we cannot1547assure you that Year 2000 issues will not occur at a later date that would have1548a material adverse impact on our results of operations, financial condition and1549cash flows.</P>1550<P><I>Other Uncertainties.</I> We discuss other operating, financial or legal1551risks or uncertainties in this Form 10-K in specific contexts and in the1552Company's other periodic SEC filings. The Company is, of course, also subject to1553general economic risks, the risk of interruption in the source of supply,1554dependence on key personnel and other risks and uncertainties.</P>1555<P><B>Currency Fluctuations</B></P>1556<P>Substantially all of our international sales are denominated in U.S. dollars.1557Fluctuations in currency exchange rates in other countries could reduce the1558demand for our products by increasing the price of our products in the currency1559of the countries in which the products are sold, although we do not believe1560currency fluctuations have had a material effect on the Company's results of1561operations to date.</P>1562<P ALIGN=CENTER>Page 24</p>1563<HR>1564<P></P>1565<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>1566<TR>1567<TD WIDTH=15% VALIGN=TOP><B>ITEM 7A.</B></TD>1568<TD WIDTH=85%><B>QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK</B>1569</TD></TR></TABLE>1570<P>We do not use derivative financial instruments to manage the impact of1571interest rate changes on our investments or debt instruments.</P>1572<P>We invest our cash reserves in high quality short-term liquid money market1573instruments with major financial institutions and in certificates of deposit. At1574December 31, 2000, we had $5,790,323 invested in money market funds, $1,069,5751575in certificates of deposit with maturities less than 90 days from the purchase1576date and $1,040,000 in certificates of deposit with maturity dates of greater1577than 90 days from the purchase date. The rate of interest earned on these1578investments will vary with overall market rates. A hypothetical 100-basis point1579change in the interest rate earned on these investments would not have a1580material effect on our income or cash flows.</P>1581<P>We also have certain investments in available-for-sale securities. These1582investments primarily consist of investment grade municipal bonds with1583maturities less than one year from the date of purchase, a real estate1584investment trust traded on the New York Stock Exchange and an investment grade1585corporate preferred security also traded on the New York Stock Exchange. The1586cost of these investments is $1,156,442 and the fair value at December 31, 20001587was $1,030,318. The investments are subject to overall stock market and interest1588rate risk. A hypothetical 20 percent decrease in the value of these investments1589from the prices at December 31, 2000 would decrease the fair value by1590$206,064.</P>1591<P>At December 31, 2000, we had no debt instruments.</P>1592<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>1593<TR>1594<TD WIDTH=15% VALIGN=TOP><B>ITEM 8.</B></TD>1595<TD WIDTH=85%><B>FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA</B></TD></TR>1596</TABLE>1597<P>The information required by this item is set forth in Appendices A, B and C.1598</P>1599<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>1600<TR>1601<TD WIDTH=15% VALIGN=TOP><B>ITEM 9.</B></TD>1602<TD WIDTH=85%><B>CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING1603AND FINANCIAL DISCLOSURE</B></TD></TR></TABLE>1604<P>None.</P>1605<P ALIGN=CENTER><B>PART III</B></P>1606<P></P>1607<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>1608<TR>1609<TD WIDTH=15%><B>ITEM 10.</B></TD>1610<TD WIDTH=85%><B>DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT</B></TD>1611</TR></TABLE>1612<P>The information required by this item is contained under the captions1613"Election of Directors" and "Executive Officers" in our definitive proxy1614material which will be filed in connection with our 2001 annual meeting of1615stockholders, which information is incorporated herein by reference.</P>1616<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>1617<TR>1618<TD WIDTH=15% VALIGN=TOP><B>ITEM 11.</B></TD>1619<TD WIDTH=85%><B>EXECUTIVE COMPENSATION</B></TD></TR></TABLE>1620<P>The information required by this item is contained under the captions1621"Compensation and Committees of the Board of Directors" and "Compensation of1622Executive Officers" in our definitive proxy material which will be filed in1623connection with our 2001 annual meeting of stockholders, which information is1624incorporated herein by reference. Information in the section entitled1625"Compensation Committee Report" and in the subsection entitled " Performance1626Graph" are not incorporated herein by reference.</P>1627<P ALIGN=CENTER>Page 25</P>1628<HR>1629<P></P>1630<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>1631<TR>1632<TD WIDTH=15% VALIGN=TOP><B>ITEM 12.</B></TD>1633<TD WIDTH=85%><B>SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT1634</B></TD></TR></TABLE>1635<P>The information required by this item is contained under the caption1636"Security Ownership of Management and Principal Shareholders" in our definitive1637proxy material which will be filed in connection with our 2001 annual meeting of1638stockholders, which information is incorporated herein by reference.</P>1639<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>1640<TR>1641<TD WIDTH=15% VALIGN=TOP><B>ITEM 13.</B></TD>1642<TD WIDTH=85%><B>CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OWNERS AND1643MANAGEMENT</B></TD></TR></TABLE>1644<P>Inapplicable.</P>1645<P ALIGN=CENTER><B>PART IV</B></P>1646<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>1647<TR>1648<TD WIDTH=15% VALIGN=TOP><B>ITEM 14.</B></TD>1649<TD WIDTH=85%><B>EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM16508-K</B></TD></TR></TABLE>1651<P></P>1652<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>1653<TR>1654<TD WIDTH=10%>(a)</TD>1655<TD WIDTH=90%>Documents filed as part of this report.</TD></TR></TABLE>1656<P></P>1657<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>1658<TR>1659<TD WIDTH=10%> </TD>1660<TD WIDTH=10%>1.</TD>1661<TD WIDTH=90%>Financial Statements:<BR>See Index to Financial Statements on the1662second page of Appendix A.</TD></TR>1663<TR>1664<TD> </TD>1665<TD></TD>1666<TD></TD></TR>1667<TR>1668<TD> </TD>1669<TD>2.</TD>1670<TD>Financial Statement Schedules:*<BR>Schedule II - Valuation and Qualifying1671Accounts.<BR>See Appendix B.</TD></TR>1672</TABLE>1673<P></P>1674<P>*Those schedules not listed above are omitted as not applicable or not1675required.</P>1676<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>1677<TR>1678<TD WIDTH=10%> </TD>1679<TD WIDTH=10%>3.</TD>1680<TD WIDTH=90%>Exhibits: See (c) below.</TD></TR></TABLE>1681<P></P>1682<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>1683<TR>1684<TD WIDTH=10%>(b)</TD>1685<TD WIDTH=90%>Reports on Form 8-K.</TD></TR></TABLE>1686<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>1687<TR>1688<TD WIDTH=10%> </TD>1689<TD WIDTH=90%>The Company filed a report on Form 8-K on December 1, 2000 to1690report the definitive agreement on November 30, 2000 to acquire Hi-tronics1691Designs, Inc.<BR><BR>The Company filed a report on Form 8-K on January 9, 2001,1692to report the consummation of the acquisition of Hi-tronics Designs, Inc. on1693January 2, 2001.<BR><BR>The Company filed a report on Form 8-K on January 18,16942001 reporting certain information under Regulation FD Disclosure which the1695Company intended to disclose in a series of analyst/investor conferences1696commencing on January 18, 2001.</TD></TR>1697</TABLE>1698<P ALIGN=CENTER>Page 26</P>1699<HR>1700<P></P><TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>1701<TR>1702<TD WIDTH=10%>(c)</TD>1703<TD WIDTH=90%>Exhibits:</TD></TR>1704</TABLE>1705<P></P>1706<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>1707<TR>1708<TD WIDTH=10% ALIGN=RIGHT>Exhibit<BR><U>Number</U></TD>1709<TD WIDTH=5%></TD>1710<TD WIDTH=85% ALIGN=CENTER><U>Description</U></TD></TR>1711</TABLE>1712<P></P>1713<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>1714<TR>1715<TD WIDTH=10% ALIGN=RIGHT VALIGN=TOP>2.1 </TD>1716<TD WIDTH=5%> </TD>1717<TD WIDTH=85%>Agreement and Plan of Merger, dated as of November 30, 2000, by1718and amoung Advanced Neuromodulation Systems, Inc., ANS Acquisition Corp, and1719Hi-tronics Designs, Inc.(10)</TD></TR>1720<TR>1721<TD ALIGN=RIGHT VALIGN=TOP>3.1 </TD>1722<TD></TD>1723<TD>Articles of Incorporation, as amended and restated(11)</TD></TR>1724<TR>1725<TD ALIGN=RIGHT VALIGN=TOP>3.2 </TD>1726<TD></TD>1727<TD>Bylaws(11)</TD></TR>1728<TR>1729<TD ALIGN=RIGHT VALIGN=TOP>4.1 </TD>1730<TD></TD>1731<TD>Rights Agreement dated as of August 30, 1996, between Quest Medical, Inc.1732and KeyCorp Shareholder Services, Inc. as Rights Agent(5)</TD></TR>1733<TR>1734<TD ALIGN=RIGHT VALIGN=TOP>10.1 </TD>1735<TD></TD>1736<TD>Quest Medical, Inc. 1979 Amended and Restated Employees Stock Option1737Plan(2)</TD></TR>1738<TR>1739<TD ALIGN=RIGHT VALIGN=TOP>10.2 </TD>1740<TD></TD>1741<TD>Form of 1979 Employees Stock Option Agreement(3)</TD></TR>1742<TR>1743<TD ALIGN=RIGHT VALIGN=TOP>10.3 </TD>1744<TD></TD>1745<TD>Quest Medical, Inc. Directors Stock Option Plan (as amended)(2)</TD></TR>1746<TR>1747<TD ALIGN=RIGHT VALIGN=TOP>10.4 </TD>1748<TD></TD>1749<TD>Form of Directors Stock Option Agreement(1)</TD></TR>1750<TR>1751<TD ALIGN=RIGHT VALIGN=TOP>10.5 </TD>1752<TD></TD>1753<TD>Quest Medical, Inc. 1987 Stock Option Plan(4)</TD></TR>1754<TR>1755<TD ALIGN=RIGHT VALIGN=TOP>10.6 </TD>1756<TD></TD>1757<TD>Form of 1987 Employee Stock Option Agreement(4)</TD></TR>1758<TR>1759<TD ALIGN=RIGHT VALIGN=TOP>10.7 </TD>1760<TD></TD>1761<TD>Quest Medical, Inc. 1995 Stock Option Plan(4)</TD></TR>1762<TR>1763<TD ALIGN=RIGHT VALIGN=TOP>10.8 </TD>1764<TD></TD>1765<TD>Form of 1995 Employee Stock Option Agreement(4)</TD></TR>1766<TR>1767<TD ALIGN=RIGHT VALIGN=TOP>10.9 </TD>1768<TD></TD>1769<TD>Quest Medical, Inc. 1998 Stock Option Plan(7)</TD></TR>1770<TR>1771<TD ALIGN=RIGHT VALIGN=TOP>10.10</TD>1772<TD></TD>1773<TD>Advanced Neuromodulation Systems, Inc. 2000 Stock Option Plan(9)</TD></TR>1774<TR>1775<TD ALIGN=RIGHT VALIGN=TOP>10.11</TD>1776<TD></TD>1777<TD>Employment Agreement dated April 9, 1998 between Christopher G. Chavez and1778Quest Medical, Inc.(6)</TD></TR>1779<TR>1780<TD ALIGN=RIGHT VALIGN=TOP>10.12</TD>1781<TD></TD>1782<TD>Employment Agreement dated April 9, 1998 between Scott F. Drees and Quest1783Medical, Inc.(6)</TD></TR>1784<TR>1785<TD ALIGN=RIGHT VALIGN=TOP>10.13</TD>1786<TD></TD>1787<TD>Employment Agreement dated April 9, 1998 between F. Robert Merrill III and1788Quest Medical, Inc.(6)</TD></TR>1789<TR>1790<TD ALIGN=RIGHT VALIGN=TOP>10.14</TD>1791<TD></TD>1792<TD>Form of Employment Agreement and Covenant Not to Compete, between the1793Company and key employees(1)</TD></TR>1794<TR>1795<TD ALIGN=RIGHT VALIGN=TOP>10.15</TD>1796<TD></TD>1797<TD>Lease Agreement dated as of February 4, 1999, between Advanced1798Neuromodulation Systems, Inc. and Legacy Lincoln I, LTD. (8)</TD></TR>1799<TR>1800<TD ALIGN=RIGHT VALIGN=TOP>11.1 </TD>1801<TD></TD>1802<TD>Computation of Earnings Per Share(11)</TD></TR>1803<TR>1804<TD ALIGN=RIGHT VALIGN=TOP>21.1 </TD>1805<TD></TD>1806<TD>Subsidiaries(11)</TD></TR>1807<TR>1808<TD ALIGN=RIGHT VALIGN=TOP>23.1 </TD>1809<TD></TD>1810<TD>Consent of Independent Auditors(11)</TD></TR>1811<TR>1812<TD ALIGN=RIGHT VALIGN=TOP>27.1 </TD>1813<TD></TD>1814<TD>Financial Data Schedule - December 31, 2000(11)</TD></TR>1815</TABLE>1816<P>__________________________________</P>1817<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>1818<TR>1819<TD WIDTH=5% VALIGN=TOP>(1) </TD>1820<TD WIDTH=2%></TD>1821<TD WIDTH=93%>Filed as an Exhibit to the Company's Registration Statement on1822Form S-18, Registration No. 2-71198-FW, and incorporated herein by reference.1823</TD></TR>1824<TR>1825<TD>(2) </TD>1826<TD></TD>1827<TD>Filed as an Exhibit to the report of the Company on Form 10-K for the year1828ended December 31, 1987, and incorporated herein by reference.</TD></TR>1829<TR>1830<TD>(3) </TD>1831<TD></TD>1832<TD>Filed as an Exhibit to the Company's Registration Statement on Form S-1,1833Registration No. 2-78186, and incorporated herein by reference.</TD></TR>1834<TR>1835<TD>(4) </TD>1836<TD></TD>1837<TD>Filed as an Exhibit to the Company's Registration Statement on Form SB-2,1838Registration No. 33-62991, and incorporated herein by reference.</TD></TR>1839<TR>1840<TD>(5) </TD>1841<TD></TD>1842<TD>Filed as an Exhibit to the report of the Company on Form 8-K dated September18433, 1996, and incorporated herein by reference.</TD></TR>1844<TR>1845<TD>(6) </TD>1846<TD></TD>1847<TD>Filed as an Exhibit to the report of the Company on Form 10-Q dated for the1848quarterly period ended March 31, 1998, and incorporated herein by reference.1849</TD></TR>1850<TR>1851<TD>(7) </TD>1852<TD></TD>1853<TD>Filed as an Exhibit to the Definitive Proxy Statement on Schedule 14A dated1854April 27, 1998, and incorporated herein by reference.</TD></TR>1855<TR>1856<TD>(8) </TD>1857<TD></TD>1858<TD>Filed as an Exhibit to the report of the Company on Form 10-K dated for the1859year ended December 31, 1998, and incorporated herein by reference.</TD></TR>1860<TR>1861<TD>(9) </TD>1862<TD></TD>1863<TD>Filed as an Exhibit to the Definitive Proxy Statement on Schedule 14A dated1864April 17, 2000, and incorporated herein by reference.</TD></TR>1865<TR>1866<TD>(10)</TD>1867<TD></TD>1868<TD>Filed as an Exhibit to the report of the Company on Form 8-K dated January18699, 2001, and incorporated herein by reference. Upon request, the Company will1870furnish a copy of any omitted schedule to the Commission.</TD></TR>1871<TR>1872<TD>(11)</TD>1873<TD></TD>1874<TD>Filed herewith.</TD></TR>1875</TABLE>1876<P ALIGN=CENTER>Page 27</P>1877<HR>1878<P ALIGN=CENTER><U><B>Signatures</B></U></P>1879<P>Pursuant to the requirements of Section 13 or 15(d) of the Securities1880Exchange Act of 1934, the Company has duly caused this report to be signed on1881its behalf by the undersigned, thereunto duly authorized.</P>1882<P>Date: March 29, 2001</P>1883<P>ADVANCED NEUROMODULATION SYSTEMS, INC.</P>1884<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>1885<TR>1886<TD WIDTH=40%></TD>1887<TD WIDTH=5%>By:</TD>1888<TD WIDTH=55%><U>/s/Christopher G. Chavez</U></TD></TR>1889<TR>1890<TD></TD>1891<TD></TD>1892<TD>Christopher G. Chavez</TD></TR>1893<TR>1894<TD></TD>1895<TD></TD>1896<TD>President and Chief Executive Officer</TD></TR></TABLE>1897<P></P>1898<P>Pursuant to the requirements of the Securities Exchange Act of 1934, this1899report has been signed by the following persons on behalf of the Company and in1900the capacities and on the dates indicated:</P>1901<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>1902<TR>1903<TD WIDTH=25% ALIGN=CENTER><U>Signature</U></TD>1904<TD WIDTH=5%></TD>1905<TD WIDTH=45% ALIGN=CENTER><U>Title</U></TD>1906<TD WIDTH=5%></TD>1907<TD WIDTH=20% ALIGN=CENTER><U>Date</U></TD></TR>1908<TR>1909<TD> </TD><TD></TD><TD></TD><TD></TD><TD></TD></TR><TR>1910<TD ALIGN=LEFT VALIGN=TOP><U>/s/Christopher G. Chavez</U><BR>Christopher G.1911Chavez</TD>1912<TD></TD>1913<TD ALIGN=LEFT>Chief Executive Officer, President and Director of Advanced1914Neuromodulation Systems, Inc. (Principal Executive Officer)</TD>1915<TD></TD>1916<TD ALIGN=CENTER VALIGN=TOP>March 29, 2001</TD></TR><TR>1917<TD> </TD><TD></TD><TD></TD><TD></TD><TD></TD></TR><TR>1918<TD ALIGN=LEFT VALIGN=TOP><U>/s/F. Robert Merrill III</U><BR>F. Robert Merrill1919III</TD><TD></TD>1920<TD ALIGN=LEFT>Executive Vice President-Finance, Treasurer and Secretary of1921Advanced Neuromodulation Systems, Inc. (Principal Financial and Accounting1922Officer)</TD>1923<TD></TD>1924<TD ALIGN=CENTER VALIGN=TOP>March 29, 2001</TD></TR><TR>1925<TD> </TD><TD></TD><TD></TD><TD></TD><TD></TD></TR><TR>1926<TD ALIGN=LEFT VALIGN=TOP><U>/s/Hugh M. Morrison</U><BR>Hugh M. Morrison</TD>1927<TD></TD>1928<TD ALIGN=LEFT>Chairman of the Board and Director of Advanced Neuromodulation1929Systems, Inc.</TD>1930<TD></TD>1931<TD ALIGN=CENTER VALIGN=TOP>March 29, 2001</TD></TR><TR>1932<TD> </TD><TD></TD><TD></TD><TD></TD><TD></TD></TR><TR>1933<TD ALIGN=LEFT VALIGN=TOP><U>/s/Robert C. Eberhart</U><BR>Robert C. Eberhart1934</TD><TD></TD>1935<TD ALIGN=LEFT VALIGN=TOP>Director of Advanced Neuromodulation Systems, Inc.1936</TD><TD></TD>1937<TD ALIGN=CENTER VALIGN=TOP>March 29, 2001</TD></TR><TR>1938<TD> </TD><TD></TD><TD></TD><TD></TD><TD></TD></TR><TR>1939<TD ALIGN=LEFT VALIGN=TOP><U>/s/Joseph E. Laptewicz</U><BR>Joseph E. Laptewicz1940</TD><TD></TD>1941<TD ALIGN=LEFT VALIGN=TOP>Director of Advanced Neuromodulation Systems, Inc.1942</TD><TD></TD>1943<TD ALIGN=CENTER VALIGN=TOP>March 29, 2001</TD></TR><TR>1944<TD> </TD><TD></TD><TD></TD><TD></TD><TD></TD></TR><TR>1945<TD ALIGN=LEFT VALIGN=TOP><U>/s/A. Ronald Lerner</U><BR>A. Ronald Lerner1946</TD><TD></TD>1947<TD ALIGN=LEFT VALIGN=TOP>Director of Advanced Neuromodulation Systems, Inc.1948</TD><TD></TD>1949<TD ALIGN=CENTER VALIGN=TOP>March 29, 2001</TD></TR><TR>1950<TD> </TD><TD></TD><TD></TD><TD></TD><TD></TD></TR><TR>1951<TD ALIGN=LEFT VALIGN=TOP><U>/s/Richard D. Nikolaev</U><BR>Richard D. Nikolaev1952</TD><TD></TD>1953<TD ALIGN=LEFT VALIGN=TOP>Director of Advanced Neuromodulation Systems, Inc.1954</TD><TD></TD>1955<TD ALIGN=CENTER VALIGN=TOP>March 29, 2001</TD></TR><TR>1956<TD> </TD><TD></TD><TD></TD><TD></TD><TD></TD></TR><TR>1957<TD ALIGN=LEFT VALIGN=TOP><U>/s/Michael J. Torma</U><BR>Michael J. Torma1958</TD><TD></TD>1959<TD ALIGN=LEFT VALIGN=TOP>Director of Advanced Neuromodulation Systems, Inc.1960</TD><TD></TD>1961<TD ALIGN=CENTER VALIGN=TOP>March 29, 2001</TD></TR>1962</TABLE>1963<P ALIGN=CENTER>Page 28</P>1964<HR>1965<P ALIGN=RIGHT><B><U>Appendix A</U></B></P>1966<P></P><P></P>1967<P ALIGN=CENTER><B>Consolidated Financial Statements<BR>Independent1968Auditors’ Report<BR><BR>Three Years Ended December 31, 2000<BR><BR>1969Forming a Part of the Annual Report<BR><BR>Form 10-K<BR><BR>Item 8<BR><BR><BR>1970of<BR><BR>ADVANCED NEUROMODULATION SYSTEMS, INC.<BR>(Name of issuer)<BR><BR><BR>1971<BR>Filed with the<BR><BR>Securities and Exchange Commission<BR><BR>Washington,1972D.C. 20549<BR><BR><BR>under<BR><BR>The Securities and Exchange Act of 1934</B>1973</P>1974<HR>1975<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>1976<BR>Table of Contents<BR>to<BR>Consolidated Financial Statements<BR><BR>1977Form 10-K - Item 8</B></P>1978<P></P><P></P><P></P><P></P>1979<P><B>Independent Auditors’ Report</B></P>1980<P></P><P></P>1981<P><B>Consolidated Financial Statements:</B></P>1982<P>Consolidated Balance Sheets - December 31, 2000 and 1999<BR> Consolidated1983Statements of Operations - Years ended December 31, 2000, 1999 and 1998<BR>1984Consolidated Statements of Stockholders' Equity - Years ended December 31, 2000,19851999 and 1998<BR> Consolidated Statements of Cash Flows - Years ended December198631, 2000, 1999 and 1998<BR> Notes to Consolidated Financial Statements</P>1987<HR>1988<P ALIGN=CENTER>Report of Independent Auditors</P>1989<P>The Board of Directors<BR>Advanced Neuromodulation Systems, Inc.</P>1990<P>We have audited the accompanying consolidated balance sheets of Advanced1991Neuromodulation Systems, Inc. and subsidiaries (the Company) as of December 31,19922000 and 1999, and the related consolidated statements of operations,1993stockholders’ equity and cash flows for each of the three years in the1994period ended December 31, 2000. Our audits also included the financial statement1995schedule listed in the Index at Item 14A. These consolidated financial1996statements and schedule are the responsibility of the Company’s management.1997Our responsibility is to express an opinion on these financial statements and1998schedule based on our audits.</P>1999<P>We conducted our audits in accordance with auditing standards generally2000accepted in the United States. Those standards require that we plan and perform2001the audit to obtain reasonable assurance about whether the financial statements2002are free of material misstatement. An audit includes examining, on a test basis,2003evidence supporting the amounts and disclosures in the financial statements. An2004audit also includes assessing the accounting principles used and significant2005estimates made by management, as well as evaluating the overall financial2006statement presentation. We believe that our audits provide a reasonable basis2007for our opinion.</P>2008<P>In our opinion, the financial statements referred to above present fairly, in2009all material respects, the consolidated financial position of Advanced2010Neuromodulation Systems, Inc. and subsidiaries at December 31, 2000 and 1999,2011and the consolidated results of their operations and their cash flows for each2012of the three years in the period ended December 31, 2000, in conformity with2013accounting principles generally accepted in the United States. Also, in our2014opinion, the related financial statement schedule, when considered in relation2015to the basic financial statements taken as a whole, presents fairly in all2016material respects the information set forth therein.</P>2017<P></P>2018<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>2019<TR>2020<TD WIDTH=40%> </TD>2021<TD WIDTH=60%><U>/s/Ernst and Young LLP</U><BR>Ernst and Young LLP</TD></TR>2022</TABLE>2023<P></P>2024<P></P>2025<P>Dallas, Texas<BR>March 2, 2001</P>2026<HR>2027<P></P>2028<PRE>2029Advanced Neuromodulation Systems, Inc. and Subsidiaries2030Consolidated Balance Sheets2031December 31, 2000 and 199920322033Assets 2000 19992034------ ------------ ------------2035Current assets:2036Cash and cash equivalents $ 7,505,578 $ 8,353,6582037Certificates of deposit with maturities over203890 days at purchase 1,040,000 --2039Marketable securities 1,030,318 398,20820402041Receivables:2042Trade accounts, less allowance for doubtful2043accounts of $130,255 in 2000 and $140,824 in 1999 3,850,605 3,785,7192044Note receivable-current portion 100,000 --2045Interest and other 282,567 70,9652046------------ ------------2047Total receivables 4,233,172 3,856,6842048------------ ------------2049Inventories:2050Raw materials 2,187,500 3,014,9082051Work-in-process 880,097 626,4022052Finished goods 2,580,193 2,357,9072053------------ ------------2054Total inventories 5,647,790 5,999,2172055------------ ------------20562057Deferred income taxes 546,671 654,0862058Refundable income taxes 359,953 --2059Prepaid expenses and other current assets 1,634,677 1,107,3802060------------ ------------2061Total current assets 21,998,159 20,369,2332062------------ ------------2063Equipment and fixtures:2064Furniture and fixtures 3,185,477 3,240,3222065Machinery and equipment 4,203,401 3,599,3382066Leasehold improvements 716,189 711,2712067------------ ------------20688,105,067 7,550,93120692070Less accumulated depreciation and amortization 2,830,420 1,862,3612071------------ ------------2072Net equipment and fixtures 5,274,647 5,688,5702073------------ ------------2074Note receivable, excluding current portion 1,400,000 --20752076Cost in excess of net assets acquired, net of accumulated2077amortization of $2,847,824 in 2000 and $2,291,220 in 1999 7,963,840 8,520,4442078Patents and licenses, net of accumulated amortization2079of $674,220 in 2000 and $472,708 in 1999 4,160,253 4,071,1962080Purchased technology from acquisitions, net of accumulated2081amortization of $1,533,334 in 2000 and $1,266,667 in 1999 2,466,666 2,733,3332082Tradenames, net of accumulated amortization of2083$718,745 in 2000 and $593,750 in 1999 1,781,255 1,906,2502084Other assets, net of accumulated amortization of2085$221,320 in 2000 and $137,985 in 1999 326,866 265,7482086------------ ------------2087$ 45,371,686 $ 43,554,7742088============ ============2089See accompanying notes to consolidated financial statements.2090</PRE>2091<HR>2092<PRE>2093Advanced Neuromodulation Systems, Inc. and Subsidiaries2094Consolidated Balance Sheets2095December 31, 2000 and 199920962097Liabilities and Stockholders' Equity 2000 19992098------------------------------------ ------------ ------------2099Current liabilities:2100Accounts payable $ 783,761 $1,765,3772101Accrued salary and employee benefit costs 1,015,643 793,2752102Accrued tax abatement liability 969,204 969,2042103Income taxes payable -- 511,8482104Other accrued expenses 141,416 151,3722105------------ ------------2106Total current liabilities 2,910,024 4,191,0762107------------ ------------21082109Deferred income taxes 2,301,670 2,325,40321102111Commitments and contingencies21122113Stockholders' equity:2114Common stock, $.05 par value2115Authorized-25,000,000 shares;2116Issued-8,708,367 shares 435,418 435,4182117Additional capital 40,313,751 40,423,4572118Retained earnings 6,648,066 5,694,4222119Accumulated other comprehensive income (loss), net of2120tax benefit of $42,883 in 2000 and $124,437 in 1999 (83,241) (241,550)2121Cost of common shares in treasury; 1,049,133 shares2122in 2000 and 1,316,558 shares in 1999 (7,154,002) (9,273,452)2123------------ ------------21242125Total stockholders' equity 40,159,992 37,038,29521262127------------ ------------2128$45,371,686 $43,554,7742129============ ============21302131See accompanying notes to consolidated financial statements.2132</PRE>2133<HR>2134<PRE>2135Advanced Neuromodulation Systems, Inc. and Subsidiaries2136Consolidated Statements of Operations2137Years Ended December 31213821392000 1999 19982140------------ ------------ ------------2141Net revenue-product sales $23,081,624 $20,578,384 $17,006,4072142Net revenue-contract research and development --- 8,900,000 3,100,0002143------------ ------------ ------------2144Total net revenue 23,081,624 29,478,384 20,106,4072145------------ ------------ ------------2146Operating expenses:2147Cost of product sales 7,488,321 6,628,983 4,985,8872148General and administrative 2,838,319 2,756,931 2,633,2502149Research and development 3,561,956 3,772,579 2,801,1752150Amortization of intangibles 1,233,112 1,187,689 1,170,5852151Marketing 6,851,022 6,290,004 4,682,4232152------------ ------------ ------------215321,972,730 20,636,186 16,273,3202154------------ ------------ ------------2155Earnings from operations 1,108,894 8,842,198 3,833,08721562157Other income (expense):2158Loss on sale of marketable securities (3,218) -- (4,381)2159Interest expense -- (44,861) (331,468)2160Investment and other income, net 582,181 751,238 834,7722161------------ ------------ ------------2162578,963 706,377 498,9232163------------ ------------ ------------2164Earnings from continuing operations2165before income taxes 1,687,857 9,548,575 4,332,01021662167Income taxes 734,213 3,545,294 1,746,3042168------------ ------------ ------------2169Net earnings from continuing operations 953,644 6,003,281 2,585,7062170------------ ------------ ------------2171Loss from discontinued operations, net of income2172tax benefits of $129,711 -- -- (211,634)21732174Gain on sale of assets of discontinued operations, net of2175income tax expense of $2,473,293 -- -- 4,585,1302176------------ ------------ ------------2177Net earnings from discontinued operations -- -- 4,373,4962178------------ ------------ ------------2179Net earnings $ 953,644 $ 6,003,281 $ 6,959,2022180============ ============ ============2181Basic earnings per share:2182Continuing operations $ .13 $ .79 $ .312183Discontinued operations -- -- .532184------------ ------------ ------------2185Net earnings $ .13 $ .79 $ .842186============ ============ ============2187Diluted earnings per share:2188Continuing operations $ .11 $ .75 $ .302189Discontinued operations -- -- .512190------------ ------------ ------------2191Net earnings $ .11 $ .75 $ .812192============ ============ ============21932194See accompanying notes to consolidated financial statements.2195</PRE>2196<HR>2197<PRE>2198Advanced Neuromodulation Systems, Inc. and Subsidiaries2199Consolidated Statements of Cash Flows2200Years Ended December 31220122022000 1999 19982203------------ ------------ ------------2204Cash flows from operating activities:2205Net earnings from continuing operations $ 953,644 $ 6,003,281 $ 2,585,7062206Adjustments to reconcile earnings from continuing2207operations to net cash provided by operating2208activities:2209Depreciation 1,217,331 816,125 615,3882210Amortization 1,233,112 1,187,689 1,170,5852211Deferred income taxes 2,129 225,525 103,2672212Non-operating loss included in net earnings 3,218 -- 4,3812213Increase in inventory reserve 5,133 -- 52,8182214Changes in operating assets and liabilities2215Receivables (276,488) (596,558) (748,442)2216Inventories 346,294 (3,355,955) 200,8342217Prepaid expenses and other current assets (527,297) (254,427) (383,940)2218Income taxes payable (267,443) (1,543,713) 1,605,3192219Accounts payable (981,616) 860,478 649,8022220Accrued expenses 212,412 (220,897) 177,9042221Deferred revenue -- (900,000) 900,0002222------------ ------------ ------------2223Net cash provided by continuing operations 1,920,429 2,221,548 6,933,6222224Net cash provided by discontinued operations -- -- 59,0492225------------ ------------ ------------2226Net cash provided by operating activities 1,920,429 2,221,548 6,992,6712227------------ ------------ ------------22282229Cash flows from investing activities:2230Purchases of certificates of deposit with maturities2231over 90 days (1,425,000) -- --2232Proceeds from certificates of deposits with maturities2233over 90 days 385,000 -- --2234Purchases of marketable securities (808,760) -- (106,001)2235Net proceeds from sales of marketable securities 413,290 -- 851,6212236Additions to equipment, fixtures and patent2237licenses - continuing operations (1,239,025) (5,907,550) (1,678,842)2238Additions to property, plant and equipment-2239discontinued operations -- -- (12,060)2240Net proceeds from sale of assets in 2000 and2241discontinued operations in 1999 and 1998 600 6,354,965 21,754,1812242------------ ------------ ------------2243Net cash provided by (used in) investing2244activities (2,673,895) 447,415 20,808,8992245------------ ------------ ------------22462247Cash flows from financing activities:2248Loan to third party (1,500,000) -- --2249Decrease in short-term obligations -- (3,633,475) (8,081,763)2250Payment of long-term notes -- -- (177,137)2251Exercise of stock options and warrants 1,405,386 573,272 817,7662252Purchase of treasury stock -- (2,952,311) (9,411,055)2253------------ ------------ ------------2254Net cash used in financing activities (94,614) (6,012,514) (16,852,189)2255------------ ------------ ------------22562257Net increase (decrease) in cash and cash equivalents (848,080) (3,343,551) 10,949,3812258Cash and cash equivalents at beginning of year 8,353,658 11,697,209 747,8282259------------ ------------ ------------2260Cash and cash equivalents at end of year $ 7,505,578 $ 8,353,658 $11,697,2092261============ ============ ============22622263Supplemental cash flow information is presented below:2264Income taxes paid $ 958,585 $ 4,863,482 $ 37,7152265============ ============ ============2266Interest paid $ -- $ 44,861 $ 370,3042267============ ============ ============22682269See accompanying notes to consolidated financial statements.2270</PRE>2271<HR>2272<PRE>2273Advanced Neuromodulation Systems, Inc. and Subsidiaries2274Consolidated Statements of Stockholders' Equity2275Three Years Ended December 31, 200022762277Other2278Retained Comprehensive Total2279Common Stock Additional Earnings Income Treasury Stockholders'2280Shares Amount Capital (Deficit) (Loss) Stock Equity2281------------- ------------- ------------- ------------- ------------- ------------- -------------2282Balance at2283December 31, 1997 8,635,509 $ 431,775 $ 40,780,717 $ (7,268,061) $ (38,494) $ -- $ 33,905,9372284Net earnings -- -- -- 6,959,202 -- -- 6,959,2022285Adjustment to2286unrealized losses2287on marketable2288securities -- -- -- -- (92,266) -- (92,266)2289-------------2290Comprehensive income 6,866,9362291-------------2292Shares issued upon2293exercise of stock2294options 72,858 3,643 160,554 -- -- -- 164,1972295Compensation expense2296resulting from2297changes to stock2298options -- -- 1,004,654 -- -- -- 1,004,6542299Issuance of 184,8742300shares from2301treasury for2302stock option2303exercises -- -- (908,852) -- -- 1,562,421 653,5692304Purchase of23051,258,625 treasury2306shares, at cost -- -- -- -- -- (9,411,055) (9,411,055)2307Tax benefit from2308employee stock2309option exercises -- -- 119,509 -- -- -- 119,5092310------------- ------------- ------------- ------------- ------------- ------------- -------------23112312Balance at2313December 31, 1998 8,708,367 435,418 41,156,582 (308,859) (130,760) (7,848,634) 33,303,7472314Net earnings -- -- -- 6,003,281 -- -- 6,003,2812315Adjustment to2316unrealized losses2317on marketable2318securities -- -- -- -- (110,790) -- (110,790)2319-------------2320Comprehensive income 5,892,4912321-------------2322Tax benefit from2323employee stock2324option exercises -- -- 221,096 -- -- -- 221,0962325Issuance of 162,0682326shares from2327treasury for2328stock option2329exercises -- -- (954,221) -- -- 1,527,493 573,2722330Purchase of 404,8752331treasury shares,2332at cost -- -- -- -- -- (2,952,311) (2,952,311)2333------------- ------------- ------------- ------------- ------------- ------------- -------------2334Balance at2335December 31, 1999 8,708,367 435,418 40,423,457 5,694,422 (241,550) (9,273,452) 37,038,2952336Net earnings -- -- -- 953,644 -- -- 953,6442337Adjustment to2338unrealized losses2339on marketable2340securities -- -- -- -- 158,309 -- 158,3092341-------------2342Comprehensive income 1,111,9532343-------------2344Tax benefit from2345employee stock2346option exercises -- -- 604,358 -- -- -- 604,3582347Issuance of 267,4252348shares from2349treasury for2350stock option2351exercises and2352warrant exercise -- -- (714,064) -- -- 2,119,450 1,405,3862353------------- ------------- ------------- ------------- ------------- ------------- -------------2354Balance at2355December 31, 2000 8,708,367 $ 435,418 $ 40,313,751 $ 6,648,066 $ (83,241) $ (7,154,002) $ 40,159,9922356============= ============= ============= ============= ============= ============= =============23572358See accompanying notes to consolidated financial statements.2359</PRE>2360<HR>2361<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>2362Notes to Consolidated Financial Statements</B></P>2363<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>2364<TR>2365<TD WIDTH=5%><B>(1)</B></TD>2366<TD WIDTH=95%><B>Business</B></TD></TR></TABLE>2367<P><B>Continuing Operations</B></P>2368<P>Advanced Neuromodulation Systems, Inc. (the “Company” or2369“ANS”) designs, develops, manufactures and markets implantable2370neuromodulation devices. ANS devices are used primarily to manage chronic severe2371pain. ANS revenues are derived primarily from sales throughout the United2372States, Europe and Australia.</P>2373<P>The neuromodulation business, described above, was acquired in March 1995.2374All other businesses of the Company were sold in January 1998 as described below2375under Discontinued Operations.</P>2376<P>The research and development, manufacture, sale and distribution of medical2377devices is subject to extensive regulation by various public agencies,2378principally the Food and Drug Administration and corresponding state, local and2379foreign agencies. Product approvals and clearances can be delayed or withdrawn2380for failure to comply with regulatory requirements or the occurrence of2381unforeseen problems following initial marketing.</P>2382<P>In addition, ANS products are purchased primarily by hospitals and other2383users who then bill various third-party payors including Medicare, Medicaid,2384private insurance companies and managed care organizations. These third-party2385payors reimburse fixed amounts for services based on a specific diagnosis. The2386impact of changes in third-party payor reimbursement policies and any amendments2387to existing reimbursement rules and regulations that restrict or terminate the2388eligibility of ANS products could have an adverse impact on the Company’s2389financial condition and results of operations.</P>2390<P><B>Discontinued Operations</B></P>2391<P>On January 30, 1998, the Company sold its cardiovascular and intravenous2392fluid product lines (“CVS Operations”), including its MPS®2393myocardial protection system product line, to Atrion Corporation (see Note 9 -2394“Sale of CVS Operations/Discontinued Operations”). The CVS Operations2395have been accounted for as discontinued operations in the Consolidated2396Statements of Operations for the year ended December 31, 1998. During October23971998, Atrion also exercised an option to acquire the Company’s land, office2398and manufacturing facility for $6.5 million. The transaction was closed on2399February 1, 1999.</P>2400<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>2401<TR>2402<TD WIDTH=5%><B>(2)</B></TD>2403<TD WIDTH=95%><B>Summary of Significant Accounting Policies</B></TD></TR>2404</TABLE>2405<P><B>Principles of Consolidation</B></P>2406<P>The consolidated financial statements include the accounts of Advanced2407Neuromodulation Systems, Inc. and all of its subsidiaries. All significant2408inter-company transactions and accounts have been eliminated in2409consolidation.</P>2410<P><B>Use of Estimates</B></P>2411<P>The preparation of financial statements in conformity with generally accepted2412accounting principles requires management to make estimates and assumptions that2413affect the amounts reported in the financial statements and accompanying notes.2414Actual results could differ from those estimates.</P>2415<P ALIGN=CENTER>Page 1</P>2416<HR>2417<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>2418Notes to Consolidated Financial Statements</B></P>2419<P><B>Cash Equivalents</B></P>2420<P>The Company considers all highly liquid investments with maturities of three2421months or less at the time of purchase to be cash equivalents.</P>2422<P><B>Revenue Recognition</B></P>2423<P>The Company recognizes revenue from product sales when the goods are shipped2424to its customers. The Company recognizes revenue from research and development2425contracts based upon the estimated percentage of completion of the development2426project which is determined by hours completed as a percentage of the total2427estimated hours under the product development plan.</P>2428<P><B>Marketable Securities</B></P>2429<P>The Company’s marketable securities and debt securities are classified2430as available-for-sale and are carried at fair value with the unrealized gains2431and losses reported in a separate component of stockholders’ equity2432entitled “Other comprehensive income”. The amortized cost of debt2433securities in this category is adjusted for amortization of premiums and2434accretion of discounts to maturity. Such amortization is included in investment2435income. Realized gains and losses and declines in value judged to be other than2436temporary are included in other income. The cost of securities sold is based on2437the specific identification method. Interest and dividends are included in2438investment income.</P>2439<P><B>Inventories</B></P>2440<P>Inventories are recorded at the lower of standard cost or market. Standard2441cost approximates actual cost determined on the first-in, first-out2442(“FIFO”) basis. Cost includes the acquisition cost of raw materials2443and components, direct labor and overhead.</P>2444<P><B>Equipment and Fixtures</B></P>2445<P>Equipment and fixtures are stated at cost. Additions and improvements2446extending asset lives are capitalized while maintenance and repairs are expensed2447as incurred. The cost and accumulated depreciation of assets sold or retired are2448removed from the accounts and any gain or loss is reflected in the Statement of2449Operations.</P>2450<P>Depreciation is provided using the straight-line method over the estimated2451useful lives of the various assets as follows:</P>2452<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>2453<TR>2454<TD WIDTH=35%>Leasehold improvements</TD>2455<TD WIDTH=25% ALIGN=RIGHT>5 years</TD>2456<TD WIDTH=40%></TD></TR>2457<TR>2458<TD>Furniture and fixtures</TD>2459<TD ALIGN=RIGHT>2 to 10 years</TD>2460<TD></TD></TR>2461<TR>2462<TD>Machinery and equipment</TD>2463<TD ALIGN=RIGHT>3 to 10 years</TD>2464<TD></TD></TR></TABLE>2465<P><B>Intangible Assets</B></P>2466<P>The excess of cost over the net assets of acquired businesses2467(“goodwill”) is amortized on a straight-line basis over the estimated2468useful life of 20 years.</P>2469<P>The cost of purchased technology related to acquisitions is based on2470appraised values at the date of acquisition and is amortized on a straight-line2471basis over the estimated useful life (15 years) of such technology.</P>2472<P ALIGN=CENTER>Page 2</P>2473<HR>2474<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>2475Notes to Consolidated Financial Statements</B></P>2476<P>The cost of purchased tradenames is based on appraised values at the date of2477acquisition and is amortized on a straight-line basis over the estimated useful2478life (20 years) of such tradenames.</P>2479<P>The cost of purchased patents is amortized on a straight-line basis over the2480estimated useful life (17 years) of such patents. The cost of certain licensed2481patents is amortized on a straight-line basis over the estimated useful life (202482years) of such patents while the cost of certain other licensed patents is2483amortized on a units of production method. Costs of patents that are the result2484of internal development are charged to current operations.</P>2485<P>The Company assesses the recoverability of all its intangible assets2486primarily based on its current and anticipated future undiscounted cash flows.2487At December 31, 2000, the Company does not believe there has been any impairment2488of its intangible assets.</P>2489<P><B>Research and Development</B></P>2490<P>Product development costs including start-up and research and development are2491charged to operations in the year in which such costs are incurred.</P>2492<P><B>Advertising</B></P>2493<P>Advertising expense is charged to operations in the year in which such costs2494are incurred. Total advertising expense included in marketing expense from2495continuing operations was $24,716, $40,440 and $21,843 at December 31, 2000,24961999 and 1998, respectively.</P>2497<P><B>Deferred Taxes</B></P>2498<P>Deferred income taxes are recorded based on the liability method and2499represent the tax effect of the differences between the financial and tax basis2500of assets and liabilities other than costs in excess of the net assets of2501businesses acquired.</P>2502<P><B>Stock-Based Compensation</B></P>2503<P>The Company has adopted the disclosure-only provisions of SFAS No. 123,2504“Accounting for Stock-Based Compensation”, which disclosures are2505presented in Note 5, “Stockholders’ Equity”. Because of this2506election, the Company continues to account for its stock-based compensation2507plans under APB No. 25, “Accounting for Stock Issued to Employees”.2508All of the Company’s stock option grants are at exercise prices equal to2509the fair market value of the Company’s stock on the date of grant, and2510therefore, no compensation expense is recorded.</P>2511<P><B>Earnings Per Share</B></P>2512<P>Basic earnings per share is computed based only on the weighted average2513number of common shares outstanding during the period, and the dilutive effect2514of stock options and warrants is excluded. Diluted earnings per share is2515computed using the additional dilutive effect, if any, of stock options and2516warrants using the treasury stock method based on the average market price of2517the stock during the period. Basic earnings per share for 2000, 1999 and 19982518are based upon 7,484,572, 7,583,159, and 8,314,290 shares, respectively. Diluted2519earnings per share for 2000, 1999, and 1998 are based upon 8,328,169, 8,003,087,2520and 8,544,040 shares, respectively. The following table presents the2521reconciliation of basic and diluted shares:</P>2522<P ALIGN=CENTER>Page 3</P>2523<HR>2524<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>2525Notes to Consolidated Financial Statements</B></P>25262527<PRE>25282000 1999 19982529--------- --------- ---------2530Weighted-average shares outstanding2531(basic shares) 7,484,572 7,583,159 8,314,29025322533Effect of dilutive instruments(1)2534Stock options 799,060 401,292 214,8062535Warrants 44,537 18,636 14,9442536--------- --------- ---------2537Dilutive potential common shares 843,597 419,928 229,7502538--------- --------- ---------2539Diluted shares 8,328,169 8,003,087 8,544,0402540========= ========= =========2541</PRE>2542<P>(1) See Note 5 for a description of these instruments.</P>2543<P></P>2544<P>For 2000, 1999 and 1998 the incremental shares used for dilutive earnings per2545share relate to stock options and warrants whose exercise price was less than2546the average market price in the underlying quarterly computations. Options to2547purchase 12,975 shares at an average price of $15.38 per share were outstanding2548in 2000, 250 shares at an average price of $8.94 per share were outstanding in25491999, and options to purchase 215,981 shares at an average price of $9.02 per2550share were outstanding in 1998 but were not included in the computation of2551diluted earnings per share because the options’ exercise prices were2552greater than the average market price of the common shares and, therefore, the2553effect would be antidilutive.</P>2554<P><B>Comprehensive Income</B></P>2555<P>Statement of Financial Accounting Standards No. 130 – “Reporting2556Comprehensive Income” – requires unrealized gains or losses on the2557Company’s available for sale securities to be included in “Other2558comprehensive income” and be reported in the Consolidated Statements of2559Stockholders’ Equity.</P>2560<P><B>New Accounting Standards</B></P>2561<P>In June 1998, the Financial Accounting Standards Board issued Statement of2562Financial Accounting Standards No. 133 (“SFAS 133”), “Accounting2563for Derivative Instruments and Hedging Activities.” SFAS 133 requires2564companies to record derivatives on the balance sheet as assets or liabilities,2565measured at fair value. Gains or losses resulting from changes in the values of2566those derivatives would be accounted for depending on the use of the derivative2567and whether it qualifies for hedge accounting. SFAS 133, as amended by SFAS 138,2568is effective for fiscal years beginning after June 15, 2000. The adoption of2569SFAS 133 as of January 1, 2001 is not expected to have a material impact on the2570financial position or results of operations of the Company because we have no2571derivatives or hedges.</P>2572<P><B>Reclassification</B></P>2573<P>Certain prior period amounts have been reclassified to conform to2574current-year presentation.</P>2575<P ALIGN=CENTER>Page 4</P>2576<HR>2577<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>2578Notes to Consolidated Financial Statements</B></P>2579<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>2580<TR>2581<TD WIDTH=5%><B>(3)</B></TD>2582<TD WIDTH=95%><B>Marketable Securities</B></TD></TR>2583</TABLE>2584<P>The following is a summary of available-for-sale securities at December 31,25852000:</P>25862587<PRE>2588Gross Gross2589Unrealized Unrealized Estimated2590Cost Gains Losses Fair Value2591---------- ---------- ---------- ----------2592Investment grade preferred security $ 250,000 -- $ 89,380 $ 160,6202593Investment grade municipal bonds 808,760 -- -- 808,7602594Real estate investment trust 97,682 -- 36,744 60,9382595---------- ---------- ---------- ----------2596$1,156,442 -- $ 126,124 $1,030,3182597========== ========== ========== ==========2598</PRE>25992600<P>Estimated fair value for the investment grade preferred security and real2601estate investment trust are determined by the closing prices as reported on the2602New York Stock Exchange at each financial reporting period. In the case of the2603investment grade municipal bonds, the brokerage firms holding such bonds provide2604the values at each reporting period by utilizing a standard pricing service.</P>2605<P>At December 31, 2000, no individual security represented more than 45 percent2606of the total portfolio or 1.1 percent of total assets. The Company did not have2607any investments in derivative financial instruments at December 31, 2000.</P>2608<P>The following is a summary of available-for-sale securities at December 31,26091999:</P>26102611<PRE>2612Gross Gross2613Unrealized Unrealized Estimated2614Cost Gains Losses Fair Value2615---------- ---------- ---------- ----------2616Investment grade preferred securities $ 554,596 -- $ 275,107 $ 279,4892617Publicly traded limited partnerships 51,875 -- 27,815 24,0602618Real estate investment trusts 141,590 -- 47,143 94,4472619Other 16,134 -- 15,922 2122620---------- ---------- ---------- ----------2621$ 764,195 -- $ 365,987 $ 398,2082622========== ========== ========== ==========2623</PRE>26242625<P>At December 31, 1999, no individual security represented more than 40 percent2626of the total portfolio or 1 percent of total assets. The Company did not have2627any investments in derivative financial instruments at December 31, 1999.</P>2628<P ALIGN=CENTER>Page 5</P>2629<HR>2630<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>2631Notes to Consolidated Financial Statements</B></P>2632<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>2633<TR>2634<TD WIDTH=5%><B>(4)</B></TD>2635<TD WIDTH=95%><B>Federal Income Taxes</B></TD></TR>2636</TABLE>2637<P>The significant components of the net deferred tax liability at December 31,2638were as follows:</P>26392640<PRE>2641Deferred tax assets: 2000 19992642------------ ------------2643Tax credit and net operating loss carry forwards $ -- $ 36,6492644Accrued expenses and reserves 519,593 496,2132645Unrealized loss on marketable securities 42,883 124,4372646------------ ------------2647Total deferred tax asset 562,476 657,29926482649Deferred tax liabilities:26502651Purchased intangible assets (1,529,252) (1,670,250)2652Excess of tax over book depreciation (678,262) (597,425)2653Other (109,961) (60,941)2654------------ ------------2655Total deferred tax liabilities (2,317,475) (2,328,616)2656------------ ------------26572658Net deferred tax liabilities $(1,754,999) $(1,671,317)2659============ ============2660</PRE>26612662<P>The provision for income taxes on earnings from continuing operations for the2663years ended December 31 consists of the following:</P>26642665<PRE>26662000 1999 19982667----------- ----------- -----------26682669Current $ 741,382 $3,682,727 $2,005,7132670Deferred (7,169) (137,433) (259,409)2671----------- ----------- -----------2672$ 734,213 $3,545,294 $1,746,3042673=========== =========== ===========2674</PRE>26752676<P>A reconciliation of the provision for income taxes on earnings from2677continuing operations to the expense calculated at the U.S. statutory rate2678follows:</P>26792680<PRE>26812000 1999 19982682----------- ----------- -----------2683Income tax expense at statutory rate $ 573,871 $3,246,515 $1,472,8832684Tax effect of:2685State taxes 4,581 183,625 117,9002686Nondeductible amortization of goodwill 189,279 189,211 189,2452687Other (33,518) (74,057) (33,724)2688----------- ----------- -----------2689Income tax expense $ 734,213 $3,545,294 $1,746,3042690=========== =========== ===========2691</PRE>26922693<P>In 1998, the Company utilized net operating loss carry forwards of $4,277,5402694and general business credits and alternative minimum tax credits of $1,038,6692695to reduce its tax liabilities.</P>2696<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>2697<TR>2698<TD WIDTH=5%><B>(5)</B></TD>2699<TD WIDTH=95%><B>Stockholders' Equity</B></TD></TR>2700</TABLE>2701<P>The Company has a Shareholder’s Rights Plan, adopted in 1996, which2702permits shareholders to purchase shares of the Company’s common stock at2703significant discounts in the event a person or group acquires more than 152704percent of the Company’s common stock or announces a tender or exchange2705offer for more than 20 percent of the Company’s common stock.</P>2706<P ALIGN=CENTER>Page 6</P>2707<HR>2708<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>2709Notes to Consolidated Financial Statements</B></P>2710<P>During the year ended December 31, 1998, the Company repurchased 1,258,6252711shares of its common stock at an aggregate cost of $9,411,055 and during the2712year ended December 31, 1999, the Company repurchased 404,875 shares of its2713common stock at an aggregate cost of $2,952,311. No repurchases were made during2714the year ended December 31, 2000. During the years ended December 31, 2000, 19992715and 1998, the Company issued 267,425, 162,068 and 184,874 shares respectively,2716from its treasury upon the exercise of stock options and a warrant. At December271731, 2000, 1,049,133 shares remained in the treasury. These shares were reissued2718in connection with two acquisitions in January 2001. See Note 11.</P>2719<P>In 1998, the Company issued a five-year warrant to purchase 100,000 shares of2720common stock at an exercise price of $6.50 per share in connection with a2721$2,000,000 loan from a nonaffiliate shareholder. The warrant was exercised by2722the nonaffiliate shareholder in December 2000.</P>2723<P>The Company has various stock option plans pursuant to which stock options2724may be granted to key employees, officers, directors and advisory directors of2725the Company. The most recent of the plans, approved by the shareholders during27262000 (the “2000 Plan”), reserved 500,000 shares of common stock for2727options under the plan; provided, however, that on January 1 of each year2728(commencing in 2001), the aggregate number of shares of common stock reserved2729for options under the 2000 Plan shall be increased by the same percentage that2730the total number of issued and outstanding shares of common stock increased from2731the preceding January 1 to the following December 31 (if such percentage is2732positive). On January 1, 2001, 18,100 options were added to the 2000 Plan.</P>2733<P>Several of the plans allow for the grant of incentive stock options to key2734employees and officers intended to qualify for preferential tax treatment under2735Section 422 of the Internal Revenue Code of 1986. Under all of the2736Company’s plans, the exercise price of options granted must equal or exceed2737the fair market value of the common stock at the time of the grant. Options2738granted to employees and officers expire ten years from the date of grant and2739for the most part are exercisable one-fourth each year over a four-year period2740of continuous service. Options granted to directors and advisory directors2741expire six years from the date of grant and for the most part are exercisable2742one-fourth each year over a four-year period of continuous service. Certain2743options, however, have a two-year vesting schedule.</P>2744<P>At December 31, 2000, under all of the Company’s stock option plans,27451,422,196 shares had been granted and were outstanding, 1,975,672 shares of2746common stock had been issued upon exercise, and 225,894 shares were reserved for2747future grants.</P>2748<P ALIGN=CENTER>Page 7</P>2749<HR>2750<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>2751Notes to Consolidated Financial Statements</B></P>2752<P>Data with respect to stock option plans of the Company are as follows:</P>27532754<PRE>2755------------------------------------------------- -----------------------------2756Options Outstanding Exercisable Options2757------------------------------------------------- -----------------------------2758Weighted Weighted2759Average Average2760Shares Exercise Price Shares Exercise Price2761----------------- ------------ -------------- ------------ --------------2762January 1, 1998 833,272 $ 5.68 568,285 $ 4.662763Granted 1,352,800 $ 6.122764Exercised (257,732) $ 3.492765Forfeited (860,125) $ 8.102766----------------- ------------ -------------- ------------ --------------2767January 1, 1999 1,068,215 $ 4.82 465,340 $ 4.582768Granted 332,500 $ 6.732769Exercised (162,068) $ 3.992770Forfeited (18,000) $ 8.142771----------------- ------------ -------------- ------------ --------------2772January 1, 2000 1,220,647 $ 5.40 499,397 $ 4.832773Granted 422,332 $ 14.212774Exercised (167,158) $ 4.672775Forfeited (53,625) $ 6.822776----------------- ------------ -------------- ------------ --------------2777December 31, 2000 1,422,196 $ 8.05 601,989 $ 5.192778----------------- ============ ============== ============ ==============2779</PRE>2780<PRE>27812782Exercisable Options2783Options Outstanding at December 31, 2000 at December 31, 20002784- -------------------------------------------------------- ------------------------2785Weighted2786Average Weighted Weighted2787Range of Remaining Average Average2788Exercise Price Shares Life (Years) Exercise Price Shares Exercise Price2789- -------------- --------- ------------ -------------- -------- --------------2790$ 3.50 - 5.25 728,864 7.83 $ 5.00 532,614 $ 5.002791$ 5.25 - 8.00 278,000 8.30 $ 6.69 69,125 $ 6.682792$ 8.00 - 12.00 39,500 9.00 $ 9.36 250 $ 8.942793$12.00 - 16.00 324,332 9.49 $ 14.13 -- $ --2794$16.00 - 20.00 51,500 9.96 $ 19.25 -- $ --2795- -------------- --- ----- ------------ -------------- -------- --------------27961,422,196 8.41 $ 8.05 601,989 $ 5.192797========= ============ ============== ======== ==============2798</PRE>27992800<P>Exercisable options at January 1, 1999 and 1998 included options for 134,9042801and 306,297 shares, respectively, with a weighted average exercise price of2802$4.53 per share at January 1, 1999 and $4.22 per share at January 1, 1998, which2803were held by employees who terminated employment with the Company on January 30,28041998 in connection with the sale of the CVS Operations (see Note 9 - “Sale2805of CVS Operations/Discontinued Operations”). The Company accelerated the2806vesting of the unvested portion of these terminated employee options as a result2807of the sale. The Company also extended the normal 90-day exercise period2808subsequent to termination to January 30, 1999 for these options.</P>2809<P>In November 1998, the Board of Directors authorized the repricing of options2810for certain employees, advisory directors and directors under several of the2811Plans. Stock options were rescinded for these participants and a new option was2812granted at the then fair market value of the common stock of $5.00 per share.2813Data with respect to the option repricing during November 1998 is as2814follows:</P>2815<P ALIGN=CENTER>Page 8</P>2816<HR>2817<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>2818Notes to Consolidated Financial Statements</B></P>28192820<PRE>28211998 Option Repricing Data2822------------------------------------------------------2823Range of Exercise Weighted Average2824Price Before Exercise Price2825Repricing Shares Before Repricing2826-------------------- ----------- -------------------2827$ 5.75 - 7.75 293,000 $ 6.282828$ 7.75 - 9.75 408,500 $ 8.582829$ 9.75 - 11.75 77,000 $ 10.252830$ 11.75 - 12.25 15,000 $ 12.132831----------- -------------------2832793,500 $ 7.962833=========== ===================2834</PRE>28352836<P>In accordance with APB No. 25, the Company has not recorded compensation2837expense for its stock option awards. As required by SFAS No. 123, the Company2838provides the following disclosure of hypothetical values for these awards. The2839weighted-average fair value of an option granted in 2000, 1999 and 1998 was2840$5.76, $2.73 and $2.30, respectively. For purposes of fair market value2841disclosures, the fair market value of an option grant was estimated using the2842Black-Scholes option pricing model with the following assumptions:</P>28432844<PRE>28452000 1999 19982846-------- -------- --------28472848Risk-free interest rate 5.9% 5.5% 4.6%2849Average life of options (years) 3.0 3.0 3.02850Volatility 52.4% 49.1% 49.2%2851Dividend Yield -- -- --2852</PRE>28532854<P>Had the compensation expense been recorded based on these hypothetical2855values, pro forma net earnings (loss) for 2000, 1999 and 1998 would have been2856$(187,653), $5,047,706 and $6,457,825, respectively, and pro forma diluted net2857earnings per common share for 2000, 1999 and 1998 would have been $(0.02), $.632858and $.76, respectively.</P>2859<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>2860<TR>2861<TD WIDTH=5%><B>(6)</B></TD>2862<TD WIDTH=95%><B>Commitments and Contingencies</B></TD></TR>2863</TABLE>2864<P>On February 1, 1999, the Company sold its principal office and manufacturing2865facility in Allen, Texas to Atrion Corporation. Atrion leased space to the2866Company at the rate of $48,125 per month from February 1, 1999 through May 31,28671999. The Company entered into a sixty-three month lease agreement on 40,0002868square feet of space located in the North Dallas area during February 1999. The2869Company relocated its operations to the leased facility in May 1999 and the2870rental period under the lease commenced on June 1, 1999. Under the terms of the2871lease agreement, the Company received three months free rent and the monthly2872rental rate for the remaining term of the lease is $48,308. The monthly rental2873rate includes certain operating expenses such as property taxes on the facility,2874insurance, landscape and maintenance and janitorial services. The Company also2875has the first right of refusal to acquire the facility. Future minimum rental2876payments relating to the leased facility for the years ended December 31 are2877$579,696 in 2001, 2002 and 2003 and $386,464 in 2004.</P>2878<P>In addition, the Company leases transportation equipment under non-cancelable2879operating leases. Future minimum rental payments under non-cancelable2880transportation leases for the years ended December 31 are $17,667 in 2001 and2881$5,104 in 2002.</P>2882<P ALIGN=CENTER>Page 9</P>2883<HR>2884<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>2885Notes to Consolidated Financial Statements</B></P>2886<P>Total rent expense included in continuing operations for the years ended2887December 31, 2000, 1999 and 1998 was $572,447, $533,600 and $8,782,2888respectively.</P>2889<P>The Company is a party to product liability claims related to ANS2890neurostimulation devices. Product liability insurers have assumed responsibility2891for defending the Company against these claims. While historically product2892liability claims for ANS neurostimulation devices have not resulted in2893significant monetary liability for the Company beyond its insurance coverage,2894there can be no assurances that the Company will not incur significant monetary2895liability to the claimants if such insurance is inadequate or that the2896Company’s neurostimulation business and future ANS product lines will not2897be adversely affected by these product liability claims.</P>2898<P>Except for such product liability claims and other ordinary routine2899litigation incidental or immaterial to its business, the Company is not2900currently a party to any other pending legal proceeding. The Company maintains2901general liability insurance against risks arising out of the normal course of2902business.</P>2903<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>2904<TR>2905<TD WIDTH=5%><B>(7)</B></TD>2906<TD WIDTH=95%><B>Financial Instruments, Risk Concentration and Major Customers2907</B></TD></TR>2908</TABLE>2909<P>In the United States, the Company’s accounts receivable are due2910primarily from hospitals and distributors located throughout the country.2911Internationally, the Company’s accounts receivable are due primarily from2912distributors located in Europe and Australia. The Company generally does not2913require collateral for trade receivables. The Company maintains an allowance for2914doubtful accounts based upon expected collectibility. Any losses from bad debts2915have historically been within management’s expectations.</P>2916<P>Net sales of implantable neurostimulation systems to one major customer for2917each of the years ended December 31, as a percentage of net revenue from product2918sales from continuing operations, were as follows: 2000- 14 percent and 1998- 202919percent. Net sales of implantable neurostimulation systems to two major2920customers for the year ended December 31, 1999, as a percentage of net revenue2921from product sales from continuing operations, were 15 percent and 11 percent,2922respectively.</P>2923<P>Foreign sales, primarily Europe and Australia, for the years ended December292431, 2000, 1999 and 1998 were approximately 7 percent, 7 percent and 10 percent2925of net revenue from product sales from continuing operations, respectively.</P>2926<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>2927<TR>2928<TD WIDTH=5%><B>(8)</B></TD>2929<TD WIDTH=95%><B>Employee Benefit Plans</B></TD></TR></TABLE>2930<P>The Company has a defined contribution retirement savings plan (the2931“Plan”) available to substantially all employees. The Plan permits2932employees to elect salary deferral contributions of up to 15 percent of their2933compensation and requires the Company to make matching contributions equal to 502934percent of the participants’ contributions to a maximum of 6 percent of the2935participants’ compensation. The Board of Directors may change the2936percentage of matching contribution at their discretion. The expense of the2937Company’s contribution for continuing operations was $157,601 in 2000,2938$158,842 in 1999 and $119,543 in 1998.</P>2939<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>2940Notes to Consolidated Financial Statements</B></P>2941<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>2942<TR>2943<TD WIDTH=5%><B>(9)</B></TD>2944<TD WIDTH=95%><B>Sale of CVS Operations/Discontinued Operations</B></TD></TR>2945</TABLE>2946<P>On January 30, 1998, the Company sold its cardiovascular and intravenous2947fluid product lines, including its Myocardial Protection System product line, to2948Atrion Corporation. The Company received approximately $23 million from the sale2949and utilized $8.0 million of the proceeds to retire debt and $1.2 million to pay2950expenses related to the transaction. The Company reported a net gain (after2951income tax expense) from the sale of $4.6 million. This gain is net of a pre-tax2952expense of $969,204, discussed below, recorded in connection with the sale of2953the corporate facility to Atrion in February 1999. The gain is also net of a2954pre-tax compensation expense of $1,004,654 recorded as a result of changes made2955to the options held by employees of the CVS Operations (see Note 5 –2956“Stockholders’ Equity”). The Company also reported a net loss for2957the CVS Operations of approximately $211,634 in January 1998 prior to the2958sale.</P>2959<P ALIGN=CENTER>Page 10</P>2960<HR>2961<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>2962Notes to Consolidated Financial Statements</B></P>2963<P>As part of the sale of the CVS Operations to Atrion, the Company granted2964Atrion a nine-month option to acquire the Company’s principal office and2965manufacturing facility in Allen, Texas for $6.5 million. During October 1998,2966Atrion exercised its option to acquire the facility. When the facility was built2967in 1993, the Company entered a ten-year agreement with the City of Allen2968granting tax abatements to the Company if a minimum job base and personal2969property base were maintained in the City of Allen. The agreement provided for2970the repayment of abated taxes if the Company defaulted under the agreement. As2971mentioned above, during 1998 the Company recorded a pretax expense of $969,2042972in connection with the abated taxes. In April 1999, the Company was successful2973in petitioning the City of Allen to assign the abatement agreement to Atrion. In2974July 1999, the Company, Atrion and the City of Allen executed an assignment2975agreement under which Atrion (as successor in interest to the Company) must2976continue to meet the conditions of the original tax abatement agreement until2977August 2003. The City preserved its rights to collect previously abated taxes if2978Atrion fails to comply with its obligations any time prior to August 2003. The2979Company retains monetary liability for the amount of abated taxes, even after2980assignment, because pursuant to the purchase and sale agreement with Atrion, the2981Company indemnified Atrion from any tax abatement liabilities that accrued to2982the City of Allen prior to the sale of the CVS Operations in January 1998. If2983Atrion meets the minimum requirements under the agreement until August 2003,2984then no payment will be required. If no payment is required, the Company intends2985to reverse the obligation of $969,204 in September 2003.</P>2986<P>On February 1, 1999, the sale of the facility to Atrion was consummated. The2987Company repaid the mortgage debt on the facility at the closing of the2988transaction. After repayment of the mortgage debt and expenses related to the2989transaction, the Company received $2.7 million of net proceeds. No material gain2990or loss was recorded on the sale of the facility except related to the tax2991abatement liability described above. The Company moved its operations to a299240,000 square foot leased facility in the North Dallas area during May 1999.2993Until such time, the Company leased space from Atrion at a monthly expense of2994$48,175 and paid Atrion fifty percent of certain operating expenses. The expense2995of moving and transitioning into the new leased facility was immaterial.</P>2996<P>Operating results of the CVS Operations have been reclassified and reported2997as discontinued operations. Summary operating results for the year ended2998December 31, 1998 for the CVS Operations were as follows (the 1998 period2999includes results for one month until the sale on January 30, 1998):</P>3000<PRE>300119983002--------------30033004Revenue $ 1,111,9923005Gross profit 206,4813006Loss from operations (307,120)3007Interest expense (34,225)3008--------------3009Loss before income tax benefit (341,345)3010Income tax benefit (129,711)3011--------------3012Net loss $ (211,634)3013==============3014</PRE>3015<P ALIGN=CENTER>Page 11</P>3016<HR>3017<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>3018Notes to Consolidated Financial Statements</B></P>3019<P>The above operating results of the CVS Operations reflect the revenues and3020expenses of the CVS Operations including direct and indirect expenses of the3021CVS Operations that are paid by the Company and charged directly to the CVS3022Operations. General overhead of the Company includes charges for regulatory,3023general corporate management, accounting and payroll services, human resources,3024management information systems and facilities expenses. These expenses were3025charged to the CVS Operations in amounts that approximate the discreet3026identifiable costs of the CVS Operations that will not continue after the sale.3027Management believes that the expenses charged to the CVS Operations on this3028basis are not materially different from the costs that would have been incurred3029had the CVS Operations borne such expenses on a direct basis.</P>3030<P>Interest expense on the Company’s corporate facility has been allocated3031to the CVS Operations based on space utilization. Interest expense on the3032Company’s general credit facilities was allocated to the CVS Operations3033based on the ratio of the net assets of the CVS Operations to the total net3034assets of the Company.</P>3035<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3036<TR>3037<TD WIDTH=5%><B>(10)</B></TD>3038<TD WIDTH=95%><B>Product Development Agreement</B></TD></TR></TABLE>3039<P>In June 1998, the Company entered an agreement with Sofamor Danek Group, Inc.3040(“Sofamor Danek”) under which the Company agreed to develop and3041manufacture for Sofamor Danek, products and systems for use in Deep Brain3042Stimulation (“DBS”). DBS products provide electrical stimulation to3043certain areas of the brain and are intended to relieve the effects of various3044neurological disorders, such as Parkinson’s Disease and Essential Tremor.3045Under terms of the agreement, the Company granted Sofamor Danek exclusive3046worldwide rights to use, market and sell the DBS products developed and3047manufactured by ANS. The Company received a cash payment of $4 million upon3048execution of the agreement that was being recognized into income as revenue3049based upon the estimated percentage of completion of the development project.3050During the year ended December 31, 1998, the Company recognized $3.1 million3051into income as revenue. Due to the termination of the agreement discussed below,3052the remaining $900,000 was recognized into income as revenue during January 19993053and is included in the Statements of Operations for the year ended December 31,30541999. The agreement also called for ANS to receive four additional payments of3055$2 million each, to be recognized into income upon the satisfactory completion3056of certain domestic and international regulatory milestones over the next3057several years.</P>3058<P>In December 1998, the Company and Sofamor Danek agreed to terminate the June30591998 DBS agreement due to the impending merger of Sofamor Danek and Medtronic,3060the Company’s sole competitor in the DBS market. Under the termination3061agreement, Sofamor Danek agreed to accelerate payments due the Company in the3062amount of $8 million and the Company agreed to release Sofamor Danek from3063further contractual obligations. The Company received the $8 million payment3064from Sofamor Danek in January 1999. The $8 million payment was recognized into3065revenue during January 1999 and is included in the Statements of Operations for3066the year ended December 31, 1999.</P>3067<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3068<TR>3069<TD WIDTH=5%><B>(11)</B></TD>3070<TD WIDTH=95%><B>Subsequent Events</B></TD></TR></TABLE>3071<P>On January 2, 2001, the Company acquired the assets of Implantable Devices3072Limited Partnership (IDP) and ESOX Technology Holdings, LLC (ESOX), two3073privately held Minnesota companies, for 119,100 shares of the Company’s3074common stock. Based on the closing price of ANS common stock on December 29,30752000, the value of the stock issued to acquire the assets was $2.43 million. The3076assets purchased consisted primarily of intellectual property and technology for3077the fully implantable constant-rate infusion pump that ANS has developed. Prior3078to the acquisition, the Company had licensed rights to the technology only for3079pain and cancer therapy applications.</P>3080<P ALIGN=CENTER>Page 12</P>3081<HR>3082<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>3083Notes to Consolidated Financial Statements</B></P>3084<P>Also on January 2, 2001, the Company completed the acquisition of Hi-tronics3085Designs, Inc. (HDI), a privately-held contract developer and original equipment3086manufacturer (OEM) of electro-mechanical devices with headquarters in Budd Lake,3087New Jersey. The Company acquired all of HDI’s outstanding stock through a3088merger in exchange for 1,104,725 shares of ANS common stock. The transaction3089will be accounted for on a pooling of interests basis. HDI developed and is the3090manufacturer of the Company’s totally implantable pulse generator (IPG)3091used in the treatment of chronic intractable pain and was also the OEM3092manufacturer of the transmitter used with the Company’s Renew3093radio-frequency spinal cord stimulation system. HDI’s revenues for its3094fiscal 2000, which ended November 30, 2000, were approximately $10.4 million,3095including approximately $1.6 million of revenue associated with sales to3096ANS.</P>3097<P>A summary of operations data as if the acquisition had taken place as of3098January 1, 1999, excluding the charges related to the acquisition, follows:</P>3099<PRE>31002000 1999 19983101------------- ------------- -------------31023103Revenues $ 31,826,998 $ 35,779,019 $ 26,516,8703104Net income $ 832,458 $ 5,816,922 $ 6,700,2313105Earnings per share $ .09 $ .64 $ .693106</PRE>3107<P ALIGN=CENTER>Page 13</P>3108<HR>3109<P ALIGN=RIGHT><B><U>Appendix B</U></B></P>3110<P></P><P></P><P></P>3111<P ALIGN=CENTER><B>Schedule II - Valuation and Qualifying Accounts</B></P>3112<P></P><P></P>3113<P ALIGN=CENTER><B>Forming a Part of the Annual Report<BR><BR>Form 10-K<BR><BR>3114Item 14<BR><BR><BR>of<BR><BR>ADVANCED NEUROMODULATION SYSTEMS, INC.<BR>3115(Name of issuer)</B></P>3116<P></P><P></P>3117<P ALIGN=CENTER><B>Filed with the<BR><BR>Securities and Exchange Commission<BR>3118<BR>Washington, D.C. 20549<BR><BR><BR>under<BR><BR>The Securities and Exchange3119Act of 1934</B></P>3120<HR>3121<PRE>3122Schedule II - Valuation and Qualifying Accounts3123Advanced Neuromodulation Systems, Inc. and Subsidiaries3124December 31, 200031253126Balance at Charged to3127Beginning Charged to Other Balance at3128Description of Year Expenses Accounts Deductions End of Year3129- ----------------------------------- ----------- ----------- ----------- ----------- -----------3130Year ended December 31, 2000:3131Continuing Operations:3132---------------------3133Allowance for doubtful accounts $ 140,824 $ 19,990 $ -- $ 30,559 $ 130,2553134Reserve for obsolete inventory 86,599 5,133 -- -- 91,7323135----------- ----------- ----------- ----------- -----------31363137Total $ 227,423 $ 25,123 $ -- $ 30,559 $ 221,9873138=========== =========== =========== =========== ===========31393140Year ended December 31, 1999:3141Continuing Operations:3142---------------------3143Allowance for doubtful accounts $ 249,607 $ 35,756 $ -- $ 144,539 $ 140,8243144Reserve for obsolete inventory 86,599 -- -- -- 86,5993145----------- ----------- ----------- ----------- -----------3146Total $ 336,206 $ 35,756 $ -- $ 144,539 $ 227,4233147=========== =========== =========== =========== ===========31483149Year ended December 31, 1998:3150Continuing Operations:3151---------------------3152Allowance for doubtful accounts $ 212,375 $ 25,000 $ -- $ (12,232)(1) $ 249,607(1)3153Reserve for obsolete inventory 56,005 50,709 -- 20,115 86,5993154----------- ----------- ----------- ----------- -----------3155Total $ 268,380 $ 75,709 $ -- $ 7,883 $ 336,2063156=========== =========== =========== =========== ===========31573158Discontinued Operations:3159-----------------------3160Allowance for doubtful accounts $ 30,610 $ 96,238 $ -- $ 126,848 $ --3161Reserve for obsolete inventory 154,347 -- -- 154,347 --3162----------- ----------- ----------- ----------- -----------3163Total $ 184,957 $ 96,238 $ -- $ 281,195 $ --3164=========== =========== =========== =========== ===========31653166(1) Includes $96,238 transferred from discontinued operations for accounts remaining with the Company.3167</PRE>3168<HR>3169<P ALIGN=RIGHT><B><U>Appendix C</U></B></P>3170<P></P><P></P><P></P>3171<P ALIGN=CENTER><B>Quarterly Financial Data<BR>(unaudited)</B></P>3172<P></P><P></P>3173<P ALIGN=CENTER><B>Forming a Part of the Annual Report<BR><BR>Form 10-K<BR><BR>3174Item 8<BR><BR><BR>of<BR><BR>ADVANCED NEUROMODULATION SYSTEMS, INC.<BR>(Name of3175issuer)</B></P>3176<P></P><P></P>3177<P ALIGN=CENTER><B>Filed with the<BR><BR>Securities and Exchange Commission<BR>3178<BR>Washington, D.C. 20549<BR><BR><BR>under<BR><BR>The Securities and Exchange3179Act of 1934</B></P>3180<HR>3181<PRE>31822000 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.3183- --------------------------------------------- ------------- ------------- ------------- -------------3184Net revenue- product sales $ 5,598,864 $ 5,707,692 $ 5,762,546 $ 6,012,5223185Total net revenue 5,598,864 5,707,692 5,762,546 6,012,5223186Gross profit- product sales 3,750,268 3,847,647 3,878,081 4,117,3073187Earnings from operations 189,880 312,995 277,552 328,4673188Earnings from operations before income taxes 317,937 449,975 425,617 494,3283189- --------------------------------------------- ------------- ------------- ------------- -------------3190Net earnings $ 181,132 $ 256,781 $ 239,357 $ 276,3743191- --------------------------------------------- ------------- ------------- ------------- -------------31923193- --------------------------------------------- ------------- ------------- ------------- -------------3194Basic earnings per share $ 0.02 $ 0.03 $ 0.03 $ 0.043195- --------------------------------------------- ------------- ------------- ------------- -------------31963197- --------------------------------------------- ------------- ------------- ------------- -------------3198Diluted earnings per share $ 0.02 $ 0.03 $ 0.03 $ 0.033199- --------------------------------------------- ------------- ------------- ------------- -------------3200320132021999 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.3203- --------------------------------------------- ------------- ------------- ------------- -------------3204Net revenue- product sales $ 4,595,238 $ 5,169,614 $ 5,488,479 $ 5,325,0533205Total net revenue 13,495,238 5,169,614 5,488,479 5,325,0533206Gross profit- product sales 3,235,058 3,583,979 3,413,948 3,716,4163207Earnings (loss) from operations 8,775,155 161,881 (70,851) (23,987)3208Earnings from operations before income taxes 8,957,826 375,382 97,758 117,6093209- --------------------------------------------- ------------- ------------- ------------- -------------3210Net earnings $ 5,446,358 $ 222,494 $ 216,135 $ 118,2943211- --------------------------------------------- ------------- ------------- ------------- -------------32123213- --------------------------------------------- ------------- ------------- ------------- -------------3214Basic earnings per share $ 0.70 $ 0.03 $ 0.03 $ 0.023215- --------------------------------------------- ------------- ------------- ------------- -------------32163217- --------------------------------------------- ------------- ------------- ------------- -------------3218Diluted earnings per share $ 0.67 $ 0.03 $ 0.03 $ 0.023219- --------------------------------------------- ------------- ------------- ------------- -------------3220</PRE>3221<HR>3222<P ALIGN=CENTER><B>INDEX TO EXHIBITS</B></P>3223<P></P>3224<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3225<TR>3226<TD WIDTH=10% ALIGN=RIGHT>Exhibit<BR><U>Number</U></TD>3227<TD WIDTH=5%></TD>3228<TD WIDTH=85% ALIGN=CENTER><U>Description</U></TD></TR>3229</TABLE>3230<P></P>3231<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3232<TR>3233<TD WIDTH=10% ALIGN=RIGHT VALIGN=TOP>2.1 </TD>3234<TD WIDTH=5%> </TD>3235<TD WIDTH=85%>Agreement and Plan of Merger, dated as of November 30, 2000, by3236and amoung Advanced Neuromodulation Systems, Inc., ANS Acquisition Corp, and3237Hi-tronics Designs, Inc.(10)</TD></TR>3238<TR>3239<TD ALIGN=RIGHT VALIGN=TOP>3.1 </TD>3240<TD></TD>3241<TD>Articles of Incorporation, as amended and restated(11)</TD></TR>3242<TR>3243<TD ALIGN=RIGHT VALIGN=TOP>3.2 </TD>3244<TD></TD>3245<TD>Bylaws(11)</TD></TR>3246<TR>3247<TD ALIGN=RIGHT VALIGN=TOP>4.1 </TD>3248<TD></TD>3249<TD>Rights Agreement dated as of August 30, 1996, between Quest Medical, Inc.3250and KeyCorp Shareholder Services, Inc. as Rights Agent(5)</TD></TR>3251<TR>3252<TD ALIGN=RIGHT VALIGN=TOP>10.1 </TD>3253<TD></TD>3254<TD>Quest Medical, Inc. 1979 Amended and Restated Employees Stock Option3255Plan(2)</TD></TR>3256<TR>3257<TD ALIGN=RIGHT VALIGN=TOP>10.2 </TD>3258<TD></TD>3259<TD>Form of 1979 Employees Stock Option Agreement(3)</TD></TR>3260<TR>3261<TD ALIGN=RIGHT VALIGN=TOP>10.3 </TD>3262<TD></TD>3263<TD>Quest Medical, Inc. Directors Stock Option Plan (as amended)(2)</TD></TR>3264<TR>3265<TD ALIGN=RIGHT VALIGN=TOP>10.4 </TD>3266<TD></TD>3267<TD>Form of Directors Stock Option Agreement(1)</TD></TR>3268<TR>3269<TD ALIGN=RIGHT VALIGN=TOP>10.5 </TD>3270<TD></TD>3271<TD>Quest Medical, Inc. 1987 Stock Option Plan(4)</TD></TR>3272<TR>3273<TD ALIGN=RIGHT VALIGN=TOP>10.6 </TD>3274<TD></TD>3275<TD>Form of 1987 Employee Stock Option Agreement(4)</TD></TR>3276<TR>3277<TD ALIGN=RIGHT VALIGN=TOP>10.7 </TD>3278<TD></TD>3279<TD>Quest Medical, Inc. 1995 Stock Option Plan(4)</TD></TR>3280<TR>3281<TD ALIGN=RIGHT VALIGN=TOP>10.8 </TD>3282<TD></TD>3283<TD>Form of 1995 Employee Stock Option Agreement(4)</TD></TR>3284<TR>3285<TD ALIGN=RIGHT VALIGN=TOP>10.9 </TD>3286<TD></TD>3287<TD>Quest Medical, Inc. 1998 Stock Option Plan(7)</TD></TR>3288<TR>3289<TD ALIGN=RIGHT VALIGN=TOP>10.10</TD>3290<TD></TD>3291<TD>Advanced Neuromodulation Systems, Inc. 2000 Stock Option Plan(9)</TD></TR>3292<TR>3293<TD ALIGN=RIGHT VALIGN=TOP>10.11</TD>3294<TD></TD>3295<TD>Employment Agreement dated April 9, 1998 between Christopher G. Chavez and3296Quest Medical, Inc.(6)</TD></TR>3297<TR>3298<TD ALIGN=RIGHT VALIGN=TOP>10.12</TD>3299<TD></TD>3300<TD>Employment Agreement dated April 9, 1998 between Scott F. Drees and Quest3301Medical, Inc.(6)</TD></TR>3302<TR>3303<TD ALIGN=RIGHT VALIGN=TOP>10.13</TD>3304<TD></TD>3305<TD>Employment Agreement dated April 9, 1998 between F. Robert Merrill III and3306Quest Medical, Inc.(6)</TD></TR>3307<TR>3308<TD ALIGN=RIGHT VALIGN=TOP>10.14</TD>3309<TD></TD>3310<TD>Form of Employment Agreement and Covenant Not to Compete, between the3311Company and key employees(1)</TD></TR>3312<TR>3313<TD ALIGN=RIGHT VALIGN=TOP>10.15</TD>3314<TD></TD>3315<TD>Lease Agreement dated as of February 4, 1999, between Advanced3316Neuromodulation Systems, Inc. and Legacy Lincoln I, LTD. (8)</TD></TR>3317<TR>3318<TD ALIGN=RIGHT VALIGN=TOP>11.1 </TD>3319<TD></TD>3320<TD>Computation of Earnings Per Share(11)</TD></TR>3321<TR>3322<TD ALIGN=RIGHT VALIGN=TOP>21.1 </TD>3323<TD></TD>3324<TD>Subsidiaries(11)</TD></TR>3325<TR>3326<TD ALIGN=RIGHT VALIGN=TOP>23.1 </TD>3327<TD></TD>3328<TD>Consent of Independent Auditors(11)</TD></TR>3329<TR>3330<TD ALIGN=RIGHT VALIGN=TOP>27.1 </TD>3331<TD></TD>3332<TD>Financial Data Schedule - December 31, 2000(11)</TD></TR>3333</TABLE>3334<P>__________________________________</P>3335<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3336<TR>3337<TD WIDTH=5% VALIGN=TOP>(1) </TD>3338<TD WIDTH=2%></TD>3339<TD WIDTH=93%>Filed as an Exhibit to the Company's Registration Statement on3340Form S-18, Registration No. 2-71198-FW, and incorporated herein by reference.3341</TD></TR>3342<TR>3343<TD>(2) </TD>3344<TD></TD>3345<TD>Filed as an Exhibit to the report of the Company on Form 10-K for the year3346ended December 31, 1987, and incorporated herein by reference.</TD></TR>3347<TR>3348<TD>(3) </TD>3349<TD></TD>3350<TD>Filed as an Exhibit to the Company's Registration Statement on Form S-1,3351Registration No. 2-78186, and incorporated herein by reference.</TD></TR>3352<TR>3353<TD>(4) </TD>3354<TD></TD>3355<TD>Filed as an Exhibit to the Company's Registration Statement on Form SB-2,3356Registration No. 33-62991, and incorporated herein by reference.</TD></TR>3357<TR>3358<TD>(5) </TD>3359<TD></TD>3360<TD>Filed as an Exhibit to the report of the Company on Form 8-K dated September33613, 1996, and incorporated herein by reference.</TD></TR>3362<TR>3363<TD>(6) </TD>3364<TD></TD>3365<TD>Filed as an Exhibit to the report of the Company on Form 10-Q dated for the3366quarterly period ended March 31, 1998, and incorporated herein by reference.3367</TD></TR>3368<TR>3369<TD>(7) </TD>3370<TD></TD>3371<TD>Filed as an Exhibit to the Definitive Proxy Statement on Schedule 14A dated3372April 27, 1998, and incorporated herein by reference.</TD></TR>3373<TR>3374<TD>(8) </TD>3375<TD></TD>3376<TD>Filed as an Exhibit to the report of the Company on Form 10-K dated for the3377year ended December 31, 1998, and incorporated herein by reference.</TD></TR>3378<TR>3379<TD>(9) </TD>3380<TD></TD>3381<TD>Filed as an Exhibit to the Definitive Proxy Statement on Schedule 14A dated3382April 17, 2000, and incorporated herein by reference.</TD></TR>3383<TR>3384<TD>(10)</TD>3385<TD></TD>3386<TD>Filed as an Exhibit to the report of the Company on Form 8-K dated January33879, 2001, and incorporated herein by reference. Upon request, the Company will3388furnish a copy of any omitted schedule to the Commission.</TD></TR>3389<TR>3390<TD>(11)</TD>3391<TD></TD>3392<TD>Filed herewith.</TD></TR>3393</TABLE>3394<HR>3395<P></P>3396<P></P>3397<P></P>3398<P></P>3399<P></P>3400<P></P>3401<P ALIGN=CENTER><B>EXHIBIT 3.1</B></P>3402<P></P>3403<P></P>3404<P></P>3405<P></P>3406<P></P>3407<P></P>3408<HR>3409<P ALIGN=CENTER><B>ARTICLES OF INCORPORATION</B></P>3410<P ALIGN=CENTER><B>OF</B></P>3411<P ALIGN=CENTER><B>ADVANCED NEUROMODULATION SYSTEMS, INC.</B></P>3412<P ALIGN=CENTER>(restated March 2001 for purposes of filing with the Securities3413and Exchange Commission)</P>3414<P ALIGN=CENTER><B>ARTICLE ONE</B></P>3415<P>The name of the corporation is Advanced Neuromodulation Systems, Inc. (the3416"Corporation")</P>3417<P ALIGN=CENTER><B>ARTICLE TWO</B></P>3418<P>The period of duration of the Corporation is perpetual.</P>3419<P ALIGN=CENTER><B>ARTICLE THREE</B></P>3420<P>The purpose for which the Corporation is organized is to engage in the3421transaction of any and all lawful business for which Corporations may be3422incorporated under the Texas Business Corporation Act.</P>3423<P ALIGN=CENTER><B>ARTICLE FOUR</B></P>3424<P>The Corporation shall have authority to issue 25,000,000 shares of common3425stock, $.05 par value (“Common Stock”). Each share of Common Stock3426shall have identical rights and privileges in every respect.</P>3427<P ALIGN=CENTER><B>ARTICLE FIVE</B></P>3428<P>No holder of any shares of Common Stock shall have any preemptive or3429preferential right to receive, purchase, or subscribe to (a) any unissued or3430treasury shares of any class of stock (whether now or hereafter authorized) of3431the Corporation, (b) any obligations, evidences of indebtedness, or other3432securities of the Corporation convertible into or exchangeable for, or carrying3433or accompanied by any rights to receive, purchase, or subscribe to, any such3434unissued or treasury shares, (c) any right of subscription to or right to3435receive, or any warrant or option for the purchase of, any of the foregoing3436securities, or (d) any other securities that may be issued or sold by the3437Corporation.</P>3438<P ALIGN=CENTER><B>ARTICLE SIX</B></P>3439<P>The Corporation will not commence business until it has received for the3440issuance of its shares consideration of the value of $1,000, consisting of3441money, labor done, or property actually received.</P>3442<P ALIGN=CENTER><B>ARTICLE SEVEN</B></P>3443<P>Cumulative voting for the election of directors is expressly denied and3444prohibited.</P>3445<P ALIGN=CENTER><B>ARTICLE EIGHT</B></P>3446<P>No contract or other transaction between the Corporation and any other person3447(as used herein the term “person” means an individual, firm, trust,3448partnership, joint venture, association, corporation, or other entity) shall be3449affected or invalidated by the fact that any director of the Corporation is3450interested in, or is a member, director, or an officer of, such other person,3451and any director may be a party to or may be interested in any contract or3452transaction of the Corporation or in which the Corporation is interested; and no3453contract, act, or transaction of the Corporation with any person shall be3454affected or invalidated by the fact that any director of the Corporation is a3455party to, or interested in, such contract, act, or transaction, or in any way3456connected with such person. Each and every person who may become a director of3457the Corporation is hereby relieved from any liability that might otherwise exist3458from contracting with the Corporation for the benefit of himself or any person3459in which he may be in any way interested; provided that the fact of such3460interest shall have been disclosed to or shall be known by the other directors3461or the shareholders of the Corporation, as the case may be, acting upon or with3462reference to such act, contract, or transaction, even though the presence at a3463meeting or vote or votes of such interested director might have been necessary3464to obligate the Corporation upon such act, contract, or transaction.</P>3465<HR>3466<P ALIGN=CENTER><B>ARTICLE NINE</B></P>3467<P>To the extent permitted by applicable law, and by resolution or other proper3468action of the board of directors of the Corporation, the Corporation may3469indemnify (a) any present or former director or officer of the Corporation, (b)3470any other employee or agent of the Corporation, and (c) any other person serving3471at the request of the Corporation as a director, trustee, officer, employee, or3472agent of another corporation, domestic or foreign, nonprofit or for profit,3473partnership, joint venture, association, trust, or other enterprise, against3474expenses, including attorneys’ fees, judgments, fines, and amounts paid in3475settlement actually and reasonably incurred in connection with any threatened,3476pending, or completed action, suit, or proceeding to which any such person is,3477or is threatened to be made, a party and which may arise by reason of the fact3478he is or was a person occupying any such office or position.</P>3479<P ALIGN=CENTER><B>ARTICLE TEN</B></P>3480<P>The Corporation shall have the authority to purchase, directly or indirectly,3481its own shares to the extent of the aggregate of the unrestricted capital3482surplus available therefore and unrestricted reduction surplus available3483therefore, without submitting such purchase to a vote of the shareholders of the3484Corporation.</P>3485<P ALIGN=CENTER><B>ARTICLE ELEVEN</B></P>3486<P>Any action of the Corporation which, under the provisions of the Texas3487Business Corporation Act, is required to be authorized or approved by the3488holders of two-thirds or any other specified fraction which is in excess of3489one-half or any specified percentage which is in excess of 50%, of the3490outstanding shares (or any class or series thereof) of the Corporation shall,3491notwithstanding any such provisions of the Texas Business Corporation Act, be3492deemed effectively and properly authorized or approved if authorized or approved3493by the vote of the holders of more than 50% of the outstanding shares entitled3494to vote thereon (or, if the holders of any class or series of the3495Corporation’s shares shall be entitled by the Texas Business Corporation3496Act to vote thereon separately as a class, by the vote of the holders of more3497than 50% of the outstanding shares of each such class or series). Nothing3498contained in this article is intended to require shareholder authorization or3499approval of any action of the Corporation whatsoever unless such authorization3500or approval is specifically required by the other provisions of these articles3501of incorporation, the bylaws of the Corporation, or by the Texas Business3502Corporation Act.</P>3503<HR>3504<P ALIGN=CENTER><B>ARTICLE TWELVE</B></P>3505<P>The post office address of the registered office of the Corporation is 65013506Windcrest Dr., Suite 100, Plano, Texas 75024, and the name of its registered3507agent at such address is Christopher G. Chavez.</P>3508<P ALIGN=CENTER><B>ARTICLE THIRTEEN</B></P>3509<P>The number of directors constituting the board of directors of the3510Corporation is seven, and the names and addresses of the persons who are to3511serve as directors until the next annual meeting of shareholders and until their3512successors are elected and qualified are:</P>3513<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3514<TR>3515<TD WIDTH=30%><U>Name</U></TD>3516<TD WIDTH=70%><U>Address</U></TD></TR>3517<TR>3518<TD>Hugh M. Morrison</TD>3519<TD>6501 Windcrest Dr., Suite 100, Plano, Texas 75024</TD></TR>3520<TR>3521<TD>Christopher G. Chavez</TD>3522<TD>6501 Windcrest Dr., Suite 100, Plano, Texas 75024</TD></TR>3523<TR>3524<TD>Robert C. Eberhart</TD>3525<TD>6501 Windcrest Dr., Suite 100, Plano, Texas 75024</TD></TR>3526<TR>3527<TD>Joseph E. Laptewicz</TD>3528<TD>6501 Windcrest Dr., Suite 100, Plano, Texas 75024</TD></TR>3529<TR>3530<TD>A. Ronald Lerner</TD>3531<TD>6501 Windcrest Dr., Suite 100, Plano, Texas 75024</TD></TR>3532<TR>3533<TD>Richard D. Nikolaev</TD>3534<TD>6501 Windcrest Dr., Suite 100, Plano, Texas 75024</TD></TR>3535<TR>3536<TD>Michael J. Torma</TD>3537<TD>6501 Windcrest Dr., Suite 100, Plano, Texas 75024</TD></TR>3538</TABLE>3539<P ALIGN=CENTER><B>ARTICLE FOURTEEN</B></P>3540<P>A director of the Corporation is not liable to the Corporation or its3541shareholders for monetary damages for an act or omission in the director’s3542capacity as a director, except that this article does not eliminate or limit the3543liability of a director for:</P>3544<OL>3545<LI>a breach of a director's duty of loyalty to the3546Corporation or its shareholders;3547<LI>an act or omission not in good faith or that3548involves intentional misconduct or a knowing violation of the law;3549<LI>a transaction from which a director received an3550improper benefit, whether or not the benefit resulted from an action taken3551within the scope of the director's office;3552<LI>an act or omission for which the liability of a director is expressly3553provided for by statute; or3554<LI>an act related to an unlawful stock repurchase or payment of a3555dividend.</OL>3556<HR>3557<P>If the Texas Business Corporation Act, Texas Miscellaneous Corporation Laws3558or related laws are amended after approval by the shareholders of this Article3559to authorize corporation action further eliminating or limiting the personal3560liability of directors, then the liability of a director of the Corporation3561shall be eliminated or limited to the fullest extent permitted by applicable3562Texas law, as so amended.</P>3563<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3564<TR>3565<TD WIDTH=40%></TD>3566<TD WIDTH=60%>ADVANCED NEUROMODULATION SYSTEMS, INC.</TD></TR>3567<TR>3568<TD> </TD><TD></TD></TR><TR>3569<TD> </TD>3570<TD><U>/s/F. Robert Merrill III</U></TD></TR><TR>3571<TD> </TD>3572<TD>F. Robert Merrill III</TD></TR><TR>3573<TD> </TD>3574<TD>Executive Vice President - Finance,</TD></TR><TR>3575<TD> </TD>3576<TD>Treasurer and Secretary</TD></TR></TABLE>3577<HR>3578<P></P>3579<P></P>3580<P></P>3581<P></P>3582<P></P>3583<P></P>3584<P ALIGN=CENTER><B>EXHIBIT 3.2</B></P>3585<P></P>3586<P></P>3587<P></P>3588<P></P>3589<P></P>3590<P></P>3591<HR>3592<P ALIGN=CENTER>AMENDED AND RESTATED BYLAWS<BR><BR>OF<BR><BR>ADVANCED3593NEUROMODULATION SYSTEMS, INC., a Texas Corporation</P>3594<P ALIGN=CENTER>(Restated in March 2001 for purposes of filing with the3595Securities and Exchange Commission)</P>3596<P></P>3597<P ALIGN=CENTER>PREAMBLE</P>3598<P></P>3599<P>These bylaws are subject to, and governed by, the Texas Business Corporation3600Act and the articles of incorporation of Advanced Neuromodulation Systems, Inc.3601(the “Corporation”). In the event of a direct conflict between the3602provisions of these bylaws and the mandatory provisions of the Texas Business3603Corporation Act or the provisions of the articles of incorporation of the3604Corporation, such provisions of the Texas Business Corporation Act or the3605articles of incorporation of the Corporation, as the case may be, will be3606controlling.</P>3607<P></P>3608<P ALIGN=CENTER>ARTICLE ONE: OFFICES</P>3609<P></P>3610<P>1.01 <U>Registered Office and Agent.</U> The3611registered office and registered agent of the Corporation shall be as designated3612from time to time by the appropriate filing by the Corporation in the office of3613the Secretary of State of Texas.</P>3614<P>1.02 <U>Other Offices</U>. The Corporation may also3615have offices at such other places, both within and without the State of Texas,3616as the board of directors may from time to time determine or the business of the3617Corporation may require.</P>3618<P></P>3619<P ALIGN=CENTER>ARTICLE TWO: SHAREHOLDERS</P>3620<P></P>3621<P>2.01 <U>Annual Meetings.</U> An annual meeting of3622shareholders of the Corporation shall be held during each calendar year on such3623date and at such time as shall be designated from time to time by the board of3624directors and stated in the notice of the meeting. At such meeting, the3625shareholders shall elect directors and transact such other business as may3626properly be brought before the meeting.</P>3627<P>2.02 <U>Special Meetings</U>. A special meeting of the3628shareholders may be called at any time by the chairman of the board, the3629president, the board of directors, or the holders of not less than ten percent3630of all shares entitled to vote at such meeting. Only such business shall be3631transacted at a special meeting as may be stated or indicated in the notice of3632such meeting.</P>3633<P>2.03 <U>Place of Meetings</U>. The annual meeting of3634shareholders may be held at any place within or without the State of Texas as3635may be designated by the board of directors. Special meetings of shareholders3636may be held at any place within or without the State of Texas as may be3637designated by the person or persons calling such special meeting as provided in3638Section 2.02. If no place for a meeting is designated, it shall be held at the3639registered office of the Corporation.</P>3640<P>2.04 <U>Notice</U>. Written or printed notice stating3641the place, day, and hour of each meeting of shareholders, and, in case of a3642special meeting, the purpose or purposes for which the meeting is called, shall3643be delivered not less than ten nor more than 50 days before the date of the3644meeting, either personally or by mail, by or at the direction of the chairman of3645the board, the president, the secretary, or the person calling the meeting, to3646each shareholder of record entitled to vote at such meeting.</P>3647<HR>3648<P>2.05 <U>Voting List</U>. At least ten days before each3649meeting of shareholders, the secretary shall prepare a complete list of3650shareholders entitled to vote at such meeting, arranged in alphabetical order,3651including the address of each shareholder and the number of voting shares held3652by each shareholder. For a period of ten days prior to such meeting, such list3653shall be kept on file at the registered office of the Corporation and shall be3654subject to inspection by any shareholder during usual business hours. Such list3655shall be produced at such meeting, and at all times during such meeting shall be3656subject to inspection by any shareholder. The original stock transfer books3657shall be prima facie evidence as to who are the shareholders entitled to examine3658such list or stock transfer books.</P>3659<P>2.06 <U>Voting of Shares</U>. Treasury shares, shares3660of the Corporation’s own stock owned by another corporation the majority of3661the voting stock of which is owned or controlled by the Corporation, and shares3662of the Corporation’s own stock held by another corporation in a fiduciary3663capacity, shall not be shares entitled to vote or to be counted in determining3664the total number of outstanding shares. Shares held by an administrator,3665executor, guardian, or conservator may be voted by him, either in person or by3666proxy, without transfer of such shares into his name so long as such shares form3667a part of the estate and are in the possession of the estate being served by3668him. Shares standing in the name of a trustee may be voted by him, either in3669person or by proxy, only after the shares have been transferred into his name as3670trustee. Shares standing in the name of a receiver may be voted by such3671receiver, and shares held by or under the control of a receiver may be voted by3672such receiver without transfer of such shares into his name if authority to do3673so is contained in the court order by which such receiver was appointed. Shares3674standing in the name of another domestic or foreign corporation of any type or3675kind may be voted by such officer, agent, or proxy as the bylaws of such3676corporation may provide or, in the absence of such provision, as the board of3677directors of such corporation may determine. A shareholder whose shares are3678pledged shall be entitled to vote such shares until they have been transferred3679into the name of the pledgee, and thereafter, the pledgee shall be entitled to3680vote such shares.</P>3681<P>2.07 <U>Quorum</U>. The holders of a majority of the3682outstanding shares entitled to vote, present in person or represented by proxy,3683shall constitute a quorum at any meeting of shareholders, except as otherwise3684provided by law, the articles of incorporation, or these bylaws. If a quorum3685shall not be present or represented at any meeting of shareholders, a majority3686of the shareholders entitled to vote at the meeting, who are present in person3687or represented by proxy, may adjourn the meeting from time to time, without3688notice other than announcement at the meeting, until a quorum shall be present3689or represented. At any reconvening of an adjourned meeting at which a quorum3690shall be present or represented any business may be transacted which could have3691been transacted at the original meeting, if a quorum had been present or3692represented.</P>3693<P>2.08 <U>Majority Vote; Withdrawal of Quorum.</U> If a3694quorum is present in person or represented by proxy at any meeting, the vote of3695the holders of a majority of the outstanding shares entitled to vote, present in3696person or represented by proxy, shall decide any question brought before such3697meeting, unless the question is one on which, by express provision of law, the3698articles of incorporation, or these bylaws, a different vote is required, in3699which event such express provision shall govern and control the decision of such3700question. The shareholders present at a duly convened meeting may continue to3701transact business until adjournment, notwithstanding any withdrawal of3702shareholders which may leave less than a quorum remaining.</P>3703<HR>3704<P>2.09 <U>Method of Voting; Proxies</U>. Every3705shareholder of record shall be entitled at every meeting of shareholders to one3706vote on each matter submitted to a vote, for every share standing in his name on3707the original stock transfer books of the Corporation except to the extent that3708the voting rights of the shares of any class or classes are limited or denied by3709the articles of incorporation. Such books shall be prima facie evidence as to3710the identity of shareholders entitled to vote. At any meeting of shareholders,3711every shareholder having the right to vote may vote either in person or by a3712proxy executed in writing by the shareholder or by his duly authorized3713attorney-in-fact. Each such proxy shall be filed with the secretary of the3714Corporation before or at the time of the meeting. No proxy shall be valid after371511 months from the date of its execution, unless otherwise provided in the3716proxy. If no date is stated on a proxy, such proxy shall be presumed to have3717been executed on the date of the meeting at which it is to be voted. Each proxy3718shall be revocable, unless expressly provided therein to be irrevocable, or3719unless otherwise made irrevocable by law.</P>3720<P>2.10 <U>Closing of Transfer Books; Record Date.</U>3721For the purpose of determining shareholders entitled to notice of or to vote at3722any meeting of shareholders or any reconvening thereof or entitled to receive3723payment of any dividend or in order to make a determination of shareholders for3724any other proper purpose, the board of directors may provide that the stock3725transfer books of the Corporation shall be closed for a stated period but not to3726exceed in any event 50 days. If the stock transfer books are closed for the3727purpose of determining shareholders entitled to notice of or to vote at a3728meeting of shareholders, such books shall be closed for at least ten days3729immediately preceding such meeting. In lieu of closing the stock transfer books,3730the board of directors may fix in advance a date as the record date for any such3731determination of shareholders, such date in any case to be not more than 50 days3732and, in case of a meeting of shareholders, not less than ten days prior to the3733date on which the particular action requiring such determination of shareholders3734is to be taken. If the stock transfer books are not closed and if no record date3735is fixed for the determination of shareholders entitled to notice of or to vote3736at a meeting of shareholders or entitled to receive payment of a dividend, the3737date on which the notice of the meeting is mailed or the date on which the3738resolution of the board of directors declaring such dividend is adopted, as the3739case may be, shall be the record date for such determination of shareholders.3740</P>3741<P>2.11 <U>Presiding Officials at Meetings</U>. Unless3742some other person or persons are elected by a vote of a majority of the shares3743then entitled to vote at a meeting of shareholders, the chairman of the board3744shall preside at and the secretary shall prepare minutes of each meeting of3745shareholders. </P>3746<P></P>3747<P ALIGN=CENTER>ARTICLE THREE: DIRECTORS</P>3748<P></P>3749<P>3.01 <U>Management</U>. The business and affairs of3750the Corporation shall be managed by the board of directors, subject to the3751restrictions imposed by law, the articles of incorporation, or these bylaws.3752</P>3753<P>3.02 <U>Number; Election; Term; Qualification</U>. The3754first board of directors shall consist of the number of directors named in the3755articles of incorporation. Thereafter, the number of directors which shall3756constitute the entire board of directors shall be determined by resolution of3757the board of directors at any meeting thereof or by the shareholders at any3758meeting thereof, but shall never be less than one. At each annual meeting of3759shareholders, directors shall be elected to hold office until the next annual3760meeting of shareholders and until their successors are elected and qualified. No3761director need be a shareholder, a resident of the State of Texas, or a citizen3762of the United States.</P>3763<P>3.03 <U>Decreases in Number</U>. No decrease in the3764number of directors constituting the entire board of directors shall have the3765effect of shortening the term of any incumbent director.</P>3766<HR>3767<P>3.04 <U>Removal</U>. At any meeting of shareholders3768called expressly for that purpose, any director or the entire board of directors3769may be removed, with or without cause, by a vote of the holders of a majority of3770the shares then entitled to vote on the election of directors.</P>3771<P>3.05 <U>Vacancies; Increases in Number</U>. Any3772vacancy occurring in the board of directors (by death, resignation, removal, or3773otherwise) may be filled by the affirmative vote of a majority of the remaining3774directors though less than a quorum of the board of directors. A director3775elected to fill a vacancy shall be elected to serve for the unexpired term of3776his predecessor in office. In case of any increase in the number of directors3777constituting the entire board of directors, the additional directors shall be3778elected at a meeting of shareholders.</P>3779<P>3.06 <U>First Meeting</U>. Each newly elected board of3780directors may hold its first meeting for the purpose of organization and the3781transaction of business, if a quorum is present, immediately after and at the3782same place as the annual meeting of shareholders, and notice of such meeting3783shall not be necessary.</P>3784<P>3.07 <U>Regular Meetings</U>. Regular meetings of the3785board of directors may be held without notice at such times and places as may be3786designated from time to time by the chairman of the board, or by resolution of3787the board of directors and communicated to all directors. </P>3788<P>3.08 <U>Special Meetings</U>. A special meeting of the3789board of directors shall be held whenever called by any director at such time3790and place as such director shall designate in the notice of such special3791meeting. The director calling any special meeting shall cause notice of such3792special meeting to be given to each director at least 24 hours before such3793special meeting. Neither the business to be transacted at, nor the purpose of,3794any special meeting of the board of directors need be specified in the notice or3795waiver of notice of any special meeting. </P>3796<P>3.09 <U>Quorum; Majority Vote</U>. At all meetings of3797the board of directors, a majority of the directors, fixed in the manner3798provided in these bylaws, shall constitute a quorum for the transaction of3799business. If a quorum is not present at a meeting, a majority of the directors3800present may adjourn the meeting from time to time, without notice other than an3801announcement at the meeting, until a quorum is present. The vote of a majority3802of the directors present at a meeting at which a quorum is in attendance shall3803be the act of the board of directors, unless the vote of a different number is3804required by the articles of incorporation or these bylaws.</P>3805<P>3.10 <U>Procedure; Minutes</U>. At meetings of the3806board of directors, business shall be transacted in such order as the chairman3807of the board or the board of directors may determine from time to time. If3808present, the chairman of the board shall preside at the meeting. If not so3809present, the board of directors shall appoint at the meeting another director to3810preside at the meeting and a person to act as secretary of the meeting. The3811secretary of the meeting shall prepare minutes of the meeting which shall be3812delivered to the secretary of the Corporation for placement in the minute books3813of the Corporation.</P>3814<P>3.11 <U>Presumption of Assent</U>. A director of the3815Corporation who is present at any meeting of the board of directors at which3816action on any matter is taken shall be presumed to have assented to the action3817unless his dissent shall be entered in the minutes of the meeting or unless he3818shall file his written dissent to such action with the person acting as3819secretary of the meeting before the adjournment thereof or shall forward any3820dissent by certified or registered mail to the secretary of the Corporation3821immediately after the adjournment of the meeting. Such right to dissent shall3822not apply to a director who voted in favor of such action. </P>3823<HR>3824<P>3.12 <U>Compensation</U>. Directors, in their capacity3825as directors, may receive, by resolution of the board of directors, a fixed sum3826and expenses of attendance, if any, for attending meetings of the board of3827directors or a stated salary. No director shall be precluded from serving the3828Corporation in any other capacity or receiving compensation there for. </P>3829<P></P>3830<P ALIGN=CENTER>ARTICLE FOUR: COMMITTEES</P>3831<P></P>3832<P>4.01 <U>Designation.</U> The board of directors may,3833by resolution adopted by a majority of the entire board of directors, designate3834executive and other committees.</P>3835<P>4.02 <U>Number; Qualification; Term</U>. Each3836committee shall consist of one or more directors appointed by resolution adopted3837by a majority of the entire board of directors. The number of committee members3838may be increased or decreased from time to time by resolution adopted by a3839majority of the entire board of directors. Each committee member shall serve as3840such until the expiration of his term as a director or his earlier resignation,3841unless sooner removed as a committee member or as a director. </P>3842<P>4.03 <U>Authority</U>. The executive committee, unless3843expressly restricted in the resolution adopted by a majority of the entire board3844of directors establishing the executive committee, shall have and may exercise3845all of the authority of the board of directors in the management of the business3846and affairs of the Corporation. Each other committee, to the extent expressly3847provided for in the resolution adopted by a majority of the entire board of3848directors establishing such committee, shall have and may exercise all of the3849authority of the board of directors in the management of the business and3850affairs of the Corporation. However, no committee shall have the authority of3851the board of directors in reference to: </P>3852<OL TYPE=a>3853<LI>amending the articles of incorporation;3854<LI>approving a plan of merger or consolidation;3855<LI>recommending to the shareholders the sale, lease, or exchange of all or3856substantially all of the property and assets of the Corporation otherwise than3857in the usual and regular course of its business;3858<LI>recommending to the shareholders a voluntary dissolution of the Corporation3859or a revocation thereof;3860<LI>amending, altering, or repealing these bylaws or adopting new bylaws;3861<LI>filling vacancies in or removing members of the board of directors or of any3862committee;3863<LI>electing or removing officers or committee members;3864<LI>fixing the compensation of any committee member; and3865<LI>altering or repealing any resolution of the board of directors which by its3866terms provides that it shall not be amendable or repealable.</OL>3867<P>In the resolution adopted by a majority of the entire board of directors3868establishing an executive or other committee, the board of directors may3869expressly authorize such committee to declare dividends or to authorize the3870issuance of shares of the Corporation.</P>3871<P>4.04 <U>Committee Changes.</U> The board of directors3872shall have the power at any time to fill vacancies in, to change the membership3873of, and to discharge any committee. However, a committee member may be removed3874by the board of directors, only if, in the judgment of the board of directors,3875the best interests of the Corporation will be served thereby, but such removal3876shall be without prejudice to the contract rights, if any, of the person so3877removed.</P>3878<HR>3879<P>4.05 <U>Regular Meetings.</U> Regular meetings of any3880committee may be held without notice at such times and places as may be3881designated from time to time by resolution of the committee and communicated to3882all committee members.</P>3883<P>4.06 <U>Special Meetings</U>. A special meeting of any3884committee may be held whenever called by any committee member at such time and3885place as such committee member shall designate in the notice of such special3886meeting. The committee member calling any special meeting shall cause notice of3887such special meeting to be given to each committee member at least 12 hours3888before such special meeting. Neither the business to be transacted at, nor the3889purpose of, any special meeting of any committee need be specified in the notice3890or waiver of notice or any special meeting. </P>3891<P>4.07 <U>Quorum; Majority Vote</U>. At all meetings of3892any committee, a majority of the number of committee members designated by the3893board of directors shall constitute a quorum for the transaction of business. If3894a quorum is not present at a meeting of any committee, a majority of the3895committee members present may adjourn the meeting from time to time, without3896notice other than an announcement at the meeting, until a quorum is present. The3897vote of a majority of the committee members present at any meeting at which a3898quorum is in attendance shall be the act of a committee, unless the vote of a3899different number is required by the articles of incorporation or these bylaws.3900</P>3901<P>4.08 <U>Minutes</U>. Each committee shall cause3902minutes of its proceedings to be prepared and shall report the same to the board3903of directors upon the request of the board of directors. The minutes of the3904proceedings of each committee shall be delivered to the secretary of the3905Corporation for placement in the minute books of the Corporation. </P>3906<P>4.09 <U>Compensation</U>. Committee members may, by3907resolution of the board of directors, be allowed a fixed sum and expenses of3908attendance, if any, for attending any committee meetings or a stated salary.3909</P>3910<P>4.10 <U>Responsibility</U>. The designation of any3911committee and the delegation of authority to it shall not operate to relieve the3912board of directors or any director of any responsibility imposed upon it or such3913director by law.</P>3914<P></P>3915<P ALIGN=CENTER>ARTICLE FIVE: GENERAL PROVISIONS RELATING TO MEETINGS</P>3916<P></P>3917<P>5.01 <U>Notice</U>. Whenever by law, the articles of3918incorporation, or these bylaws, notice is required to be given to any3919shareholder, director, or committee member and no provision is made as to how3920such notice shall be given, it shall be construed to mean that notice may be3921given either (a) in person, (b) in writing, by mail, (c) except in the case of a3922shareholder, by telegram, telex, cable, telecopies, or similar means, or (d) by3923any other method permitted by law. Any notice required or permitted to be given3924hereunder (other than personal notice) shall be addressed to such shareholder,3925director, or committee member at his address as it appears on the books of the3926Corporation or, in the case of a shareholder, on the stock transfer records of3927the Corporation or at such other place as such shareholder, director, or3928committee member is known to be at the time notice is mailed or transmitted. Any3929notice required or permitted to be given by mail shall be deemed to be delivered3930and given at the time when the same is deposited in the United States mail,3931postage prepaid. Any notice required or permitted to be given by telegram,3932telex, cable, telecopier, or similar means shall be deemed to be delivered and3933given at the time transmitted.</P>3934<HR>3935<P>5.02 <U>Waiver of Notice</U>. Whenever by law, the3936articles of incorporation, or these bylaws, any notice is required to be given3937to any shareholder, director, or committee member of the Corporation a waiver3938thereof in writing signed by the person or persons entitled to such notice,3939whether before or after the time notice should have been given, shall be3940equivalent to the giving of such notice. Attendance of a director at a meeting3941shall constitute a waiver of notice of such meeting, except where a director3942attends a meeting for the express purpose of objecting to the transaction of any3943business on the ground that the meeting is not lawfully called or convened. </P>3944<P>5.03 <U>Telephone and Similar Meetings.</U>3945Shareholders, directors, or committee members may participate in and hold a3946meeting by means of a conference telephone or similar communications equipment3947by means of which persons participating in the meeting can hear each other.3948Participation in such a meeting shall constitute presence in person at such3949meeting, except where a person participates in the meeting for the express3950purpose of objecting to the transaction of any business on the ground that the3951meeting is not lawfully called or convened.</P>3952<P>5.04 <U>Action Without Meeting</U>. Any action which3953may be taken, or is required by law, the articles of incorporation, or these3954bylaws to be taken, at a meeting of shareholders, directors, or committee3955members may be taken without a meeting if a consent in writing, setting forth3956the action so taken, shall be signed by all of the shareholders, directors, or3957committee members, as the case may be, entitled to vote with respect to the3958subject matter thereof, and such consent shall have the same force and effect,3959as of the date stated therein, as a unanimous vote of such shareholders,3960directors, or committee members, as the case may be, and may be stated as such3961in any document filed with the Secretary of State of Texas or in any certificate3962or other document delivered to any person. The consent may be in one or more3963counterparts so long as each shareholder, director, or committee member signs3964one of the counterparts. The signed consent shall be placed in the minute books3965of the Corporation.</P>3966<P></P>3967<P ALIGN=CENTER>ARTICLE SIX: OFFICERS AND OTHER AGENTS</P>3968<P></P>3969<P>6.01 <U>Number; Titles; Election; Term</U>. The3970Corporation shall have a president and a secretary, and such other officers and3971agents as the board of directors may deem desirable. The board of directors3972shall elect a president and secretary at its first meeting at which a quorum3973shall be present after the annual meeting of shareholders or whenever a vacancy3974exists. The board of directors then, or from time to time, may also elect or3975appoint one or more other officers or agents as it shall deem advisable. Each3976officer and agent shall hold office until his successor has been elected or3977appointed and qualified, or, if earlier, at his death, resignation, or removal.3978Any two or more offices may be held by the same person. No officer or agent need3979be a shareholder, a director, a resident of the State of Texas, or a citizen of3980the United States.</P>3981<P>6.02 <U>Removal</U>. Any officer or agent elected or3982appointed by the board of directors may be removed by the board of directors,3983whenever, in the judgment of the board of directors, the best interests of the3984Corporation will be served thereby, but such removal shall be without prejudice3985to the contract rights, if any, of the person so removed. Election or3986appointment of an officer or agent shall not of itself create contract rights.3987</P>3988<P>6.03 <U>Vacancies.</U> Any vacancy occurring in any3989office of the Corporation (by death, resignation, removal, or otherwise) may be3990filled by the board of directors.</P>3991<P>6.04 <U>Authority</U>. Officers shall have such3992authority and perform such duties in the management of the Corporation as are3993provided in these bylaws or as may be determined by resolution of the board of3994directors not inconsistent with these bylaws.</P>3995<HR>3996<P>6.05 <U>Compensation.</U> The compensation, if any, of3997the officers shall be fixed, increased, or decreased from time to time by the3998board of directors.3999<P>6.06 <U>Chairman of the Board</U>. The chairman of the4000board, if a person is elected to such office by the board of directors, shall4001perform the following duties and have the following responsibilities: schedule4002regular meetings of the board of directors; work with the officers and other4003directors of the Corporation to set the agenda for regular and special meetings4004of the board of directors; preside at all meetings of the board of directors4005that the chairman is able to attend; ensure that the directors are given4006adequate information to render informed decisions at board meetings; work with4007the president and the other officers of the Corporation to formulate public4008announcements, press releases and shareholder and analyst communications and4009oversee and coordinate their release; ensure the smooth operation of the4010committees of the board of directors; see that all orders and resolutions of the4011board are carried into effect; and perform such other duties and have such other4012authority and powers as the board of directors may from time to time prescribe.4013</P>4014<P>6.07 <U>President and Chief Executive Officer</U>. The4015president and chief executive officer shall be the chief executive officer of4016the Corporation subject to the supervision of the board of directors. The4017president and chief executive officer shall perform the following duties and4018have the following responsibilities: generally manage the business and property4019of the Corporation in the ordinary course of business with all such powers of4020oversight, supervision and management with respect to such business and property4021as may be reasonably incident to such responsibilities, including, but not4022limited to, the power to employ, discharge, or suspend employees or agents of4023the Corporation, to fix the compensation of employees and agents, and to4024suspend, with or without cause, any officer of the Corporation pending final4025action by the board of directors with respect to continued suspension, removal,4026or reinstatement of such officer; perform such other duties and have such other4027authority and powers as are typically possessed and exercised by corporate4028presidents and chief executive officers, all subject to the board’s further4029instructions on discharging the duties of managing the business and property of4030the Corporation. If the board of directors has not elected a person to the4031office of chairman of the board, the president shall exercise all of the powers4032and discharge all of the duties of the chairman of the board. As between the4033Corporation and third parties, any action taken by the president in the4034performance of the duties of the chairman of the board shall be conclusive4035evidence that there is no chairman of the board. </P>4036<P>6.08 <U>Secretary</U>. The secretary shall maintain4037minutes of all meetings of the board of directors, of any committee, and of the4038shareholders or consents in lieu of such minutes in the Corporation’s4039minute books, and shall cause notice of such meetings to be given when requested4040by any person authorized to call such meetings. With respect to any contract,4041deed, deed of trust, mortgage, or other instrument executed by the Corporation4042through its duly authorized officer or officers, the attestation to such4043execution by the secretary shall not be necessary to constitute such contract,4044deed, deed of trust, mortgage, or other instrument a valid and binding4045obligation against the Corporation unless the resolution, if any, of the board4046of directors authorizing such execution expressly states that such attestation4047is necessary. The secretary shall have charge of the certificate books, stock4048transfer books, and stock papers as the board of directors may direct, all of4049which shall at all reasonable times be open to inspection by any director. The4050secretary shall perform such other duties as may be prescribed from time to time4051by the board of directors or as may be delegated from time to time by the4052president.</P>4053<HR>4054<P></P>4055<P ALIGN=CENTER>ARTICLE SEVEN: CERTIFICATES AND SHAREHOLDERS</P>4056<P></P>4057<P>7.01 <U>Certificates for Shares</U>. The certificates4058for shares of stock of the Corporation shall be in such form as shall be4059approved by the board of directors in conformity with law. The certificates4060shall be consecutively numbered, shall be entered as they are issued in the4061books of the Corporation or in the records of the Corporation’s designated4062transfer agent, if any, and shall state the shareholder’s name, the number4063of shares, and such other matters as may be required by law. The certificates4064shall be signed by the president or any vice president and also by the4065secretary, an assistant secretary, or any other officer, and may be sealed with4066the seal of the Corporation or a facsimile thereof. If any certificate is4067countersigned by a transfer agent or registered by a registrar, either of which4068is other than the Corporation itself or an employee of the Corporation, the4069signatures of the foregoing officers may be a facsimile. </P>4070<P>7.02 <U>Lost, Stolen, or Destroyed Certificates.</U>4071The Corporation shall issue a new certificate in place of any certificate for4072shares previously issued if the registered owner of the certificate:</P>4073<OL TYPE=a>4074<LI><U>Claim.</U> Makes proof by affidavit, in form and substance satisfactory4075to the board of directors, that a previously issued certificate for shares has4076been lost, destroyed, or stolen;4077<LI><U>Timely Request.</U> Requests the issuance of a new certificate before the4078Corporation has notice that the certificate has been acquired by a purchaser for4079value in good faith and without notice of an adverse claim;4080<LI><U>Bond</U>. If requested by the board of directors, delivers to the4081Corporation a bond, in form and substance satisfactory to the board of4082directors, with such surety or sureties and with fixed or open penalty, as the4083board of directors may direct, in its discretion, to indemnify the Corporation4084(and its transfer agent and registrar, if any) against any claim that may be4085made on account of the alleged loss, destruction, or theft of the certificate;4086and4087<LI><U>Other Requirements.</U> Satisfies any other reasonable requirements4088imposed by the board of directors.</OL>4089<P>When a certificate has been lost, destroyed, or stolen, and the shareholder4090of record fails to notify the Corporation within a reasonable time after he has4091notice of it, and the Corporation registers a transfer of the shares represented4092by the certificate before receiving such notification, the shareholder of record4093is precluded from making any claim against the Corporation for the transfer or4094for a new certificate.</P>4095<P>7.03 <U>Transfer of Shares</U>. Shares of stock of the4096Corporation shall be transferable only on the books of the Corporation by the4097shareholders thereof in person or by their duly authorized attorneys or legal4098representatives. Upon surrender to the Corporation or the transfer agent of the4099Corporation of a certificate representing shares duly endorsed or accompanied by4100proper evidence of succession, assignment, or authority to transfer, the4101Corporation or its transfer agent shall issue a new certificate to the person4102entitled thereto, cancel the old certificate, and record the transaction upon4103its books. </P>4104<P>7.04 <U>Registered Shareholders.</U> The Corporation4105shall be entitled to treat the shareholder of record as the shareholder in fact4106of any shares and, accordingly, shall not be bound to recognize any equitable or4107other claim to or interest in such shares on the part of any other person,4108whether or not it shall have actual or other notice thereof, except as otherwise4109provided by law.</P>4110<HR>4111<P></P>4112<P ALIGN=CENTER>ARTICLE EIGHT: MISCELLANEOUS PROVISIONS</P>4113<P></P>4114<P>8.01 <U>Fiscal Year.</U> The fiscal year of the4115Corporation shall be fixed by the board of directors; provided, that if such4116fiscal year is not fixed by the board of directors it shall be the calendar4117year.</P>4118<P>8.02 <U>Seal</U>. The seal, if any, of the Corporation4119shall be in such form as may be approved from time to time by the board of4120directors. If the board of directors approves a seal, the affixation of such4121seal shall not be required to create a valid and binding obligation against the4122Corporation. </P>4123<P>8.03 <U>Resignation</U>. A director, committee member,4124officer, or agent may resign by so stating at any meeting of the board of4125directors or by giving written notice to the Corporation. The effective time of4126such resignation shall be any time specified in the statement made at the board4127of directors’ meeting or in the written notice given to the Corporation,4128but in no event may the effective time of such resignation be prior to the time4129such statement is made or such notice is given. If no effective time is4130specified in the resignation, the resignation shall be effective immediately.4131Unless a resignation specifies otherwise, it is effective without being4132accepted. </P>4133<P>8.04 <U>Securities of Other Corporations</U>. The4134president or any vice president of the Corporation or any other person4135authorized by resolution of the board of directors shall have the power and4136authority to transfer, endorse for transfer, vote, consent, or take any other4137action with respect to any securities of another issuer which may be held or4138owned by the Corporation and to make, execute, and deliver any waiver, proxy, or4139consent with respect to any such securities. </P>4140<P>8.05 <U>Amendment</U>. The power to alter, amend, or4141repeal these bylaws or to adopt new bylaws is vested in the board of directors,4142subject to repeal or change by action of the shareholders. </P>4143<P>8.06 <U>Invalid Provisions</U>. If any provision of4144these bylaws is held to be illegal, invalid, or unenforceable under present or4145future laws, such provision shall be fully severable; these bylaws shall be4146construed and enforced as if such illegal, invalid, or unenforceable provision4147had never comprised a part hereof; and the remaining provisions hereof shall4148remain in full force and effect and shall not be affected by the illegal,4149invalid, or unenforceable provision or by its severance herefrom. Furthermore,4150in lieu of such illegal, invalid, or unenforceable provision there shall be4151added automatically as a part of these bylaws a provision as similar in terms to4152such illegal, invalid, or unenforceable provision as may be possible and be4153legal, valid, and enforceable. </P>4154<P>8.07 <U>Headings.</U> The headings used in these4155bylaws are for reference purposes only and do not affect in any way the meaning4156or interpretation of these bylaws.4157<P></P>4158<P ALIGN=CENTER><U>CERTIFICATE</U></P>4159<P></P>4160<P>These Amended and Restated Bylaws were adopted by the Board of Directors of4161the Corporation on July 3, 1996. </P>4162<P></P>4163<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>4164<TR>4165<TD WIDTH=60%></TD>4166<TD WIDTH=40%><U>/s/ F. Robert Merrill III</U><BR>F. Robert Merrill III<BR>4167Secretary</TD></TR></TABLE>4168<HR>4169<P></P>4170<P></P>4171<P></P>4172<P></P>4173<P></P>4174<P></P>4175<P ALIGN=CENTER><B>EXHIBIT 11.1</B></P>4176<P></P>4177<P></P>4178<P></P>4179<P></P>4180<P></P>4181<P></P>4182<HR>4183<PRE>41844185Advanced Neuromodulation Systems, Inc.4186Computation of Earnings Per Share4187Years Ended December 31418841892000 1999 19984190------------ ------------ ------------4191Basic earnings per share:41924193Weighted average common4194shares outstanding 7,484,572 7,583,159 8,314,2904195------------ ------------ ------------41964197Net earnings from continuing operations $ 953,644 $ 6,003,281 $ 2,585,7064198Net earnings from discontinued operations -- -- 4,373,4964199------------ ------------ ------------4200Net earnings $ 953,644 $ 6,003,281 $ 6,959,2024201------------ ------------ ------------420242034204Net earnings from continuing operations4205per share $ 0.13 $ 0.79 $ 0.314206Net earnings from discontinued operations4207per share -- -- 0.534208------------ ------------ ------------4209Net earnings per share $ 0.13 $ 0.79 $ 0.844210------------ ------------ ------------421142124213Diluted earnings per share:42144215Weighted average common4216shares outstanding 7,484,572 7,583,159 8,314,2904217Stock options and warrants--based on the treasury4218stock method using average market price 843,597 419,928 229,7504219------------ ------------ ------------4220Diluted common and common equivalent4221shares outstanding 8,328,169 8,003,087 8,544,0404222------------ ------------ ------------422342244225Net earnings from continuing operations $ 953,644 $ 6,003,281 $ 2,585,7064226Net earnings from discontinued operations -- -- 4,373,4964227------------ ------------ ------------4228Net earnings $ 953,644 $ 6,003,281 $ 6,959,2024229------------ ------------ ------------423042314232Net earnings from continuing operations4233per share $ 0.11 $ 0.75 $ 0.304234Net earnings from discontinued operations4235per share -- -- 0.514236------------ ------------ ------------4237Net earnings per share $ 0.11 $ 0.75 $ 0.814238------------ ------------ ------------4239</PRE>4240<HR>4241<P></P>4242<P></P>4243<P></P>4244<P></P>4245<P></P>4246<P></P>4247<P ALIGN=CENTER><B>EXHIBIT 21.1</B></P>4248<P></P>4249<P></P>4250<P></P>4251<P></P>4252<P></P>4253<P></P>4254<HR>4255<PAGE>4256<P ALIGN=CENTER><B><U>SUBSIDIARIES</U></B></P>4257<P></P>4258<P>The Company has no "significant subsidiaries" as defined in Rule 1-02 (w) of4259Regulation S-X.</P>4260<HR>4261<P></P>4262<P></P>4263<P></P>4264<P></P>4265<P></P>4266<P></P>4267<P ALIGN=CENTER><B>EXHIBIT 23.1</B></P>4268<P></P>4269<P></P>4270<P></P>4271<P></P>4272<P></P>4273<P></P>4274<HR>4275<P ALIGN=CENTER><U>Consent of Independent Auditors</U></P>4276<P></P>4277<P>We consent to the incorporation by reference in the Registration Statements4278(Form S-8 - Nos. 2-82414, 2-91410, 33-235312, 33-00967 and 333-75879, and Form4279S-3 - Nos. 333-40927 and 333-53440) pertaining to the Advanced Neuromodulation4280Systems, Inc. 1979 Amended and Restated Employees’ Stock Option Plan; the4281Advanced Neuromodulation Systems, Inc. Directors’ Stock Option Plan; the4282Advanced Neuromodulation Systems, Inc. 1987 Employees’ Stock Option Plan;4283the Advanced Neuromodulation Systems, Inc. 1995 Stock Option Plan; the Advanced4284Neuromodulation Systems, Inc. Sales and Marketing Employees Stock Option Plan;4285the Heaton Stock Option Plan; the Advanced Neuromodulation Systems, Inc. 19984286Stock Option Plan; the registration of 100,000 shares of Common Stock issued4287pursuant to a Common Stock Purchase Warrant between Advanced Neuromodulation4288Systems, Inc. and Robert L. Swisher, Jr., the registration of 1,223,825 shares4289of Common Stock issued pursuant to an Agreement and Plan of Merger dated4290November 30, 2000 between the Company and Hi-tronics Designs, Inc. and an Asset4291Purchase Agreement dated as of January 2, 2001 between the Company and4292Implantable Devices Limited Partnership, ESOX Technology Corporation and4293Implantable Devices, Inc. and the related Prospectuses of our report dated March42942, 2001, with respect to the consolidated financial statements of Advanced4295Neuromodulation Systems, Inc. and Subsidiaries, included in the Annual Report4296(Form 10-K) for the year ended December 31, 2000.</P>4297<P></P>4298<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>4299<TR>4300<TD WIDTH=40%> </TD>4301<TD WIDTH=60%><U>/s/Ernst and Young LLP</U><BR>Ernst and Young LLP</TD></TR>4302</TABLE>4303<P></P>4304<P>Dallas, Texas<BR>March 27, 2001</P>4305<H1 ALIGN=CENTER><FONT SIZE=3>EXHIBIT 27.1</FONT></H1>4306</BODY>4307</HTML>4308</TEXT>4309</DOCUMENT>4310<DOCUMENT>4311<TYPE>EX-274312<SEQUENCE>24313<FILENAME>0002.txt4314<DESCRIPTION>FDS --4315<TEXT>43164317<TABLE> <S> <C>431843194320<ARTICLE> 54321<LEGEND>4322(Exhibit 27.1, Financial Data Sheet)4323</LEGEND>4324<CIK> 00003517214325<NAME> Advanced Neuromodulation Systems, Inc.43264327<S> <C>4328<PERIOD-TYPE> YEAR4329<FISCAL-YEAR-END> DEC-31-20004330<PERIOD-START> JAN-01-20004331<PERIOD-END> DEC-31-20004332<CASH> 8,545,5784333<SECURITIES> 1,030,3184334<RECEIVABLES> 3,980,8604335<ALLOWANCES> 130,2554336<INVENTORY> 5,647,7904337<CURRENT-ASSETS> 21,998,1594338<PP&E> 8,105,0674339<DEPRECIATION> 2,830,4204340<TOTAL-ASSETS> 45,371,6864341<CURRENT-LIABILITIES> 2,910,0244342<BONDS> 04343<PREFERRED-MANDATORY> 04344<PREFERRED> 04345<COMMON> 435,4184346<OTHER-SE> 39,724,5744347<TOTAL-LIABILITY-AND-EQUITY> 45,371,6864348<SALES> 23,081,6244349<TOTAL-REVENUES> 23,081,6244350<CGS> 7,488,3214351<TOTAL-COSTS> 14,484,4094352<OTHER-EXPENSES> (578,963)4353<LOSS-PROVISION> 04354<INTEREST-EXPENSE> 04355<INCOME-PRETAX> 1,687,8574356<INCOME-TAX> 734,2134357<INCOME-CONTINUING> 953,6444358<DISCONTINUED> 04359<EXTRAORDINARY> 04360<CHANGES> 04361<NET-INCOME> 953,6444362<EPS-BASIC> .134363<EPS-DILUTED> .11436443654366</TABLE>4367</TEXT>4368</DOCUMENT>4369</SEC-DOCUMENT>4370-----END PRIVACY-ENHANCED MESSAGE-----437143724373